Payments go mobile: The gradual revolution

Part of the Vantiv Insight Series 2012, featuring proprietary research performed by Vantiv LLC and Mercator Advisory Group

© 2012 by Vantiv LLC. All rights reserved.

3

Payments go mobile:The gradual revolution

Mobile solutions are seemingly everywhere these days, and lap-

tops, tablets, and smartphones are enabling an “anytime, anywhere”

approach to business and personal lives. This is starting to include

payments. In news reports and ad campaigns, consumers are learn-

ing that they can use their mobile devices to buy anything from a

Starbucks coffee or a Big Mac to office supplies, lumber, and cloth-

ing. The age of mobile payments, it seems, is upon us.

But things are not that simple. Mobile payments are indeed grow-

ing. Yet, in spite of the industry and media buzz, it is likely to be sev-

eral years before the majority of consumers are using their phones

at points of sale.

That’s one of the key findings of recent Vantiv/Mercator research

exploring consumer and industry-executive views of the evolving

payments landscape (see “Key Points,” page 4). The research found

that consumers see a bright future for mobile payments, with 62%

saying that they expect mobile payments to be widely used within

five years. Yet only 38% actually see themselves using mobile pay-

ments by then.

about the research

The Vantiv/Mercator Insight Series research focuses on understanding payment trends and adoption rates for emerging payments methods. As part of this primary research effort, Vantiv and Mercator Advi-sory Group teamed up in early 2012 to survey 1,200 consumers about how they currently make payments and how they expect to do so in the future. In addi-tion, researchers conducted in-depth interviews in the spring of 2012 with execu-tives from financial institu-tions and merchants to explore their perspectives on the changing payments landscape.

4

Why the paradox? The research sug-gests that although consumers see mobile payments becoming common in the future, they can’t picture it in their daily lives. Some may lack a compelling reason to change. Others see problems with security that make them skeptical about using mobile devices to move their money around.

And it’s not just consumers. Merchants and financial institutions also have concerns about mobile payments and how they will work and affect their businesses. They see uncertainty in evolving standards and technologies, and are acutely aware of the impact of security problems. And they have questions about demand and solution “stickiness.” As a result, many are un-derstandably cautious, and are taking a wait-and-see attitude.

But the issues slowing adoption will eventually be worked out—and re-search findings assure us that consum-ers will be ready. The Vantiv research assessed consumers’ usage, interest, and awareness of mobile payments, and an analysis of those factors shows that this method is at a critical tipping point, where it is beginning to enter the mainstream—and in five years, it is likely to be a familiar part of the pay-ments landscape.

“Mobile payments may evolve a little more slowly than people expect, but they will evolve—and it will absolutely be a game changer,” says Bill Wein-

gart, chief product officer at Vantiv. “The emergence of mobile payments will enable consumers, merchants, and financial institutions to do a variety of payment activities in new and more ef-fective ways.”

To take advantage of these opportu-nities, merchants and financial institu-tions will need to move beyond to-day’s wait-and-see attitudes. “There is still reason to move cautiously, and methods you can use to do so. But that doesn’t mean inaction,” says Weingart. “To succeed with mobile payments, they will have to under-stand these new approaches and technologies, take steps to be part of this emerging world, and be ready to deliver the mobile payments that their customers expect. Financial institu-tions that deliver mobile services that consumers value—such as check deposit—will have an advantage in the future.”

understanding the Growth curveIn the Vantiv research, a number of findings pointed clearly to significant growth of mobile payments in the coming years. True, only a small number of consumers are using mobile pay-ments today (1% to 4%, depending on the form). However, 50% of consum-ers are aware of mobile payments, and 23% are interested in using mobile payments going forward. Those levels of awareness and interest typically

KeY PoINts1

Widespread adoption will take several years due to some

fundamental challenges.

2Consumers are concerned

about security and don’t see a need for mobile payments.

3 Worried about costs, standards,

and technologies, many merchants and FIs are taking a

wait-and-see approach.

4 Including mobile payments will be key to the appeal of mobile banking platforms—and banks

may have a leg up there.

5 Widespread adoption will

depend on a compelling value proposition that offers more

than convenience.

6 Consumers are looking for

platforms that provide more information, location-based

applications, and rewards.

