April 11, 2011
Dispelling the myths about mobile banking and payments
There is a lot of confusion these days when it comes to mobile banking and payments. Consumer advocates warn that mobile payments will be unsafe and we need to develop consumer protections now to create a harbor from scams and rip-offs. While it's true that payment innovations often introduce new risks, they also create opportunities to create better safeguards that ensure a more secure payments system. So the path forward is best armed with accurate information about how the mobile wallet will work in the future. With so many new product trials and service rollouts for both mobile banking and payment services, it's difficult to separate fact from fiction. Today, we take an opportunity to do just that. We’ll look at some of the myths we hear most often about mobile banking and payments in the United States.
Myth #1: Mobile banking and mobile payments are one and the same
We often hear people use the term mobile financial services to refer to banking and to payments, as if they were the same thing. The fact is, they are different services that appeal to consumers in different ways, and they are accompanied by very different types of risk. As a recent position paper published by the Atlanta and Boston Federal Reserve Banks defined it, mobile banking refers to a service that accesses bank information such as account balances and transaction history and that facilitates transfers between accounts and online bill payment. Mobile payments, on the other hand, refers to the use of the phone either to make a payment for purchasing goods or services at a merchant's point-of-sale—a transaction also known as a proximity payment—or to transfer money to another person or a business. The latter transactions, domestic and remittance payments, are referred to as mobile money transfer (MMT) payments and occur remotely either within a country or cross-border. Because mobile banking services are merely extending online functionality from the PC to the cell phone, the risk profile for the mobile phone is not markedly different.
Myth #2: Mobile payments represent digital money and lack regulation
While emerging markets are experiencing some remarkable advances in mobile commerce using text messaging to send a payment via prepaid airtime, the U.S. experience, as with other developed countries, is very different. Text-message-based mobile payment systems work for those emerging markets because they are clearly safer than cash. Here and in other developed countries, we have safe payments already, so the mobile device would merely be another channel to access existing payment instruments and their networks for clearing and settlement. All the rule sets, laws and regulations, and consumer protections that govern retail payments today will simply migrate to the mobile channel. While new networks, or rails, may emerge in the future, at present, the payment network systems remain the same.
Myth #3: Mobile payments are less secure that other payment methods
First of all, the security functionalities resident in the mobile handset provide authentication capabilities that don't exist in the current payments environment. The ability to add passwords and GPS location functionality to the handset represent additional security controls to accessing payment instruments in the future mobile wallet. Today, there are no locks on your leather wallet to preclude a bad actor from stealing your credit and debit cards and using them for illicit activity.
Moreover, the technologies that enable our current payments are becoming increasingly obsolete and vulnerable to fraud. Card payments grow riskier every day as the United States remains reliant upon mag-stripe technology, which is very easy for criminals to breach and then use to clone cards for illegal payments. Because mobile devices will use contactless technology in the form of an embedded computer chip, the mobile phone will be a much more secure payment device than the plastic cards we use today.
Conclusion So maybe the idea of mobile banking and payments isn't that scary—and maybe these things aren’t even that trendy any more. When you get right down to it, the cell phone is just another form factor for a payment.
But that's not to say that a lot of new ideas aren’t percolating out there. We know that telecoms are taking small steps with micropayments by allowing consumers to pay after-the-fact for digital goods—things like avatar accessories, ringtones, and even cows and corn in online games like Farmville—on their regular phone bills. Facebook credits are reportedly evolving into Facebook payments for physical venues outside of virtual online games and stores. And we all are waiting expectantly to see if Apple will make use of its extensive iTunes network as a more open payment system whenever the next iPhone is released.
At the Retail Payments Risk Forum we'll continue to keep an eye on emerging payment developments such as these, and work toward clearing up confusion. So don't wait for a blog post, feel free to send an e-mail to any one of us in the Risk Forum if you have a question. We’d love to hear from you.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum
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