Mobile Payments
Surging but Obstacles

Payments continued going mobile in 2012. Consumers spent roughly $13 billion via mobile payments last year, according to the research firm Forrester. That total still is a small fraction of all consumer payments, as the mobile channel has not caught on in the United States as quickly as it has in some other parts of the world.

But the dollar volume of mobile consumer payments in the U.S. climbed substantially last year and figures to continue growing quickly. Mobile payments by dollar volume are increasing about 48 percent annually and will reach $90 billion by 2017, Forrester predicted. These statistics reflected transactions in which a person sent money using software on a mobile phone. The numbers did not include payments made through a simple phone call.

Mobile payments drew big money, interest

Corporations took notice of the increased adoption of mobile payments during 2012. Banks, mobile communications carriers, hardware and software makers, payments processors, and large retailers positioned themselves to take advantage of the rise of mobile payments. Ranging from start-ups to household names, companies formed partnerships, made acquisitions, and introduced mobile payments products and services. A stored-value mobile application, or "app," from the coffee retailer Starbucks took in $2 billion in deposits in 2012, Brett King, an author of books on technology and consumer behavior, said at an Atlanta Fed banking conference. That $2 billion is more than what 65 percent of banks in the United States accepted in deposits, King said.

In 2012, a mobile payments start-up company, Square Inc., secured the largest venture capital infusion of any U.S. information technology firm, according to PricewaterhouseCoopers and the National Venture Capital Association. Numerous commercial trials of mobile payments products and services started. One market test, for instance, allowed consumers to buy a soft drink by tapping their smartphone on a vending machine.

Yet for all the activity in mobile payments, 2012 saw no obvious breakthrough. No single development, neither technological nor commercial, set the industry on a clear path forward. Various technological platforms for conducting mobile payments continued to compete for market space, including systems based on cloud computing, near-field communications, and QR codes. No neat technological categories—like Windows and Mac, for example—emerged, as technological standards remained unsettled. Data security also remained a hurdle to wider use of mobile payments, as mobile payments remained more widespread overseas than in the United States. In a 2012 Federal Reserve Board of Governors survey, 42 percent of consumers said they were concerned about the security of mobile payments. (See see chart 1 and chart 2)

The Fed's interest in mobile payments

The growth of mobile payments matters to the Fed, particularly the Atlanta Fed-based Retail Payments Office (RPO), because of the central bank's role in the payments system. For one, the Fed is charged by Congress with ensuring the integrity, reliability, security, and efficiency of the nation's payments systems. In the Fed's view, the U.S. payments system is an element of vital national infrastructure, analogous to the electrical grid or communications systems.

The growth of mobile payments last year affected the payments system in various ways, but especially in terms of security. Security, and in turn data privacy, was of particular interest to the Federal Reserve System's Retail Payments Risk Forum, a group housed at the Atlanta Fed. The Risk Forum serves as a convener, research center, and information clearinghouse for the retail payments industry pertaining to matters of risk.

Mobile payments featured prominently in a technology conference the Risk Forum held in October. Conference discussions reiterated the notion that technology continued to shape the payments industry, creating enormous opportunities and equally large challenges. For example, regarding ongoing development of mobile payments solutions, "the focus at the point of sale will be the convergence of innovation and security," according to an Atlanta Fed summary of the October conference.

Security a major issue

Consumers sought to protect personally identifiable information, such as account numbers, PINs, security codes, and passwords. Smartphones, the main tool for conducting mobile payments, made this sensitive data more vulnerable. A 2012 study by Javelin Strategy & Research found a 33 percent higher incidence of identity fraud among smartphone users than among the general public. To be sure, smartphone users were a large portion of the public. During the fourth quarter of 2012, smartphone owners in the United States numbered 126 million, more than half of all Americans 16 and older, according to comScore, a market research firm specializing in digital technology.

"The spread of smartphones means billions of people (worldwide) are carrying powerful computers, creating a proliferation of opportunities to practice unsafe computing," said Mary Kepler, executive director of the Retail Payments Risk Forum. This in turn affects the security of mobile payments.

This risk environment has major implications for payments industry participants. In devising new products and services, the industry must satisfy the concerns not only of consumers, but also of merchants and regulators. Industry practitioners worked, and must continue to work, to address concerns over consumers' personal financial information being intercepted "over the air" or stolen along with a mobile phone, according to researchers at the Federal Reserve Banks of Atlanta and Boston.

Mobile payments also concern the Federal Reserve because payments involve banks. Payment settlements, the final exchange of funds between parties to a transaction, often involve a bank account. In terms of regulation, settlements between bank accounts over existing payments systems are subject to the statutes, rules, or procedures already in place, such as Fed regulation E that covers electronic fund transfers between accounts at financial institutions, Stephanie Martin, associate general counsel of the Board of Governors, told the U.S. House Committee on Financial Services at a June 2012 hearing on mobile payments. The Federal Reserve regulates bank holding companies and member banks, so transactions that can affect the safety and soundness of financial institutions are of great interest to the Fed.

Fed changed with the times

The locus of innovation in payments moved in recent years from the underlying settlement systems to the end-user level, helping to fuel mobile payments. In response to this shift, the Federal Reserve instituted a broader view of the payments ecosystem, paying greater attention to developments throughout the payments chain from consumers and merchants to banks and payments processors. This view was codified in 2012 in a new Federal Reserve Financial Services strategic direction. That direction sets a foundation for Fed initiatives aimed at streamlining payment transactions from origination to settlement.

Embracing the new did not mean abandoning the old. As the Fed took a holistic approach to the payments system, it did not ignore the so-called legacy clearing and settlement systems, such as the ACH (automated clearinghouse), checks, and funds transfer networks. Those systems are as critical as ever in the nation's payments infrastructure, not least because they still handled a large number of electronic—including mobile—payments. "We are looking forward to determining what we need to do to enhance our legacy systems to support these innovations happening at the point where payments originate," said Cheryl Venable, senior vice president of the Atlanta Fed and retail payments product manager for the RPO.