Exclusive Interview: Fed’s Predictions for the Future of U.S. Mobile Payments

Editor’s Note

In this month’s Business section of the Lydian Journal, we publish a transcript of an interview the journal’s Editor-in-Chief, David Evans, conducted with two of the Federal Reserve’s leading authorities on the coming evolution of mobile and retail payments in the United States. Marianne Crowe is a long-time senior leader and consumer payments industry expert at the Boston Fed, and she has recently been leading the mobile payments efforts for the Boston Federal Reserve.  Richard Oliver leads the Federal Reserve’s retail payments group, including the management of the ACH and check processing businesses, from his executive position with the Atlanta Fed.  Regular readers of the Lydian Journal and of PYMNTS.com sections covering mobile will recognize a familiar debate in this interview – namely, will NFC-enabled payments represent the primary opportunity for mobile-enabled commerce in North America? What will be the common standards for the underlying technology, and what will be the common business model and business case to drive adoption? The Federal Reserve is working to bring the major parties together to drive to consensus.

– Tim Attinger, Business Editor and Managing Director at Market Platform Dynamics   

DAVID EVANS: Everyone agrees that people are going to be paying with mobile in the United States, but no one knows when, and there’s a lot of debate about what business model is going to look like to make this work for merchants, consumers, mobile carriers, banks, networks and lots of other stakeholders. This is David Evans, and I’m here today with Marianne Crowe, who leads the mobile payments project at the Boston Fed, and Rich Oliver from the Atlanta Fed. Rich, as many of you know, is responsible for retail payments for the Fed, including the Fed’s checks and its ACH business. Marianne and Rich helped put together a group of the key stakeholders in mobile to talk through these thorny issues that I just mentioned.

A few weeks ago, along with several of their colleagues, they published a report called “Mobile Payments in the United States: Mapping the Road Ahead.” Marianne and Rich, thanks for chatting today.

Rich, let me start with you. What are the three biggest hurdles to getting mobile payments ignited in the United States? And I’ll tell you right now what my follow-up question is going to be: what’s going to happen, in your view, to overcome those obstacles? So, let’s take it away with the first part of that. What are the three biggest hurdles? 

RICHARD OLIVER: Well, there are several hurdles that we’ve talked about in the process of producing our report, and I think there are some chicken-and-egg issues that are particularly acute here. The biggest one right now seems to be the definition of a business case that applies to all the parties within the ecosystem. I think that we have seen the advent of mobile and mobile experiments elsewhere, but right now, there is not a general agreement on the business case, or the business model that would produce a business case. So that would be one hurdle.

Secondly, I guess, and tangential to the business case, is the expense that the merchants are going to have to incur in order to upgrade terminals to accept mobile payments. And, I guess the counterpart to that is the presence of smartphones in the hands of enough individuals who want to use mobile. In the United States, there are so many other options that consumers are not, perhaps, as hungry for it as elsewhere.

And then finally, I would probably throw in standards. There doesn’t appear to be much of an agreement as yet on exactly what standard would be used. So those three things, I think, stand out to me.

EVANS: Is there anything specific that comes to mind in terms of overcoming these obstacles, or is it really just a matter of time for things to work themselves out?

OLIVER: I think it’s a matter of time. There have been any number of pilots announced, and each of them is sort of charting its own course and trying something different. And I think we’ll be learning from those pilots. But in our sessions, there does seem to be a fundamental agreement on a number of underlying principles here. For example, whether or not the participants are really now to begin to follow up, following the publication of this paper, to maybe pick off one or two of those and begin working at it. This could jumpstart things.

EVANS: Marianne, a number of ventures are investing in mobile solutions using barcodes for authentication. That’s the route, for example, that Starbucks has taken. And venture capitalists seem to be pouring a lot of money into other startups, for example, Symbol, that are using barcodes. Your group seems to – maybe this is too strong – but it seems to dismiss anything except NFC. Why?

