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 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 OLIVER: Our pleasure.
EVANS: 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’s 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?
OLIVER: Well, there’s several hurdles that we’ve talked about in the process of producing the paper, and I think there’s 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 of them.
Part, 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, in some ubiquitous fashion, and I guess the counterpart of that is the presence of smartphones in the hands of enough individuals who want to use mobile. And we’ve discussed in the document that, 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: In terms of overcoming those obstacles, is there anything specific that comes to mind in terms of overcoming them, or is that really just a matter of time for things to work themselves out?
OLIVER: I think it’s a matter of time. There’s been any number of pilots announced, and each of them is sort of charting its own course and trying something different. And I think they’ll be learning from those pilots. But I will tell you that, in our sessions, there seems to be some fundamental agreement on a number of underlying principles here, and 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. That 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 – we think 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 – one of that – so one reason we’re looking at NFC because of that.
And then, if we look at what’s going on globally, NFC in the developed world seems to be also the direction, 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, that seems to work just great?
OLIVER: That’s a great question, and we actually talked some 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 that basically all you do is select it and tap it, and you’re gone, much like the experiments going on today with stickers and 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 about that, in 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 there. 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, in these experiments, a lot of them are designed, I think, 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, and we made – 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, how they can either share a relationship and responsibility for the customer has to be worked out, because, in the end, that’s 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, where identifying the need or gaps in regulatory oversight, so that we all can understand it, and they know what they 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 they 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: Yeah, I was going to say, if I could kick in on that, I think one of the interesting things we’re hearing where there’s some disagreement 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 there about which technology’s the best, and that has a lot to do with who they think owns the phone, 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 terminal. And some of those terminals are, in fact, capable of handling NFC. I think that that is certainly an issue that was discussed much 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 go to what technology, and then they’ll go through with once. They have to replace terminals usually every five years anyhow.
But when you drop down into the smaller-end merchants and everything, you get into some real issues, because that’s a lot of people out there, and they 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 guys 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. And, Marianne, you can kick in here too, but I mean, 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 and Apple, they’re 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. I mean, you have now entering into the payment stream the mobile operators, who are typically overseen by the FCC. But the FCC doesn’t oversee, historically, payments activity. And so the group is actually, as one of the underlying principles, asked us to perhaps assist in working with regulatory agencies to determine who might do what here, 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 this time.
EVANS: So, this would be collaboration between the agencies, as opposed to having the federal communications and payments commission.
OLIVER: Yeah, 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 – kind of come together and figure out, when you look at a mobile payments application, where’s the jurisdictions that are going to look at various parts of it, and how it’s going to be regulated then.
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 here while the paper was published, that they seem to want to continue to meet and perhaps pick up one of the topics that’s left open here 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: I mean, 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 more long-term where we go from here. We would like, as Rich just said, perhaps taking 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, and also 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 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, and 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 me and a lot of other people would probably love to have been flies on the wall in the room for these discussions. So, thanks again for joining us today and have a great rest of the day.
CROWE: Thank you.
OLIVER: Thank you so much, David. Appreciate it.
Executive Bios
Marianne Crowe is a vice president in the Treasury and Financial Services department of the Federal Reserve Bank of Boston. She serves as the Mobile Payments Project manager and payments liaison to the Consumer Payments Research Center. Her previous roles at the Boston Fed include vice president/project manager in the Consumer Payments Research Center, assistant vice president of business development, the National Image Archive service, and the Boston check operations. Prior to joining the Fed in 2000, Crowe worked at BankBoston in project and operations management positions. Crowe has been a member of the FSTC mobile payments workgroup and the NACHA Internet Council.
Richard R. Oliver is an executive vice president with the Federal Reserve Bank of Atlanta and has been with the Bank since 1973. Since 1998, he has served as retail payments product manager for the Federal Reserve System. In this capacity, he has responsibility for managing the Fed’s check and ACH businesses nationwide. Earlier in his career, Mr. Oliver served as planning analyst, administrator of the Automated Clearinghouse, chairman of the Federal Reserve’s Electronic Payments Implementation Task Force, manager and officer in charge of software development, vice president in charge of automation services, the Federal Reserve System’s product manager for electronic payments services, officer in charge of business development and check software, and staff director for the Federal Reserve System’s Policy Committee for Financial Services. He also serves on the Federal Reserve Bank of Atlanta’s Management Committee. Mr. Oliver received a bachelor’s degree in math from the University of Nevada, a master’s degree in information and computer sciences from Georgia Institute of Technology, and an MBA in management from Georgia State University. He has also completed executive development programs at Harvard University and the University of Tennessee.
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