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S. HRG. 112–644 

DEVELOPING THE FRAMEWORK FOR SAFE AND 

EFFICIENT MOBILE PAYMENTS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE FRAMEWORK FOR SAFE AND EFFICIENT MOBILE 

PAYMENTS 

MARCH 29 AND JULY 10, 2012 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

LAURA SWANSON, Policy Director 

CATHERINE GALICIA, Counsel 

JANA STEENHOLDT, Legislative Assistant 

BRETT HEWITT, Legislative Assistant 

MARC LABONTE, CRS Detailed Economist 

BRIAN FILIPOWICH, Professional Staff Member 

WILLIAM FIELDS, Legislative Assistant 

ANDREW OLMEM, Republican Chief Counsel 

MIKE PIWOWAR, Republican Chief Economist 

BETH ZORC, Republican Counsel 

DANA WADE, Republican Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

RIKER VERMILYE, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

THURSDAY, MARCH 29, 2012 

Page 

Opening statement of Chairman Johnson ............................................................. 1 

WITNESSES 

Kenneth C. Montgomery, First Vice President and Chief Operating Officer, 

Federal Reserve Bank of Boston ......................................................................... 3 

Prepared statement .......................................................................................... 15 

Sandra F. Braunstein, Director, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System ................................ 5 

Prepared statement .......................................................................................... 21 

Responses to written questions of: 

Senator Kirk .............................................................................................. 86 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

‘‘Mobile Payments in the United States: Mapping out the Road Ahead’’ ........... 92 

TUESDAY, JULY 10, 2012 

Page 

Opening statement of Chairman Johnson ............................................................. 149 

WITNESSES 

Michael L. Katz, Sarin Chair in Strategy and Leadership, Professor of Economics, University of California, Berkeley ........................................................ 150 

Prepared statement .......................................................................................... 167 

Sarah Jane Hughes, University Scholar and Fellow in Commercial Law, 

Maurer School of Law, University of Indiana ................................................... 152 

Prepared statement .......................................................................................... 222 

Thomas P. Brown, Adjunct Professor, University of California, Berkeley 

School of Law ........................................................................................................ 154 

Prepared statement .......................................................................................... 227 

(III)

(1) 

DEVELOPING THE FRAMEWORK FOR SAFE 

AND EFFICIENT MOBILE PAYMENTS—PART I 

THURSDAY, MARCH 29, 2012 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:05 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. Good morning. I call this hearing to order, 

entitled, ‘‘Developing the Framework for Safe and Efficient Mobile 

Payments’’. It is an opportunity for the Committee to learn about 

the growth of mobile payments and the current framework of rules 

this market operates under. 

Our jurisdiction extends over all financial services and payment 

systems regardless of the company that delivers this service. That 

is why the Committee needs to make sure there are no gaps in the 

rules so that this emerging market is safe and efficient. This will 

be the first in a series of hearings, and future hearings will delve 

deeper into this discrete policy area. 

I would note that today we are exploring mobile payments, not 

mobile banking. Although both require a cell phone or a smart 

phone, mobile banking is simply a service that allows consumers to 

access their bank account over the Internet on a mobile device so 

that they can perform transactions. 

Mobile payments are much more. They allow consumers to pay 

for a purchase or transfer money using a mobile device. The device 

takes the place of cash, check, or card. The payment is made 

through a Web page, a downloadable app, an email, or a text message using a bank or money service business or a mobile network 

provider. 

By simply waving or tapping the device at a terminal, or texting 

a few letters, a payment is made. At a future hearing, we plan to 

invite industry witnesses to describe how this works in more detail. 

Today’s witnesses are at the forefront of the mobile payments 

and have spent much time studying this topic. They will describe 

our country’s current mobile payment system and how it is different from similar systems in other parts of the world. They will 

also discuss trends in mobile payment use such as who is making 

mobile payments and how much money is moving through our payment system. 

2 

It is not surprising to learn that people between the ages of 18 

and 29 are the most active mobile payment users. What may be 

surprising is that the underbanked make significant use of mobile 

payments. This can be explained by the high rate of mobile and 

smart phone ownership across socioeconomic lines. 

This morning, we will also explore barriers to use and development of mobile payments in the U.S., opportunities for growth in 

this marketplace, and regulatory gaps in the various mobile payment models. The current framework of laws that govern mobile 

payments depends on how the payment is modeled. 

If the payment is made through a bank, then the existing set of 

banking and consumer protection laws apply. If the payment is 

made through a money service business, then at a minimum, Federal consumer financial, antimoney laundering, and State laws 

apply. 

However, payments made through a text message via a mobile 

network provider do not fall under banking laws. This Committee 

began laying the foundation for rules to oversee these new types 

of payments in the Wall Street Reform Act. The Consumer Financial Protection Bureau was given the authority to apply Federal 

consumer financial laws to these transactions. 

The bottom line is that as the mobile payment system evolves, 

it is important for this Committee to provide proper oversight so 

that these payments can be secure and convenient. I look forward 

to today’s testimony, and I now turn to Ranking Member Shelby 

for his opening statement. 

Senator SHELBY. Mr. Chairman, I ask that my written statement 

be made part of the record so we can move on with the witnesses. 

Chairman JOHNSON. Without objection. 

Senator SHELBY. Thank you. 

Chairman JOHNSON. Thank you, Senator Shelby. Are there any 

other Members who wish to make a brief opening statement? If 

not, thank you all. I want to remind my colleagues that the record 

will be open for the next 7 days for opening statements and any 

other materials you would like to submit. 

Now I will briefly introduce our witnesses. Kenneth Montgomery 

is the First Vice President and the Chief Operating Officer of the 

Federal Reserve Bank of Boston. The Boston and Atlanta Reserve 

Banks have been at the forefront of starting mobile payments. The 

convened the Mobile Payments Workgroup and produced a white 

paper that sets out a roadmap for the development of the mobile 

payments market in the United States. 

Sandra F. Braunstein is the Director of the Division of Consumer 

and Community Affairs at the Federal Reserve Board. Her division 

authored the Consumer Mobile Financial Services survey we are 

examining today. I thank all of you again for being here today. I 

would like to ask the witnesses to please keep your remarks to 5 

minutes. Your full written statements will be included in the hearing record. 

Mr. Montgomery, please proceed. 

3 

STATEMENT OF KENNETH C. MONTGOMERY, FIRST VICE 

PRESIDENT AND CHIEF OPERATING OFFICER, FEDERAL RESERVE BANK OF BOSTON 

Mr. MONTGOMERY. Chairman Johnson, Ranking Member Shelby, 

and Members of the Committee, thank you for inviting me to talk 

about the Federal Reserve’s involvement in the evolution of payment systems in the United States. The Federal Reserve has a 

keen interest in this topic as part of our broader efforts to foster 

the efficiency and safety of the Nation’s payment systems. 

In 2009, the Federal Reserve Bank of Boston began assessing the 

U.S. mobile payments market to understand mobile payment 

trends, activities of key stakeholders, and potential risks to consumers related to security and protection. 

As part of our assessment and to respond to industry concerns, 

the Boston and Atlanta Reserve Banks facilitated a meeting in 

early 2010 with most of the major stakeholders involved in the mobile payments industry. The purpose of this meeting was to discuss 

the opportunities, barriers, and challenges associated with implementing a successful mobile payments environment in this country, 

with a focus on mobile purchases at point of sale. 

This first meeting prompted the establishment of the Mobile Payments Industry Workgroup, or MPIW, which has met three or four 

times a year and these meetings are continuing through 2012. Over 

the course of these meetings, participants have shared their high 

level plans for mobile payments and their perspectives on the benefits and barriers to implementation. 

The workgroup also identified possible areas for future collaboration to build critical mass for mobile payments in the U.S. such as 

in the area of security and standards. Recognizing that a successful 

mobile payments platform needed an underpinning on which to 

build, the MPIW collaborated to define the necessary foundational 

principles. 

The first was to build an open mobile wallet. The concept is a 

virtual wallet that securely stores multiple payment credentials, as 

opposed to proprietary or closed wallets that might limit the number of payment methods available for use by a consumer with a 

mobile phone. 

Second, the mobile infrastructure would be based on a standardized near-field communication or contactless technology implemented in mobile phones and retail point of sale terminals allowing 

users to tap their phones to pay for purchases. 

Third, mobile payments will be cleared and settled over existing, 

well-protected rails, including debit card, credit card, prepaid, and 

ACH networks. Further, to address security issues during the payment process, dynamic data authentication would be used to deter 

counterfeiting and ID theft at the point of sale. This is already 

used in so-called chip and PIN cards in other countries and getting 

readied for use in the United States over the next 3 years. 

Fifth, common standards for mobile payments should be implemented throughout the industry to ensure interoperability, efficiency, and ease of use by consumers and businesses. 

Sixth, clarity of regulatory responsibilities among bank and 

nonbank regulators needs to be established early on. While current 

regulations and rules may cover underlying payment methods, 

4 

multiple regulatory agencies have responsibility for different aspects of payments and wireless transactions. Industry participants 

urge bank and nonbank regulators, such as the FCC, the FTC, and 

the Consumer Financial Protection Bureau to collaborate to define 

the regulatory environment for all participants. 

Finally, entities known as Trusted Service Managers should 

oversee the provision of interoperable and shared secure elements 

in the mobile phone. These TSMs are the bridge between the banks 

and the mobile carriers and ensure the process of installing a customer’s account information to the mobile phone as efficient and secure. 

These principles form the basis of the white paper on the future 

point of sale mobile payments titled, Mobile Payments in the 

United States, Mapping Out the Road Ahead. The paper, reflecting 

the general thoughts of the MPIW participants, was written by the 

Federal Reserve Banks of Boston and Atlanta and published in 

March 2011. 

The paper was socialized at numerous conferences and in the 

trade press, and shared prior to final publication at a meeting with 

Federal regulators and law enforcement agencies. The Federal Reserve will continue to facilitate the dialog among the MPIW participants and other stakeholders and monitor progress in the evolution 

of mobile payments. 

A workgroup meeting is scheduled next month. This meeting, 

which will include bank and nonbank regulatory agencies, will 

focus on issues related to security, privacy, consumer protection, 

and respective oversight responsibilities. Future efforts will focus 

on education that is needed to help consumers understand steps 

they can take to protect their mobile financial and personal information. 

In closing, the Federal Reserve plans to continue to leverage the 

MPIW as a forum to discuss issues and barriers, collaborate on 

areas of common interest, and help to ensure that mobile payments 

evolve safely and efficiently for all consumers. Thank you for inviting me to appear today. I am happy to answer any questions the 

Committee may have. 

Chairman JOHNSON. Thank you, Mr. Montgomery. Ms. 

Braunstein, you may begin your testimony. 

STATEMENT OF SANDRA F. BRAUNSTEIN, DIRECTOR, DIVISION OF CONSUMER AND COMMUNITY AFFAIRS, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Ms. BRAUNSTEIN. Thank you. Chairman Johnson, Ranking Member Shelby, and Members of the Committee, thank you for inviting 

me to appear today to discuss consumers’ use of mobile financial 

services. By mobile financial services, I am talking about two categories of activities. 

The first we call mobile banking, which is using your mobile device to interact with your financial institution, doing things you 

could also do through more traditional means like check your account balance or transfer money between accounts. 

The second we call mobile payments, which we define as making 

purchases, bill payments, charitable donations, or payments to 

other persons using your mobile device with the payment applied 

5 

to your phone bill, charged to your credit card, or withdrawn directly from your bank account. 

Beyond banking and payments, mobile devices have the potential 

to be useful tools in helping consumers track their spending, saving, investing, and borrowing, and in making financial decisions. 

Such technologies also hold the potential to expand access to mainstream financial services for segments of the population that are 

currently unbanked or under banked. 

That said, the technologies are still evolving and important concerns such as consumers’ unease about the security of these technologies must be addressed for consumers to feel confident adopting these new services. 

To further our understanding about consumers’ use of and opinions about such services, the Board commissioned a survey late last 

year. Nearly 2,300 respondents completed the survey. This survey 

integrated questions about using mobile devices for shopping and 

comparing products, along with questions about using mobile devices for banking and payments. A copy of the report, which is 

based on the survey responses, is attached to my written testimony. 

Nearly nine out of ten adults in the United States have a mobile 

phone, and two-fifths of those phones are smart phones with Internet connectivity. Among all mobile phone users, one out of five 

have used their phones to conduct some banking activity in the last 

12 months. 

Consumers below age 29 have readily adopted mobile banking 

and make up almost 44 percent of all consumers surveyed who use 

such services. Adoption rates of mobile banking also differ by racial 

and ethnic background, with Hispanics and non-Hispanic blacks 

making up a disproportionate share of those who use mobile banking services. 

Of those consumers who had not adopted mobile banking, the 

primary reason given was that they felt their banking needs were 

being met through more traditional means. Security concerns were 

the second-most cited reason for not using mobile banking. Mobile 

payments are not yet as prevalent as mobile banking. One out of 

eight respondents reported making a mobile payment in the previous 12 months, and usually this involved paying a bill online via 

their mobile phone. 

Mobile payments are disproportionately used by consumers 

under the age of 45 and by Hispanics. Consumers who are not currently using mobile payments responded that they were concerned 

about the security of the technology, did not see any benefit from 

mobile payments, or found it easier to pay in other ways, for example, with cash or with a credit card. 

Consumers who were underbanked, that is, those who have a 

bank account but also use alternative financial service providers, 

such as a check casher, a payday lender, an auto-title lender, or 

payroll card makes significant use of mobile banking and mobile 

payments. The underbanked are more likely than the general population to use mobile payments, with one out of six using payment 

services on their mobile devices. 

Consumers can also use mobile financial services to make financial decisions. Of those consumers who use mobile banking, more 

6 

than two-thirds reported that they checked their account balance 

or available credit before making a large purchase. Moreover, 

among the consumers that reported doing this, nearly six out of ten 

reported that they had decided not to buy an item because of the 

amount of money available in their account. 

Some consumers reported setting up text alerts from their banks 

if their account balance was getting low, and among those using 

this service, five out of six reported taking some action in response 

to receiving these alerts. 

We plan to continue monitoring consumers’ experiences as the 

technology and business practices evolve. I am happy to answer 

any questions you may have. 

Chairman JOHNSON. Thank you. Unfortunately, it does not appear that we will reach a quorum for this morning’s nominations 

mark-up. We will, therefore, hold the mark-up off the Senate floor 

when we vote at 11:30. Please monitor communications from Committee staff for specific details. 

Thank you for your testimony. As we begin questions, I will ask 

the clerk to put 5 minutes on the clock for each Member. Mr. Montgomery, given the evolving marketplace for mobile payments, what 

are your recommendations for effectively balancing the need for 

safeguards while fostering efficiency and innovation in this rapidly 

changing industry? 

Mr. MONTGOMERY. We think that there needs to be a balance to 

ensure that we have an environment where we have cooperation 

amongst the providers in this complex delivery environment. Mobile payments require a combination of technologies and using our 

existing infrastructures and payment mechanisms such that there 

has to be cooperation between the providers, handset manufacturers, and others involved in the payment system. 

In that regard, we think that an environment where regulators 

are working with the structures already in place, will help foster 

that innovation and where the providers are working collaboratively, setting standards with one another such that the innovation will continue. 

The need for standards and interoperability is going to be very 

important to continue to move progress forward on the adoption of 

mobile payments. 

Chairman JOHNSON. This is for both witnesses, beginning with 

you, Ms. Braunstein. Information security concerns are one of the 

biggest barriers to mobile payment use. What steps has industry 

taken to address those concerns and are they sufficient? What 

steps should this Committee take to make sure that all forms of 

mobile payments are secure? Ms. Braunstein, let us start with you? 

Ms. BRAUNSTEIN. OK. I think, to be honest, Mr. Montgomery is 

probably better able to address this question. I know that industry 

is very concerned about the security, as it is a big consumer issue, 

and there are things they are doing to address these concerns. Mr. 

Montgomery could better address those. 

Mr. MONTGOMERY. The industry is looking at a number of different mechanisms for security. Security needs to occur both at the 

channel and in terms of the mobile phone itself. And so, there are 

standards under development for technologies related to near-field 

7 

communication. Likewise, we have to ensure that there is security 

through the entire channel of delivery, including backing systems. 

Sufficient standards exist in place for many of those mechanisms 

today. Ongoing technology looking at potential security risks across 

that broad spectrum needs to occur. There is a component of this 

that involves making sure the consumer is aware of how to use the 

device and what protections they can take to ensure that their 

phone is being used for banking appropriately. 

Chairman JOHNSON. Ms. Braunstein, what information should a 

consumer disclosure form contain for a mobile payments service? 

Ms. BRAUNSTEIN. So at this point in time, there are no specific 

disclosures for using mobile technology. The disclosures that apply 

to the accounts or the mechanisms that people are using to pay 

their bills would still apply. I think that it bears further study in 

terms of how effective the current disclosure regime will be over a 

mobile device. 

There are questions of clear and conspicuous. There are questions of size of disclosures for various transactions. And I think 

that those things have not yet been addressed, but are something 

that need to be looked at. 

Chairman JOHNSON. Mr. Montgomery, the U.S. lags the rest of 

the world in mobile payment usage. Please discuss why using examples of how this market has evolved in other countries. What 

were some of the major barriers and how were they overcome? 

What can we do to encourage the safe growth of this market in the 

United States? 

Mr. MONTGOMERY. So as we look at the market of mobile payments, there are a couple of other countries and implementations 

that we could look at. In Japan, for example, they have a rather 

robust implementation of mobile payments. They started with the 

use of contactless payment cards that were used basically in their 

transportation system. 

In Japan, cash is widely used for payments of lots of services. 

Over several years, as more and more consumers got accustomed 

to using contactless technology for transportation, as well as other 

merchants in particular areas surrounding transportation, they 

quickly were able to move that technology into secured chips within 

mobile phones. 

As a result, a number of organizations within Japan have collaborated to come up with standards such that mobile handset providers as well as other providers can use similar formats. Restaurants, other consumer outlets now accept that mobile payment 

device at the point of sale as part of that transaction. 

What we see in other countries that do not have as many choices 

in terms of retail payments, countries like Kenya where they do 

not have a banking system with lots of branches, is that they are 

using mobile payments as a way of not only person-to-person payments, but for the ability to get cash and make payments in other 

outlets. That use relies quite a bit on collaboration between the 

telecommunication providers as well as the national banking systems. 

As we look into Europe, they are likewise moving toward a mobile payment environment, but they have years of experience with 

the so-called chip and pin card. They are moving to contactless 

8 

technology. We see that making consumers comfortable with the 

use of a contactless card seems to be a segue into getting them 

comfortable with using a mobile device with the same type of security protections to make purchases. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. Mr. Montgomery, in 

your testimony, you discuss the need to clarify the regulatory responsibilities among the bank and nonbank regulators for oversight 

of mobile payments. You note that you believe that the FCC, the 

FTC, and the Consumer Bureau all have to collaborate to define 

the regulatory environment for all the participants here. 

On which issue is it most important for regulators to cooperate 

on regulating mobile payments and has the Federal Reserve met 

with any or all of those agencies to address those issues? 

Mr. MONTGOMERY. The regulation for payments using debit 

cards, credit cards is very well defined. Using a mobile device is 

just another channel into the payment system. So those rules apply 

very well. 

Senator SHELBY. The rules are there, right? 

Mr. MONTGOMERY. Yes, sir, the rules are there. As we look at 

some other mechanisms by which mobile can be funded, like prepaid cards, as well as perhaps prefunded cards that would be used 

as part of your mobile payment bill, or perhaps some purchases you 

would make that would be charged to your mobile payment bill, 

there are the areas where we seem to need some further collaboration amongst the regulators. 

Senator SHELBY. For example? Give us an example. 

Mr. MONTGOMERY. So if I was purchasing something and it was 

charged directly to my mobile phone bill and it cost six or seven 

dollars, what would be my redress if for some reason I really did 

not make that charge? Who would I have to go to to get that money 

back? What would be the regulations so that that telco provider 

would fund my account? Those are the types of things that we 

would have to look at. 

Senator SHELBY. Is there a lot of that? 