7 Merchants and FIs can take incremental steps today to

build knowledge and strategies.

5

indicate that an emerging payment method is on the verge of widespread adoption.

An important driver of adoption will undoubtedly be the ongoing prolif-eration of mobile devices. Vantiv’s research found that smartphone ownership at the beginning of 2012 was 45%, up from 28% in 2011. “This year, smartphone market penetration is crossing an important line between being an early-adopter technology to being in the early stages of mainstream usage, with double-digit growth in the numbers of devices in use,” says Ben Love, vice president, Mobile, at Vantiv.

A deeper exploration of the findings shows other indicators of growth. For example, consumers ages 18 to 34 are far more likely to think that mobile payments will be common within five years, with 72% of this group believing that, compared to 61% for consumers overall. Fifty-six percent of respon-dents in that age group said that they personally expect to be using mobile payments by that time. As one execu-tive interviewed by Vantiv/Mercator researchers said, “Mobile payments is a multigenerational thing. For older generations, smartphones and iPads are a second language, but the young-er generation expects more and more to be digital.”

“Today’s younger consumers are more comfortable with the idea of mobile payments,” adds Love. “As they and

their even younger counterparts move into the consumer mainstream, they are going to drive increased usage.” The research also found that tablet owners, smartphone users, and con-sumers earning more than $100,000 a year were more likely to see a positive future for mobile payments. “Affluent consumers are interested,” he says. “So some of the best customers out there for both merchants and banks will be looking for this.”

Today, the most common use of mobile payments is via a mobile phone using the mobile web or a retailer’s phone app. However, says Love, “as mobile payments take hold, they will be used in a growing range of payment scenarios, altering the overall share of wallet for various payment methods.”

Indeed, the Vantiv/Mercator research shows that mobile payments will gain traction in all major spending cat-egories. For example, about 10% of consumers said that by 2017, they expect to be using mobile payments for small in-store and grocery purchas-es, displacing primarily cash and debit transactions. In addition, 9% expect to use them for household expenses, displacing mostly debit transactions; 8% for large in-store purchases, dis-placing mostly credit; and 7% for online purchases, displacing credit/debit. These percentages may actually be low, because consumers tend to under-estimate future usage of tools that are currently unfamiliar to them.

Mobile payments will be common

31%

30%10%

22% 7%

■ 1-2 years ■ 2-5 years ■ 5+ years

■ No idea

■ Never

I will use mobile payments

18%

19%

37%

18%

8%

the MobILe PaYMeNts ParaDoX

Consumers like the concept of mobile payments but also have doubts about actual usage. About two-thirds of consumers think that mobile payments will be widely used in five years or less. But only about one-third think that they personally will be using this method.

Mobile payments will be common

31%

30%10%

22% 7%

■ 1-2 years ■ 2-5 years ■ 5+ years

■ No idea

■ Never

I will use mobile payments

18%

19%

37%

18%

8%

Mobile payments will be common

31%

30%10%

22% 7%

■ 1-2 years ■ 2-5 years ■ 5+ years

■ No idea

■ Never

I will use mobile payments

18%

19%

37%

18%

8%

6

the obstacles

Altogether, these factors indicate that mobile payments will grow very rap-idly, and very soon. But there are other factors at play, as well—and they are inhibiting that growth.

A key obstacle is consumer percep-tions of smartphone-based payments. The research found that consumers are concerned about problems such as short smartphone battery life (53%), losing their phones (77%), and be-ing hacked (78%). With such issues in mind, two-thirds said that even if they used a phone for payments, they would keep a traditional card as a backup.

Consumers’ greatest concern with smartphone payments is security. More than three out of four cited criminal hacking of phones and the resulting compromise of account security as a real worry. “This does not seem to be a matter of consumers being suspicious of a new, unfamiliar technology,” says Patty Walters, senior vice president of Merchant Product and Security at Vantiv. “Smartphone users and young consumers are actually more likely than consumers in general to be concerned about smartphone security.” They are also more apt to say that even if they were to use smartphone-based pay-ments, they would continue to carry cards as a backup.

