Making Tracks for Mobile Payments

Published in Banking Strategies, Aug 2, 2010

Monday, August 02, 2010

While the Automated Clearing House (ACH) and card networks present the most readily available and familiar mechanisms for running mobile transactions, both of these systems also have their drawbacks. Meanwhile a new, cell-phone-specific payments landscape is emerging where non-traditional players like PayPal Inc. and the mobile operators themselves could demand a stake in the backend – or at least influence how those payments are routed. After all, a consumer’s mobile-initiated purchase may be as easily charged to their monthly phone bill or their PayPal account as to their credit card.

To date, a clear winner has not yet emerged. But industry experts say that the critical factors of who receives the revenue and the size of the transaction will likely affect the choice of technical infrastructure upon which specific payments are processed.

From Front to Back

Mobile payments have been long heralded by bankers as the means to make money in mobile services since mobile banking per se (checking balances, shifting money between accounts) has become a loss leader that is typically offered for free to consumers. Now, cell phone-initiated payments are beginning to percolate in the United States as more services emerge to allow consumers and businesses to make purchases online through their mobile device, as well as pay bills, make proximity payments (using a contactless chip embedded in or attached to the phone) and send money to friends. Mobile online shopping in the U.S. tripled to more than $1.2 billion in 2009 from $396 million in 2008, according to a recent study by New York City-based ABI Business Intelligence Inc.

As more opportunities to transact through the mobile front end arise, the issue of how these transactions will be routed, managed and settled on the back end also comes into play. Arguably, the landscape for mobile transactions differs from that for either real-world payments or even traditional online payments. It’s less static and potentially more diverse, both in terms of the platforms that are being used and the form the payments take.

At least initially, the two most stable and conventional of payment processing systems – namely the ACH and card processing networks – are seen as the most likely paths for processing mobile transactions. “Banks are familiar with the ACH and the card systems,” says Donald MacCormick, vice president for product and engineering for San Rafael, Calif.-based ClairMail Inc., a mobile payments developer. “These systems are in place, they work around fraud and they’re convenient.”

With ACH processing, the biggest upside is currently price. The cost of running a transaction via the ACH is typically just two or three cents, compared with 0.5% to as much as 5% (often with a minimum fee of five cents) per-transaction for a debit card transaction run on the card networks, according to Andy Brown, director product marketing for ACI Worldwide Inc. of Elkhorn, Neb.

On the other hand, the card networks have speed on their side; transactions are processed and approved virtually instantaneously and backed by the card company, as compared to ACH transactions, which can take as much as two days to settle and can be reversed long after the transaction is initially okayed. “The fact that there’s not that same-day processing capability for ACH as exists for the card networks is limiting for payment transactions on mobile devices,” says Beth Robertson, director of payments research for Pleasanton, Calif.-based Javelin Strategy & Research.

Since the need for speed is particularly critical in the fast-moving mobile world, this is an important edge for the card networks. “In general, there’s growing expectation with mobile payments that there needs to be a more real-time element,” says Adam Vancini, senior vice president for San Francisco-based Wells Fargo & Co.

Another benefit to the card networks, Robertson adds, is that they have historically been used  in “trial” or pilot situations, which weigh in their favor, as mobile payment players struggle to get their bearings in this nascent business. Michael Lindsey, senior vice president and head of the retail banking division for Tupelo, Miss.-based Bancorp South, a pioneer in mobile banking, says more of his counterparts in the industry have been talking to the card networks than to ACH providers about mobile payments.

“With ACH, you don’t have the same validation-of-funds issue,” Lindsey says. “The card networks are fast and very robust.” Bancorp South currently operates a mobile banking service and Lindsey says the company hopes to offer mobile payments soon.

The global reach of the Visa and MasterCard networks may also come into play, since many international payments (remittances, for example) are initiated via mobile phones. “The card networks have the upper hand because they are global,” says ACI’s Brown, although he notes that the SWIFT network is another, albeit expensive, option for processing these types of payments.

And Then There’s …

Despite the strength of the established ACH and card networks, some new players have entered the market as well, including PayPal, a major force in online payments and more recently a partner with banks in mobile payments. “Companies like PayPal are a force to be reckoned with,” says Soren Bested, managing director of Providence, R.I.-based Monitise Americas LLC.

John Schulte, senior vice president and chief information officer of Grand Rapids-based Mercantile Bank of Michigan, is working with PayPal and Norcross, Ga.-based S1 Corp. on the bank’s mobile person-to-person (P2P) payment service, which launched in early May. S1, the bank’s vendor, has a direct connect to PayPal and settles with PayPal on a daily basis for all the transactions made by the bank’s mobile payment customers that day, Schulte says. In return for paying PayPal a flat 25 cents per transaction, Mercantile Bank gets a payment infrastructure that not only covers the clearing and validation of the payment but also the PayPal brand and simplicity and ease-of-use for customers, he adds.

“We felt it was important for this to be an instant process for consumers,” Schulte says. He admits that while a straight connection through ACH may be cheaper, the PayPal arrangement pays for itself in customer satisfaction and retention. “I’m comfortable with this all day long as long as the customers like it,” he says.

An advantage of an online payments-centric service such as PayPal is that it was built with digital transactions in mind, according to MacCormick. So, it’s not surprising that mobile payments processing is giving rise to a host of new intermediaries who may not act as the end processor but are situating themselves into the payments pipeline to manage clearing or settlement. Among these are lesser-known payments pioneers such as Bling Nation, which issues radio frequency identification tags that affix to a mobile phone for contactless payments, and Square Inc., which created a device that plugs into the mobile phones to support payments.

Perhaps the most obvious alternative for re-routing mobile payments is via the mobile operators themselves. Robertson cites Verizon Wireless’s announced BilltoMobile payment service, which enables mobile subscribers to pay for purchases as part of their monthly cell phone bill. However, Robertson points out that these mobile payment services usually carry stricter limits on the transaction size and prevent users from making riskier transactions. BilltoMobile, for example, imposes a $25 per month spending limit.

Verizon Wireless upped the ante in August with its announcement of a joint venture with AT&T Inc. to offer contactless payments via smartphones.

Ostensibly, such services would give the big wireless providers something they have long desired – a slice of the mobile payments revenue pie. But some industry observers argue that stepping into the payments processing business is likely to come at too high a cost. “The issue that mobile operators are wrestling with is that if you start putting all these other transactions on the cell phone bill, you’re essentially turning the phone bill into a credit card,” MacCormick says. “It’s a quantum step.”

Ultimately, like real-world and online transactions before them, mobile payments will likely be routed along different tracks based on the size and the specific type of transaction – whether it’s a P2P payment, a merchant purchase or a bill payment. For example routine bill payments or small-value P2P payments may utilize the lower-costing ACH whereas mobile transactions that require more immediacy or where the parties don’t have a pre-existing relationship may rely on card networks, which offer speed and indemnity for a slightly higher price. Digital or very low-value items (buying a ringtone or a news article) might just as easily be charged to a mobile bill.

“It’s really about creating a mobile payment system that leverages all existing payments functionalities,” Bested says.

Ms. Hoffman is a freelance writer based in Poulsbo, Wash.