Mr. MONTGOMERY. There are some instances in which we are 

seeing people buying ringtones or other things from their provider 

and they have to work directly with their provider to purchase 

those things. Probably another area with similar concerns is the 

use of prepaid cards, such that if the prepaid card is the funding 

mechanism, and there was an unauthorized charge, what would be 

the recourse for getting that card refunded. 

Senator SHELBY. Well, today if you have a problem with your 

credit card, you call your credit card issuer. 

Mr. MONTGOMERY. That is correct. 

Senator SHELBY. I have had people steal my card, stuff like that. 

But the issuer always corrects it. 

Mr. MONTGOMERY. The issuer corrects that as part of the relationship that they have within banking regulation, and there are 

rules in terms of the time frames that they have to be resolved, 

when credits have to be returned. That is not as clear in the mobile 

world if it was being charged not with your debit or your credit 

card but with a telco provider or a prepaid card. 

9 

And that is the area we think, working with the FCC and the 

FTC and the Consumer Protection Bureau, we could look at what 

changes would be required for that. 

Senator SHELBY. You want the system to continue to work. I 

would assume you would not want to be so heavy-handed it would 

not work, right? 

Mr. MONTGOMERY. That is, I think, a very important point, that 

we are looking for regulation to basically help continue movement 

in this area, not inhibit the type of progress we want to make. And 

so, as we look at where there might be gaps in regulation, it would 

be closing those gaps, not doing a zero-based review with the regulation. 

Senator SHELBY. Ms. Braunstein, the underbanked, which are a 

lot of people, the Fed’s recent survey stated that the underbanked 

are substantially more likely to make bill payments using their mobile phones than the general population. In particular, the report 

states that 62 percent of the underbanked who use mobile services 

report paying bills with their mobile phones in the past year, compared with 47 percent of the overall population of mobile phone 

users. 

What are some of the benefits to the underbanked that come 

from the use of mobile technology? And how do you define the 

underbanked? 

Ms. BRAUNSTEIN. The underbanked—I will take the last question 

first. 

Senator SHELBY. OK. 

Ms. BRAUNSTEIN. And the underbanked are defined as people 

who have a banking relationship. They may have an account at a 

bank, but they also use alternative financial providers. So in addition to their bank account—— 

Senator SHELBY. And why do they—excuse me. Why do they do 

that if they have a banking relationship? Why do they use alternatives? 

Ms. BRAUNSTEIN. Well, there could be a variety of reasons why 

they use—they may need a payday loan or an auto-title loan and 

it could be the inability to get a loan at a bank. Or the fact that 

there is discomfort with dealing with banks—— 

Senator SHELBY. OK. 

Ms. BRAUNSTEIN. ——and dealing with a payday lender is easier. 

The accessibility in neighborhoods is also a big reason, where the 

check cashers and the payday lenders are more accessible to some 

people who are underbanked, and so they use those services more 

frequently. It seems that the underbanked are not necessarily 

underphoned, so they do have a much higher percentage of ownership of mobile phones. 

That may be one reason why they are using these mechanisms. 

There may be a comfort factor with using mobile technology. 

Senator SHELBY. The Fed’s recent survey also indicated that the 

use of a mobile phone can have a positive impact on a consumer’s 

financial decisions. For example, the survey found that 59 percent 

of those consumers who check their bank or credit card account information using a mobile device before making a purchase reported 

that they decided not to buy an item. They probably saw their balance or thought that they would be challenged. 

10 

What are the other ways a mobile device can help consumers 

make on-the-spot financial decisions? 

Ms. BRAUNSTEIN. Well, in addition to the fact that they do not 

make the purchase, there is also an interesting statistic in terms 

of consumers who get information about their account balances getting low and take some action such as transferring or depositing 

more funds to bring the balances up. 

The other thing that we are starting to see is consumers using 

their mobile devices for shopping, and there is the ability for some 

smart phones, to be used when consumers are in a store to scan 

in the barcode of an item and get information about similar products, which may be cheaper. It helps consumers make better financial decisions in terms of their purchasing right on the spot. 

So it is one of those teachable moments, frankly, in financial education. 

Senator SHELBY. It could have a positive impact on consumers’ 

shopping habits—— 

Ms. BRAUNSTEIN. Correct. 

Senator SHELBY. ——and make them a little more frugal? 

Ms. BRAUNSTEIN. Could be, yes. 

Senator SHELBY. Thank you. Mr. Montgomery, in your testimony, 

you noted that data privacy is a major concern. Providers of the 

mobile payment services will have access to customer data and a 

customer’s buying behavior, which could in turn be sold to marketers and retailers. We know that. 

Your testimony states, and I quote, that the potential marketing 

value of consumer data, when tied to mobile payments, is significant. I think that is obvious. The question to you, should consumers be given the opportunity to opt out of having their customer information shared in this context? 

Mr. MONTGOMERY. Yes. Consumers should have the—— 

Senator SHELBY. The answer is yes? 

Mr. MONTGOMERY. Yes. 

Senator SHELBY. OK. 

Mr. MONTGOMERY. Consumers need to have the option to opt out 

from information that is being collected about them. Likewise, as 

they are using particular services provided by mobile phone and 

mobile payments, they should be very much informed about what 

data is being collected. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. I want to thank you 

and the Ranking Member for holding this hearing. I know maybe 

it has not attracted a lot of our colleagues, but I think you are 

probably looking at one of the most significant areas of growth over 

the next couple of decades, and I am glad the Fed is taking some 

of these actions. 

I mean, it seems to me you have got two or three different buckets here. You have got, on the mobile payments, you have got the 

mobile banking piece. You have got the mobile payments piece. You 

have got the mobile payments piece that runs through the traditional credit card authorization process that comes with a certain 

amount of protections and rules of the road. 

11 

You have got the mobile payment piece that might run, as you 

mentioned, Mr. Montgomery, back to the telecom provider, right? 

So the bill might appear there. You have got certain individual retailers who are setting up their own systems where if you come 

into the national brand retailer, it may then appear back on that 

particular retailer’s credit card or credit device, if they have got 

some prearranged. And then you have got the prepaid. 

Is there any way, at this point, either in the States with your 

survey you did, or examinations abroad of kind of breaking that 

into percentages of how much falls into each of those categories? 

Mr. MONTGOMERY. I do not have exact percentages, but the vast 

majority goes back to the credit card. 

Senator WARNER. But if you could get some of that and whether 

the growth is coming in on the prepaid side, as Ms. Braunstein 

said, in terms of folks who are underbanked, I would be very interested in those, as well as directly back onto the telecom providers’ 

bill. 

Because I think one of the things that we might want to think 

about or love to get you-all’s comments on, is that if you are not 

going to go through the credit card, and we have had more than 

some debates in this Committee and on the floor about the whole 

question of interchange fees, and if you affect that fee, whatever 

level it is set at is the transaction protection fee in there. You could 

end up having a marketplace set a whole bunch of fees that could 

be hidden, baked into your telecom bill, or baked into your provider 

bill, or prebaked into if you have got a prepaid card. 

I would just hope we would be—I do not have an answer on what 

that should look like, but have we been—have you been looking at 

that? If you are bypassing the traditional credit card industry with 

the protections that are in place, who is going to bear the risk and 

who is going to charge the fee to bear that risk? 

Mr. MONTGOMERY. Those are some of the issues as we look at, 

the channels people are using for payment. What are the associated costs that are coming along with that? My earlier comment 

where I indicated that the vast majority of payments were flowing 

through the channels that support a debit and credit card, those 

fees are well-known. 

And as we look at some of these other channels, prepaid directly 

to the telecom provider, that is where we would have to make sure 

we understood the fee structure. 

Senator WARNER. Again, but there are two ways. One may be 

prepaid, which may or may not carry—you might have a telecom 

risk. The other would be whether the telecom company is going to 

take on that risk in terms of bundling into some kind of payment 

that appears or maybe does not appear on your telecom bill. Is that 

not correct? 

Mr. MONTGOMERY. That is correct. There would be two different 

areas to look at related to that. 

Senator WARNER. And has the work you have done, both looked 

into how those practices are evolving in the United States and how 

they have evolved in other countries? 

Mr. MONTGOMERY. Not at this point. As we talk about moving 

forward with some of the work of the Boston and Atlanta Feds and 

this MPIW and discussions with the regulators, that is where I 

12 

would expect we would at least start to discuss some of these 

issues, and then as other regulators begin to collaborate on them, 

I would expect some work to occur on that as well. 

Senator WARNER. Mr. Chairman, as somebody who felt that we 

kind of took a blunt instrument to the interchange fee debate, and 

that echoing Senator Shelby’s comments that we want this practice 

to have appropriate rules of the road but we do not want to inhibit 

it moving forward, I would urge that we ought to see if we can get 

some thinking maybe—I know you are going to have other hearings 

in this area—that kind of get ahead of this, at least in our thinking, because I think this area, you know, somebody’s going to bear 

this risk, different type on prepaid, different type on putting onto 

the telecom, different type on directly putting it onto the retailers, 

a specific card, and thinking about that ahead of time so we do not 

end up later on down the path finding that there is a monster been 

created here that we did not think about ahead of time and then 

having to come in and, perhaps with over-regulation later, if we 

can set the rules before this industry grows too quick. 

But I can assure you, as somebody that managed to eke out a 

living in the wireless business 25 years back when everybody 

thought it was going to be a tiny little business, and just like this 

Committee, nobody wanted to show up at the hearing, I would 

make a bet that this payment system around mobile is going to be 

a huge issue. 

Senator SHELBY. Would the Senator yield, if you would? 

Senator WARNER. Of course. 

Senator SHELBY. He did more than eke out a living, but he was 

in the early part of the mobile phone business and everything else. 

But we want this to grow. I think you would agree. The market 

will grow it. Innovation will grow it. But we also could choke it to 

death by regulation and pricing and price fixing, like we did on the 

interchange fee. Somebody, as you mentioned, somebody is going to 

pay. There is a cost for all of this, but the more it is, the lower the 

cost. 

Senator WARNER. Right. And all I am saying, Senator—— 

Senator SHELBY. Would you disagree with that? 

Senator WARNER. No, I completely agree and I think you—you 

know, I agree with you. We do not want to choke this off with overregulation. But we do need—what we would hate, knowing how 

quickly some of these industries develop, and there is going to be 

a clearinghouse at some point because you are going to have all 

these different systems, trying to at least make sure that we are 

all aware. 

What we would not want to have happen is you have got the beginnings of a robust industry and telecom providers have agreed to 

bake into a bill X percent, whatever it is, and then after the fact, 

everybody says, Oh, my gosh, this is way above market, or whatever, and then we kind of back into another interchange argument. 

We just ought to know what we are getting into ahead of time. 

Senator SHELBY. Absolutely. 

Ms. BRAUNSTEIN. Senator, can I just—— 

Senator WARNER. And I know my time is expired. 

Ms. BRAUNSTEIN. I am sorry. 

Chairman JOHNSON. Ms. Braunstein. 

13 

Ms. BRAUNSTEIN. Yes. I am sorry. I just wanted to address one 

thing in terms of the prepaids, not the telecom bills, but the 

prepaids. There are some protections already afforded to those 

prepaids that are payroll cards that are used specifically for paying 

employees. Those protections have not been extended at this point 

to general purpose, prepaid cards. 

But the authority to do that kind of work has been given to the 

Consumer Protection Bureau. It was one of the authorities we had 

under the EFTA Regulation E, that transferred to the Bureau last 

July. So there is some authority for that right now. 

Senator WARNER. The only comment I would make, Mr. Chairman, is, you know, again having been on the telecom side, and I 

cannot believe that the telecom provider, even with a prepaid, is 

going to charge the same rate or fee for a text message that my 

daughter might send to her friend, that they are going to charge 

for that financial transaction, even with a prepaid chip back to the 

ultimate receiver of those funds. 

Because just the risk exposure is going to be different. Maybe I 

am wrong. I do not know, but I would like—— 

Ms. BRAUNSTEIN. Well, at this point, we do not know what will 

happen in the future, but at this point, from what we can see, the 

telecoms are not charging for the use of mobile banking or payments. There is no charge. 

Senator WARNER. I just would love to have, at some point—and 

I know we are just at the beginnings of this and maybe we could 

get some more from the merchants and others and telecoms, and 

again, a little more idea about what is going on abroad, where 

this—somebody is going to charge an interchange fee or something 

like an interchange fee in this process. 

I would just like to see what all the options are. 

Ms. BRAUNSTEIN. As we said, this is a mechanism to use existing 

channels. So if you are using a debit card or a credit card, the 

interchange fees that apply to those instruments—— 

Senator WARNER. Right, I got that. 

Ms. BRAUNSTEIN. ——will still apply. 

Senator WARNER. I got that. Thank you. Thank you, Mr. Chairman. I appreciate it. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. I just want to pick up in the area of Senator 

Warner, just an observation. There is a charge for anything, a service. There should be a charge. People should be aware of this. But 

I believe myself that the market ought to set it, not the Government, because it is price fixing, in a sense, because as this technology explodes and keeps growing, and it will, as Senator Warner 

pointed out, price of doing business should come down, not go up. 

There is nothing like transparency, but gosh knows, I hope we 

will not continue down the road of staying in the interchanges. 

There is just a cost for transactions. I do not mind paying that cost. 

I know I have got a friend that used PayPal on something. I did 

not even know how PayPal worked. 

But he did it because it was a quick payment like this and he 

is happy with what he paid. He knew. He is very well-educated. He 

knew what was happening and he knew it was not free. But as 

long as people know. 

14 

Senator WARNER. And I guess I would completely echo what Senator Shelby just said. I think the market ought to set this, but 

there are so many ways that you could bake this in that it is not 

transparent. 

Senator SHELBY. Oh, yes. 

Senator WARNER. And that is what I was trying to make 

sure—— 

Senator SHELBY. I do not like hidden things, but I do not want 

the Government pricing things. I do not believe the Senator from 

Virginia does either. 

Senator WARNER. No, sir. Thank you, Mr. Chairman. 

Chairman JOHNSON. I would like to thank our witnesses for their 

very interesting testimony today. As the mobile payment system 

develops in this country and around the world, the Committee 

must make sure that consumers are protected and that the efficiency and integrity of the U.S. payment system is maintained. 

I will look forward to learning more about this topic and working 

with my colleagues on the policy questions raised by this evolving 

market. This hearing is adjourned. 

[Whereupon, at 10:52 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

15 

1 RFID or Radio Frequency Identification Device is a tag or transponder used to identify and 

transmit data short distances in one direction via radio waves. 

PREPARED STATEMENT OF KENNETH C. MONTGOMERY 

FIRST VICE PRESIDENT AND CHIEF OPERATING OFFICER, FEDERAL RESERVE BANK OF

BOSTON

MARCH 29, 2012 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for inviting me to appear before you today to talk about consumers’ use 

of mobile financial services. 

My testimony today will discuss development of the mobile payments system in 

the United States, and activities and progress of a mobile payments industry 

workgroup (MPIW) first convened by the Federal Reserve Banks of Boston (FRB 

Boston) and Atlanta in January 2010 to facilitate a discussion among key mobile 

industry stakeholders as to how a successful retail mobile payments ecosystem could 

evolve in the U.S. This group includes representatives of several large banks, credit 

card and automated clearing house (ACH) networks, the two largest mobile carriers, 

intermediaries/third-party payment processors, Internet payment service providers, 

mobile technology and security providers, handset and chip manufacturers, mobile 

and payment trade organizations, and a merchant trade group. Representatives 

from the Board of Governors of the Federal Reserve and United States Treasury 

also participate. This workgroup has continued to meet three to four times each 

year since the initial 2010 meeting. 

Evolution of Mobile Payments and Banking in the United States 

Before turning to mobile payments and banking, it may be helpful to provide brief 

context about the post- World War II history of the U.S. payments system. Looking 

back, banks and policy makers in the 1950s and 1960s were grappling with significant problems created by the growth of economic and financial activity relative to 

our ability to process paper payments and other financial instruments. At that time, 

retail payments were largely made by cash and checks. The use of computers to 

automate banking processes was just beginning. Since then, the U.S. payments 

landscape has changed dramatically. Electronic payments made through payment 

card networks and the automated clearing house system have become increasingly 

prevalent, and now represent about four out of every five noncash payments in this 

country. Virtually all check payments, which have been declining in number since 

the mid-1990s, are now cleared electronically, rather than in paper form. The cumulative effects of automation and innovation have driven several waves of new banking and payment services that continue to improve the efficiency and effectiveness 

of our payment systems. 

The evolution of mobile banking and payments encompasses a combination of continued advances in hardware, software, and payment systems, including contactless 

payments, online banking, mobile phones (particularly smartphones), applications, 

and the convergence of Internet or e-commerce and mobile-commerce. 

Since the late 1980s, companies and industries around the globe have experimented with different payment mechanisms aimed at improving access to banking 

services and the efficiency and ease of use for retail point-of-sale payments. For example, a contactless technology was developed in Japan, which a major commuter 

railroad in Tokyo implemented in a proprietary reloadable prepaid card. In addition 

to transit fare, consumers could use the contactless card to pay for purchases at 

merchants equipped with contactless readers near train stations. A similar product, 

also based on this contactless technology, was launched in Hong Kong’s transit system in 1997. In the same year, a RFID 1 contactless payment system that allowed 

customers to wave/tap a fob to pay at the pump, was launched, the first of its kind 

in the United States. 

In the late 1990s, Finland launched a number of mobile commerce and banking 

initiatives. The first two mobile phone-enabled vending machines, which accepted 

payment via mobile phone text messaging, were installed in Helsinki. A bank in 

Finland launched the first mobile banking service to monitor account activity using 

this technology. 

In the early 2000s, an online payment platform emerged that allowed consumers 

to email payments to each other. In 2002, online auctions were enabled to receive 

electronic payments from participants, replacing paper checks. Eventually, the online payment platform was expanded to online merchants. 

U.S. consumers began to embrace online banking in the early 2000s. By October 

2002, 34 million consumers, (representing 30 percent of U.S. Internet users) used 

16 

2 3G (generation) mobile services provided more bandwidth for faster Internet access from a 

mobile phone, as well as advanced media features. 3 Near Field Communication or NFC is a short-range wireless proximity technology that uses 

radio frequency to enable two-way communication between devices. NFC chips are embedded 

in mobile phones to enable contactless ‘‘tap and go’’ payments. 4 Combination of hardware, software, interfaces, and protocols that enable secure storage and 

use of credentials for payment, authentication, and other services. 5http://www.frbservices.org/communications/paymentlsystemlresearch.html 6http://www.bos.frb.org/economic/ppdp/2011/ppdp1101.htm 

online banking, an increase of 19 million consumers performing online banking 

since March 2000. 

Initiatives that would allow consumers to use their mobile phones to perform new 

functions surged in 2000, driven by the development of mobile Internet access, the 

popularity of the Internet and e-commerce, and the increased awareness of mobile 

phones as more than voice communication tools. However, these service offerings did 

not meet consumer expectations and neither the phones nor the mobile networks 

handled data well, which led to very low adoption rates. The arrival of 3G 2 services 

in the mid-2000s addressed earlier technology problems and had a revolutionary impact on mobile technology in the U.S. Mobile phone manufacturers introduced 

smartphones that were enabled with more effective Web browsing and data capabilities. 

By 2006, helped by increased Internet and online banking adoption, and availability of smartphones, banks began to reexamine the development of mobile banking capabilities. Six of the largest ten U.S. banks offered mobile banking services 

by the end of 2007. Initially most banks offered browser and Short Message Service 

(SMS) based services, but in 2007, the mobile banking/payments market underwent 

a major transformation with the introduction of a new generation of smartphone. 

Now customers were able to download banking applications and other more advanced applications used for mobile-commerce that were not SMS-based, providing 

customization and improved security. The success and rapid growth of these and 

other smartphones led to increasing use of downloadable mobile applications for mobile banking and payments. By 2008, core deposit processors and mobile solution 

vendors began to develop software solutions tailored to financial institutions, enabling smaller U.S. banks to also offer mobile banking services. 