The research found similar concerns with mobile wallets. These apps are key to convenient mobile payments

because they allow consumers to use their credit or debit cards or a bank ac-count to make payments, using a single point of access—the phone. Consum-ers are more interested in mobile wal-let/phone payments at retail points of sale than any other mobile phone pay-ment method. But security issues are dampening interest in this approach, too, with 63% of those not interested in mobile payments citing security con-cerns. Smartphone and tablet owners were especially worried on this front (79% and 80%, respectively).

It’s not just consumer perceptions that are an issue. The broad merchant in-store infrastructure needed for smartphone payments is not in place today. Most existing POS terminals are not equipped for near field com-munications (NFC) and therefore do not allow users to tap or wave their phone near a device to make payments. Some companies are exploring other approaches, such as using closed-loop prepaid accounts and a 2-D barcode for transactions at specific retailers. But in many scenarios, adoption of smartphone payments will require new infrastructure—and merchants see that as a significant investment with an uncertain return, given the unsettled nature of the technology and related standards.

These issues are not insurmountable, but finding and implementing solu-tions will take time. For example, in the Vantiv/Mercator research, security was less of a concern among consumers if

Great MoMeNts IN MobILe PaYMeNts

1994 Online banking

1997 Vending machines take

SMS payments

1997 SMS-based mobile banking

1999 Web-based mobile banking

1997 Contactless payment

(Mobil Speedpass)

2004 NFC Forum founded

2006 First NFC phone (Nokia)

2007 Release of iPhone

2009 Mobile-phone households

surpass landline households

2010 Release of iPad

2011 Google Wallet

2012 Isis Wallet

7

the retail store had its own app, such as the one offered by Starbucks, that the user could download for smart-phone payments. And technology companies will continue to bring more sophistication to security, including the expected rollout of EMV chip-based security technology. “The increase in tokenization and encryption as well as the implementation of EMV will really help address some of the immediate concerns with respect to fraud and se-curity when we move into new mobile technology,” says Walters.

The lack of in-store infrastructure may change soon, as well. Current EMV mandates from MasterCard and Visa will shift liability for security breaches to merchants over the next few years—which means security problems could cost major merchants millions of dol-lars a year. Thus, they have a financial incentive to upgrade their terminal network to comply with EMV require-ments. Merchants may decide that this upgrade is a good opportunity to also bring on NFC capabilities, which are needed to support communication between phones and terminals. That way, the merchant can leverage compli-ance-driven expenditures to move into a payment method that consumers are going to expect in the coming years. (Of course, standards are evolving, and, while it is still not clear that NFC will be the winning technology, it is an approach that many see as being the most viable. A number of executives interviewed noted that the release of more NFC-equipped smartphones is

likely to increase interest in both NFC and mobile payments.)

Payments and Next- Generation Mobile bankingAs interest in mobile payments grows, many in the industry see mobile bank-ing apps as a ready platform for build-ing out payments functionality. “Of-fering payment capabilities is a natural extension of the mobile banking plat-form, and many banks are starting to pursue that in the form of wallet-based payments,” says Love. The inclusion of mobile payments and wallets promises to be key to taking mobile banking to the next level.

But banks are not alone in their inter-est in mobile wallets. Other players have been working on wallet offerings, from Google and Apple to numerous large retailers. “There are more than 100 wallets in development or in pilot in the U.S. today, and that number may be as high as 200 by the end of the year,” says Love. (See sidebar, page 12.) The result is a confusing array of options being laid in front of consum-ers—and that confusion is often trans-lating to a lack of interest and uptake of mobile wallets.

Banks, however, have many strengths that they can draw on to differenti-ate themselves in that crowded field. When it comes to payment methods, security is always foremost in consum-ers’ minds. In a churning mix of mobile wallet options—many from companies

0% 40% 80%

78%Criminal

hacking to get payment data

Losing phone

Would still carry credit/

debit cards

Battery life

77%

67%

53%

coNsuMer coNcerNs about sMartPhoNes

When thinking about mobile payments, more than three-quarters of consumers have concerns about security, such as hacking or losing their phone. That lack of confi-dence leads more than two-thirds to say they would still carry plastic cards as a back-up to smartphone payments.

Tablets such as Apple’s iPad, have found their way into a variety of retail settings, where they are used by salespeople to help customers—and, in a number of cases, to accept payments throughout the store.

