Why mobile payments have barely caught on in the U.S., despite the rise of smartphones


The Apple Pay logo is displayed in a mobile kiosk sponsored by Visa and Wells Fargo to demonstrate the new Apple Pay mobile payment system.

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Despite growing smartphone dependence, most Americans still aren’t using the devices to pay for things.

In other countries, it’s a different story.

Places such as China and India are witnessing rapid adoption of smartphone payments. In China, for example, more than 80% of consumers used mobile payments last year, according to management consultancy Bain. In the U.S., major mobile payments apps had adoption rates of less than 10%.

“The U.S. is not a leader when it comes to mobile payments — at best, it’s the middle of the pack compared to other countries,” said Gerard du Toit, partner and head of the banking and payments sector of Bain’s financial services practice in North America.

It seems odd considering the ubiquity of iPhones and Androids in the United States. More than 81% of Americans own a smartphone, up from 35% just eight years ago, according to Pew Research Center. While experts say mobile payments in the U.S. will eventually close the gap, they see legacy financial systems, a lack of a need for other options, and rewards cards as major headwinds.

‘Friction factor’

One reason phones are the go-to payment method in some countries abroad is because cash was the only other, and far less attractive, option.

“China and India have been very cash-based economies — that has a pretty high hassle and friction factor,” du Toit said. “Mobile payment is a dramatic improvement versus having to manage a whole bunch of cash.”

In India, for example, regulators have been pushing to abandon cash and go digital.

Moving away from physical bills was a way to get more tax revenue, since cash transactions often happen under the table. India also added some requirements to make low-value bank-to-bank transfers available in real time and in a more widely available way. As a result, mobile payments took off “unbelievably fast,” duToit said.

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China’s mobile-payment Renaissance was less a result of government intervention. Instead, tech giants Alibaba and Tencent began battling for customers’ wallets and eclipsed banks in the process. Because they deal with both merchants and consumers, there’s less of a need for credit cards to act as the middlemen.

But in the U.S., the credit and debit card system is well-established and works just fine for most people.

“A big driver of mobile adoption is just how big an improvement is it,” du Toit said. “When it comes to the U.S., there is a good enough solution there already.”

Cards are widely accepted, and in some cases it’s easier to swipe a credit card than to take out your digital device, hold it up to your face to unlock it, then double tap the button and hold it up to a monitor. Arieh Levi, senior analyst at CB Insights, also said the popularity of cards is a key reason mobile isn’t taking off.

“There is incredible saturation among debit cards and credit cards in the U.S. and Europe. So people already had a way to pay digitally that isn’t cash,” Levi said. “In areas where mobile is common, there weren’t really established legacy players already.”

The legacy players include Visa and Mastercard and the banks. Those players have a lot to lose if the status quo changes, including revenue they get when customers swipe credit cards. Levi said the most likely outcome is that the economics involving banks and credit card companies will look the same. But the “cosmetics” and user experience will happen on a smartphone, instead of through a physical card.

Merchant acceptance

U.S. consumers aren’t lacking options when it comes to paying on their phones. There’s Apple Pay, Google Pay, Samsung Pay, PayPal, Venmo, Square Cash, Zelle and newcomers looking to disrupt that entire list. But in order to use these apps, merchants such as coffee shops and retail stores need the proper hardware.

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“It’s not the consumer mobile experience — they’ve done a pretty good job,” said Peter Gordon, CEO of PRMPayments. “It’s acceptance, meaning the merchant has to sign up for it. It’s expensive.”

Conventional methods are still winning in the U.S. Last year, 80% of consumers used credit cards for purchases, according to Bain. PayPal was the most popular nonbank option at 40% adoption but is largely used for online payments. Apple Pay had 9% adoption.

Will Graylin, founder of LoopPay, which was sold to Samsung, said merchants need to hit a certain threshold before even early adopters will consider switching entirely to mobile. He said there needs to be at least 90% of acceptance to get even 1% of consumers to change a habit.

“The reality is we’re not there yet,” said Graylin, who was also global co-GM of Samsung Pay. “There is simply not enough ubiquitous acceptance.”

Rewards

Credit cards compete for customers with cash back and travel rewards — something people won’t readily give up. Consumers can use one credit card for gas, one for groceries and another for travel based on the rewards and cash they might get in the process.

CB Insights’ Levi said that’s not as easy to transfer to mobile. He pointed to one exception: the Starbucks app, which according to eMarketer is the most widely used payments app in the U.S., with 23.4 million users. Apple Pay has 22 million, while Google Pay has 11.1 million, according to eMarketer.

“With Starbucks, the use case is so apparent: You use this to earn free coffee,” he said. “That might not exist yet for Apple Pay or Google Pay.”

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Apple’s new credit card with Goldman Sachs was designed with that in mind. It offers 2% in cash back on Apple Pay transactions, 3% for purchases made directly through Apple, and 1% on purchases with a physical card. The rewards are paid out on a daily basis.

“The physical Apple card is going to drive liquidity into the mobile app, Apple Pay,” he said. “That’s not the only reason Apple is launching the card, but it’s certainly a piece of it driving money to other parts of their ecosystem.”

Fed opens up lanes

A recent, real-time payment announcement from the Federal Reserve might also change the mobile-payment landscape.

In April, the central bank announced a real-time payments system that would make money transfers available almost immediately. The FedNow Service, which is set to begin by 2024, will allow money to move at any time, any day, according to the Fed.

PRMPayments’ Peter Gordon said the project could change the current mobile-payment landscape by allowing entrepreneurs and companies such as PayPal to take advantage of the direct, real-time connection to customers’ accounts.

It could also enable more bank-like offerings from tech giants such as Facebook’s WhatsApp or even Amazon and Google, according to CB Insights’ Levi. Those would most likely be rooted in mobile.

While it could help nonbanks to move into the space, Bain’s du Toit said credit cards are here to stay.

People don’t always want to pay for things immediately, in real time. The borrowing aspect is still valuable, as well as the coveted rewards and points. Cards might just look like a “hybrid” version of their old models in mobile form, and in some cases embedded in the apps, he said.

“There will be different models; it’s going to be fascinating to see which wins,” du Toit said.



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