Beginning in 2005, two payment networks launched several U.S. card and mobile 

contactless trials, which typically took place in metropolitan areas and ran for 4 to 

6 months. The trials involved using a mobile phone to pay for in-store purchases 

at selected convenience stores and fast food restaurants, purchase transit tickets, or 

purchase concession items at sports venues. Although some trials proved the viability of Near Field Communication 3 (NFC) contactless technology, no full-scale deployments followed. In 2009–2010, several NFC initiatives were taking place in Turkey, Singapore, and the U.K., and NFC-enabled phones were introduced in Canada. 

Several new mobile payment services were introduced within the last 3 years that 

could have a major impact on mobile payments in this country. In 2009, a new attachable card reader that plugs in to a smartphone was introduced, enabling small 

merchants to accept credit and debit cards. In 2011, a number of companies and industry partnerships announced mobile/digital wallet solutions utilizing NFC or 

cloud technology. 

Mobile payments have been referred to as the ‘‘next payments revolution’’ by some 

industry participants. As mobile wallet technology, built upon the NFC contactless 

chip and secure element 4 for improved security and convenience, appeals to a broader array of consumers, and as merchants, banks, payments systems participants, 

and technology and telecommunications providers derive increased revenue or lower 

costs as a result of broad adoption, mobile payments should significantly change domestic and global payments practices. 

Why the Federal Reserve System Convened the MPIW 

The Federal Reserve strives to foster the safety and efficiency of the Nation’s payment systems. We monitor the evolution of retail payments through a variety of 

means, including a triennial Retail Payments Study 5 and an annual Survey of Consumer Payment Choice. 6 Of particular interest has been the migration of retail payments from traditional to emerging platforms, including the evolution of mobile 

banking and payments. 

When FRB Boston began to research mobile banking and payments, our goal was 

to better understand how the industry was evolving, the factors that would motivate 

interaction and cooperation between mobile carriers and U.S. banks, the major barriers to adoption, and the impact of mobile payments on consumers in the U.S. payment system. We had seen mobile payments evolving more quickly in other parts 

17 

7 Banks had shown significant interest in the previous 3 years, but many preferred to be fast 

followers, not leaders. Most banks, except the very large, were moving slowly, waiting for others 

to demonstrate the viability of mobile payments. Only 1,000 of the approximately 17,000 banks 

offered mobile banking in the U.S. at the end of 2009. However, 40 percent of U.S. consumers 

used online banking. Many stakeholders believed that in 2010 and 2011 there would be significant momentum leading the financial services industry to become more involved in mobile 

(banking and payment) services. They noted, however, that many smaller U.S. banks and credit 

unions look to their existing third-party core deposit processors to deliver solutions without significant upfront cost. 

Contactless cards, introduced several years ago in the U.S., were not successful and did little 

to generate demand for mobile payments. Poor marketing and education may have contributed. 

Many cardholders received contactless cards but were unaware that they had them or how to 

use them and did not know whether merchants they frequented accepted contactless payments. 

of the world and wanted to understand why progress in the U.S. was slower. In late 

2009, the large U.S. banks were developing mobile banking solutions, and regional 

and small banks were beginning to assess their business cases for mobile banking, 

but the concept of using a mobile phone to make a purchase was just surfacing. 7

In conversations FRB Boston had with bankers and payments experts in 2009, we 

heard that they were concerned with fragmentation and lack of communication 

among key stakeholders, particularly mobile carriers, about the direction of mobile 

payments in the U.S. Industry participants suggested that the Federal Reserve facilitate a conversation among a diverse group of mobile payment stakeholders. Realizing that mobile payments would impact consumers in new ways, we wanted to ensure that all stakeholders adequately addressed issues related to consumer protection and security. Additionally, mobile carriers, which had limited understanding of 

banking and payment systems, would have an important role in the evolution of mobile payments, which introduced new coordination issues. Lastly, we believed that 

mobile payments, correctly implemented, could create new efficiencies in payments 

and possibly create new, cost effective, alternatives for the unbanked and the underbanked. As a result, the Federal Reserve hosted the first meeting of the MPIW in 

January 2010, to facilitate discussion on the evolution of mobile retail payments in 

the United States. 

Objectives of the MPIW 

The overarching goal of the Federal Reserve in convening the MPIW was to encourage growth and innovation in the mobile payments market while minimizing 

risk to consumers and the payment system. The Federal Reserve believed it was important to gain an industry perspective to determine what barriers existed to the 

proper evolution of this market and whether we could help eliminate these barriers. 

We also wanted to explore how we might collaborate on issues of mutual interest. 

Thus, the objective for the first meeting was to have the experts inform and educate 

us, and to engage in an open cross-industry dialogue. 

Many of the organizations represented at the meeting were already involved in 

mobile payment initiatives in Asia, Africa, and Europe. In the U.S., a variety of very 

limited NFC contactless pilots were underway that enabled contactless payments 

initially on credit and debit cards and then mobile phones, but none with any lasting commercial availability. The industry was struggling to define a direction for 

mobile payments because of conflicting business models and strategies, and a lack 

of demonstrated consumer demand. 

The main objectives for the group were to (1) gain a mutual understanding of the 

evolution of mobile retail payments in the U.S.; (2) provide a forum for participants 

to assess challenges, find points of mutual value, share ideas, and build consensus 

in a nonbinding, free market manner; and (3) identify possible opportunities for future collaboration to help build critical mass for the success of mobile payments in 

the U.S. 

What the MPIW Has Completed to Date 

Recognizing the diversity of industries in the MPIW, subsequent meetings attempted to level set the group by covering each organization’s initiatives relative to 

mobile payment plans, and perspectives on the benefits and barriers to implementation. Participants identified as benefits of mobile payments: 

• The ability to reduce fraud using an encrypted contactless mobile platform. 

• Potential merchant cost efficiencies gained by processing mobile payment transactions considered more secure than card transactions because of the use of dynamic data versus static magnetic card data, and reducing potential costs associated with PCI (Payment Card Industry) security standards compliance. 

18 

8 EMV is a global standard for credit and debit payment cards based on chip card technology, 

taking its name from the card schemes Europay, MasterCard, and Visa, which developed it. The 

standard covers the processing of credit and debit card payments using a card that contains a 

microprocessor chip at a merchant payment terminal. The transactions are referred to as ‘‘chip 

and PIN’’ because PIN entry is usually required to verify the customer is the genuine cardholder. The EMV standard has been implemented in most developed countries, other than the 

U.S. In August 2011, Visa announced a phased EMV migration plan for the U.S. In January 

2012, MasterCard announced its own EMV adoption program. Both programs incorporate similar incentives and timelines designed to encourage migration by processors and acquirers by 

April 2013, and retailers by mid-2015 (2017 for automated fuel dispensers). 9http://www.bos.frb.org/bankinfo/firo/publications/bankingpaypers/2011/mobile-paymentsmapping.htm 

• Consumer convenience and value using a mobile wallet containing multiple payment methods stored securely in the mobile device, along with loyalty cards, 

virtual coupons, and discounts customized to reach different demographic cohorts determined by location-based, real-time capabilities of mobile technology. 

• The ability to use a mobile phone to provide financial services to the unbanked 

and underbanked consumer segments. 

Despite the benefits, participants identified a number of barriers that have impeded the growth of mobile payments, including: 

• Lack of consumer demand, driven by the availability of many safe alternative 

payment choices in the U.S. and few differentiating factors or substantial benefits that consumers can see yet from mobile payments. 

• Lack of NFC-enabled smart phones. This obstacle may be partially addressed 

as several handset manufacturers have committed to making more NFC-enabled phones in 2012. 

• Lack of a standard business model (bank-centric, carrier-centric, partner- or 

nonbank-centric), creating market fragmentation and limits mass adoption. 

• Small percentage of merchant terminals that accept contactless NFC payments 

today. The capital investment in point-of-sale equipment for contactless technology is expensive, so merchants have been reluctant to make investments 

until they are certain of the direction in which the market is headed. They must 

now also factor in the implementation of EMV technology in the U.S., given the 

recent Visa/MasterCard mandate of compliance beginning in 2013. 8 However, 

this mandate may encourage faster implementation of NFC as part of the EMV 

implementation, or at least provide a deadline for compliance. 

• Uncertain revenue models and lack of collaboration. Two NFC mobile wallet 

providers are aggressively seeking merchants to participate in their programs, 

and offering incentives for eligible consumers to use their mobile phones to pay 

for purchases. These commercial trials test new revenue models and partnerships to determine whether collaboration among stakeholders is successful. 

• Participants also identified other barriers, such as the uncertainty regarding 

who owns the customer relationship (banks or mobile carriers), lack of global 

standards, and unclear regulatory direction as hindering the growth of the market. 

Building on the identified benefits and challenges, the MPIW discussed the need 

for a roadmap to develop a high-level framework for the U.S. mobile ecosystem. This 

roadmap would include best practices and industry standards to manage the technology, security, settlement risk, and customer requirements at different points in 

the value chain. The MPIW also wanted to understand the roles of regulators for 

mobile payments and the applicable regulations. The MPIW then worked to define 

the principles essential to addressing the barriers and ensuring a successful mobile 

payment ecosystem in the U.S. Participants agreed in general with the principles 

related to mobile security, interoperability, and consumer protection, although there 

was not unanimous support on all details. These principles formed the basis of a 

white paper on the future of point-of-sale mobile payments in the U.S., Mobile Payments in the United States Mapping out the Road Ahead, published in March 

2011. 9 Although written by the Federal Reserve, it reflected the general thoughts 

of the MPIW. These foundation principles are summarized below: 

• Creation of an ‘‘open mobile wallet’’ that supports multiple payment options 

(credit, debit, bank account, prepaid/stored value, etc.) stored in a secure element in the phone, with broad payment and merchant marketing value options, 

such as rewards, coupons, and loyalty programs, enabling consumer choice. 

19 

• Use of NFC technology for contactless mobile payments at point-of-sale, along 

with enabling secure mobile applications. NFC must be based on industry 

standards, capable of supporting all payment methods and networks, and operable globally and in multiple venues (e.g., retail, transportation, ATM). 

• Clearing and settling payments through existing channels (credit, debit, prepaid, ACH, mobile), but open to new channels. Existing payment mechanisms 

are the necessary foundation for the mobile payments platform to allow for 

mass adoption and consumer choice. New payment channels should be permitted but must be interoperable with the existing clearing/settlement system. 

• Deployment of dynamic data authentication (DDA) as part of the security and 

fraud mitigation program for card-based mobile payment transactions. DDA 

generates a unique one-time cryptogram for each transaction, which is verified 

by interaction between the encrypted information on the chip and the network 

server when the transaction is authorized. Using contactless chip technology for 

mobile payments can reduce fraud because even if payment card information is 

stolen it cannot be used to make counterfeit cards or fraudulent online transactions. 

• Development of mobile payment standards for the U.S. based on international 

standards and an industry-supported certification process to ensure domestic 

and global interoperability. The MPIW discussed potential gaps in standards for 

rules and best practices, and possible existing banking standards or rules that 

could be applicable to mobile phones with some modification. The payments 

business has well-defined groups that set standards, such as the American National Standards Institute and NACHA. Who would promote the adoption of the 

standards by the mobile payments industry is an open issue. Participants suggested that the U.S. consider working with existing mobile standards bodies, 

such as GSMA, GlobalPlatform, and NFC Forum, as appropriate, to identify 

gaps in coverage, and develop globally interoperable standards. 

• Clarity of regulatory responsibilities among bank and nonbank regulators needs 

to be established early on, with input from the mobile stakeholders. While current regulations and rules may cover underlying payment methods, there is confusion because multiple regulatory agencies have responsibility for different aspects of payments and wireless transactions. Industry participants urged bank 

and nonbank regulators, such as the Federal Communications Commission, the 

Federal Trade Commission and the Consumer Financial Protection Bureau, to 

collaborate to define the regulatory environment for all the participants. 

For example, data privacy was a major concern. Complexities arise when different parties begin to share data. The potential marketing value of customer 

data when tied to mobile payments is significant. Data must be managed carefully to avoid potential abuse and unauthorized access to mobile payments data 

(e.g., transaction data, location-based data, etc.). 

• Trusted Service Managers (TSMs) should manage and control the provision of 

secure elements in the mobile phone to control risk and ensure interoperability 

between mobile platforms. Although a broader role for the TSM was mentioned, 

the MPIW believed it was too early in the mobile payments evolution to consider this option. 

Several major initiatives occurred after the paper was published in March 2011. 

First, the Federal Reserve and MPIW members began discussing the basic principles at payment industry conferences, and with payment trade groups, individual 

organizations, and regulators to collect feedback and escalate issues. 

Second, to get input from a broader group of stakeholders, we invited several merchants, a prepaid card provider, debit card networks, a global mobile standards 

body, and consumer-focused organizations to the July 2011 MPIW meeting. The 

merchants raised several issues. They remain concerned about their business case— 

processing costs, investment in terminal upgrades, and cost of PCI compliance. Merchants would like to collect marketing data that will enable them to offer loyalty 

programs, customized coupons, and merchant rewards that provide consumers with 

a better shopping experience and increase sales. Because of the large capital investment, they would like to see a roadmap that clearly illustrates the industry direction for mobile payments, including mobile wallets. 

Third, we created a sub-group to identify security pros and cons related to retail 

mobile payments that use contactless NFC (SIM, micro SD and embedded chip) or 

cloud technology. FRB Boston plans to publish a report of the findings later this 

year. 

20 

10For mobile payments, QR codes are two-dimensional barcodes that can be read by 

smartphones with a mobile application to pay for purchases or receive mobile coupons. 

Current Status of the U.S. Mobile Payments Landscape 

The volume of mobile Internet and remote purchases (m-commerce) is still small, 

but growing as the number of mobile applications increases, and more consumers 

own smart phones (about 45 percent adoption in the U.S. currently). As consumers 

have more opportunities to receive mobile coupons, discounts, rewards and locationbased offers, the incentives to use mobile payments will further increase. 

NFC contactless technology is being implemented in conjunction with several mobile wallet solutions at retail point-of-sale locations; however, alternatives to NFC 

do exist. QR codes 10 are in use at a few retailers for prepaid mobile purchases. 

Cloud technology, where payment credentials are stored on a secure file server that 

communicates with the merchant terminal for payment, rather than in a secure element on the physical mobile phone, is another emerging alternative. In the current 

mobile market, some of the large players continue to invest in NFC, others are developing wallets in the cloud, and still others are covering all bases by providing 

mobile services for both NFC and cloud. It is feasible that these technologies will 

coexist in the mobile payment ecosystem. 

Nonbanks are substantially influencing the evolution to mobile payments. In 

2011, several commercial partnerships and joint ventures were announced for retail 

mobile wallet payments. Additionally, an online payment platform announced plans 

to enable brick-and-mortar merchants to accept payments from its wallet accounts. 

The initial offering uses a mobile phone number, not a mobile phone. Several new 

entrants to the payment system are enabling small merchants to accept card payments using their mobile phones with a plug-in device and a mobile application, 

while others serve as intermediaries to handle payments for digital content billed 

directly to mobile carriers. 

Some smartphones are being used for functions previously performed on personal 

computers. These devices became a game changer because they provided consumers 

with an interface to the Web and many new applications. Consumers demonstrated 

their desire to use their smartphones for multiple functions, which led to even more 

new applications. The smartphone helped to build consumer experience and prepare 

the environment for mobile payments. 

Next Steps 

The Federal Reserve will continue to facilitate the dialogue among MPIW participants and other stakeholders and monitor progress in the evolution of mobile payments. The next MPIW meeting is scheduled for April 2012. This meeting, which 

will include bank and nonbank regulatory agencies, will focus on issues related to 

security, privacy, and consumer protection, and respective oversight responsibilities. 

Future MPIW efforts will focus on education that is needed to help consumers understand steps they can take to protect their mobile financial data, including using 

passwords to lock their devices to prevent access to sensitive data, mitigation tools 

that allow for remote device deactivation and wiping of data, and alerts of suspicious activity. 

The Federal Reserve will continue to conduct research to better understand consumer needs, behaviors, and adoption plans related to mobile payments. In addition, 

the Federal Reserve plans to work with industry participants to identify potential 

gaps in security and fraud prevention, and potential mitigation strategies for the 

different mobile payment technologies (NFC versions and cloud). We plan to encourage the mobile stakeholders to work together to define the respective responsibilities 

of the various parties (e.g., the phone, mobile carriers, processors, banks, and settlement systems) to ensure robust end-to-end security, and to develop security rules 

and standards for eliminating or appropriately mitigating risks for mobile payments. 

Conclusion 

Collaboration among mobile industry stakeholders, the Federal Reserve, and interested Government agencies through the MPIW has helped to educate diverse participants on different views and concerns around mobile payments, and awareness 

of the need for collaboration in certain areas, such as security and standards. Going 

forward, the MPIW will continue to provide a forum to discuss issues and barriers 

as they arise with an objective of more timely resolution. The MPIW enables proprietary innovation to occur, while promoting a shared framework for interoperability. 

Finally, working with mobile carriers, banking and payments industry participants, 

and Government regulators, the Federal Reserve hopes to help mobile payments in 

21 

1The report is available at www.federalreserve.gov/econresdata/mobile-device-report201203.pdf. 

the United States evolve in an efficient and safe manner and provide a convenient 

payment option to all consumer segments. 

Thank you again for inviting me to appear today. I am happy to answer any of 

the Committee’s questions. 

PREPARED STATEMENT OF SANDRA F. BRAUNSTEIN 

DIRECTOR, DIVISION OF CONSUMER AND COMMUNITY AFFAIRS, BOARD OF GOVERNORS

OF THE FEDERAL RESERVE SYSTEM

MARCH 29, 2012 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for inviting me to appear before you today to talk about consumers’ use 

of mobile financial services. 

The evolution of new technologies that enable consumers to conduct financial 

transactions using mobile devices has the potential to affect their financial lives in 

important—but as of yet, not fully known—ways. For this reason, the Federal Reserve has been monitoring trends and developments in mobile financial services. By 

‘‘mobile financial services,’’ I am really talking about two categories of activities. The 

first we call ‘‘mobile banking,’’ which is using your mobile device to interact with 

your financial institution, mostly doing things you could also do through more traditional means, like check your account balance or transfer money between accounts. 

The second we call ‘‘mobile payments,’’ which we define as making purchases, bill 

payments, charitable donations, or payments to other persons using your mobile device with the payment applied to your phone bill, charged to your credit card, or 

withdrawn directly from your bank account. 

Beyond banking and payments, mobile devices have the potential to be useful 

tools in helping consumers track their spending, saving, investing, and borrowing, 

and in making financial decisions. Such technologies also hold the potential to expand access to mainstream financial services to segments of the population that are 

currently unbanked or underbanked. That said, the technologies are still new, and 

important concerns, such as consumers’ expressions of unease about the security of 

these technologies, must also be addressed for consumers to feel confident adopting 

these new services. 

To further our understanding of consumers’ use of, and opinions about, such services, the Federal Reserve commissioned a survey late last year. Nearly 2,300 respondents completed the survey. This survey is among the first to integrate questions about using mobile devices for shopping and comparing products along with 

questions about using mobile devices for banking and payments. On March 14, 

2012, the Federal Reserve released a report, based on these responses, titled ‘‘Consumers and Mobile Financial Services.’’ 1 My testimony today will draw from this 

report, which is attached to my written testimony. 

Nearly 9 out of 10 adults in the United States have a mobile phone, and two-fifths 

of those phones are so-called ‘‘smartphones’’ with Internet connectivity. Among all 

mobile phone users, one out of five has used their phones to conduct some banking 

activity in the last 12 months. Those users with more traditional mobile phones, or 

so-called ‘‘feature phones,’’ access bank information via text messages, while 

smartphone users access their bank information by downloading their bank’s application or via the bank’s Internet site. Younger consumers, those below age 29, have 

readily adopted mobile banking, and make up almost 44 percent of all consumers 

surveyed who use such services. Adoption rates of mobile banking also differ by racial and ethnic background, with Hispanics and non-Hispanic blacks making up a 

disproportionate share of those who use mobile banking services. The most common 

transactions performed by users of mobile banking were checking account balances 

or checking recent transactions. Transferring money between accounts was another 

common transaction. 