“There are still relatively few mer-chants actually using tablets for mobile payments at this point, but many are evaluating this approach,” says Dean Seifert, senior vice president, Product Strategy, at Vantiv. And a number of those merchants have deep concerns about having to change in-store pro-cesses and handle the complexity of multiple mobile POS checkout points.

Nevertheless, payments handled through merchant-owned tablets are likely to grow rapidly over the next two years, according to recent Vantiv/Mercator research. Already, 17% of surveyed consumers have used them for in-store payments. What’s more, 51% are aware of this payment op-tion, and 28% are interested in using it. These levels are quite high—higher, in fact, than those of any of the other emerging payments covered in the research, including smartphone pay-ments, mobile wallets, and retailer app-based payments. “Merchant POS tablets are clearly at the tipping point of wide adoption—if not already past that point,” says Seifert.

The use of merchant tablets for in-store payments can be highly cost- effective. They use the existing in-stalled base of card-acceptance pro-cesses, and the devices themselves are one-tenth the price of traditional cash registers. They enable salespeople to sell and handle payments more effi-ciently and help shorten checkout lines during peak periods. Using the tablet, salespeople can quickly check invento-ry for a given product that the custom-

er wants and have the item brought to the floor, without having to leave the customer. The customer can then fill out his or her payment information on the tablet and complete the sale via secure, encrypted card acceptance.

Beyond support for sales and pay-ments, merchant tablets can contribute to a satisfying customer experience in a number of ways. They can, for ex-ample, be used to deliver product and availability information out to the floor, either to salespeople or to customers themselves. Tablets can also be linked to CRM systems so that salespeople can capture customer information for the merchant’s marketing efforts, and retrieve customer preferences and his-tories—including a customer’s interac-tions in other channels—as they help customers. One retail executive whose company is planning to implement tablet payments told the research-ers: “We think mobile technology will help us better engage our customers and we can help them in the aisles. We also expect to have a profile within our application to guide them around our stores while they are shopping. We’ll have associates there to assist them and let them pay right there.”

As they find their way into more retail environments, the tablets themselves will evolve in various ways to fit the specific situation. Some might be “hardened” for home-improvement stores, others made waterproof for restaurant use, and yet others be highly specialized with limited functions to discourage theft. “We believe that merchant tablets will be used by many types of merchants,” says Seifert. “And ultimately, they will change the way stores operate.”

TableTs:

At Home on the Sales Floor

8

20% 40% 60%

51%Aware

Interested

Used

28%

17%

0%

tabLets taKe oFF

Merchant tablets may have already hit the tipping point,

with more than half of all respondents aware of this

payment method and 17% saying they’ve already

used it. This percentage is slightly higher among

smartphone users.

9

that are new to the payments space—those consumers may see their banks as a safe and simple wallet option. Banks already maintain consumers’ personal and financial information, so there is no need for consumers to share that with other organizations. Convenience, too, is a factor: if a con-sumer already uses a mobile banking application, it is easy to add payments to that and rely on that one device for a broad range of financial activity.

Overall, mobile banking is clearly an area of focus for banks. In a Vantiv survey of financial institutions, nearly half said that they expect to invest in this platform in the coming year. Already, banks are rolling out mobile check deposit, which enables consumers to use their smartphones to photograph and deposit a check, and thus avoid a trip to the bank branch. “This makes it very easy for the consumer,” says Love. “And banks like it because it helps them reduce over-the-counter physical trans-actions.” With continued investment, financial institutions are expected to of-fer additional innovations in the near fu-ture. These will enable them to build on existing consumer relationships—and consumer trust—to take advantage of the growing consumer interest in both mobile banking and mobile payments.

connecting with consumers

The actions of banks and merchants—as well as technology providers—will

play an important role in expanding the use of mobile payments. But the most critical factor will be consumer behav-ior—whether consumers find mobile payments appealing enough to change their current habits.

