Beyond question, consumer technology darling Apple really kicked over an anthill by recently announcing ApplePay, and that might just be the event that finally gets the retail industry moving to implement mobile payment options in a meaningful way. But it’s not as if the technology hasn’t been out there for some time. RSR has been commenting in Retail Paradox Weekly on various issues related to mobile payments since 2011 ( “forever ” in the fast paced world of consumer electronics), around the time that VISA announced its EMV 2015 mandate with its built-in incentives for chip-based payments related to PCI.

Still, there are lots of inhibitors to mass acceptance of mobile payments, and they were outlined in a presentation by Marianne Crowe, VP of Payment Strategies at the Federal Reserve Bank of Boston, last week at the RVCF (Retail Value Chain Federation) Conference in Scottsdale, Arizona.

Drivers & Inhibitors

In her presentation, Ms. Crowe first outlined the reasons why mobile payments aren’t just likely, but inevitable:

• First and foremost, there’s the the rapid adoption of smart phone technology by consumers. Smart phone penetration is expected to be almost 72% by mid-2015 (Android 52%, Apple 42%)
• Mobile banking (deposits, bill pay, etc.) is becoming “mainstream ” for consumers
• Consumers are increasingly using mobile payments already, particularly for mass transit tickets and online goods and services
• Nowadays, consumers are being presented with incentives like mobile-only rewards and discounts
• Non-banks, like Softcard (sponsored by mobile network providers), Google, PayPal, MCX, Apple, and Starbucks are all offering new mobile payment capabilities
• And finally, there are more and more technologies to choose from (and therein lies the rub).

So while these factors favor the adoption of mobile payments in retail stores, just because something can happen, that doesn’t necessarily mean that it will happen, and Marianne pointed out the biggest inhibitor of all – consumer attitudes about mobile payments (from a Federal Reserve Bank consumer study):

• 76% of consumers think cash or the familiar debit/credit card format is easier to use;
• 63% of consumers are concerned about the security of mobile phones; and,
• 61% “see no benefit “

These concerns underline one of the most fundamental “truths ” of technology adoption: any new technology solution must be easier to use than to ignore. And to date, that just hasn’t been the case, at least when it comes to mobile payments in retail stores. But let’s assume that with the inevitable shift in the basic demographic of consumers when all of us card-happy Baby Boomers will cede center stage to younger tech savvy shoppers, attitudes will change. Is that all it will take? That could be a long time – just consider how long it’s taken American consumers to give up writing checks!

Challenges Abound

Ms. Crowe boiled down the challenges that have to be resolved into three broad categories, Security and Standards, Infrastructure and Technology, and Market and Adoption.

“Market and Adoption ” is center stage right now with the debate about ApplePay vs. CurrentC, the soon-to-be-released mobile pay solution from MCX (the retailer digital payment consortium led by Walmart), that hit the airwaves when U.S. drugstore chains CVS and Riteaid said that they would not accept ApplePay. Market competitor Walgreens, sensing an opportunity, said it would be happy to accept ApplePay.

Beyond the fact that both CVS and Riteaid are members of the MCX retailer consortium while Walgreens is not, there are more fundamental issues related to standards and technology at work. For starts, the Apple iPhone 6 uses NFC ( “near field communications “) to communicate with NFC-enabled payments terminals. MCX’s CurrentC mobile app will use QR codes that are scannable at the POS, but will not use NFC at least for now. It seems like an odd omission on the part of MCX, since the consortium members will continue to honor credit and debit cards at the register. That means that they must upgrade their POS payment terminals to be EMV compliant, and most of those new terminals are also NFC-capable. So while its probably the case that the MCX team made that decision long before Apple’s plans became clear, I think that the retailer consortium members look petty by disallowing ApplePay, as if they are begging for a fight for dominance with Apple. Place your bets!

There’s a “security ” angle to this as well. ApplePay is working with big banks and payment networks like Bank of America, USAA, Citi, American Express, Mastercard, VISA, Wells Fargo, etc. ApplePay implements a “token ” based payment authorization scheme (where the authorizing mobile phones send tokens rather than specific card numbers and PINs), and the banks manage “token vaults ” to ensure the security of authorization requests. That means that the banks are liable for the risk- not consumers and not retailers. With MCX, it’s not clear yet who will be liable for the risk. After all, retailers joined MCX to get around the banks and avoid what they consider unfair fees. So will the consortium bear the risk? Or accepting retailers or consumers? It’s not clear.

But even ignoring the Apple vs. MCX debate, there are differences in the various options available in the market right now. Apple iPhone 6 phones use an industry-standard “secure element “, just like many Android phones do. But Apple uses it differently – it uses the token scheme discussed above, whereas Android users will use an app on the phone to manage their credit/debit card information stored on the “secure element “, and that info will be passed into the network when a payment is authorized. And don’t forget that Google Wallet is in the market now, as well the popular Starbucks card. PayPal seems like a low tech option by contrast; just enter your PayPal ID and password, and you’re good to go.

Netting it out, it seems like “Beta vs. VCS ” all over again, and there is no assurance that the best solution will win – or even that there is such a thing as a “best ” solution. But until technology, standards, and security issues get resolved, widespread market adoption won’t happen. While each of the players may be hoping that they will become the “VHS ” of mobile payments by virtue of the greatest consumer acceptance, this isn’t video entertainment we’re talking about, it’s people’s money.

What Has To Happen: The Federal Reserve Bank POV

I remember asking a C-level executive at New York City based retailer Duane Reed (pre-Walgreens), “what kinds of payments does your company support at the point of sale? ” His response: “if a customer offers us money, we want to take it. People come from every corner of the planet to our Manhattan stores, and we never want to say ‘no’ to them. ” That sounds like a sensible approach. But as I pointed out earlier, mobile payment adoption is dependent on a lot of things beyond retailers’ control. So, given the state of flux in mobile payments, what should retailers do right now? I called the Federal Reserve’s Marianne Crowe to get an answer for that question. Here’s her take:

“If retailers aren’t tied to the exclusivity clause in the MCX agreement, there are still options that they could be looking at right now. It almost doesn’t make a difference! You need to get something into your stores so that consumers can start getting comfortable, whether it’s QR coded like the Starbucks card or NFC contactless. As better solutions come along or you want to add solutions, you’ll at least have a baseline to work from.”

“If retailers aren’t tied to the exclusivity clause in the MCX agreement, there are still options that they could be looking at right now. It almost doesn’t make a difference! You need to get something into your stores so that consumers can start getting comfortable, whether it’s QR coded like the Starbucks card or NFC contactless. As better solutions come along or you want to add solutions, you’ll at least have a baseline to work from.”

“I can’t see retailers only offering one solution in the next few years, because not every consumer will want to use the same thing, and not every consumer will have an iPhone – a lot of people prefer Android. Look at your competitors; in every industry there are people who are trying things out. See what they’re offering and think about putting those things in your stores and testing them out. It’s a good time to do this now because the volumes of transactions are still relatively low, and the market is still immature. Find out what works and what doesn’t and build on that! ”

The mobile payments expert also recommends that retailers either get involved in standards-making bodies like the Accredited Standards Committee X9. That may be too expensive of an option for many retailers, but indirect involvement via trade associations is possible (for example, the NACS – National Association of Convenience Stores – participates on behalf of its constituents).

Marianne’s final words of advice? “Everybody needs to stay calm, and not stifle innovation. We’re still innovating, we’re still learning, and we’re still growing. Stay close to it, and see where it’s going. That’s where we are right now “.