Of those consumers who had not adopted mobile banking, the primary reason 

given was that they felt their banking needs were being met through more traditional means. Security concerns were the second most-cited reason for not using mobile banking. Specifically, consumers expressed concerns about hackers gaining access to their phones and exposing their personal financial information. A little more 

than one-third of all mobile phone users reported that they do not know how secure 

mobile banking technology is for protecting their personal information, while an additional one-third rated the technology as unsafe. Nevertheless, among those conVerDate Nov 24 2008 10:31 Jan 18, 2013 Jkt 048080 PO 00000 Frm 00025 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\329710.TXT JASON
22 

sumers with any type of mobile phone, but who are not currently using mobile 

banking, one out of ten expects to be using it within the next year. 

In addition to mobile banking, we asked about mobile payments, which I described earlier. Mobile payments are not yet as prevalent as mobile banking; one 

out of eight respondents reported making a mobile payment in the previous 12 

months, and usually this involved paying a bill online via their mobile phone. Mobile payments are disproportionately used by consumers under age 45 and by Hispanics. Consumers who are not currently using mobile payments responded that 

they were concerned about the security of the technology, did not see any benefit 

from mobile payments, or found it easier to pay in other ways—for example, with 

cash or with a credit card. 

Consumers who are ‘‘underbanked’’—that is, those who have a bank account but 

who also use an alternative financial service provider such as a check casher, payday lender, auto-title lender, or payroll card—make significant use of mobile banking and mobile payments. Among this group, nearly three out of ten have used mobile banking, primarily to check their account balances. The underbanked are more 

likely than the general population to use mobile payments, with one out of six using 

payment services on their mobile devices. Those consumers who are unbanked also 

report using mobile financial services, generally in conjunction with a general purpose prepaid card or payroll card. 

Let me give you a few examples from the report of how consumers reported using 

mobile financial services to make financial decisions. I stated earlier that the most 

frequent use of mobile banking was to check account balances. Of those consumers 

who use mobile banking, more than two-thirds reported that they checked their account balance or available credit before making a large purchase. Moreover, among 

the consumers that reported doing this, nearly six out of ten reported that they had 

decided not to buy an item because of the amount of money available in their account. As another example, some consumers reported setting up a text alert from 

their bank if their account balance was getting low; among those using this service, 

five out of six reported taking some action—transferring money into the account 

with the low balance, reducing spending, or making a deposit into the account—in 

response to receiving an alert. Consumers also reported using their mobile devices 

to browse product reviews or get pricing information while shopping. 

More details on consumers’ use of mobile financial services are available in the 

report. Staff members in the Division of Consumer and Community Affairs expect 

to conduct additional analysis of the data in the months ahead. This should round 

out our understanding of these initial findings. For instance, some of the differences 

that we see based on ethnic or socioeconomic factors may be better understood when 

we examine how such factors interact with other characteristics of the respondents. 

We also anticipate that we may conduct periodic updates of the survey to monitor 

consumers’ experiences as the technology and business practices evolve. 

Thank you again for inviting me to appear before you today. I would be happy 

to answer any questions you may have. 

23 


32912001.eps

BO A RD OF GOVE RNO RS OF TH E FEDERAL R ESE RVE SYSTE M 
24 


32912002.eps

...... 

Consumers and 

Mobile Financial Services 

March 2012 

BO ARD OF GOVER NOR S OF TH E F EDERAL RESE RVE SYST EM 
25 


32912003.eps

To order additional copies of this or other Federal Reserve Board publications, contact: 

Publications Fulfillment 

Mail Stop N-127 

Board of Governors of the Federal Reserve System 

Washington, DC 20551 

(Ph) 202-452-3245 

(fax) 202-728-5886 

(e-mail) Publications-BOG@frb.gov 

This and other Federal Reserve Board research into consumer topics is available online at 

www.federalreserve.gov/econresdatalconsumerresearch_publications.htm. 
26 


32912004.eps

The survey and report were prepared by the 

Consumer Research Section of the Federal Reserve 

Board's Division of Consumer and Community 

AlTairs (DCCA). 

DCCA directs consumer-related functions performed 

by the Board and the Federal Reserve Banks, including conducting research on financial services policies 

practices and their implications for consumer 

financial stability, community development, and 

neighborhood stabilization. For more information 

aboLil DCCA, visit the Federal Reserve Board website a1 www.federalreserve.gov. 

iii 

DCCA staO' members Matthew B. Gross, Jeanne M. 

Hogarth, and Maximilian D. Schmeiser prepared this 

article. 
27 


32912005.eps

Executive Summary ................................................................................................................. 1 

Introduction ............................................................................................................................... 3 

Trends in the Utilization of Mobile Banking and Payments ............................................................. 3 

Potential Utilization for "Underbanked" and "Unbanked" Consumers ............................................ 3 

Younger Age Groups: Mobile Phone and Mobile Banking Adoption . . .. 4 

Survey Background .................................................................................................................... 4 

How Are Consumers Interacting with Financial Institutions? ....................... 7 

Online Banking ........................................................................................................................... 7 

Current Use of Mobile Banking and Payments ........................................... 9 

ti~~~.................. .. _................................................ .. 9 

Mobile Payments ........................................... ........................................................................... 11 

Mobile Security ......................................................................................................................... 13 

Other Mobile Financial Services ........................................................... 15 

Shopping Behavior ................................................................................................................... 15 

Personal Financial Management and Budgeting ......................................................................... 16 

Unbanked and Underbanked . .. .. . . 17 

Conclusion ............................................................................................................................... 20 

Appendix I: Survey of Consumers' Financial Decisionmaking Using 

New Technologies- Questionnaire .................................................................................. 21 

Banking Section ........................................................................................................................ 21 

ti~~~~~.................................. ...... _.............. .... _ ........ ~ 

Mobile Payments Users .. . ........ 30 

Non-Mobile Banking Users ........................................................................................................ 32 

Non-Mobile Payments Users ..................................................................................................... 33 

Appendix 2: Consumer Responses to Survey Questionnaire .................................. 47 
28 


32912006.eps

Mobile devices have increasingly become tools that 

consumers use for banking, payments, budgeting, 

and shopping. This report presents findings from an 

online survey, conducted in December 2011 and 

January 2012, examining the use of mobile technology to access financial services and make financial 

decisions. 

Key findings of the survey include 

• Mobile phones and mobile Internet access are in 

widespread use 

---'J7 percent of the U.S. population has a mobile 

phone 

--44 percent of mobile phones are smartphones 

(Internet-enabled) 

- 84 percent of smart phone users have accessed 

the Internet on their phone in the past week 

• The ubiquity of mobile phones is changing the way 

consumers access financial services 

- 21 percent of mobile phone owners have used 

mobile banking in the past 12 months 

-II percent of those not currently using mobile 

banking think that they will probably use it 

within the next 12 months 

- The most common use of mobile banking is to 

check account balances or recent transactions 

(90 percent of mobile banking users) 

- Transferring money between accounts is the sec· 

ond most common use of mobile banking 

(42 percent of mobile banking users) 

• Mobile phones are also changing Ihe way consumers 

make payments 

- 12 percent of mobile phone owners have made a 

mobile payment in the past 12 months 

- The most common use of mobile payments was 

to make an online bill payment (47 percent of 

mobile payment users) 

- 21 percent of mobile payment users transferred 

money directly to another person's bank, credit 

card, or Paypal account 

• Perceplimls of Iimiled usefulncss and concerns aboul 

security are holding back the adoption of mobile 

financial senrices 

- The primary reason why mobile phone users had 

not yet adopted mobile banking was that they 

felt their banking needs were being met without 

the use of mobile banking (58 percent) 

- Concerns about the security of the technology 

were the primary reason given for not using 

mobile payments (42 percent) and the second 

most common reason given for not using mobile 

banking (48 percent) 

- More than a third of mobile phone users who do 

not use mobile payments either don't see any 

benefit from using mobile payments or find it 

easier to pay with another method 

• The "ulldcrballked" make significanl usc of mobile 

financial senrices 

- The underbanked make comparatively heavy use 

of both mobile banking and mobile payments, 

with 29 percent having used mobile banking and 

17 percent having used mobile payments in the 

past 12 months 

-62 percent of the underbanked who use mobile 

payments have used it to pay bills 

-10 percent of the completely unbanked report 

using mobile banking in the past 12 months, and 

12 percent have made a mobile payment 
29 


32912007.eps

Mobile phones have clearly become ubiquitous and a 

standard aspect of daily life for many American consumers in the last decade. Ongoing innovations in 

mobile finance show some potential to change the 

way consumers conduct financial transactions by 

offering consumers new services. Yet, many people 

remain skeptical of the benefit of mobile financial 

services and the level of security provided along with 

such services. 

To further understanding of these developments and 

consumers' usage of and attitudes towards mobile 

financial services, the Board conducted a consumer 

survey in late 2011 and early 2012. 

Trends in the Utilization of Mobile 

Banking and Payments 

A number of new services allow consumers to obtain 

financial account information and conduct transactions with their financial institution ("mobile banking") and others allow consumers to make payments, 

transfer money, or pay for goods and services 

("mobile payments"). 

As the market share of Internet-enabled smartphones 

continues to grow, the utilization of mobile banking 

and mobile payment technologies also increases. I As 

of March 2011, nearly one out of every five Americans with both a bank account and a mobile phone 

has used their phone to view account balances, 

receive account alerts, and conduct banking with 

their financial institution in the past 90 days2 

I The Pe\1I Research Cenler reports Ihal 35 percent of American 

aduhsowned a smartphone as of May 2011. Pew Internet 

study, 1011, 15% of AmericlOi Adults Own a Smarlphone (http:// 

pewinternet.orgl-lmediallFilesIReportsl201llPIP _Smartphones 

. pdQ 

2 In ils July 2011 report on smartphone banking security (based 

on a March 20 tl survey), Javelin Strategy and Research finds 

that 19 percent of U.S. consumers are using mobile banking 

Javelin, lO ti, "Smarlphone Banking SecurilY: Mobile Banking 

Utilization Stalls on Consumer Fears. " 

Although mobile payments have been adopted more 

slowly by consumers in the U.S. than in many other 

countries, these services may become more popular 

over the coming years as the technology evolves and 

if the services become more widely accepted as a 

form of payment. In September 20 II, for example, 

Google launched the Google Wallet service, which 

allows consumers to use smart phones equipped with 

a near field communication (NFC) chip to make "tap 

payments" at any retailer accepting MasterCard PayPass. Besides Google, many other firms- induding 

mobile phone carriers, credit card issuers, and payment networks-are investing in mobile wallet technology As the number of phones equipped with 

NFC increases, mobile payments may also increase. 

Consumers respond to timely financial incentives and 

emotional appeals. Recent survey data show that 

some consumers view mobile payments as timesaving and convenient while providing them with 

increased access to, and control of, their finances. 

Despite these positive mobile finance allributes and 

perceptions, consumers also remain concerned about 

the cost and the security risks inherent in mobile 

financial transactions. 3 

Potential Utilization for 

"Underbanked" and "Unbanked" 

Consumers 

Mobile phone use is high among younger generations, minorities, and those with low levels of 

income- groups that are prone to be unbanked or 

underbanked. Mobile banking and mobile payments 

have the potential to expand financial access to the 

1mbanked and underbanked by reducing transaction 

costs and increasing the accessibility of financial 

products and services . 

3 Javelin, 2011 J Smarlplume Bmlking SeCllriry: Mobile Bunking 

Utilization Slallson COllsloller Fears. 
30 


32912008.eps

Consumers and Mobile Financial Services 

A significant number of Americans do not have a 

bank account of any kind, and many make regular 

use of alternative financial services such as payday 

loans, check cashers, rent-to-own services, money 

orders, or pawn shops. A 2009 study by the Federal 

Deposit Insurance Corporation (FDIC) found that 

8 percent of Americans had no checking or savings 

account, and thus were defined as unbanked.4 An 

additional 18 percent had a bank account but had 

used an alternative financial service at least once per 

year and so were classified as underbanked. 

While there remains a digital divide in computer 

Internet access across the socioeconomic spectrum, 

this divide does not hold true for mobile phone 

access. The 20 II Pew Internet study showed that 

83 percent of American adults have a mobile phone, 

and 35 percent have a smart phone that can access the 

Internet. Moreover, adoption of mobile phones is 

actually higher among minorities., as 89 percent of 

non-Hispanic blacks and 86 percent of Hispanics 

own a mobile phone. 

Indeed, minorities are also more likely to own a 

smart phone than non-Hispanic whites., with 44 percent of both non-Hispanic blacks and Hispanics 

owning a smart phone compared with 30 percent of 

non-Hispanic whites. While mobile phone and smartphone adoption is less prevalent at lower levels of 

income, approximately 75 percent of U.S. adults in 

households earning less than $20,000 per year have a 

mobile phone of some type, and 20 percent have a 

smartphone. 5 

Younger Age Groups: Mobile Phone 

and Mobile Banking Adoption 

Unsurprisingly, mobile phone adoption is highest for 

younger age groups: only 5 percent of individuals 

ages 18 to 24 do not have a mobile phone, and 

49 percent have a smartphone. In contrast, 44 percent 

of those ages 65 and over do not have a mobile 

phone, and only II percent have a smart phone.' 

Furthermore, and perhaps more surprisingly, a recent 

survey by the Center for Financial Services Innova4 Federal Deposit Insurance Corporation, 1009 SUfI"eyof 

Ullballked and Umierballked Households (www.fdic.gov/ 

householdsurvey/fllll_report.pdf). 

5 Pew Internet study, 2011 ,35% of AmericaJl Mil/IS 011'/1 a 

Smarlpilolle (httplfpewinternet.orrJ-fmediallFileslReportsi 

20111PIP _Smartphones.pdf). 

6 Ibid. 

tion (CFSI) shows that individuals under the age of 

25 are increasingly underbanked- some as a matter 

of choice- and appear comfortable with alternative 

financial services. 7 Given the prevalence of mobile 

phone usage among young individuals, minorities, 

and low-income families-groups most likely to be 

unbanked or underbanked- there is potential for 

mobile financial services to help integrate these individuals into the financial mainstream. 

Survey Background 

In consultation with a mobile financial services advisory group made up of key Federal Reserve System 

statT with relevant consumer research backgrounds, 

the Consumer Research Section in the Federal 

Reserve Board's Division of Consumer and Community Affairs designed a survey instrument to examine 

consumers' usage of and attitudes towards mobile 

phones and mobile financial services. 

The survey was administered by Knowledge Networks, an online consumer research company, on 

behalf of the Board. The survey was conducted using 

a sample of adults ages 18 and over from KnowledgePanel®, a proprietary, probability-based web 

panel of more than 50,000 individuals from randomly sampled households; the sample was designed 

to be representative of the U.S. population. After 

pretesting, the data collection for the survey began 

on December 22, 2011 and concluded on January 9, 

2012. The 2,290 respondents completed thesurvey in 

approximately 15 minutes (median time). 

The number of respondents sampled and participating in the survey, and the survey completion rates, are 

presented in table 1. A total of 3,382 e-mail solicitations to participate in the survey were sent out to the 

KnowledgePanel, and 2,290 individuals completed 

the survey fully (a "cooperation rate" yield of 68 percent). To enhance the cooperation rate, Knowledge 

7 Center for Financial Services Innovation (CFSI), 2010, Fillallcia/ First Ellcounters: An Examination of Ihe Fracfllred Financial 

Lalldscape Facillg YOlllh Today (hupJfcfsinnovation.com/sitesl 

defallltltilesllirst_encounters_white-paper_12_16_0.pdf) 
31 


32912009.eps

Networks sent e-mail reminders to non-responders 

on days three and six of the field period. 

The responses to all the survey questions are presented in Appendix 2 in the order in which they were 

asked of respondents. A table of summary statistics 

for the respondent demographics is also included as 

table 8.87. Beginning at table 8.88, cross-tabulations 

are presented of consumers' use of online banking, 

telephone banking, mobile banking, and mobile payments by age, race, gender, education, and income. 

March 2012 

The following sections of this report summarize key 

findings from the Knowledge Networks survey of 

consumers, with a focus on how consumers are using 

mobile phones to conduct their banking, make payments, enhance information gathering while shopping, and manage their financ" All data were 

weighted to yield estimates for the U.S. population. 

Only questions pertaining to these topics are discussed in the report; however, the complete survey 

questionnaire and the results of the entire survey are 

summarized in Appendix I and Appendix 2. 
32 


32912010.eps

Survey respondents were asked a set of screening 

questions that covered whether or not they had a 

bank account, access to the Internet, and ownership 

of mobile phones or smartphones. Survey responses 

indicate that the majority of American consumers 

use some form of technology to interact with their 

financial institution. 

As shown in figure 1, of those consumers with regular Internet access and a bank account, 68 percent 

used online banking in the past 12 months Telephone banking is the second most commonly used 

method of accessing financial services, with 33 percent of banked consumers reporting that they used it 

in the past 12 months. Mobile banking and mobile 

payments are the least common methods of accessing 

financial services, as just over a fifth of respondents 

with mobile phones and a bank account report using 

mobile banking and only II percent report using 

mobile payments in the past 12 months. 

However, as discussed in the following section, 

mobile banking access appears to be gaining traction 

with consumers and is likely to overtake telephone 

banking access in the next couple of years (as measured by consumers' expectations regarding their 

future use of the technology). 

Figure 1. Usage of different means of accessing bankmg services 

Online Banking 

Three out of ten respondents (30 percent) who use 

online banking are between ages 30 and 44, while 

20 percent of the online banking users are age 60 and 

older (see tables B.88, B.91, B.94, B.97,and B. 100in 

Appendix 2). Online banking users are predominantly non-Hispanic whites (73 percent), while Hispanics and non-Hispanic blacks comprise about 

12 percent and 8 percent of the online banking community, respectively. 

Online banking users are split evenly among men and 

women. Use of online banking is generally unrelated 

to household income, \\~th the share of online banking users by income category corresponding to their 

share of the population. Exceptions occurred at the 

tails of the income distribution, with those individuals earning less than $25,000 per year being significantly less likely to use online banking than their 

share of the population would suggest, while those 

individuals earning more than $100,000 per year 

being significantly more likely to use online banking 

than their share of the population would suggest. 

Level of education and use of online banking have a 

linear relationship, with online banking use increasing as education level increases: individuals ,\~th a 

Q16. Used online banking in the past 12 months ~ •••••• 68% 

Q12. Used telephone banking in the past 12 months 33% 

Q22. Used mobile banking In the past 12 months 

Q29. Made a mobile payment in the past 12 months 

Note: The cienominalN varies across services dlJe to quesfion screening 
33 


32912011.eps

Consumers and Mobile Financial Services 

bachelor's degree or higher account for 39 percent of viduals with a bank account. 

online banking users relative to 30 percent of indi-
34 


32912012.eps

Mobile Banking 

The Federal Reserve survey defines mobile banking 

as "using a mobile phone to access your bank 

account, credit card account, or olher financial 

accoun!. Mobile banking can be done either by 

accessing your bank's web page through the web 

browser on your mobile phone, via text messaging, or 

by using an application downloaded to your mobile 

phone." 

A significant number of mobile phone users have 

already adopted mobile banking. Nearly 21 percent 

of mobile phone users in the survey report that they 

used mobile banking in the past 12 months.' Moreover, among those consumers who do not currently 

use mobile banking, II percent report that they will 

"definitely" or "probably" use mobile banking in the 

ncxt 12 months. An additional 17 percent of those 

who report that they are unlikely to use mobile banking in the next 12 months report that they will "definitely" or "probably" adopt mobile banking at some 

poin!. Adding all these respondents together would 

imply peak adoption of 42 percent of all mobile 

phone owners.9 As smart phone users arc morc likely 

to adopt mobile banking than non-smart phone users, 

increasing smart phone adoption should further fuel 

mobile banking adoption. 

