Why hasn’t mobile payment taken off
in the United States?

Making payments and purchases through mobile apps has taken off in many countries. Why are customers in the US reluctant to buy or pay with their phones?

______________________________________________________________________

By Jian Wang

(Wang, vice editor-in-chief of the New Media Division of China National Radio, is a visiting scholar at the Center for the Digital Future. Contact Wang at wangjian76@gmail.com.)

On February 20, Google announced the launch of its new mobile payment app — Google Pay. The new service replaces Android Pay and Google Wallet, and is capable of managing payment across platforms — online, in store, or to other people.

In fact, this is not Google’s first effort in mobile payment market. From the debut of Google Checkout in 2006 to the launch of Android Pay in 2015, neither can be labeled as “a success.”

Google should not take all of the blame for the tepid market performance. There have been other less-than-successful efforts, such as Paypal’s Venmo, Square’s Cash app, Amazon Pay, and Walmart Pay. None have changed consumers’ payment habits in the United States.

This lack of success is in sharp contrast with other markets. In China, for example, mobile payments totaled $12.8 trillion from January to October last year. However the U.S. mobile payments market was worth only $49.3 billion, according to eMarketer.

Interestingly, mobile payment is often finding greater success in developing nations. For instance, M-Pesa in Kenya, which enables customers to transfer money and pay bills via mobile phone, has 27.8 million users — in a nation of 45 million people.

In Bangladesh, a mobile payment company amassed 11.6 million users in just a few years, and a nationwide mobile payments system is planned to launch during 2018. Payment Week proclaimed in one article: “the country to beat in mobile payments is…Bangladesh?”
_________________________________________________________________________________________________

As the leading model of a free market economy, the United States should be leading the way in mobile payments. But with lack of awareness, confidence, acceptance, and enthusiasm, mobile payment in the U.S. has yet to take off. Only with significant change will the U.S. be able to enter the dawn of a cashless society.

_________________________________________________________________________________________________

What are the reasons for the lukewarm performance in the United States? With a huge population of affluent consumers and probably the best telecommunication and financial infrastructures in the world, shouldn’t the United States be in the leading position?

Jack Ma, founder of Alipay, the biggest mobile payment company in China, responded to inquiries about his hesitation of entering the US mobile payment market by saying, “The US financial market is quite special. Financial institutions have been running smoothly for more than half a century. Where there is a need, there is a service to fulfill it. It is hard for us to fit in. They have their own universe.”

This is probably true. With credit cards and debit cards in common use, payments for American consumers have never been an issue. Even if people want to give money to a friend, they can use a gift card. Consequently, U.S. consumers lack enthusiasm in paying with a smart phone. They like the ways they shop and pay.

In China, however, there is no tradition of using credit cards. The behavior of spending first and paying back later also runs against Chinese ethics and is considered unwise. Although banks in China have spent years promoting credit cards, the efforts have had little effect. On average, Americans have 2.9 credit cards in their wallets; in China, the average is 0.3. As a result, China leapfrogged over credit card use and went directly to mobile payment.

American consumers’ unwillingness to use mobile payment is directly related to a lack in incentives for making a transition in payment habits. PayPal’s chief financial officer, John Rainey, considers “value proposition” as the most important factor for promoting mobile payment.

“It is not extremely difficult to pull out a credit card to shop at a merchant or storefront, said Rainey.  “So, as PayPal accelerates the shift to digital payments, it needs to make sure it provides a value proposition to consumers and merchants to help that shift.”

Another obstacle is the lack of trust thanks to some very public and widespread security breaches. The Center’s current study on the future of money and banking found that 49% of banking customers are reluctant to use online banking because of security concerns.  The study also found that 30 percent of Americans do not feel secure in linking their accounts to payment apps.

A study by YouGov reinforces the Center’s findings: 56% of U.S. consumers feel that mobile payments increase the chances of fraud and theft. Only 5% of people trust mobile payment as a secure method.

_________________________________________________________________________________________________

Jack Ma, founder of Alipay, the biggest mobile payment company in China, responded to inquiries about his hesitation of entering the US mobile payment market by saying, “The US financial market is quite special. Financial institutions have been running smoothly for more than half a century. Where there is a need, there is a service to fulfill it. It is hard for us to fit in. They have their own universe.”

_________________________________________________________________________________________________

Beyond behavioral reasons, there are regulatory issues as well. The current regulatory climate for mobile payment in the United States could be described as a maze. While a sound system of regulations is in place for debit, credit, or prepaid transactions, whether these regulations are sufficient to manage new payment methods is unknown.

Mobile payment stakeholders are concerned about insufficient coverage, uncertainty, and liability responsibilities. When a smartphone is lost and unauthorized charges are made, can the consumer get the money back? What proof is sufficient for such a refund? Paper receipts and other disclosure requirements do not mesh well with mobile payment technologies. The regulations should no doubt be updated to incorporate mobile payment issues and dispel the worries.

However, there is no single agency governing mobile payments. The Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, and the Federal Reserve System are among many, and all have some duties. But coordination among these bodies is necessary before coherent regulatory practices can be produced.

It is hard to believe that the lack of adequate infrastructure also can be an obstacle.  In many nations, point-of-sale terminals (PoS) that accept Near Field Communication (NFC) transactions have been widely employed. Elsewhere merchants are using other channels for charging purchases; for example, the scan of a QR code is good enough in China.

In the United States, PoS terminals are considered more reliable. However, it may take years for merchants to switch to NFC-compatible PoS terminals. According to Wayne Johnson, senior research analyst at Raymond James, only 1 million out of 8 million (U.S. retailers) have been updated.

Many American merchants argue that it is not worth investing in payment systems that only a limited number of consumers will use. Consumers counter by saying that if the system is not installed, how can they make mobile payment? Thus we have a classic “chicken and egg” dilemma to solve.

For the U.S. consumer, too many choices often translate into a headache rather than better services. There are many different mobile payment apps to choose from. But which one is better? And if no one service is widely accepted, will consumers need to have several apps installed for different merchants? Without a dominant player, consumers probably have to ask what payment app is accepted in store during their checkout process.

Today, mobile payments still make up less than 1 percent of overall in-store transaction volume in the U.S. In contrast, in China, India, South Korea, Japan, and many other countries, people have started to enjoy the benefits of a cashless society; the annoyances of coins and heavy pockets are gone.

As the leading model of a free market economy, the United States should be leading the way in mobile payments. But with lack of awareness, confidence, acceptance, and enthusiasm, mobile payment in the U.S. has yet to take off. Only with significant change will the U.S. be able to enter the dawn of a cashless society.
__________

See all columns from the Center.