MARIANNE CROWE: Well, I think I agree. I wouldn’t say that we’ve dismissed it, but we’re trying to look at what solution would provide broader application in terms of payments and other opportunities to use the mobile phone, and what application or solution would be more secure and expandable. So looking at NFC for contactless payments, we have the secure element in the mobile wallet that encompasses that. And there’s a lot of potential using NFC even beyond the financial services type applications, the mobile banking applications, just regular mobile payments at point of sale. It’s those value-added services that NFC can provide that are going to attract more consumer demand, and also see value for the merchant. Things like transit, or adding location-based services to do coupons and discounting or rewards. And then even things beyond that, like identification, putting your license on it, or for health service information. So for that reason we’re looking at NFC.

And then, if we look at what’s happening globally, the developed world seems to be going in the direction of NFC, and we want something that’s globally interoperable, that we can build standards around, and will work for broader adoption. So it just made more sense to focus on that.

EVANS: Rich, here’s a problem that I have with a lot of the mobile payment solutions that I run across. They all seem to take a lot longer to do than just swiping my card. What’s going to make consumers and merchants really interested in ditching the good old magstripe card here in the United States, which seems to work just great?

OLIVER: That’s a great question, and we actually talked in the group about this issue of convenience of service, and whether or not there’d be an advantage to the retailer in terms of expeditious checkout. I think the group’s sense is that, with the right technologies, that problem is taken care of. In terms of having a secure element, basically all you do is select it and tap it, and you’re gone. It’s much like the experiments going on today with stickers, microSD and stuff like that in these isolated experiments.

I think, too, you mentioned the magstripe card, and while that’s pretty efficient, there are ominous signs on the horizon that the rest of the world is adopting alternate chip and PIN technology. And so one of the interesting discussions we’ve had is, how does that integrate with the migration to the mobile phone, and is there a step that should be skipped? Does the phone become, in essence, with NFC technology, the successor to the magstripe? Or do we go through an introduction of chip and PIN along the way? But I think a lot of these experiments are designed to really test the expeditious checkout procedure, and we’ll see how that goes. There’s no reason to believe it can’t be just as fast.

EVANS: Marianne, you’ve been locked in rooms, I gather now, with a bunch of businesses that all want a larger slice out of the pie than the other guy. In terms of moving mobile payments forward, how much do they really agree on, and if you can say, what are the bigger sources of business disagreement among the stakeholders?

CROWE: I think, first of all, in terms of the things that they may not agree on, obviously they’re still competitors. From the beginning, we said we understand and recognize they still have their own competitive needs to support their own businesses. And so probably one of the areas still of biggest disagreement was the business model and the customer control: who owns the customer, or how they can share a relationship and responsibility for the customer, because, in the end, the customer is going to generate revenue for them. So I think that’s one of their big disagreements, although I don’t think it’s something that we can’t work out.

But on the other hand, the things we’ve tried to focus on in the group was, well, where are the common areas that we can work together on shared things that nobody really wants to or can do alone? And those things are the standards, identifying the need or gaps in regulatory oversight, so that we all can understand it and they know what we need to do moving forward, and also on security, to support customers. So if we can focus initially on working on those common things that we can do together, while businesses in parallel work on their own individual partnerships and experiments, I think eventually we are going to come together towards a collaborative type of a model.

OLIVER: Yes, if I could kick in on that, I think one of the interesting disagreements we’re hearing is in what the underlying technology is for the secure element. Is it a microSD, is it a SIM card or is it a chip embedded in the phone? And there’s an experiment that’s been announced with every one of those so far, so that leads me to believe that there’s going to be some discussion about which technology’s the best, and that has a lot to do with who owns the phone, and who owns the customer relationship, too.

EVANS: Rich, sticking with you, based on what you’ve seen to date, do you believe merchants are going to fund changes in point-of-sale equipment without getting subsidies from someone?

OLIVER: Fair question, and I think it may depend on who the merchant is. I think that some of the larger merchants have already begun to implement that technology. Many of them have invested in successor terminals. And some of those terminals are, in fact, capable of handling NFC. I think that that is certainly an issue that was much discussed during the meetings, and the merchants really would love to see a roadmap. They’d like somebody to come up with a decision and decide who is going to go ahead and adopt what technology, and then they’ll go through with it. They have to replace terminals usually every five years anyhow.