8 There is a wide range of estimates of mobile banking adoption. 

oomScorc estimates that 13.9 percent of an mobile phone users 

had adopted mobile banking as of Q2 2011. Javelin estimated 

that 19 percent of mobile phone users had adopted mobile 

banking as of March 20 I I (Smartphone Banking Security 

Report); however, the firm subsequently reports that mobile 

banking adoption jumped to 30 percent asof June 2011 (comScore, 2011 , Mobile Ballkillg Fillallcial Illstiflltioll Scorecard). 

9 The denominalOr for each of the questions on mobile banking 

adoption varies, thus the polential adoplion rale is less than the 

sum of the percentages of respondenls who indicate that they 

have or will adopt mobile banking. There are a total of 2,002 

mobile phone users in our survey: 418 are current users of 

mobile banking, 182 report Ihat Ihey are likely 10 use mobile 

banking inlhe next 12 monlhs, and 246 report Ihallhey will 

likely use mobile banking al some point inlhe future (for a IOtal 

of 846 potenlial users, or 42 percenl of all 2,002 mobile phone 

users) 

Use of mobile banking appears to be highly correlated with age (table 2), as individuals between ages 

18 and 29 account for approximately 44 percent of 

mobile banking users, relative to 22 percent of 

mobile phone users. Conversely, individuals age 60 

and over account fo r only 6 percent of all mobile 

banking users, while at the same time they represent 

24 percent of all mobile phone users. 

Non-Hispanic black and Hispanic users show a disproportionately high rate of adoption of mobile 

banking (table 3), at 16 percent and 17 percent of all 

mobile banking users relative to II percent and 

J3 percent of mobile phone users, respectively. Meanwhile, mobile banking users are split evenly between 

males and female~ and use of mobile banking is generally unrelated to household income (table 4), ~"th 

Table 2 Use of mobile banking In the past 12 months by 

age 

Percen~except asnoled 

t .. " --43.5 16.8 22.4 

30-4' 35.7 24.7 27 

'&-59 14.7 311.2 26.9 

00. S. t 28.4 23.7 

Number of respondents 372 1,626 1.998 

Note: This is lable B.89 in Appeooix2. 

Table 3 Use of mobile banking In the past 12 months by 

race 

Percen~excepl asnoled 

While, Noo-Hispanic 

--603 71.5 592 Blac~Non-Hispanic 16.2 10 11.3 

Other, Noo-Hisparic 5.2 5.8 5S 

Hispanic 17.1 11.6 12.8 

2+ Races, Non-Hispanic 1.2 I.t 1.2 

Number of respondents 372 1,626 1.998 

Nole:This is lable 8.92 in Appeooix2. 
35 


32912013.eps

10 Consumers and Mobile Financial Services 

Table 4 Use of mobile banking In the past t2 months by 

Income group 

Percenl, excepl as naled 

lesslllan$25,00J 12.8 19.9 18.4 

S2S,OCO-S39,OOS 19 16.6 17.1 

$40,(0)...$74,999 27.5 26.5 26.7 

$75,OO)...S99,009 12.9 14 13.8 

Sl00,OOJor greater 27.9 22.9 2' 

Number of respondents 372 1,626 I," 

Note:TableB.l01in Appaooix2 

the share of mobile banking users by income category corresponding to their share of the mobile 

phone user population. As with online banking, 

exceptions occurred at the tails of the income distribution, with those individuals earning less than 

S25,000 per year being significantly less likely to use 

mobile banking than their share of the mobile phone 

less tIlan high schoo! &S 12.1 10.7 

HighscOOol 21.5 31.8 29.6 

Some college 39 27.4 29.8 

Bachelor'sd99'9Elorhiljlar 34 28.8 29.9 

NumbBr of respondents 372 1,626 t," 

Note: Table B.98 in Appendix 2. 

user population would suggest, while those individuals earning more than SIOO,OOO per year being significantly more likely to use mobile banking than their 

share of the mobile phone user population would 

suggest. Mobile banking is highly correlated with 

education (table 5): 73 percent of all mobile banking 

users have at least some college education, but this 

education group represents only 60 percent of all 

mobile phone users. 

By far, checking financial account balances or transaction inquiries were the most common mobile banking activity, with 90 percent of mobile banking users 

having performed this function in the past 12 months 

(figure 2). Less prevalent activities were transferring 

money between accounts (42 percent) or receiving a 

text message alert from a bank (33 percent). Less frequently used mobile banking functions include making online bill payments from a bank account 

(26 percent), locating an in-network ATM (21 percent), and depositing a check by phone (II percent). 

Lastly, mobile investment management is utilized by 

only 2 percent of mobile banking users. Many mobile 

banking users appear to be making use of their 

banks' mobile applications, as 48 percent have 

installed such an application on their phones. 

Consumers report using mobile banking up to 60 

times per month; however, the median number of 

mobile banking transactions is four or five times in a 

typical month. 

Of the consumers who use mobile banking, many 

appear to be quite satisfied with their experiences, as 

Figure 2. USing your mobile phone, have you done any of the follOWing In the past 12 months? 

Checked an account balance or checked recent transactions ~ _______________ 9,", 

Downloadedyourbank'smobilebankingapplic:.ation ~ _______ • ,,% 

Transferredmoneybetweentwoacoounts ~ ______ • '2% 

Receivedatextmessagealffifromyourbank ~ _____ ,,. 

Madeabilipaymentusingyourbank'swebsiteOl'application ~ ___ • ,,% 

Loca1ed the closest in-networkATM for your bank 21% 

Deposltedachl!(ktoyouraccountuslngyourphone'scamera 

Refused to anSWfr 

Managed your investments 

Other 1% 

Note: This was question 2S in Ihe sU!Yey (seeApperdix It number of respordenls was 372. 
36 


32912014.eps

62 percent report being "very satisfied" with their 

experiences, and another 32 percent report being 

"somewhat satisfied" with their experiences. 

Among those consumers with mobile phones who do 

not currently use mobile banking, the top two reasons for not using the service are that they believe 

their banking needs are met without mobile banking 

(58 percent) and that they are concerned abolll security (48 percent) (figure 3). Less commonly cited reasons include a lack of trust in the technology to process transactions properly (22 percent), the high cost 

of data access on mobile phones (18 percent), and 

the small size of the mobile phone screen 

(17 percent). 

Consumers who express concerns about the security 

of mobile banking are concerned with hackers gaining access to their phone remotely (54 percent), losing their phone or having it stolen (19 percent), and 

experiencing data interception by a third party 

(18 percent). If these concerns were addressed, many 

non-users would be willing to adopt mobile banking. 

Moreover, the potential uses of mobile banking by 

those who have yet to adopt it largely mirror those of 

current users. The majority is interested in checking 

financial accollnt balances or recent transactions 

(55 percent), while fewer are interested in receiving 

text message alerts from their bank (30 percent), 

transferring money between accounts (25 percent), or 

making bill payments (24 percent). 

March 2012 II 

Mobile Payments 

The Federal Reserve survey defined mobile payments 

as "purchases, bill payments, charitable donations, 

payments to another person, or any other payments 

made using a mobile phone. Mobile payments can be 

used by accessing a web page through the web 

browser on your mobile device, by sending a text 

message (SMS), or by using a downloadable application on your mobile device. The amount of the payment may be applied to your phone bill (for example, 

Red Cross text message donation), charged to your 

credit card, or withdrawn directly from your bank 

account." 

Consumers were less li kely to adopt mobile payments 

than mobile banking, with only 12 percent of mobile 

phone users reporting that they made a mobile payment in the past 12 months. Mobile payment users 

also perform a narrower set of transactions than 

mobile banking users, with the most common activity being payment of bills (47 percent), followed by 

making online purchases (36 percent) and transferring money directly to another person (21 percent). 

All other transactions (e.g., receiving a payment, texting to make a charitable donation) are used by less 

than 10 percent of those making mobile payments. 

Mobile payments are disproportionately used by 

younger consumers (table 6). Individuals age 18 to 29 

account for 37 percent of mobile payment users rela -

tive to 22 percent of all mobile phone users, while 

Figure 3, What are the main reasons you have decided not to use mobile banking? 

My banking needs are being met without mobile bankillg '-_________ S7% 

rmconcemed about the security of mobile banking ~ _______ 48% 

I don't trust the technology to property process my banking transactions 22% 

The cost of data access on my wireless plan is too high 

It is too diffiC1Jlt to see on my mobile phone's screen 

Other 

It's difficult Of time consuming to set up mobile banking 

I don't have a banking account with which to use mobile banking 

It is not offered by my bank or credh union 

My bank charges a fee for using mobile banking 

Refused to answer 1% 

Nole: This was question 36 in Ihe Sl.O'ay (seeAppeooix n number oi respordents was 1,626. 
37 


32912015.eps

12 Consumers and Mobile Financial Services 

Table 6 Use of mobile payments In the past t2 months by 

age 

Percenl,exceplasnoled 

18-29 37.3 20.3 22.4 

30-44 3&9 25.6 26.9 

45-59 16.9 28.5 27 

61), 10 25.7 23.7 

Number 01 respondenls 213 1,700 1,993 

Nole:This is lable 8.00 in Appendix 2. 

individuals age 30 10 44 accounl for a funher 36 percen! of mobile paymenl users relalive 10 27 percelll of 

all mobile phone users. Hispanic consumers are 

aClive users of mobile paymenls, accounling for 

approximalely 21 percenl of all mobile paymenl users 

relative to 13 percent of all mobile phone users 

(table 7). In conlraSI, non-Hispanic whiles are proponionally less likely 10 use mobile paymenls, as Ihey 

make up 58 percen! of mobile paymenl users bLII are 

69 percenl of mobile phone users. Almosl13 percelll 

of non-Hispanic blacks use mobile paymellls, which 

is comparable to their II percent share of the mobile 

phone user populalion. Females are sliglnly more 

likely to use mobile payments than males, accounting 

for 55 percenl of all users (table 8). Income does nol 

playa role in mobile payment use, as each income 

group represenls roughly Ihe same percenlage as il 

does in Ihe overall mobile phone user sample 

(table 9). Similarly, mobile paymenl use by educalion 

level is roughly proportionate to its representation in 

Ihe mobile phone user populalian (table 10). 

Consumers use a variety of methods to make mobile 

payments, but the most common method is to input a 

credit card, debit card, or prepaid card number into a 

mobile phone (66 percenl). Olher mobile paymenl 

techniques used by consumers include making payTable), Use of mobile payments In the past t2 months by 

race 

Percenl,exceplas noled 

Whi\e,Noo-Hisparic 

--5&3 70.8 69.3 Black, Non-Hispani:: 12.9 10.9 11.2 

Olher,Noo·Hispanic 7.1 5.4 5.6 

HispanK: 209 11.6 12.8 

2+ Races, Non·Hispanic 0.9 1.2 1.2 

Nurmefof f6SpOnde nis 213 1,700 1,993 

Nole:This is table B.93 in Appeooix2. 

Table 8 Use of mobile payments In the past 12 months by 

gender 

Percen4exceplasnoled 

Female 

--55 52.7 53 

Mala 45 47.3 47 

Number of respondenls 213 1,700 1,993 

Note: This is lable 8.96 in Ap!)lndix2. 

menls direclly from a bank accoun! (45 percenl); 

using Google Wallel, Paypal, or iTunes (22 percenl); 

or adding a paymenl 10 a mobile phone bill 

(8 perceni). 

Consumers use mobile payment services less frequen!ly Ihan Ihey do mobile banking services. The 

median number of mobile paymenls in a Iypical 

mOn!h is one. Allbough some responden!s reponed 

making as many as 24 mobile payments per month, 

fewe r than 7 percent of respondents make more than 

five paymenls in a Iypical monlh. 

As with mobile banking, users of mobile payments 

appear 10 be quile salisfied wilh Ibeir experiences: 

Lessthan$25,00J 19. 1 18.5 18.5 

S25,oo}-S39,999 20.6 16.1 11.2 

S411,oo}-S74,999 23 27.2 26.7 

S75,OO}-S99,999 11.7 14 13.7 

Sl00,OOJorgreater 256 236 239 

Nurmerof respondenls 213 1,700 1,993 

Note: This istableB.l02 in Appeooix2. 

Less than highschool 72 11.2 10.7 

High schoo 27.9 29.9 29.7 

Somecotteo;J6 37 28] 29.7 

Bacllelor'sdegraaorhigler 27.9 3<1.1 29.9 

Nurmefof fespondenls 213 1,700 1,993 

Nole:This is table B.99 in Appeooix2. 
38 


32912016.eps

55 percent report being "very satisfied" with their 

experiences and 33 percent report being "somewhat 

satisfied" with their experiences. 

Although security is the dominant reason why individuals do not use mobile payments (42 percent), 

there are many consumers who do not see any value 

in mobile payments; 36 percent report that it is easier 

to pay with other methods, and 37 percent report 

that they do not see any benefit from using mobile 

payments (figure 4). Other reasons for not using 

include the lack of necessary features on a phone 

(31 percent) and a lack of trust in the technology to 

properly process payments (20 percent). 

If the concerns of non-users of mobile payments 

were addressed, those consumers express that they 

would have an interest in using mobile payments for 

a variety of activities. In particular, 34 percent report 

that they would pay bills online using their phone, 

28 percent would receive coupons on their phone, 

and 22 percent say they would receive location-based 

olTers or buy goods and services online. Making 

person-to-person payments is listed by 17 percent of 

respondents as a preferred mobile payment activity; 

the same percentage expresses a similar sentiment for 

using a mobile phone as the payment mechanism at a 

cash register or to lise a phone as a "virtual wallet." 

Consumers also express some interest in using mobile 

payments \0 transfer money to friends or relatives in 

other countries (7 percent). 

March 2012 13 

Mobile Security 

Two major impediments to consumers' adoption of 

mobile banking and mobile payment technologies are 

(I) concerns about security and (2) the possibility of 

backers remotely accessing consumers' phones. Consumers' beliefs about whether mobile banking or 

mobile payment technologies are secure is correlated 

with their use of these technologies. Consumers who 

use mobile banking or mobile payments are morc 

likely to rep0r1that it is a secure process than those 

who do not use mobile banking or mobile payments. 

For example, when consumers were asked to rate the 

security of text messages for mobile banking, those 

who are mobile banking users rate the service "very 

safe" (18 percent) or "somewhat safe" (42 percent). 

In contrast, 38 percent of non-users of mobile banking report that they "don't know" whether or not text 

messages for mobile banking are safe, while only 

6 percent rate the service "very safe" and 27 percent 

rate it "somewhat safe." 

The dichotomy between users and non-users of 

mobile banking is even more pronounced when asked 

about the overall security of mobile banking for protecting personal information. Two-fifths of non-users 

report that they do not know if it is secure, while 

13 percent of this group rate mobile banking "very 

unsecure" and 23 percent rate the service "somewhat 

un secure." Mobile banking users, however, rate 

mobile banking as "very safe" (18 percent) or "somewhat safe" (56 percent) in maintaining their personal 

information. 

Figure 4. What are the main reasons why you ha'Je not used mobile payments? 

I'm concerned about the seturity of mobile payments :::::~: 42% 

I don't see any benefit from using mobile payments 37% 

It's easier to pay with another method like cash or a credit card 36% 

I don't have the netessary feature on my phone 31% 

I don't trust the technology to properly process my payments 

The cost of data actess on my rele~ plan is too high 

Other 

It is difficult or time consuming to set up mobile payments 

I don't know of any stores that let you pay with your mobile phone 

Itis not offered by my bank or credit union 

My bank charges a fee for using mobile payments 

Refused to answer 2% 

Note: This was question 38in Ihe survey (seeAppeooix It numbar of respordenls WdS 1,780 

20% 
39 


32912017.eps

There appears to be widespread interest among 

mobile phone users in expanding how they lise 

mobile technology to access financial services, despite 

Ihe Federal Reserve survey finding Ihal only 21 percenl of respondenl mobile phone users have adopled 

mobile banking and only 12 percenl of respondents 

have adopled mobile paymenls. 

Consumers were asked to select the Iypes of activity 

they would be interested in performing with their 

mobile phones assuming the function were made 

available 10 Ihem (figure 5). Nearly one-half (48 percent) of consumers in the survey express an interest 

in using Iheir phone 10 compare prices while shopping. Similarly, one-Ihird indicale Ihal lhey would 

like to lise their mobile phones to receive locationbased offers and promotions, and 31 percent indicate 

thai they would like to receive and manage discount 

olTers and coupons. Consumers also report that they 

would use Iheir mobile phones 10 manage Iheir personal finances, as 31 percenl indicale Ihallhey would 

like 10 use Iheir mobile phones 10 Irack Iheir finances 

on a daily basis 

Consumers in the survey have a limited interest in 

using their mobile phone as a "mobile wallet'): 

15 

25 percenl indicale Ihey would like 10 use Iheir 

mobile phone 10 pay allhe poinl of sale. Given Ihe 

currenl mobile paymenl adoplion rale of 12 percenl, 

Ihis would double Ibe use of mobile paymenls. One 

fourth indicate they would use it as a membership 

card, and 21 percent indicate they would use it to 

organize and Irack gift cards, loyalty poinls, and 

reward points. In a related potential application of 

mobile technology, 23 percent of consumers indicate 

Ihallhey would like 10 use Iheir mobile phones as a 

form of pholo idenlificalion. 

Shopping Behavior 

The adoption of smart phones with barcode scanning 

software and Internet access has the potential to sub· 

stantially alter consumer behavior in the retail envi· 

ronment. Wilh Ihis lechnology, consumers can 

quickly and easily compare prices across retailers 

Figure 5. Would you like to use your mobile phone for any of the followmg purposes, assummg they were made available to 

you? 

Compare prices when shopping 

To receive offers and promotions based on where you are 

Track your finances on a daily basis 

To receive and manage discount offers and coupons 

Buy things at the point of sale 

Asamembershipcard 

Asa form of photo identification 

Purchase tickets to events 

Organize and track gift cards, loyalty and reward points 

As a ticket for buses 

As a key to enter your house 

Refused to answer 

Note: This was question 46in Ihe sU!Yey (seeApperdix It number of respordents was 2,002 

33% 

31% 

31% 

25% 

~ __ . 24% 

~ __ 23% 

~ __ 23% 
40 


32912018.eps

16 Consumers and Mobile Financial Services 

while in store or online, or locate an item that is out 

of stock. 

Consumers can also browse product reviews or get 

product specifications with lillie elTort. Thus, consumers may become better informed abolll the products they purchase and find lower prices; however, 

the ease with which these tasks can be performed 

might also encourage impulse buying. 

Consumers already make significant use of the Internet to inform their major purchases. A majority of 

respondents (58 percent) indicate that they 

comparison-shop online, and the same percentage 

say they look at product reviews before making a 

large purchase while at a retail store. Even though 

security concerns may make consumers wary of 

mobile devices as the payment mechanism for poinlof-sale purchases, the technology can enable shopping and comparisons of products and services. 

About one in eight (16 percent) mobile phone users 

reporl using their mobile phone for online shopping, 

and nearly one-fifth of consumers with mobile 

phones (19 percent) say that they use their mobile 

phone to comparison shop while at a retail store. 

Despite the relative novelty of barcode scanning 

applications, the Federal Reserve survey found that 

12 percent of mobile phone lIsers report using a barcode scanning application for price comparisons. One 

in six (16 percent) mobile phone users report using 

their mobile phone to browse online shopping 

reviews while in the store. 

Many consumers who use their mobile phone to 

comparison-shop report that they altered their decisions as a result: 65 percent who have comparisonshopped in a store report that they changed where 

they made a purchase after comparing prices, and 

77 percent report that they changed what they purchased as a result of reading product reviews on their 

mobile phone while at a retail store. 

Meanwhile, as a growing number of retailers develop 

their capabilities in the mobile space, opportunities 

will arise for the use of mobile advertisements and 

offers. Thirty-seven percent of consumers in the survey report signing up for coupons or special olTers by 

e-mail from reta il stores in the past 12 months, and 

73 percent of these consumers report having made a 

purchase as a resuh of these promotions. Moreover, 

28 percent of all consumers report signing up with an 

online coupon or olTer site such as Groupon or Living Social. 