Today, many consumers simply don’t see a reason to shift their payment be-havior. Just 1 in 4 survey respondents said that they regard mobile wallets as convenient, and just 1 in 8 would prefer to use smartphone payments rather than a card. “We are looking at mobile wallet apps, but our customers aren’t clamoring for it,” one regional bank ex-ecutive told researchers. “Why is wav-ing something in front of a tablet faster than swiping a card? When will there be a mobile wallet app where custom-ers will really ditch everything else and start to use it?”

“People have been using cards for de-cades,” agrees Donald Boeding, presi-dent of Merchant Services at Vantiv. “It won’t work to say, ‘Now you can do that on your phone —problem solved.’ There wasn’t really a problem to begin with. Merchants and banks have to pro-vide a compelling consumer experience and a clear value proposition for mobile payments—one that offers more than just convenience.”

One way to appeal to consumers is to offer them rewards, which can have a real impact. In the Vantiv research, 32% of consumers said that they

0% 15% 30%

27%Convenient

Reliable

Secure

23%

17%

Not coNVINceD: PercePtIoNs oF MobILe PaYMeNts

Consumers don’t seem to think that today’s mobile payment methods of-fer much more than credit cards. Only one-fourth or less see mobile payments as convenient, reliable, or secure.

10

more features and functions to con-sumers. The Vantiv research points to some of the things that consumers hope to find with mobile payments. Consumers select their payment methods based on no- or low-cost (87%), their being fast (85%), and their security (72%). Nearly three-quarters of that group (71%) said they are inter-ested in tracking account balances to control spending.

In general, consumers expect mobile solutions to put more knowledge at their fingertips, to help them make better decisions about purchases and payments, and ultimately to combine increased control over financial activi-ties with their increased mobility. “We think our customers are interested in mobile payments and remote deposit capture now; they have been very vocal about this interest, and we will be implementing both within the next 12 months,” one credit union execu-tive told researchers. “It’s particularly important for small businesses. If the boss is on the road with an iPhone or iPad and forgot to authorize payroll or forgot to pay a bill, all they do is open up their application, click a few icons, and authorize release of payment.”

To offer more than just basic pay-ments via mobile device, merchants and financial institutions can take full advantage of that device’s mobility, using geo-location capabilities and apps that predict consumer needs to provide a good experience to custom-

regarded rewards as a potentially ef-fective way to encourage the use of mobile payments. That was especially true of smartphone users (42%) and those earning more than $100,000 a year (39%). “Once consumers try a new payment approach and get comfortable with it, they’ll move to it more and more over time,” says Dean Seifert, senior vice president, Product Strategy, at Vantiv. “But you have to get them to do that initial trial. So we expect to see more rewards associ-ated with mobile payments to help consumers overcome their reluctance and skepticism.”

Doing so may not be that difficult. The research found that for many consum-ers a 1% rebate at the point of sale would be an effective incentive for adopting a new payment method—a more modest figure than many would expect. “Many financial institutions and merchants feel that it takes a 5% to 10% reward to incent customer be-havior and get people to select a cer-tain type of payment method. But the research shows that it can be far less,” says Seifert. “So banks and merchants may be overestimating what it takes.”

building the compelling Value PropositionRewards are good as far as they go, but to truly build and sustain success with mobile payments, merchants and financial institutions will need to provide a value proposition that brings

Who’ll be using smartphones to make

payments in five years? According to the Vantiv/Mercator research: more men than women, more

Millennials than Boomers, and more people earning

more than $75,000 a year.

cuttING-eDGe coNsuMers

57%18-34

35-64

65+

33%

14%

41%

33%

34%

43%

42%

33%

0% 20% 40% 60%

AGE

Men

Women

Less than $50K

$50K-75K

$75K-100K

More than $100K

GENDER

INCOME

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ers wherever they are. For example, merchants can offer coupons, credits, and discounts based on the individual consumer and his or her location. A consumer in a store, for example, could be offered a discount on something he or she buys frequently, or someone passing by a retail facility could be sent a coupon for a sale item to encourage him or her to stop in. Mobile platforms could also include polling features that allow consumers to quickly solicit the opinions of friends about a given prod-uct. And as consumers make a mobile-based payment, “frequent shopper” points can be added to their account and an update sent to their phone.

