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June 14, 2010


Boston and Atlanta Feds cohost mobile payments industry roundtable meeting

It is an established fact that the United States lags Asian and African countries in embracing mobile payments technology. The question is why. To examine the reasons for the lag, the Atlanta Fed's Retail Payments Risk Forum and the Boston Fed's Consumer Payments Research Center convened a meeting on January 27 and 28 of key industry stakeholders involved in the emerging mobile payments industry. The group engaged in a cross-industry dialogue to develop a mutual understanding of industry direction and a noncompetitive strategy to address barriers to adoption of mobile payments. Ultimately, the group sought to answer this question: "If mobile payments can function effectively and efficiently in Africa and Asia, why not in developed countries like the United States?" (Portals and Rails examined the same topic in its April 5 blog, "Consumer confidence the key to U.S. mobile payments future.")

Below is a summary of the meeting's discussion.

Drivers of and barriers to adoption
The United States has been slow to adopt mobile payments technology primarily because many existing payment alternatives are available and because a variety of different entrepreneural business models and pilot rollouts are currently under way. Many new proprietary services lack uniformity, so do not encourage trust and do not attain the critical mass necessary to succeed. Furthermore, the true state of consumer demand is clouded with conflicting perceptions concerning security and the value proposition for mobile payments. Industry participants need to understand exactly what consumers want in mobile payments, whose perceived value may in turn rely on some added feature or functionality rather than just the payment itself.

The transit industry—which is moving to contactless, card-based fare payments systems—has some of this additional functionality. These systems are being modified to allow use for the purchase of nontransit goods and services at merchants' point-of-sale locations that accept the major card brands. This trend is noteworthy because it leverages the transit system’s existing network to expand the payment functionality of the transit card to an open-loop environment.

Similarly, contactless technology, also known as near field communication (NFC), is finding its way into mobile payments, where the phone, as opposed to the card, is the form factor enabled with the chip technology. However, few chip-enabled mobile devices are available on the market today. Some vendors are offering peripheral devices, such as NFC stickers that adhere to the mobile phone, until more handset makers embed the technology in the phone itself. While this strategy provides a plausible interim solution, it also has the potential to confuse the market and delay the goal of full NFC deployment and adoption.

Merchants represent a key variable in the adoption equation. Because the capital investment in contactless point-of-sale equipment is expensive, merchants may delay investment decisions necessary for contactless payments via cards or mobile devices until they are certain of widespread adoption and use. Additional incentives such as mobile coupons or loyalty reward programs may be needed to create a viable business case for NFC payments.

Industry roles and responsibilities
A number of key topics arose out of the discussion surrounding industry roles and responsibilities.

  • Customer ownership: The mobile payments environment is evolving to include a wide range of players—many new to financial services—who share the customer relationship in some way. Consequently, as mobile business models emerge, complications may arise in the sharing of customer data and revenue. No one group in the mobile ecosystem totally owns the customer, although some may bear more responsibility and liability than others, depending on the business model and infrastructure. Ultimately, customer ownership may be defined by the consumer's perception of ownership and who the consumer believes has committed an error in a payments transaction. It will be important for industry stakeholders to discuss scenarios in which customer protection and privacy are at stake, and decide which party will assume responsibility in the payment chain when something goes wrong. It will also be important for stakeholders to agree on collective customer data sharing in order to optimize fraud reduction efforts.
  • Security: Security is a complex issue in the context of roles and responsibilities. For example, who is responsible for provisioning security for transactions that expand across the mobile space from the phone, to the carrier, to the processor, to the bank, and finally to settlement? While strong encryption methods exist for protecting user data during transmission, complexities may arise when different parties begin to share data in order to execute a payment transaction.
  • Regulatory environment: The U.S. banking industry is highly regulated and guided by well-defined standards. The telecom industry, on the other hand, has a different regulatory environment, one that is focused on nonfinancial risk issues. The establishment of a trusted service manager may ultimately serve the role of facilitator to manage and bring together different industry participants.
  • Gaps in oversight: With regard to the regulatory front, gaps may emerge in oversight for the conjoined telecom and banking industries, making it important for industry participants to work with regulators to identify oversight roles and close gaps in advance of widespread deployment. In that context, the Fed is interested in ensuring the integrity of emerging payments systems without taking any action that might stifle innovation and efficiency.

Conclusion
The meeting concluded on the theme that industry participants should work collaboratively to develop a uniform system to provide a common user experience that is safe and secure. While competition often fosters innovation, the industry should address interoperability and common standards in a cooperative rather than competitive context. Meeting participants agreed on broad actions intended to address adoption barriers and establish a viable mobile payments infrastructure. The meeting summary is available on the Boston and Atlanta Fed websites.

By Cindy Merritt, assistant director of the Retail Payments Risk Forum

June 14, 2010 in contactless , risk , telecom | Permalink

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