Personal Financial Management 

and Budgeting 

Some consumers appear to be actively managing 

their finances using their computer and some form of 

personal financial management (PFM) tool. For the 

purposes of this survey, the Federal Reserve defined 

a PFM tool as a "program or website used to track 

your household finances (e.g., Quicken, Minl.com, 

Excel, or a website provided by a bank)." Slightly 

more than one in five consumers (21 percent) report 

that they, or someone in their household, use a program or website to track their household finances. 

Most consumers who track their finances are longtime users-42 percent report using the program or 

website for more than five years. The median consumer uses PFM tools about five times a month Gust 

about once a week). 

Access on a mobile phone to information about 

financial accollnts has the potential to shape consumers' financial decisions. For example, 67 percent of 

mobile banking users report using their mobile 

phone to check account balances or available credit 

before making a large purchase in the past 

12 months. Of those who checked their balance or 

available credit, 59 percent report that they decided 

not to buy an item because of the amount of money 

in their bank account or the amount of available 

credit. 

Furthermore, some mobile phones not only allow 

their users to access financial accounts but also serve 

as PFM tools. For example, 7 percent of mobile 

phone users report using their mobile phone to track 

purchases and expenses. Among this group, 38 percent use a mobile application for expense tracking, 

10 percent use a spreadsheet, 47 percent use the web 

browser to access a website, 12 percent send text messages, and 21 percent take notes in a notepad or word 

processor. 

Consumers can take advantage of other financial 

management tools on their mobile phones, such as 

text alerts, to make smarter financial decisions. 

Alerts, reminders, and similar services provided by 

banks are meant to encourage positive consumer 

behaviors and, given the positive response to lowbalance alerts, it seems that text message notices are 

an effective tool for encouraging consumers to 

engage in better financial behaviors. 
41 


32912019.eps

One-third of mobile banking users indicate that they 

receive text message alerts from their bank and, out 

of this group, 66 percent receive "low-balance alerts" 

(figure 6). Nearly all report taking some action in 

response to getting a low-balance text alert from their 

bank: transferring money into the account with the 

low-balance (58 percent), reducing their spending 

(41 percent), or depositing additional money into the 

account (16 percent) (figure 7). Almost one-third of 

text message bankers (31 percent) indicate that they 

receive "payment due alerts," and 3 percent indicate 

that they receive "savings reminders." 

Unbanked and Underbanked 

As previously discussed, mobile technologies olTer an 

opportunity to draw the unbanked and underbanked 

into the mainstream financial system by providing 

easily accessible and low-cost financial services. 

Figure 6. What kind of text alerts do you receive? 

March 2012 17 

Who Are the Unbanked and Underbanked? 

For purposes of this report, an under banked consumer is defined as a respondent who has a checking, 

savings, or money market account, but who also lIseS 

an alternative financial service such as auto title lending, payday loans, a check-cashing service, or a payroll card. An unbanked consumer is defined as someone who does not currently have a checking, savings, 

or money market account (see box 1). 

The proportion of respondents who report being 

Imbanked or underbanked in this survey closely 

tracks that found in previous national studies. In this 

study, about II percent of the U.S. adult population 

is currently unbanked, compared with approximately 

8 percent according to the 2009 Federal Deposit 

Insurance Corporation (FDIC) National Survey of 

Unbanked and Underbanked Households and 8 percent according to the Federal Reserve's 2007 Survey 

of Consumer Finances (SCF).'O 

Results indicate that a further II percent of the U.S. 

population is underbanked. This rate is well below 

low·balancealerts ~ ••••••• _ 66% the 18 percent underbanked rate found in the FDIC 

Payment due alerts ~ •••• 12% 

Fraudalerts ~ •• _ 3"" 

Other 18% 

Saving reminders 3% 

Note: This was question 74 in Ihe survey (seeAppeooix It number of respordents 

waslll 

study; hOlVever, the definition of underbanked here is 

more na rrow than the FDIC's definition, as the latter 

includes use of services such as money orders when 

classifying an individual as underbanked. 

10 Bucks., Brian K., Arthur B. Kennickell, Traci L. Mach and 

Kevin B. Moore, 2009, '·Changes in U.S. Family Finances from 

2()()4 to 2007: Evidence from the Surwy of Consumer 

Finances," Federal &serre Bllllelill (www.fedcralres<'''fve.gov/ 

pu bslbu nelinl2tt091pdflscllt9 .pdQ 

Figure 7. Thmklng of the most recent low-balance alert you received by text message, which of the following actions did you 

take after receiving Ihe alert? 

Transferred money into the accOlJnt with the low balance ~ ••••••• 58. 

Reducedmyspendina ~ ••••• 41% 

Deposited money into the actount with the low balance 16% 

None of the above '''' Nole: This was question 75 in Ihe survey (seeAppeooix n number of respOf"dents was 78 
42 


32912020.eps

18 Consumers and Mobile Financial Services 

Box 1. Alternatives to Traditional Banking and Financial Services 

The survey included other questions on consumers' 

use of financial products, consumer financial behaviors, and consumer attitudes. Among those questions were ones on a~ernative financial services; 

resuHs are reported here because of the general 

interest in these topics among consumer educators 

and community development professionals. 

Over the past several decades, new financial products and services have arisen 10 meet the needs of 

consumers who may not have had their financial 

needs met by mainstream financial institutions, or 

who wanted an alternative to mainstream financial 

institutions. 

The spreading availability and use of payday lenders, check cashers, and prepaid debit cards are 

prime examples of this trend. 

These products and services charge fees and effective interest rates that, in some cases, can impose a 

sign~icant burden on the finances of consumers and 

can be detrimental to consumers' long-term financial 

well-being 

Payday lenders typically charge consumers fees 

ranging from 15 to 20 percent of the loan amount for 

a two-week loan, which translates into an Annual 

Percentage Rate (APR) ranging from 390 percent to 

520 percent.' 

1 Avery, Robert B. and Katherine A. Samolyk, 2011, Payday 

Loans versus Pawn Shops: The Effects of Loan Fee Limits on 

Household Use, Working Paper (www.frbsf.or9l'community/ 

conferences/2011ResearchConlerencefdocsl2·avery-paper.pdf). 

Among the various ahernative financial products and 

services, use of prepaid cards is the most common 

in our sample- more than half (55 percent) of the 

respondents report using some type of prepaid card. 

About one out of seven respondents (15 percent) 

use a general purpose prepaid card, 5 percent have 

a government provided prepaid card, and 2 percent 

have a payroll card. 

Why Consumers Use Payday Lenders 

Eleven percent of respondents in our sample report 

that they or their partner/spouse have used a payday loan, but only 5 percent report having done so 

in the past 12 months. As shown in figure A, the 

main reasons for using payday loans or advances 

are perceptions that the borrower would not qualify 

for a bank loan or credit card (29 percent), that payday loans are easier to get than a bank loan or 

credit card (25 percent), and that payday loans are 

quicker to receive than other loans (18 percent). 

Few respondents indicate that the reason for using 

the payday lender is convenience (4 percent) or 

level of comfort w~h banks (I percent). 

Besides payday lenders and prepaid cards, the use 

of the other types of ahernative financial services 

was qu~e rare in our sample. Only 4 percent of the 

overall sample reports having used a check-cashing 

service, auto title loan, or layaway loan in the past 

t2 months. 

Figure A What was the main reason for uSing a payday loan or payday advance service rather than a bank loan or 

credit card? 

Idldn'tthlnklwouldqualifyforabank loanorcreditcard ••••• ". 

It was easier to get a payday loan than to qualifyfora bank loan ore rediteard ••••• 15. 

The payday loan was much quickertogetthana bank loan orcredlt card 18. 

Refused to answer 

Other (please specify) 

The location of the payday lenderwas moreoonvenient 

I didn't want the loan 10 show up on my credit report 

It fe ~ more comfortable to work with the payrlay lender than to use a bank 1% 

Note Thiswasq~s io 6ilthesurvey(seeAjlpeOO~ l):num~ olrespo den1swas223. 
43 


32912021.eps

Why Are Consumers Unbanked and 

Underbanked? 

From this survey, the reasons reported for being 

unbanked largely mirror those found in the 2007 

SCF The most commonly cited reason is a general 

dislike of dealing with banks (24 percent) (figure 8). 

Meanwhile, 23 percent report that they do nol write 

enough checks to justify owning an account, and 

13 percent indicate that the fees and service charges 

on an account are too high. A further 10 percent of 

the Lmbanked report that banks would not allow 

them to open an account. 

This order of response frequency for why consumers 

remain unbanked tracks that found iu the 2007 SCF, 

and the magnitudes are nearly identicaL For example, 

25 percent of Lmbanked respondents to the SCF 

report that they do not have a checking account 

because they do not like dealing with banks, and 

19 percent report that they don't write enough checks 

to make it worthwhile. 

Mobile Device Use by the Unbanked 

and Underbanked 

Although II percent of all individuals are unbanked, 

they are not necessarily "unphoned." Among individuals who are un banked, 64 percent have access to 

a mobile phone and 18 percent have access to a 

smart phone. More remarkably, 91 percent of the 

underbanked have a mobile phone and 57 percent 

Figure 8. Please choose the reason why you do not have a 

checking, saVings, or money market account from the 

followmghsl: 

I don't like dealing with banks ~ •••• 24% 

Idon'twriteenoughcheds ~ •••• 23% 

Other ~easespecify) I,. 

The fees and service charges are too high 

No bank will give mean aocount 

Refused to answer 

The minimum balance is too high 

No bank has convenient hours or locations 1% 

Note: This was ques tion 3in the surwy (se.eAppeOOix 1); number o/resporoents 

was 200. 

March 2012 19 

have a smart phone- rates far above those for tbe 

overall population. 

The Unbanked and Mobile Banking 

Tbe utilization of mobile banking among the 

unbanked is low, with only 10 percent reporting its 

use in the past 12 months. Although the concept of 

an unbanked mobile banking user seems counterintuitive, 32 percent of unbanked individuals do, nevertheless, report using a debit card or check card in the 

past 12 months. Recall that our definition of mobile 

banking used here includes "using a mobile phone to 

access your bank aCCOUnI, credit card accollnt, or 

olherfinancial accounl [emphasis added]." Respondents may be referring to another financial account, 

such as a payroll card or prepaid card, often marketed as a "debit" card. 

Additionally, 19 percent of the unbanked report 

using a general purpose prepaid card in the past 

12 months, and 9 percent report using a major credit 

card in the past 12 months. Mobile payment adoption among tbe unbanked is 12 percent, wbich is 

approximately the same as in the overall population. 

Given the sample size of the survey, the number of 

individuals who are unbanked and use mobile financial services is fewer than 20, which prevents detailed 

analysis of their behavior. 

The Underbanked and Mobile 

Financial Services 

The underbanked population makes substantial use 

of mobile financial services. Almost 29 percent of the 

underbanked with mobile phones report using 

mobile banking in the past 12 months, while 17 percent report using mobile payments. 

As with all other consumers, the primary use for 

mobile banking among the underbanked is to check 

account balances, with 89 percent utilizing this service. Overall, the underbanked use mobile banking 

for the same purposes as the general population, with 

only sligbtly lower rates for making bill payments 

(20 percent relative to 26 percent) and significantly 

higher rates for transferring money between their 

accounts (55 percent relative to 42 percent). 

Although the underbanked are more likely than the 

general population to use mobile payments, the services that they use largely mirror those of the general 
44 


32912022.eps

20 Consumers and Mobile Financial Services 

population with one notable exception: the underbanked are substantially more likely to make bill payments using their mobile phon" Specifically, 62 percent of underbankcd mobile payments users report 

paying bills, with their mobile phone in the past 

12 months compared with 47 percent of the overall 

population of mobile phone users. 

Conclusion 

The evolution of mobile technology has the pntential 

to empower consumers and expand access to financial services for previously underserved populations. 

The prevalence of mobile phone access among 

minorities, low-income individuals, and younger generations creates the possibility of using mobile technology to expand financial inclusion to previously 

underserved populations. 

The disproportionate use of mobile bill payment by 

the underbanked found in our survey is one example 

of how this technology can improve financial access 

for these groups. Mobilc banking is poised for significant growth in adoption in the near future, with 

usage likely increasing to one in three mobile phone 

users by early 201 J. Similarly, a significant fraclion 

of mobile phone users appears to be interested in 

using phones to make mobile payments. 

Consumers' perception that mobile banking and 

mobile payments are unsecure is currently one of the 

primary impediments to adoption. If consumers' 

perception of security issues changes-whether due 

to actual or perceived improvements-adoption rates 

may significantly increase. 
45 


32912023.eps

Appendix 1: Survey of Consumers' Financial 

Decisionmaking Using New 

Technologies-Questionnaire 

Below is an exact reproduction of the survey instrument. The bracketed text are 

programming instructions that (I) indicate whether or not a question is single 

choice [SPI or multiple choice [MPI and (2) represent any skip pattern used to 

reach that question and which questions should be grouped together on a page. 

The respondents only saw the questions and response options; they did not see the 

program code. 

IDISPLAYI 

The Federal Reserve Board is interested in learning more about how people manage their finances, shop, and make payments. We are especially interested in how 

people use mobile phones and other technology when making financial decisions. 

To begin, we are going to ask a few questions about the types of financial products 

and services that you usc. 

Banking Section 

[SPI 

I. Do you or does your spouse/partner currently have a checking, savings, or 

money market account? 

a. Yes 

b. No 

[SPI 

IIF QI = 81 

2. Have you or your spouse/panner ever had a checking, savings, or money market account? 

a. Yes 

b. No 

[SPI 

IIF QI = 8; shown on the same screen as Q21 

3. Please choose the most important rcason why you don't have a checking, say· 

ings, or money market account from the following list: 

21 
46 


32912024.eps

22 Consumers and Mobile Financial Services 

a. I don't write enough checks to make it worthwhile 

b. The minimum balance is too high 

c. I don't like dealing with banks 

d. The fees and service charges are too high 

e. No bank has convenient hours or locations 

No bank will give me an account g. 

g. Other (please specify):[fXTII _________ _ 

[SPI 

4. A payday loan (also called a paycheck advance or deposit advance) is a small, 

short-term loan that is intended to cover your expenses until your next payday. 

Firms that alTer these loans generally charge fees for every $100 borrowed (for 

example, SIS or more). Have you or your spouse/partner ever used payday 

loans, paycheck advance, or deposit advance services? 

a. Yes 

b. No 

INUMBER BOX, RANGE: 0-999, IF Q4= AI 

S. How many times in the last 12 months did you or your spouse/partner use 

payday loan or payday advance services? In answering this question, please 

count a rollover of a payday loan as a new loan and also count using one payday loan to pay otT another as separate loans. 

__ timers) in the past 12 months 

[SP, IF Q4 = A; shuwn on the same screen as Q51 

6. What was the main reason for using a payday loan or payday advance services 

ralher than a bank loan or credit card? 

a. The location of the payday lender was more convenient 

b. The payday loan was much quicker to get than a bank loan or credit card 

c. It was easier to get a payday loan than to qualify for a bank loan or 

credit card 

d. It felt more comfortable to work with the payday lender than to use 

a bank 

e. I didn't want the loan to show up on my credit report 

I didn't think I would qualify for a bank loan or credit card 

g. Other (please specify):[fXTI, _________ _ 

[DISPLAY I 

A prepaid card is a card where funds are loaded or added to a card and then you 

access those funds with the card number or by S\viping the card. It works like a 

debit card except that it is not connected to your bank account. A prepaid card is 

NOT a credit card. 
47 


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March 2012 23 

There are four kinds of prepaid cards you may have seen before: 

1) Gift cards are prepaid cards that you can only lise at specific stores. Examples 

of these include department store cards and colTee shop cards. 

2) General purpose prepaid cards are like gift cards except you can use them at 

many plac" For example, a general purpose prepaid card can be used at grocery stores, clothing stores, gas stations, and so forth. These cards usually have 

a Visa or MasterCard logo on them. 

3) Payroll cards are cards used by cmploycrs instead of a paycheck or direct 

deposit. These cards can be used to make purchases at many stores, and to 

make online payments and ATM withdrawals. They usually have a Visa or 

MasterCard logo on them. 

4) Government issued prepaid cards are given to people who receive government 

benefits. Examples of these cards include Direct Express and Electronic Benefit Transfer (EBT) cards. These cards can be used to make purchases or payments, but may have restrictions on what you can purchase and where you can 

use them. In the rest of the survey, you can click on the text of these four kinds 

of prepaid cards (in blue) to see their definitions. 

In the rest of the survey, you can click on the text of these four kinds of prepaid 

cards (in blue) to see their definitions. 

IPROGRAM [NSTRUCTIONI 

DEFI!'I'lT[ONS. MAKE ALL [NSTANCES FOR GIFT CARD, GENERAL 

PURPOSE PREPAID CARD, PAYROLL CARD, AND GOVERNMENT 

CARD [1'1' THE SURVEY CLiCKABLE. DISPLAY A CORRESPONDING 

DEF[NITION. LET THE "CLICKABLE" TEXT AS A SIMPLE POPUP WIN· 

DOW THAT POPS UP IN A SMALLER SEPARATE WINDOW EVERY 

TIME R CLICK ON THE PHRASE. 

Gift card. Gift cards are prepaid cards that you can only use at specific stores. 

Examples of these include department store cards and coffee shop cards. 

General purpose prepaid card. General purpose prepaid cards are like gift 

cards except you can use them at many places. For example, a general purpose 

prepaid card can be used at grocery stores, clothing store~ gas stations, and so 

forth. These cards usually have a Visa or MasterCard logo on them. 

Payroll card. Payroll cards are cards used by employers instead of a paycheck 

or direct deposit. These cards can be used to make purchases at many stores, 

and to make online payments and ATM withdrawals. They usually have a 

Visa or MasterCard logo on them. 

Government issued prepaid card. Government issued prepaid cards are given 

to people who receive government benefits. Examples of these cards include 

Direct Express and Electronic Benefit Transfer (EBT) cards. These cards can 

be used to make purchases or payments, but may bave restrictions on what 

you can purchase and where you can use them. 

IMPI 
48 


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24 Consumers and Mobile Financial Services 

7. Do you have any of the fo llowing types of prepaid cards 

a. Gift card 

b. General purpose prepaid card 

c. Payroll card 

d. Government card 

e. None of the abovelExclusil·cl 

IS?, IF Q7=A OR Q7=B OR Q7=C] 

8. Some general purpose and merchant specific prepaid cards can be reloaded 

with extra dollar value by the card holder. Arc any of your prepaid cards 

reloadable? 

a. Yes 

b. No 

C. Don't know 

[S P, IF Q8 = Al 

9. In the past 12 months, did you add money to reload any of your prepaid 

cards? 

a. Yes 

b. No 

[SP, IF Q9 = Al 

10. Think about the prepaid card that you reload most often. When was the last 

time that you personally reloaded that prepaid card? 

[M PI 

a. In the past 7 days 

b. In the past 30 days 

c. In the past 90 days 

d. In the past 12 months 

e. More than 12 months ago 

Never 

II. Which of the following financial products or services have you used in the past 

12 months? 

a. Debit card or check card 

b. Paper check 

c. Major credit card (VISA, MasterCard, American Express, Discover) 

d. Store-branded credit card good only at the store that issued the card 

e. General purpose prepaid card 
49 


32912027.eps

March 2012 25 

Auto title loan 

g. Check cashing services 

h. Payday loans 

i. Layaway plan 

I use none of the products listed above \Exclusive\ 

[SP, IF QI = A[ 

12. Telephone banking is when you access your account by calling a phone number 

that your bank has provided. You interact with the system using either voice 

commands, your phone's numeric keypad, or speaking with a live customer 

service representative. It does not include accessing your bank using the internet or applications on your mobile phone. 

Have you L1sed telephone banking in the past 12 months, either with a landline phone or your mobile phone? 

a. Yes 

b. No 

[M P, IF Q12 = A[ 

13. Which of the following transactions have YOli done using telephone banking in 

the past 12 months? 

a. Checked account balances or transactions 

b. Transferred money between accounts 

c. Paid bills 

d. Asked a customer service question 

e. Deposited money 

Applied for a credit card or loan 

g. Other 

[DISPLAY\ 

In this section we'll ask a few questions about your use of the internet. Right now 

we are jLlst interested in your Lise of the internet on a computer (desktop, laptop, 

or tablet). Later on we will ask about use of the internet on mobile phones. 