“The days when you had to walk around with a paper coupon or loyalty or rewards card are going away. That will all be in the cloud and tied to the phone,” says Seifert. “Merchants are going to recognize when you are in a certain location and send you special-ized marketing within the store or as you are walking through the mall.” Or, on the other end of the spectrum, scanning attachments and apps can enable smaller providers, from plumb-ers to mechanics and musicians, to accept secure credit card payments on the spot, via their smartphone.

“The fact that we have a computer in our pocket that knows who we are, where we are, and what we are doing creates a powerful opportunity for lots of different players,” says Seifert. “So merchants and banks can take advan-

tage of that to better reach consumers and deliver information and offers that are specific to them. A retailer might send a discount that entices them to buy a good or service at a store that is nearby, and then they can actually complete that purchase with their phone.”

Micropayments: empowering the Individual

Micropayment tools let individuals make payments directly to one another, electronically. But while ACH-based P2P payments are used regularly in much of the world, that’s not the case in the U.S. In the Vantiv/Mercator research, only 3% of consumers said they are using mobile P2P services. Most small payments in the U.S. are still paper-based and handled via checks or cash.

Why? For one thing, consumers don’t seem to be especially interested in P2P. Forty-seven percent said that they don’t see a need for it, and 38.5% have security concerns. These responses may reflect a lack of familiarity with mobile P2P, with just 24% saying they had even heard of it.

Another issue is the time it takes to make a payment. With P2P payment services that rely on the ACH network, it can take a several days for pay-ments to clear.

The industry is working to address these issues. “It’s possible that finan-cial institutions, for example, could use their existing debit payment ‘rails’ in reverse to enable real-time P2P—and benefit by charging a fee,” says Vantiv’s Dean Seifert . In addition, “P2P has seen use among individuals making payments to tradespeople and other small businesses.”

Several trends may increase consumers’ familiarity with P2P in the near future. There is a growing number of banks, as well as providers such as Amazon, moving into the P2P space. And the rapid spread of devices such as Square, which let small businesses and individuals accept credit card payments with a smartphone, are increasing awareness of micropayments.

The eWallet Question

12

A key enabler for mobile payments is the mobile wallet, which provides a single access point to an individual’s cards and accounts for payments. But there are no wallet standards in place. In this environment, “everyone from the biggest names in payments and the Internet to small startup companies is getting involved,” says Ben Love, vice president, Mobile, at Vantiv.

The result is a burgeoning number of mobile wallets—a number that cur-rently tops 100, and continues to grow. It can be difficult to keep track of it all, says Love, but an understanding of who is offering what—and the motiva-tions of those providers—can help. The list of wallet contenders includes:

Gatekeeper wallets. These are the “giants,” including Visa, MasterCard, Google, and Isis, that are “jockeying for dominance in the way NFC is used,” says Love. NFC technology can enable easy smartphone wallet payments.

retailer wallets. These give merchants a way to leverage coupons and dis-counts, and move from a broad mass-marketing strategy to a more individu-alized strategy to strengthen customer relationships.

banking wallets. “This approach re-

flects the evolution of banking over the past couple of decades, from branches to ATMs to online and mobile banking,” says Love. “Providing a wallet on the mobile device is the next logical step for banks.”

e-commerce wallets. Organizations such as Amazon, Apple iTunes, and PayPal are interested in using wallets to get into the physical, bricks-and-mortar world and the offline purchase of goods and services.

There are other types of wallets in the mix as well; aggregator wallets, for ex-ample, let consumers consolidate their various credit, gift, prepaid, and loyalty cards into one wallet. And single-feature wallets have a narrow focus on doing one thing well, such as keeping transaction fees low.

Many find this growing lineup confus-ing and a source of uncertainty. For example, a number of merchants have taken a wait-and-see approach to in-stalling terminals with NFC—in part be-cause of the battle among gatekeeper wallet providers. “One side wants the NFC chip to be part of the mobile device, while the other side wants it to be part of the device’s SIM card, which gives control to the wireless service provider,” says Love. Both groups, he says, are ultimately looking for control of valuable customer purchase data for marketing purposes.

At this point, it’s difficult to determine which mobile wallets will survive and thrive. But, Love says, there’s an upside to this fluid situation. “From a retail and banking standpoint, the fact that few players are taking sides is a good thing,” he explains. “Without any domi-nant player emerging, the field is wide open to those who want to be involved in providing mobile wallets.”

