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Shortchanged: Why consumers are snubbing mobile payments

Disruption is all very well, but it's risky to depend on people to change their behavior to support your business model without a corresponding major benefit to them.

It's interesting, therefore, to consider what is going on in the global payments space. With payments being made on mobile devices, many consider it an industry that is ripe for disruption.

If you think about successful disruptions, they didn't usually require people to massively change their consumption habits—or if they did, it was to get access to something they couldn't have or couldn't afford before. The iPod, for instance, allowed people to do what they'd been doing for decades—carry music around in portable form—only in a simpler, more convenient way. Using Internet searches as a lure to get people to be exposed to ads did change behavior, but it offered a major benefit: namely, the ability to quickly find bits of information that would have previously required an extremely cumbersome process.

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Back in the '60s and '70s, most Americans paid their bills by check. Early credit cards, such as Diners Club and American Express, did exist, but it wasn't until 1966 that the two behemoths of the payments business—MasterCard and Visa—came on the scene. Before this, most credit cards were store and gas cards that could be used only where they were issued. This, obviously, was a nuisance.

What MasterCard and Visa made possible was the ability to use a card anywhere that cards were accepted. They also introduced the concept of revolving debt, which eliminated the need to actually have money in the bank to pay for things (but that's another story). Debit cards came along in the 1980s and were embraced by consumers wary of overspending. By the mid 2000s, electronic forms of payment had overtaken cash and checks by volume.

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With the increasing popularity of credit cards has also come a whopping big bill. These are the interchange fees that the two dominant card associations charge the merchants who want to accept payments using the cards. It's something on the order of a $50 billion "tax" on purchases and averages 2 percent of a merchant's take on a particular purchase. It's a big problem for merchants, who hate the fees. The problem is that in many cases the price for goods doesn't change depending on the form of payment, so the end consumer doesn't really notice.

Nonetheless, a whole fleet of would-be disruptors are attempting to dislodge the incumbents. The technology that much of the "smart money" is betting on is payment via a mobile phone. Everybody and their brother seem to be going after the mobile payments space. PayPal is, for sure, but also companies such as Braintree (oddly, acquired by eBay, the parent company of both), Square (whose swipe technology was copied in short order by PayPal), Swipe Payments, Stripe Payments, LevelUp and, of course, Google Wallet. For the most part, the entry into mobile has been disappointing as consumers and merchants fail to adopt in large numbers.

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Square is reportedly losing money on its most high-profile deal, a partnership with Starbucks, and instead of an IPO that many thought might be coming for the company, Square recently raised another round of debt financing.

The mobile wallet concept has struggled, mainly because there doesn't seem to be a compelling difference, experience-wise, for consumers or a major benefit to merchants.

It isn't for want of trying. Google Wallet has been among the notable stumbles in the mobile payments "revolution." Google hoped to offset its expenses for the free-to-use service by offering ads. But here's the irony: Google reportedly spent $300 million on developing the app, but because it has to pay such high fees to the credit card companies that it works with, it loses money on most transactions, according to a Bloomberg BusinessWeek article from last June. In May 2013, the head of Google Wallet and former eBay executive, Osama Bedier, left the company.

"With the increasing reach of cybercrime and the risk that sensitive information can be released every time we use a piece of plastic or place an order over the Internet, the biggest threat to the payments industry may well not be another payments provider. It may, instead, be the relative safety of a most traditional form of payment: cash." -RIta Gunther McGrath, professor at Columbia Business School

Can we expect the established players to be disrupted anytime soon?

There is a model lurking just beyond view, where mobile payments are not only widely accepted but positively embraced. It's a model that allows individuals to exchange money via their mobile phones, with the payment and collection functions being handled by their mobile operators. There isn't a bank involved.

Mobile payment providers such as Vodafone's M-Pesa and Airtel's Mr. Money are wildly popular with large numbers of people who do need to make payments but don't have access to a bank account. Borrowing insights from their African experiences, firms such as Vodafone are looking to take the mobile wallet concept to places where large numbers of unbanked consumers live, such as Eastern Europe.

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Will the mobile wallet eventually offer a compelling experience that would cause consumers with bank accounts to leave their cards behind? Will alternative ways be found to create the synergies between buyers, card providers and merchants that will unseat the incumbents? Will a firm like PayPal eventually become so ubiquitous and popular that it offers a real challenge? Whatever the scenario, it's likely with all this activity that disruption will happen at some point. What we don't know yet is what form it will take.

However, with the increasing reach of cybercrime and the risk that sensitive information can be released every time we use a piece of plastic or place an order over the Internet, the biggest threat to the payments industry may well not be another payments provider. It may, instead, be the relative safety of a most traditional form of payment: cash.

By Rita Gunther McGrath, professor at Columbia Business School and author of "The End of Competitive Advantage"


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