[SP[ 

14. Do you currently have regular access to the internet, either at home or outside 

your home (i.e. school, work, public library, etc)? 

a. Yes 

b. No 

[SP, IF QI4 = A] 

15. Where do you use the internet the most often? 
50 


32912028.eps

26 Consumers and Mobile Financial Services 

a. At home 

b. At work 

c. At school 

d. At a library 

c. AI someone else's home 

AI an internet cafe or store with Wi-Fi 

g. Other 

ISP, IF QI4 = A AND QI = AI 

16. Online banking involves checking your account balance and recent transactions, transferring money, paying bill~ or conducting other related transactions with your bank or credit card company using the internet. 

Have you used online banking on a desktop, laptop or tablet computer in the 

past 12 months? 

3. Yes 

b. No 

IMP, IF Ql6 = AI 

17. Which of the following transactions have you done using online banking on a 

desktop, laptop or tablet computer in the past 12 months? 

a. Checked account balances or transactions 

b. Transferred money between accounts 

c. Paid bills 

d. Asked a customer service question 

e. Deposited money 

Applied for a credit card or loan 

g. Managed investments (i.e. bought and sold stock or mutual funds) 

h. Other 

Screener Question on Mobile Phone Usage 

IIlISPLAYI 

In this section we would like to ask you about your use of mobile phones (cell 

phones). You may be able to use your mobile phone to check bank account balances, transfer funds, pay bills, or carry out other financial transactions. Mobile 

phones are also being used to make payments to stores, for parking, or to another 

person. Mobile phones can help you shop by comparing prices or looking up 

product reviews while you are in the storc. 

ISP, PROMPT, TERMINATE IF SKWPEDI 
51 


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March 2012 27 

18. Do you own or have regular access to a mobile phone (cell phone)? 

a. Yes tlMOBILE = "YES"I 

b. No tlMOIlILE = "NO"I 

DOV: MOBI LE 

I: "YES" 

2: "NO" 

[S P[ 

IMOBILE = "YES"I 

19. 19. A smart phone is a mobile phone with features that may enable it to access 

the web, send e-mails, and interact \\~th computers. Smart phones include the 

iPhone, Black Berrys, as well as Android and Windows Mobile powered 

devices. 

[SP] 

Is your mobile phone a smart phone? 

a. Yes 

b. No 

IIF QI9 = AI 

20. Which type of smart phone do you have? 

a. Android 

b. Blackberry 

c. iPhone 

d. Windows Mobile 

e. Other 

Dan', know 

[SP] 

[IF Q1 9 = A; shown on the same screen as Q20] 

21 . When was the last time thai you used the internet on your mobile phone? 

a. In the past 7 days 

b. In the past 30 days 

c. In the past 90 days 

d. In the past 12 months 

e. More than 12 months ago 

Never 
52 


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28 Consumers and Mobile Financial Services 

Mobile Banking Users 

IMOBILE = "YES"I 

[DISPLAY I 

Mobile banking uses a mobile phone to access your bank account, credit card 

account, or other financial account. This can be done either by accessing your 

bank's web page through the web browser on your mobile phone, via text messaging, or by using an application downloaded to your mobile phone. 

ISPI 

22. Have you used mobile banking in the past 12 months? 

a. Yes 

b. No 

ISPI 

IIF Q22 = BI 

23. Do you plan to use mobile banking in the next 12 months? 

a. Definitely will use 

b. Probably will use 

c. Probably will not use 

d. Definitely will not use 

ISPI 

IIF Q23 = C OR Q23 = 01 

24. Do you think you will ever use mobile banking? 

a. Definitely \1;11 use 

b. Probably will use 

c. Probably will not use 

d. Definitely \1;11 not use 

IMPI 

IIF Q22 = AI 

25. Using your mobile phone, have you done any of the following in the past 

12 months? 

a. Downloaded your bank's mobile banking application on your mobile 

phone 

b. Checked an account balance or checked recent transactions 
53 


32912031.eps

March 2012 29 

c. Made a bill payment using your bank's online banking website or banking 

application 

d. Received a text message alert from your bank 

e. Transferred money between two accounts 

Deposited a check 10 your account using your phone's camera 

g. Located the closest in-network ATM for your bank 

h. Managed your investments (i.e. bought and sold stock or mutual funds) 

i. Other banking-related activities (please specify):rrXTJ, ___ _ 

JIF Q22 = A; NUMBER BOX; RANGE: 0-999; shO\\1I 011 the sallie screell as Q25J 

26. In a typical month, how many times do you personally use mobile banking? If 

never please enter "0". __ times 

[SI'I 

[IF Q22 = A; sho\\11 011 the sallie screen as Q25] 

27. Overall, how satisfied are YOLi with your mobile banking experiences? 

a. Very satisfied 

b. Somewhat satisfied 

c. Somewhat dissatisfied 

d. Very dissatisfied 

[M P, ONLY TWO CHOICES PERMITTED, IF MORE THAN TWO, PROMPT 

"PLEASE SELECT ONLY TWO CHOICES."I 

[IF Q27 = C OR Q27 = OJ 

28. What are the top two reasons you are dissatisfied with your mobile banking 

experiences? 

a. I am concerned about my personal information being disclosed or have 

had personal information disclosed as a result of mobile banking 

b. Applications andlor websites for mobile banking are too complicated 

louse 

c. I have had problems getting the websites or applications to work properly 

d. Banking on my mobile phone takes too long 

e. It is too difficult to see on my mobile phone's screen 

The transactions I want \0 execute are not available 

g. Other (please specify): rrXTJ, ___ _ 
54 


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30 Consumers and Mobile Financial Services 

Mobile Payments Users 

IMOBILE = "YES"I 

IllISPLAYI 

Mobile payments are purchases, bill payments, charitable donations, payments to 

another person, or any other payments made using a mobile phone. You can do 

this either by accessing a web page through the web browser on your mobile 

device, by sending a text message (SMS), or by using a downloadable application 

on your mobile device. The amount of the payment may be applied to your phone 

bill (for example Red Cross text message donation), charged to your credit card, or 

wilhdrawn direcily from your bank accounl. 

[Sri 

29. Have you made a mobile payment in the past 12 months? 

a. Yes 

b. No 

IMP] 

UF Q29 = AI 

30. Using your mobile phone, have you done any of the following in the past 

12 months? 

IM P] 

a. Transferred money directly to another person's bank, credit card or Paypal account (i.e. friend, relative) 

b. Received money from another person using my mobile phone 

c. Waved or tapped my mobile phone at the cash register to pay for a 

purchase 

d. Paid bills online (excluding payments made directly from your bank website or application) 

e. Made a charitable donation by text message 

Transferred money 10 friends or family in anolher counlry 

g. Used my mobile phone as a "virtual wallet" to replace the cards I previously carried in my wallet 

h. Made online purchases 

i. None of the above ]Exclusivel 

IIF Q30 = A to HI 

31 . Do you make your mobile payments using a credit card number, your bank 

account, adding the charge to your phone bill, or through a service such as 

Paypal, Google Wallet, or une~ which indirectly charges your credit card or 

bank account? (Select all that apply) 
55 


32912033.eps

March 2012 31 

a. Credit card, debit card or prepaid card number 

b. Bank account 

c. Charged 10 your phone bill 

d. Paypal, Ooogle Wallel, iTunes, ele. 

e. Olher (please specify):[fXTI, _________ _ 

[MPI 

[IF Q29 = AI 

32. Have you used any of Ihe following mel hods 10 make or receive mobile paymenls in Ihe pasl 12 months? 

a. Used a texl message 10 make or receive a mobile paymenl 

b. Waved or tapped my mobile phone at the cash register or other payment 

sensor 

e. Scanned a barcode using your mobile phone 10 make a mobile paymenl 

d. Used your mobile phone's web browser 10 make or receive a mobile 

paymenl 

e. Used a downloadable app to make or receive a mobile paymenl 

None of Ihe above IExciusirel 

IIF Q29 = A; NUMllER BOX; RANGE: 0-99; shown onthc salllc scrcen as Q321 

33. In a Iypical monlh, how many limes do you use your mobile phone 10 make 

payments? If never please enter "0". __ limes 

[SPI 

IIF Q29 = A; shown onlhe sallie screen as Q321 

34. Overall, how salisfied are you wilh your mobile paymenl experiences? 

a. Very salisfied 

b. Somewhal salisfied 

c. Somewhal dissalisfied 

d. Very dissalisfied 

[M P, ONLY TWO CHOICES PERM ITTED, IF MORE THAN TWO, PROMPT 

"PLEASE SELECT ONLY TWO CHOICES "I 

IIF Q34 = C OR Q34 = 1)1 

35. What are the top two reasons you are dissatisfied with your mobile payment 

experiences? (Selecl only Iwo choices) 

a. I am concerned about my personal information being disclosed or have 

had personal information disclosed as a result of making mobile payments 
56 


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32 Consumers and Mobile Financial Services 

b. I find that applications andlor websites for mobile payments are too complicated to use 

c. I have had problems getting the websites or applications to work properly 

d. It is too dilTicult to see on my mobile phone's screen 

e. Making mobile payments takes too long 

Making mobile payments is much more complicated than using another 

payment method 

g. Merchants don't generally accept mobile payments 

h. The transactions I want 10 execute are not available 

i. Other (please specify):[fXTII ___ _ 

Non-Mobile Banking Users 

IIF Q22 = 81 

IDISPLAYI 

We would like to ask you about some of your reasons for not using mobile 

banking 

[M PI 

[IF Q22 = 81 

36. You indicated that you do not currently use mobile banking. What are the 

main reasons why you have decided not to use mobile banking? 

a. I'm concerned abolll the security of mobile banking 

b. My banking needs are being met without mobile banking 

c. The cost of data access on my wireless plan is too high 

d. It is too dilTicult to see on my mobile phone's screen 

e. It is no1 offered by my bank or credit union 

My bank charges a fee for using mobile banking 

g. I don't trust the technology to properly process my banking transactions 

h. I don't have a banking account with which to use mobile banking 

i. It's dilTicult or time consuming to set up mobile banking 

Other (Please specify):ITXTII _________ _ 

[SPI 

IIF Q36 = AI 

37. You mentioned that security was one of your top concerns with mobile banking. What security aspects are you most concerned with? 
57 


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March 2012 33 

a. Hackers gaining access to my phone remotely 

b. Someone intercepting my calls or data 

c. Losing my phone or having my phone stolen 

d. Malwarc or viruses being installed on my phone 

e. Other (please specify):ITXTI, _________ _ 

IM P] 

IIF Q22 = BI 

38. Assuming that any concerns you have about mobile banking were addressed, 

which of the following activities would you be interested in doing with your 

mobile phone? 

a. Download your bank's mobile banking application on your mobile phone 

b. Check an account balance or check recent transactions 

c. Make a bill payment using your bank's online banking website or banking 

application 

d. Receive text message alerts from your bank 

c. Transfer money between two accounts 

Other banking-related activities (please specify):ITXT], ____ _ 

Non-Mobile Payments Users 

IIF Q29 = BI 

[DISPLAY; shown on the same page as 39[ 

We would like to ask you about some of your reasons for not using mobile 

payments 

IM P] 

IIF Q29 = BI 

39. You indicated that you do not use mobile payments. What are the main reasons why you have decided not to use mobile payments? 

a. I'm concerned abollt the security of mobile payments 

b. It's easier to pay with another method like cash or a credit card 

c. I don't see any benefit from using mobile payments 

d. I don't know of any stores that let you pay with your mobile phone 

c. I don't have the necessary feature on my phone 

The cost of data access on my wireless plan is too high 

g. It is not offered by my bank or credit union 
58 


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34 Consumers and Mobile Financial Services 

[SPI 

h. My bank charges a fee for using mobile payments 

i. I don't trust the technology to properly process my payments 

It's difficult or time consuming to set up mobile payments 

k. Other (please specify):[fXTI, _________ _ 

[IF Q39 = AI 

40. You mentioned that security was one of your top concerns with mobile payments. What security aspect are you most concerned with? 

a. Hackers gaining access to my phone remotely 

b. Someone intercepting my payment information or other data 

c. Losing my phone or having my phone stolen 

d. Malwa re or viruses being installed on my phone 

e. Other (please specify):[fXTII _________ _ 

[MPI 

IIF Q29 = HI 

41 . Assuming that the reason(s) why you do not currently use mobile payments 

was addressed, which of the following activities would you be interested in 

doing with your mobile phone? 

[S?I 

a. Making payments directly to another person (i.e. friend, relative) 

b. Waving or tapping my mobile phone at the cash register to pay for a 

purchase 

c. Paying bills online 

d. Transferring money to friends or family in another country 

e. Using your mobile phone as a "virlllal wallet" to replace all the cards you 

currently carry in your wallet 

Buying goods or services online 

g. Receiving/using coupons on your phone 

h. Receiving specials and discount olTers based on your location 

i. Other payment-related activities (please specify) ITXTI L------

IIFQI=1l1 
59 


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March 2012 35 

Mobile Financial Services Security Questions 

IMOBILE = "YES" FOR QUESTIONS 42 THROUGH 471 

IDISPLAY, SHOW IT ON THE SAME SCREEN WITII Q42 TO Q451 

Please rate the level of security of each of the following four methods for mobile 

banking from Very Safe to Very Unsafe. 

[S P] 

42. SMS (text messaging) 

a. Very safe 

b. Somewhat safe 

c. Somewhat unsafe 

d. Very unsafe 

e. Don'\ know 

[SP] 

43. Mobile browser similar to the way you access the internet on your PC 

a. Very safe 

b. Somewhat safe 

c. Somewhat unsafe 

d. Very unsafe 

e. Dan', know 

[SP] 

44. Application downloaded from your phone's mobile app store 

a. Very safe 

b. Somewhat safe 

C. Somewhat unsafe 

d. Very unsafe 

e. Don't know 

[SP] 

45. How would you currently rate the overall security of mobile banking for protecting your personal information? 

a. Very safe 

b. Somewhat safe 

C. Somewhat unsafe 

d. Very unsafe 
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36 Consumers and Mobile Financial Services 

e. Don't know 

[M P[ 

46. Would you like to use your mobile phone for any of the following purposes, 

assuming they were made available to you? 

[S?I 

a. Buy things at the point of sale 

b. Track your finances on a daily basis 

c. Organize and track gift cards, loyalty and reward points 

d. Compare prices when shopping 

e. As a ticket for buses, trains, or subways 

As a key to enter your house 

g. Purchase tickets to events 

h. As a membership card (such as museums, gym, etc.) 

i. To receive and manage discounI offers and coupons 

To receive olTers and promotions based on where you are (i.e. You walk 

into a store and a coupon appears on your mobile phone for a product 

sold there) 

k. As a form of photo identification 

47. Banks can olTer a service whereby checks to be deposited are photographed 

using your camera pbone and tbe image is sent over tbe mobile Internet during 

a mobile banking session so that the bank can deposit the funds into your 

account without you having to present the physical check. The bank then 

sends a notification acknowledging receipt of the deposit. 

If your bank olTered tbis service, bow likely would you be 10 use it? 

a. I already use it 

b. Very likely 

c. Somewbatlikely 

d. Somewhat unlikely 

e. Very unlikely 

Shopping Behavior Questions 

[ASKED OF EVERYONE[ 

[DISPLAY[ 

In this section we would like to ask you about your sbopping habits. 

[SPI 
61 


32912039.eps

March 2012 37 

IJFQI4 = AI 

48. Before going to a retail store to make a large purchase, do you generally compare prices online? 

a. Yes 

b. No 

[SP[ 

[IF QI4 = A; showlI 011 the sallie screell as Q481 

49. Before going to a retail store to make a large purchase, do YOLI generally look 

at product reviews online? 

a. Yes 

b. No 

[SP[ 

[IF MOBILE = "YES"I 

50. Online shopping is when YOLI go to a merchant's website througb YOLir web 

browser or an application and make a purchase. Have YOll ever Llsed your 

mobile phone for online shopping? 

a. Yes 

b. No 

[SP[ 

IIF MOBILE = "YES"; showlI 011 the sallie scrcell as Q501 

51 . Have you ever used your mobile phone to comparison shop over the internet 

while at a retail store? 

a. Yes 

b. No 

[SP[ 

IIF MOBILE = "YES"; shown on the sallie screen as Q501 

52. I-lave you ever used a barcode scanning application on your mobile phone 

while shopping at a retail store to find the best price for an item? 

a. Yes 

b. No 

[SP[ 

IJF QSI = A OR QS2 = AI 
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38 Consumers and Mobile Financial Services 

53. Has using your mobile pbone to compare prices wbile you were sbopping at a 

retail store ever changed where you made your purchase? 

a. Yes 

b. No 

[SP] 

[IF MOBILE = "YES"I 

54. Have you ever used your mobile phone to browse product reviews while shopping at a retail store? 

a. Yes 

b. No 

[SP] 

]IF Q54 = AI 

55. Has reading product reviews on your mobile phone while shopping at a retail 

store ever changed which item you ended up purchasing? 

a. Yes 

b. No 

[SP] 

IIF Q22 = AI 

56. In the past 12 months, have you used your mobile phone to check your 

account balance or available credit before making a large purchase? 

a. Yes 

b. No 

[SP] 

IIF Q56 = AI 

57. Thinking of the most recent lime that you used your mobile phone to check 

your account balance or available credit before making a large purchase did 

you decide not to buy that particular item because of the amount of money 

left in your account or the amount of your available credit? 

a. Yes 

b. No 

[S ri 

IASKED OF EVERYONEI 

58. I-lave you signed up to receive coupons or special otTers bye-mail from retail 

stores in the past 12 months? 
63 


32912041.eps

March 2012 39 

a. Yes 

b. No 

[SP[ 

[IF Q58 = AI 

59. Have you made a purchase as a result of receiving one of these coupons or 

special ofTers? 

a. Yes 

b. No 

[SP[ 

IASKED OF EVERYONEI 

60. Have you ever signed up to receive couponS/ofTers from a website such as 

Groupon or Living Socia!? 

a. Yes 

b. No 

[SP[ 

IIF Q60 = AI 

61. Have you ever used a coupon from a website such as Groupon or Living 

Social? 

a. Yes 

b. No 

Payments Choice 

IMOBILE = "YES"I 

[DISPLAYI 

In this section we would like \0 ask about your thoughts on some of the new 

mobile financial service technologies. 

[S PI 

IMOBILE = "YES"I 

62. New mobile "colltactlesslt payments are becoming available from some banks, 

credit card companies, and transit operators. These let consumers "tapll or 

wave their mobile phone at a terminal instead of swiping a ca rd. 