2010$0

$50

$100

$150

$200

$250

$300

2011 2012 20132009

TOTA

L TR

AN

SAC

TIO

N V

ALU

E

In $ billions

20152014

oPPortuNItY KNocKs

Mobile wallets are being pursued by a range

of providers that are interested in capturing

part of the growing mobile payments market, which is

projected to rise to $260 billion by 2015.

Source: IE Market Research Corp.

13

0% 20% 40% 60%

51%Mobile phone

payment

Buying online with

smartphone with app

eWallet payment with

credit or debit cards

Pay in store with app on smartphone

23%

1%

40%

21%

4%

32%

20%

2%

28%

20%

1%

■ Aware ■ Interest ■ Use

use aND PercePtIoN oF eMerGING PaYMeNts

Consumers are very aware of and interested in various mobile payment methods. But actual usage is still relatively low, due in large part to concerns about security, the lack of infrastruc-ture, and a small installed base.

Mobile banking, too, can be enhanced to provide a more compelling value proposition—again, by taking fuller ad-vantage of mobility. This represents a logical progression of mobile banking, says Peter Kulik, vice president, Prod-uct Management, at Vantiv. Mobile Banking 1.0 essentially involved ac-tions such as sending a text message to the bank and getting account bal-ances back in real time—“Cool, but not something that is going really catch consumers’ attention and change their habits,” he says. Mobile Banking 2.0 moved PC-based Internet banking onto the phone, allowing consumers to check balances and transfer funds in a more convenient format—but not really do any more than they could with their desktop computers.

“We are starting to see Mobile Bank-ing 3.0 starting to emerge” Kulik says. “Mobile Banking 3.0 is all about imple-menting new use cases that are inher-ently tied to the mobility and location sensitivities of mobile phones.” With Mobile Banking 3.0, he says, consum-ers will have features such as mobile check deposit and payments, alerts, and personal financial management functions such as budgeting tools, alerts about overspending, and offers from third parties—all on one device.

What’s Next?

The rapid changes taking place in mo-bile payments—the evolving technol-

ogy, uncertain standards, and growing consumer interest—present a complex picture. For merchants and financial institutions, it can be difficult to know how to move forward. One approach, notes Love, is to “understand what your customers want, and use those needs to build stronger relationships with them.”

The Vantiv research suggests that merchants and financial institutions may not be fully aware of the growing consumer interest in mobile payments. In general, interviews with industry executives showed that most mer-chants feel that they already offer a wide enough array of payment op-tions to satisfy current needs, and few merchants or financial institutions think that their customers are ready for mobile payments at this point. It was clear that both groups foresee a fairly long timeline for the adoption of mobile payments, with merchants expecting it to occur somewhat later and financial institutions expecting it somewhat sooner.

But those perspectives are out of sync with the consumer view. As the research shows, growing awareness and interest indicate that consumers expect mobile payments to become commonplace in five years—and many expect that they themselves will be using them before long. Merchants and financial institutions appear to be lagging behind consum-

14

YEARS IN U.S. MARKET

5 years0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

10 years 15 years 20 years0 years

JAN

UA

RY 2

012

CO

NS

UM

ER U

SAG

E LE

VEL

✦ Smartphones (iPhone intro)

✦ Tablets (iPad intro)

✦ Mobile P2P services✦ Open and single-merchant e-wallets

✦ Mobile banking* (initially SMS-based)

ers when it comes to their outlook on adoption.

Merchants and financial institutions do have a number of real concerns about mobile payments. Like consumers, they see security as a challenge. But over-all, executives interviewed from both types of organizations expressed opti-mism about the ability of the industry to provide sound security for mobile payments—and even exceed cards in that area, through the use of multifac-tor authentication processes.

Beyond that, banks worry about losing control of their payment networks to third-party competitors, as so many players are now involved and technol-ogies and standards are in a state of flux. “The most challenging obstacle is to figure out which payment types a bank with limited resources should offer,” said one regional bank execu-tive. “It’s a balancing act, picking and choosing which approach to take with a limited budget. We can’t offer every type of solution that comes along.” For their part, merchants fear that mobile payment systems will be costly to implement and could steer con-sumers to competitive products from

MobILe ProDucts’ MaturItY status

The speed of adoption of mobile devices continues to be rapid, while the use

of financial apps on those devices follows a

traditional path.

providers that make more effective use of the mobile platform. Merchants also worry about third-party wallets from organizations such as Google and losing control in customer rela-tionships because of the need to work through intermediaries.

