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Retailers, financial institutions, carriers and phone makers are banking on mobile payments, but the emerging industry could hit a significant roadblock: reluctant consumers, concerned about privacy and security.

Banking On E-Wallets

E-wallet technology is set to mainstream within the next decade, with consumers paying for purchases with mobile devices in both stores and online. A survey of industry experts by Elon University and Pew Research projects mobile payments will saturate marketplaces by 2020, offering merchants and consumers ease and convenience with financial transactions.

"We have already witnessed the transition from cash to debit and credit cards," said Christian Huitema, a Microsoft engineer surveyed by Pew and Elon. "The electronic wallet is not much more than a virtual card, in which near-field wireless communication replaces the reading of a magnetic stripe."

In preparation, retailers, phone makers, carriers, banks and other financial industry players are ramping up their digital wallet technology, and a mobile payments industry is beginning to emerge with a patchwork of solutions. They range from industry-wide collaborative initiatives like the upcoming Isis payment system to mobile payment dongles that attach to tablets and smartphones, like those from start-up Square.

It's a lot of market activity for a technology that isn't yet an integral part of the retail experience, but the stakes are high and the payoff could be huge for the winners. The solution that manages to take off with both consumers and merchants may garner its maker a cut of every transaction passing through it. And with mobile phones being the conduit that processes these large sums of money, the opportunity is high to collect an unprecedented amount of consumer data on how people spend money, where they go to do it, what they buy and what they browse.

That, however, could be a major problem for consumers.

Buyers Beware

A new survey conducted by law professors at the University of California at Berkeley indicates consumers could shy away from using handsets to pay for purchases if it means giving up personal or data-tracking information -- an attitude that mobile payment players may find worrisome as they push out e-wallet technology to the masses within the next few years.

Four out of five survey respondents "objected to the transfer of their phone number to a store where they purchase goods," indicating a strong majority of consumers are highly sensitive about their personal mobile data, and would eschew the convenience of e-wallets to protect it.

Even casual data-gathering from phones drew strong reactions: a whopping 96 percent said they would definitely or probably not allow the sharing of "information about you with the stores that you visit, when you are just browsing."

Concerns over mobile data privacy are nothing new, and bringing money and spending into the equation may increase consumers' sensitivity and vigilance when it comes to information on their phones and tablets. For example, two malls in California and Virginia tracking foot traffic patterns through shoppers' phones drew significant outcry, and the malls pulled the plan as a result. Simply put, when it comes to shopping, consumers want their data to stay private and safe.

Transparency and assurance over mobile data and privacy is not yet a strong suit in the industry, however, judging from the uproar over the Carrier IQ controversy this year and Apple and Google location data snafus last year. Many consumers don't know or become confused by how companies like Apple or PayPal record and use consumer information from online or mobile purchases on platforms like iTunes and eBay. Shoppers appreciate their convenience but are wary of the unseen costs of doing business on services like these.

And when it comes to letting devices have a direct line to their bank accounts, consumers could even be more conservative, making for a highly reluctant customer base for a rising number of mobile payment solutions that will bank on enthusiastic shoppers to fuel revenues.

Too Many Cooks in the Kitchen?

Beyond issues of consumer security and privacy, mobile payment players must also deal with other obstacles to widespread adoption of digital wallet technology. Lack of infrastructure, for example, is a major roadblock to the mainstreaming of e-wallet technology. Merchants need to install mobile device readers, and near-field communications (NFC) technology, which many e-wallet offerings are leaning on, has yet to be baked into many mobile devices, leaving crucial pieces of the equation missing with retailers and consumers.

That will probably change, however, as more phone makers begin developing devices with NFC chips already installed among them. Some payment platform makers are taking advantage of the technology gap, too: Square has secured a following with its app and dongle, and PayPal will forego NFC, which will guarantee at least one e-wallet solution by a major player not using the technology.

The sheer number of options could be overwhelming for consumers as well. Currently, most store customers can only choose cash, check and major credit cards, although some retailers have begun experimenting with offering PayPal as an option. In the future, though, customers paying by e-wallet may face a bewildering amount of choices that vary by mobile OS, bank, carrier, phone, credit card company, online payment system and retailer.

Choice is generally good for consumers, but in this case, the proliferation of services could cause shoppers to question how these solutions could guarantee the security that financial transactions demand.

The winner of the mobile payments race, therefore, will be one that manages to coordinate the interests and protocols of banks, credit card companies, phone makers, carriers and merchants -- in other words, one that becomes an industry standard, much like how companies like VeriFone came to dominate point-of-sale credit card payments. The Isis digital wallet solution is a contender under this criteria and has made moves to boost security on the platform in anticipation of consumer concerns, but could be hampered by the slow rollout of NFC technology on mobile devices.

The Digitalization of Money

Mobile payments are hailed as a next-wave major innovation, but have been slow to arrive to the U.S., owing to its vast scale and complexity of its financial institutions, as well as barriers discussed earlier.

But the industry's dream of paying by phone isn't impossible, and mobile payments are a normal feature of the shopping experience in countries like Japan. Many analysts draw parallels to the implementation of credit cards, which were also slow to gain traction with consumers until infrastructure went into place and barriers lowered to let people at a wider range of income levels get credit cards.

The opportunity that mobile payments offer -- and the ease and convenience for consumers -- is simply too ripe an opportunity for the many players in the race. Many experts also point out that putting a digital wallet solution in place could improve beyond the existing system, allowing mobile payments companies to build in more layers of security and convenience for consumers and reinvent the payment systems in place now.

"For many of these experts, mobile money represents more than just existing processes adapted to a new, more portable form factor," said Janna Anderson, director of Elon's Imagining the Internet Center and a co-author of the Pew study. "They see this as an opportunity to implement security measures that are lacking in our current financial systems, to offer consumers more control over their spending, and to even reinvent the way we think about the concept of money."

As reluctant as consumers are, mobile payments are inevitable, the next step in the increasing "digitization" of money in the modern economy. As economies moved from gold to cash to numbers in a bank account, money has transformed from a concrete object to hoard and save to becoming another kind of information that can be moved and tracked by computers and, soon, mobile devices. It's a shift that has had profound effects on financial institutions, governments and consumers that are only being understood by historians now.

Money is becoming more invisible, more abstract, and consumers may remain nervous about exposing it to devices and systems that are not yet standardized and whose security is constantly being questioned. But there's too much money to be made by those who have already invested in mobile payments, and consumers will soon be ushered into a new era, nervous or not.

Why Mobile Payments Are in Trouble originally appeared at Mobiledia on Tue May 01, 2012 2:37 pm.