Mobile devices have been around for a few decades but it is with the introduction of the iPhone with its rich, powerful interface that enabled the mobility of everything.  The convergence of mobile devices and ubiquity of Internet access resulted in a trend toward mobile transactions.  Gartner and McKinsey sees an expected $545 billion generated through mobile payment transactions in 2015 up from $60 billion in 2012.  And most of this money is coming from tablets -  an Adobe Systems study found that 55% of tablet users use their device to buy products while only 28% of transactions are completed via smartphone.  At the Innovation Project 2013 summit, Gary Floods, president of global products and solutions for MasterCard speculates that “every device will become a commerce device.”  Vice president of Retail Sales at PayPal chimes in that “cash is starting to get digitized” and the “way people shop and buy is changing rapidly.”

It is clear that we are on our way to more mobile transactions but what does this mean?  What challenges are we going to face as we make this rapid large-scale transition to mobile exchange?  Before we begin, let’s try and understand the process of a mobile transaction.  There are four parties involved in this process: the buyer on one side, the seller on the other, the service provider providing the means of transaction and the regulator smoothing the kinks of the process.  All of these parties will be facing some challenges in the future which this report will attempt to examine.  And with over 6,500 financial institutions implementing their own mobile banking services, it is evident that technology is not the issue.  So then, what can we expect?

Let’s start first with the challenges on the consumer side.  Consumers are constantly being bombarded with new, different solutions designed to make every aspect of their lives easier.  Cost and convenience are important in terms of deciding the appropriate solution but point of adoption sites are equally as important.  Consumers will not use a product if merchants can’t or won’t support it.  Take a look at Google Wallet and its “lackluster adoption.”  Sterling Payment Technologies notes that between 50,000 and 100,000 consumers have downloaded the mobile application but few are actually using it.  In 2011, there were only around 2.5 million NFC terminals worldwide, contributing greatly to the slow start of digital wallets, including Google Wallets.  Consumers will have to decide but it’s up to the service providers to either solve a very relevant problem (security, for example), or provide an extensive (but not too extensive to complicate the solution) range of services whose variation will appeal to more people.

What about the merchants?  Like consumers, merchants too are experiencing a proliferation of solutions.  With so many options readily available, sellers are unable to decide the best choice for them.  The flux of new options often means solutions which lack in maturity, contributing to an even more difficult decision for merchants.  What are merchants concerned with?  The answer can be broken down into an essential question: what will help me make the most money while spending the least money?  

The merchant has three primary concerns: increased revenue, decreased cost, and improved customer satisfaction.  The first two make sense when we think about the essential question discussed earlier but why is the customer experience such a high priority?  Simple - engaging the consumer in such a way that will bring them back again and again guarantees a stable source of revenue.  Mobile has provided a new channel for merchants to know what customers want and when, a crucial aspect in developing the best customer experience.  When customers learn about or buy products via their mobile devices, retailers can understand their buying behaviors and orient themselves to align with the emerging patterns.  Chipotle lets their consumers buy their food before customers get to the store.  Nordstrom allows buyers to pay for products via mobile to avoid the lines and wasted time.  Starbucks has over 7 million people frequenting their mobile app to pay for coffee.  Mobile has allowed retailers to provide easier ways to buy, attracting a larger market and with that greater revenue.  The challenge here is deciding which innovation will appeal to consumers, as going in a particular direction is a very risky maneuver for merchants.

Service providers naturally will have the biggest burden as companies, start-up and established, venture into the opportunity-rich world of mobile payments.  The biggest problem of these institutions will be to stay afloat among the thousand other companies striving to succeed as well as to compete with successful companies like Square who have a vertical hold on mobile payments.  Why is Square so successful?  Square has sold not only a simple product that turns any iPhone into a point-of-sale terminal but an attractive business model that has largely impacted the rest of the industry.  They’ve managed to disrupt the status quo by creating an entire new category of merchants - anyone with a Square dongle and an iPhone can make a transaction, a successful model that’s gone mainstream with the support of Starbucks and other major retailers.  The challenge for service providers competing with established players will be to change the architecture of their system to enable much more innovation and to build platforms for any payment to go through this system.

To gain any traction in the mobile marketplace, service providers’ products need to suffice certain criteria.  First, the product needs to solve an existing problem.  Square transformed mobile devices into transaction devices with their product with their simple and expensive product.  The product needs to be convenient and simple to use.  FLASHiZ has mastered this aspect with their mobile application which turns a photo into a 10-second payment transaction.  The product needs to be in a closed loop environment or must have a large network of point of adoption sites.  The Octopus Card, a contactless transit card, did very well in Hong Kong with its repetitive use by consumers.  This opens up the potential for the Octopus Card to be used for payment in other ways outside of public transport, such as retail shops as consumers have already found seen value in the system and may combine interests in favor of the card issuers.  Groupon has provided a bridged between consumers and merchants, promising largely discounted deals for consumers and large interested markets for merchants.

Even more than staying alive, service providers wants to look the best.  Unless there is repetition of use, such as in the case of the Octopus Card, they will need some element to incentivize people to adopt the technology.  Groupon as aforementioned has gained momentum on the consumer and merchant side that may be enough to sustain its mobile payment system Groupon Payments released in September 2012 for iOS products.  As the service provider’s primary goal is to bridge the merchant-consumer gap, they must constantly be aware of the challenges facing merchants and consumers.  And it all points to the consumer experience. .  It’s important to make the payment transaction easier, cheaper and faster, so service providers will need to take into consideration the entire payments experience in order to gain an advantage in the mobile market which is where mobile commerce comes into play.  This suggests a shift in focus from mobile payments to mobile commerce.  Complete disregard for this element, the customer experience, will cripple service providing companies who are trying to survive in the mobile payments ecosystem.

The party in charge of regulating the payment transaction process will also experience challenge.  If mobile wallets take hold and the money stays within them, disintermediation occurs (the process of excluding banks from the equation) and the problem of liability surfaces if the money disappears.  Square recently heard from the state of Illinois which issued a cease-and-desist letter accusing the company of being “engaged in the business of transmitting money without a license."  The letter calls for Square to revisit its unclear policies on fraudulent and unauthorized transactions.  MasterCard also speaks out against unclear regulation, proposing a new fee to wallet issuers if they do not take part in the process that “requires revision of data sharing and transparency rules”.  Visa backs MasterCard’s fight against “staged” digital wallets, considering a similar surcharge.  Evidently, regulation is crucial with the growing number of mobile transactions to avoid disintermediation but when should it start?  Too soon and innovation is killed, preventing the growth of potential mobile moguls who just can’t pay the expense.  But too late and a dominant mobile player’s regulation process is under close scrutiny, causing situations like Square v. Illinois to arise.

As we can see, it’s not about mobile payments, it’s about mobile commerce.  Mobile payments are well underway and the process of these transactions has been clearly defined.  The challenge does not lie in the technology as we see we have seen it is possible.  Instead, we need to focus on mobile commerce and creating innovative and interesting business models for service providers to attract merchants and consumers.  It is no longer about the transaction but the experience and creating an interesting experience is the challenge facing merchants and service providers today.  Regulation is part of this experience, for if service providers cannot keep their consumers satisfied over the long-term, they are making themselves less competitive.  Forrester attests to this emphasis on consumer experience, arguing that successful adoption “will require infusion of significant value throughout the purchase journey before, during, and after payment.”