Such concerns are significant, but so too are the potential opportunities. By building mobile payment capabilities, merchants and financial institutions will be able to give customers what they want in payments—convenience, flexibility, and more information and control. But these companies may also benefit from a better understanding of customers. With more payments being handled through mobile devices, more data will be available for analysis. Merchants and banks can use this data to assess consumer preferences and behavior, thereby improving their ability to reach customers.

A merchant, for example, might de-velop an Amazon.com-like capability to constantly track purchase behavior and use the resulting insights to hone the offers and discounts it gives to consumers. “The relationships with customers are already there—people come into stores all the time,” says Love. “But now, the mobile data allow you to know them better—to under-stand what they buy, where. With that, you start moving from mass marketing to individual marketing. You no longer have to give people generic coupons or have a broad loyalty scheme that may

Source: Vantiv/Mercator Insight Series Research, February 2012. * Data from Mercator Advisory Group Survey, October 2011

15

or may not be meaningful. Instead, you can give each consumer target-ed, relevant offers.”

Overall, financial institutions and mer-chants have an opportunity to take advantage of the growing consumer excitement around mobile pay-ments—or run the risk of being left behind as others do so. “These com-panies can lead the way for value-added mobile payments by getting involved in early steps to engage their customers, steer the technology to their advantage, and encourage mobile payment adoption,” says Love.

In such a fluid environment, mer-chants and financial institutions will benefit most by taking small, incre-mental “early steps” that are not too large. In these initial stages of mobile payment adoption, “it is very hard to know what is going to happen next in the coming years,” says Wein-gart. “But holding still is not a good option.” With that in mind, he says, companies might seek the guidance of a partner in the payments industry.

Such partners could help them conduct pilot programs in a limited region, which doesn’t require a large bet on a given technology. This can help them build knowledge and ex-perience and better understand the evolving landscape and how consum-ers are behaving as mobile payments evolve. Those accumulated insights

can then be used to develop a larger strategy.

As they explore, merchants and financial institutions should make sure that they are looking beyond the obvious and conventional to con-sider the broader possibilities of this emerging payment method. “When the Apple iPad was introduced to the market, it was perceived as a small personal computer—because that’s what everybody knew,” says Weingart. “Now, tablets are used as vital work tools by airline pilots, physicians, and a host of others who would never have used a ‘small PC’ in their work, so it really created a new, unforeseen model.

“The rise of mobile commerce prom-ises an even greater paradigm shift, Weingart continues. “The tendency today is to look at the mobile device in certain ways—as a self-service tool, an ATM without the cash with-drawal, a device-based version of the traditional debit or credit card. But it’s much more than that. It is a new kind of key intersection between the consumer and the bank or merchant, and it is changing the face of busi-ness for merchants and banking forever.”

0% 20% 40% 60% 80%

63%eWallet payment with

credit or debit cards

Mobile phone payment at

POS

Buying online with app on smartphone

Pay in store with app on

iPhone

4%

27%

54%

6%

31%

46%

6%

37%

45%

6%

35%

■ Security ■ Reliability

■ No need for service

What’s hoLDING theM bacK

When asked what limits their interest in mobile payments, consumers cited security issues, especially with mobile wallet and in-store mobile phone payments. Across payment scenarios, a sizable number also said that they simply don’t see a need for mobile payments.

Vantiv corporate headquarters

8500 Governors Hill Drive, Cincinnati, OH 45249866-622-2880 | www.vantiv.com

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about Vantiv

Vantiv LLC is one of the leading integrated payment processors in the United States. Known as Fifth Third Processing Solutions since 1971, the company, headquartered in Cincinnati, Ohio, changed its name to Vantiv in 2011, and be-came a public company in 2012. Vantiv’s credit, debit, prepaid, and data security solutions help businesses and financial institutions of all sizes get the most out of payment activities.