But when you drop down into the smaller-end merchants, you get into some real issues, because there are a lot of smaller-end merchants who don’t necessarily have the same motivation. So I think that’s something we’re going to have to work through. We’ve seen an interesting announcement recently from Visa about their willingness to, in essence, trade off with merchants in Europe the chip and PIN implementation costs against PCI compliance. And whether or not something like that will eventually come here with respect to mobile and NFC is not clear, but at least it’s a model.

EVANS: I think Google’s announcement about Android and NFC came after you finished your report. Any views on whether that’s a likely game changer, or just another player with just another approach?

OLIVER: I think we’ll have to see how that platform works. They’ve tried to design an open platform, as they have with many other aspects of their services, and we’ll have to see if people are willing to build on it with secure applications, and have that platform secured. But, Marianne, any other thoughts there?

CROWE: Well, right, I think whether it’s Google or Apple, they are both too big and too powerful in their own right to be ignored, so I think that they have an opportunity to influence this market. But, on the other hand, they’re not banks, they’re not really financial service experts. So while I think they can help the momentum and continue to build interest and use of the phone for mobile payments, I hope that we can get them to sort of join the fold in terms of collaborating with the financial services entities, rather than competing against them, or we’re going to have a lot of fragmentation down the road. So I think it’s a positive thing on the one hand, but I’d like to see them more in line with what we’re trying to do long term.

EVANS: I’m sure that I’ve missed some of the important insights from your report and from the study group. Are there any that I’ve missed that you want to particularly highlight at this point?

OLIVER: Well, I’ll mention one. There is certainly a great concern within the group about what the regulatory oversight structure is for mobile payments. You now have the mobile operators entering into the payment stream, who are typically overseen by the FCC. But the FCC doesn’t oversee, historically, payments activity. And so the group has actually, as one of the underlying principles, asked us to perhaps assist in working with regulatory agencies to determine who might do what, and are there gaps that need to be filled, so that at least they have an idea of what the regulatory oversight structure is. And so I think that’s an important issue that comes out, and it would sure be nice to get ahead of something, rather than figure it out afterward.

EVANS: So, this would be collaboration between the agencies, as opposed to having the federal communications and payments commission?

OLIVER: Yes, I think what we’d love to see is the various regulators – the FTC, the FCC, the banking regulators, commerce, who has privacy concerns right now, and maybe even the new Consumer Financial Protection Bureau -come together and figure out, when you look at a mobile payments application, who has jurisdiction over the various parts of it, and how is it going to be regulated.

EVANS: What are your plans for continuing the study group, if that’s the right name for it, and could the group that you put together evolve into some kind of a self-regulatory organization for mobile payment?

OLIVER: Great question. I think, when we met last time, they wanted to take a break while the paper was published, and then continue to meet and perhaps pick up one of the topics that was left open and make progress on it. And I think, Marianne, they’ve expressed a desire, perhaps, to include some other people around the table when we do it, so it becomes a more representative group.

CROWE: Right.

EVANS: It could –

OLIVER: – move forward.

CROWE: The way we left it is that we would probably try to get back together in July, share the feedback we’ve all heard from the paper and from any of the announcements, and then talk about where we go from here. We would like, as Rich just said, to take perhaps one or two of those principles that we put in the paper that we can work on collaboratively, and maybe develop some sub-work groups to continue.  We would also like to figure out a way to expand the group without losing the essence of having a core team who can feel comfortable communicating and sharing information, maybe by creating a second layer and expanding this to other interested parties. We have heard a lot of interest from organizations, businesses who aren’t part of it right now. So, we’re hoping it continues. We want it to continue.

OLIVER: I think the thing that’s missing here is an entity in the middle to coordinate everybody. You see it in the area of accepted payments commissions, or what have you, in Europe. And we don’t have anything here like that to encourage everybody to talk together toward a common goal,  How that develops, whether it’s a self-regulated type entity built up by the banking industry or not, I think, remains to be seen.

EVANS: Rich and Marianne, thank you very much for your time today. This is really an exciting project you’ve been engaged in, and I think a lot of people would probably love to have been flies on the wall in the room for these discussions. So, thanks again for joining us today.

CROWE: Thank you.

OLIVER: Thank you so much, David. Appreciate it.