If you were offered the option of using this service, how likely would you be to 

lise it? 
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40 Consumers and Mobile Financial Services 

a. I already use it 

b. Very likely 

c. Somewhat likely 

d. Somewhat unlikely 

e. Very unlikely 

[SP[ 

[MOBILE = "YES"; ShOll1l 011 the same sereell as Q621 

63. How likely do you think it is that mobile contactless payments will become a 

major form of payment in the next five years? 

a. Very likely 

b. Somewhat likely 

c. Somewhat unlikely 

d. Very unlikely 

c. Dan', know 

Financial Management (Saving, Budgeting) Questions 

IASKED OF EVERYONEI 

[DISPLAY, SHOW IT ON THE SAME SCREEN WITH Q64 TO Q671 

In order to help us to understand your role in the financial activities of your 

household, please rank how much responsibility you have for the following four 

financial tasks 

[SP[ 

64. Maintaining the household budget and managing household income 

a. None or almost none 

b. Some 

c. Shared equally with other household members 

d. Most 

e. All or almost all 

[SP[ 

65 . Paying monthly bills (rent or mortgage, utilities, cell phone, etc.) 

a. None or almost none 

b. Some 

c. Shared equally with other household members 
65 


32912043.eps

d. Most 

e. All or almost all 

[SP[ 

66. Shopping for household goods and groceries 

a. None or almost none 

b. Some 

c. Shared equally with other household members 

d. Most 

e. All or almost all 

[SP[ 

March 2012 41 

67. Making decisions about saving and investments (whether to save, how much to 

save, where to invest) 

a. None or almost none 

b. Some 

c. Shared equally with other household members 

d. Most 

e. All or almost all 

[S PI 

68. Do you or anyone in your household use a program or website to track your 

household finances (for example, Quicken, MinLcom, Excel, or a website provided by your bank)? 

a. Yes 

b. No 

Isr, IF Q68= AI 

69. I-Iow long have you been using this program or website to manage your household finances? 

a. Less than a year 

b. One to two years 

c. Three to five years 

d. More than five years 

IIF Q68= A; NmmER BOX; RANGE: ()'999; showlI 011 the sallie screell as Q691 

70. In a typical month, how often do you or another household member use this 

program or website? (If never please enter "0") __ times 

Isr, IF MOBILE= "YES"I 
66 


32912044.eps

42 Consumers and Mobile Financial Services 

71 . Do you use your mobile phone to track purchases and expenses? 

a. Yes 

b. No 

IMP, IF Q71= AI 

72. What method(s) do you use to track purchases and expenses on your mobile 

phone? 

a. A mobile application for expense tracking 

b. A spreadsheet 

c. Online (using the web browser to access a website) 

d. Send text messages 

e. Take notes in a notepad or word processor 

IIF Q71 = A; NUMBER BOX; RANGE: 0-999; shnll'n on the sallte screen as Q721 

73. In a typical month, how often do you use your mobile phone to track purchases and expenses? (If never please enter "0") __ times 

IMP, IF Q25= DI 

74. You previously mentioned that you receive text alerts from your bank. What 

kind of text alerts do you receive? 

a. Low-balance alerts 

b. Payment due alerts 

c. Saving reminders 

d. Fraud alerts 

e. Other (please specify): ITXTI _______ _ 

1M)', IF Q74= AI 

75. Thinking of the most recent low-balance alert you received by lext message, 

which of the following actions did you take after receiving the alert? 

a. Transferred money into the account with the low-balance 

b. Deposited money into the account with the low-balance 

c. Reduced my spending 

d. None of the above IExciusivel 

ISP, IF Q74= 81 

76. Has receiving payment due alerts improved your ability to pay your bills on 

time? 

a. Yes, by a lot 

b. Yes, by a little 
67 


32912045.eps

March 2012 43 

c. No 

Financial Literacy Questions 

IASKED OF EVERYONEI 

[S?J 

J7. Imagine that the interest rate on your savings account was 1% per year and 

inflation was 2% per year. After I year, how much would you be able to buy 

with the money in this account? 

a. More than today 

b. Exactly the same 

c. Less than today 

lSI'; shown all lire sallie screell as Q771 

78. Considering a long time period (for example, 10 or 20 years), which asset normaUy gives the highest return? 

a. Savings accounts 

b. U.S. Government bonds 

c. Stocks 

IS?; shoWII ollihe sallie screell as Q771 

79. If an investor who only owns two stocks right now decides to instead spread 

their money among many different assets (i.e. more stocks, add bonds, add real 

estate), their risk of losing money on their entire portfolio wiU: 

a. Increase 

b. Decrease 

c. Stay the same 

[S PJ 

80. If you were to invest $1000 in a stock mutual fund for a year, it would be possible to have less than $1000 when you withdraw your money. 

a. True 

b. False 

IS?; showlI ollihe sallie screell as Q801 

81. Suppose you owe $1,000 on a loan and the interest rate you are charged is 10% 

per year compounded annuaUy. If you didn't make any payments on this loan, 

at this interest rate, how many years would it take for the amount you owe to 

double? 

a. Less than 2 years 
68 


32912046.eps

44 Consumers and Mobile Financial Services 

b. Between 2 and 5 years 

c. 5 to 9 years 

d. 10 years or more 

IMPI 

82. Imagine that your car breaks down and requires 5400 worth of repairs in order 

to drive again. Based 011 your current financial situation, how would you pay for 

this expense? If you would use more than one method to cover this expense 

please select all that apply. 

a. Put it on my credit card 

b. With the money currently in my checking account 

c. By taking money out of my savings 

d. Using money from a bank loan, line of credit, or overdraft 

e. By borrowing from a friend or family member 

Using a payday loan or deposit advance 

g. By pawning something 

h. Other (Please specify): ITXTI _______ _ 

Risk Aversion Questions 

IASKED OF EVERYONEI 

ISP] 

83. Which of the following statements comes closest to describing the amount of 

financial risk that you are willing to take when you save or make investments? 

a. Take substantial financial risks expecting to earn substantial returns 

b. Take above average financial risks expecting to earn above average returns 

c. Take average financial risks expecting to earn average returns 

d. Not willing tn take any financial risks 

ISP] 

84. Suppose that you are the only income earner in the family, and YOli have a 

good job guaranteed 10 give you your curren! income every year for life. You 

are given the opportunity to take a new and equally good job, with a 50-50 

chance that it will double your income and a 50-50 chance that it will cut your 

income by one-third (33 percent). Would you take the new job? 

a. Yes 

b. No 

ISP] 
69 


32912047.eps

March 2012 45 

[IF Q84 = AI 

85. Now suppose that the chances were 50-50 that it would double your income 

and 50-50 that it would cut your income by half (50 percent). Would you still 

take the new job? 

a. Yes 

b. No 

[SP[ 

IIF Q84 = 81 

86. Now suppose that the chances were 50-50 that it would double your income 

and 50-50 that it would cut your income by one-fifth (20 percent). Would you 

now take the new job? 

a. Yes 

b. No 
70 


32912048.eps

47 

Appendix 2: Consumer Responses to SU~ . 

Questionnaire I ~:J 

Yoo 

No 

Refused to allSwef 

Nurrber of respondents 

Yoo 

No 

Refused to answer 

Number of respondenls 

88.7 

10.8 

0.5 

2,290 

36.9 

58.9 

4.2 

100 

Table B.3. Please choose the most Important reason why 

you don't have a checkmg, saVings, or money market 

accQuntfromthefollowlnglist 

Percenl, exceplas noled 

Idon'lwr~eenoughchecks tom ake worlhM1 ile 23.5 

Tr.eminmll11 balance is 100 high 2.2 

I don't like dealing wilhbanlls 24.2 

The fees and service charges are too high 13.3 

No bank has cOIlVenienl hours crlocations 0.6 

No bank wi ll give me anacrounl 10.2 

Otller 17.8 

Refusedtoanswef 8.1 

Nurmer01 respondenls 100 

TableB.4 Have you or your spousefpartnerever used 

payday loans, paycheck advance, or deposit advance 

services? 

Percen~excepl as noted 

Yoo 11.2 

No 88.1 

AefuSEld to answer 08 

Nurmerof respondenls 2,290 

Table B 5 How many times rn the last 12 months did you or 

yourspouse/partner use payday loan or payday advance 

services? In answermg Ihls quesllon, please counla 

rolloverofa payday loan asa new loan and alsocounl 

usmgone payday loan 10 payoff anolheras separale loans 

Percen4excepl asnoled 

44.9 

13.8 

11.6 

6.3 

3.9 

53 

3.1 

0.3 

0.9 

0.1 

10 26 

" 2.1 

16 0.5 

20 0.5 

24 0.3 

40 0.6 

Aefused to answer 31 

Number of respondenls 223 
71 


32912049.eps

48 Consumers and Mobile Financial Services 

Table B.6. What was the mam reason for usmg a payday 

loan or payday advance service rather than a bank loan or 

credit card? 

Percenl,exceplasnoied 

The locabon of the payday lender was moreCOI1'Ienil'J1t 3.6 

Tr.epaydaybanwasmuchquickerlogelthanabankloanor 

credit card 17.7 

II was eas i6f to get a payday loanttran to qualify fora bank 

loan or credd card 24.9 

II lell more cOOl iortable to wcrk with Ihe payday lender ltian to 

use a bank 1.2 

I didn'lwantthe loan to show up on my credit report 2.1 

Ididn'lttdlwouldqualifyforabankloanorcreditcard 29.2 

Other 

Refusoo' to answer 13.4 

Number of respondenls 223 

Table B 7. Do you have any of the following types of prepaid 

cards? 

Percenl,excepias noled 

Gift card 48 

Geooral purpose prepaid card 14.5 

Pa~oIlcard 17 

Govammenlcard 4.8 

None of the abCN8 45.4 

Refused 10 answer 0.4 

Number of respondenls 2.200 

Yes 44.7 

No n4 

Don't know 

Refused 10 answer 

Number of respondenls 

Y~ 

No 

Number of respondenls 

24.5 

0.4 

1.228 

40.3 

59.7 

400 

Table B.l0 Think abou1 the prepaid card thaI you reload 

most often. When was the last time that you personally 

reloaded that prepaid card? 

Percen~excepl asnoled 

n ihe past 7 days 21.2 

n lhepast30days 41.1 

nlhepastOOdays 20 

n lhepast 12mooths 17.1 

Morettran 12 months ago 0.6 

Never 0.1 

Number of respondenls 207 

Debil card orcMck 69 

PapercMck '137 

Major credit card 60.2 

Store-branded credit card good onJyattl1esiOfe that issued 

tI1ecard 30.2 

General purpose prepaid card 18.6 

hrlotitle loan 3.5 

Check cashing service 4.1 

Payday loan 3.3 

Layaway plan 3.8 

None of the abova 7.2 

Refused 10 anSW8f 0.6 

Number of respondenls 2.200 

Table B.12 Have you used telephone banking In the past 

12 months, etther with a landhne phone or your mobile 

phone? 

Percen~excepl as noted 

Yoo 

No 

Refused 10 answer 

Number of respondenls 

33.3 

'133 

0.4 

2,079 
72 


32912050.eps

Checked accoont balaoces or lfansactions 78.1 

TransferredmClleybelweenaocounis 31.3 

Paidbils 29.8 

Asked acustomerservicequeslion 44 

Oepooitedmoney 4.8 

Applied fora credil card a loan 2.4 

Othe, 2.7 

Refused to answer 0.3 

Number of r6SpOndenis 653 

TableB,14 Do you currently have regularaccesstothe 

Internet, erther at home or outside your home {I e ,school, 

work,publlCllbrary)? 

Percenl,exceplas noled 

Yoo 95.4 

N, 4.3 

Refused to answer 0.4 

Number 01 r6SpOndenis 2.200 

Athome SO.8 

Atwork 14.8 

Atscho~ 0.8 

Ata library 1./ 

Atsomeoneelse'shome 1 

AtanlniemelcafeOfslocewilh'l'fHi 0.3 

other 0.3 

Relusedtoanswer 0.2 

Number 01 r6SpOndenis 2,189 

Ym 67.7 

N, 31.9 

Relusedtoanswer 0.5 

Number of r6SpOndenis 2,011 

March 2012 49 

Table B.17 WhICh of the following transactIOns have you 

done uSing online banking on a desktop, laptop, or tablet 

computer In the past 12 months? 

Percen~excepl asnoled 

Checkedaocoont balancesorlfansactions 95.8 

Transferred money belween aocoonro 67.6 

Paid bills 73.1 

Asked a customer service questi on 11.8 

Oepooitedmoney 11.9 

~pliedforaCledi ca dorloan 8 

Managed inveslments(i.9., bOO'Jhtaooscid stoc:kor mutLtaI 

fu oos) 8.8 

Other 0.8 

Aefusoo' to answer O' 

Number of respondents 1.358 

Y~ 87.1 

N, 12.9 

Number 01 respondents 2.200 

Y~ 43.9 

N, 55.9 

Aefusoo' to answer 02 

Number 01 respondents 2,002 

AndrcWd 43.4 

BlackBerry 13.1 

iPhone 30.1 

WndowsMobile 1.2 

Other 7.7 

Oon'lknow 3.9 

Aefusoo' to answer 0.5 

Number 01 respondents B36 
73 


32912051.eps

50 Consumers and Mobile Financial Services 

In lhepast7 days 83.6 

In Ihe past 30 days 5.5 

InlhepastOOdaro 2.4 

In Ihepast 12 months 1.6 

More than 12 moothsago 0.3 

N"" 6.5 

Refusoo' to answer 0.1 

Number of respondents "" 

TableB 22 Have you used mobile banking In the past 

12 months? 

Percent,exceplasnoied 

Oefiritelywilluse 0.6 

Probably will use 16.4 

Probably will not US8 45.4 

Definitely will not use 369 

RefusE:(jloanswer 0.8 

Numb6rof r6SpOndenis 1,449 

Dowrj oacledyourbank'smobileba r)]ap~icationonyour 

mobile phone 48.1 

Checked an accOlllI balance Of checked recent transactions 00.1 

Macla a bil l payment us ~ your bank's ordine bank ~ webs ite 

or banking application 25.7 

Received a text message alert from your ba nk 33.4 

Translerr€id money balween two accounts 41.7 

Oepoo iteda check 10 yoor accounl lISing your phooe'scamera 10.6 

Locatedlhecfosest in"ootworkATMforyourbank 20.7 

Marragedyoorinvestments(i.e.,bDl.ghiandsoidstockl)l' 

mulualfurds) 2.2 

Other banking-related activities 

Refused to answef 

Number of respondenis 

Verysatisfioo 

SomewhalsatisfiE:(j 

SomewhaldissatisfiE:(j 

Very dissatisfied 

Refused 10 answtlf 

Numb6rof respondenls 

372 

61.7 

32.3 

2.1 

1.1 

2.9 

372 
74 


32912052.eps

lamcoocerned aboutmypersonalinlormafionbeif"9 

disdosed 

I have had proolems gelting the websites or appltations 10 

wor p.'oper~ 

Banking 00 my mobile phone lakes too long 

II is 100 difficult 10 see on my mobile phooe'sscreen 

Thelrans<r:tionslwanl loexeculearenotavailable 

Other 

Number of respondents 14 

Table B 29 Have you made a mobile payment m the past 

12monlhs? 

Percenl,exceplasnoled 

~ 

No 

Refused 10 answer 

Number 01 respondents 

Transferred mooey directly 10 another persoo's bank, credil 

card,or paypalaccount 

Received money from another person lIiingmy mobile phone 

Waved or tapped my mooile phona al the cash reogisterto pay 

for a purchase 

Paid bils online (exduding paymoo\s madedireclly/rom your 

bank webs ite or application 

Maoo a cilarilable donation via text message 

Tr ns ferredmooeytofriendsor la l1 nothe country 

Used my mobile phone as a "virlual wal lel' lo replace the 

rdslprevious~carriadinmywall et 

Maooo~ in epurchases 

None of the abwe 

Relused 10 answer 

Number of respondents 

12.3 

87.3 

OA 

2,002 

20.5 

7.9 

2A 

47.1 

5.1 

02 

0.2 

36 

23 

OA 

113 

March 2012 51 

Table B.31 Do you make your mobile payments usmg a 

credit card number, your bank account, adding the charge 

to your phone blll,orthrough a service such as Paypal, 

Google Wallet, or ITunes, that mdlrectly charges your credit 

card or bank account? 

Percen~excepl asooled 

Credilcard,debilcard,orprepaidcard 66A 

BankaccolKlt 45.4 

Charged toyour phone bill 8A 

Paypal. Goo;jleWaliel iTunes, etc. 21.9 

Other 39 

Number of respondents 161 

Used a te:d message to make or receive a mobile payment 16.2 

Waved or tapped my mobiie phone al the cash reogis taror 

otherpaymenlsensor 1.3 

Scanned a barcode lISing your mobila phone to maka a mobile 

payment 

Used your mobile phona's web browser 10 make or receive a 

mobile payment 23 

Used a downloadable app to make or receive a mooiie 

payment 

None of the above 

Refused to answer 

Number 01 respondents 

1.0 

12 

14 

15 

24 

Refused 10 answer 

Number 01 respondenls 

45 

5A 

113 

25 

34.4 

12.7 

6.6 

4.8 

4.4 

1.9 

0.1 

0.3 

1.3 

1.5 

01 

0.2 

OA 

0.6 

5.7 

213 
75 


32912053.eps

52 Consumers and Mobile Financial Services 

Very satisfied 55.2 

Somewhalsatisfied 32.6 

Somewhaldissatisfied 1.5 

Very dissatisfied 33 

Refused 10 answer 7.4 

Numb6rof r6SpOndenis 113 

I amcoocernedaboulmy parsonal.informa.fionbeif"9 

dlsdosedcrhavehadpersonalmlormatlondisclosed 10 

lfinji:tlalapplicationsarrlforwebsitesformooifepaymenis 

areloocom~lCaledlouse 

Ihavehadp[oolemsgettinglhewebsitesorapp ~ationsto 

workpfOpar~ 

Making mobile payments takes 100 IC01g 

Making mobile payments is much more com~icaled than 

using anoiherpaymenl metho:l 

II is 100 difficuft 10 see on my mobile phoffl'sscreen 

Merchanlsdon lge eral~acceptmobilepayments 

Other 

Numb6rof r6SpOndenis 14 

Table B 36 You indICated that you do not use mobile 

banktng. What are the matn reasons why you have deCided 

nottousemobllebanktng? 

Percenl,exceplasnoled 

lamcoocernedaboullhesecurityofmobilebanking 48 

My banking needs are being met without mobile banking 57.5 

Thecretofdala access onmywireless plan is too high 18.3 

II is 100 difficult 10 see on my mobile phoffl'sscreen 16.6 

II is nol of!ered by my bank or credil union 2.7 

My bank charges a fee fl)[using mobile banking 2.2 

I don'lIrustlhetechnologylo propertjprocess my banking 

transaclioos 21.8 

I don'l have a bankingaccountwii:tl which to use mobile 

banking 8.8 

lIisdiflicultortimeclllsumingloselupmobilebanking 9.5 

Other 12.6 

Refused 10 answer 0.6 

Numb6rof r6SpOndenis 1626 

Table B.37 You mentioned that security was one of your 

top concerns with mobile banktng What security aspects 

are you most concerned with? 

Percen~excepl asnoled 

Hackersqainingaccesslomyphoneremote~ 54.3 

Someone intercepting my calls or data 18.1 

losing my phone or havif"9 my phoneslolen 19.3 

Malware or viruses being installed on my phone 4.8 

Other 3.3 

Refused 10 answsr 0.2 

Numb6rof respondenls 798 

Table B.38 Assuming that any concerns you have about 

mobile banking were addressed,whlch ofthefoliowlng 

activIties would you be Interested In performtngwlthyour 

mobile phone? 

Percen~excepl asnoled 

Dow oadyourbank'smobilebankingapplicationonyoor 

mooilephone 16.6 

Check an account balanceorcheckracentlransactioos 55.4 

Make a bill paymentusingyoll bank's online banking website 

or banking application 23.7 

Receive lexl message alerls from your bank 30.2 

Transler money b&lween two accounls 24.5 

Other banking-related activities 

Aefused 10 answer 12.6 

Numb6rof respondenls 1,626 

Table B.39 You indICated that you do not use mobile 

payments. What are the main reasons you have decided not 

tousemobllepaymenls? 

Percen~excepl asnoled 

lamcorK:ernedaboullhesecurityolmobiepaymenls 41.5 

His easier 10 pay with another method like cash I)[a 

credit card 36 

Idon'lseeanybenefilfromusif"9mooilepayments 36.7 

I don't know of any slores that let you pay with your mobile 

ph.,. 

I don'l have i:tle necessary leature on my phone 30.8 

Thacosl of data access onmywireless plan ts 100 high 15.3 

His noloflered by mybank orcredilunion 4.3 

My bank charges a lee lor using mobilepaymenls 1.9 

Idon'lIrusllhelechnologylo properly process my payments 19.7 

His difficult oc lime cOrlSuming 10 set up mobilepaymenls 9.1 

Other 12.4 

Refused 10 answer 1.7 

Numb6rof respondenls 1,780 
76 


32912054.eps

Table B.40 You mentioned that secunty was one of your 

top concerns with mobile payments What secunty aspect 

are you most concerned with? 

Percenl, excepl as noled 

Hackersgainir.gaccesslomyphoneremole~ 45.6 

Someooainiarcaplirgmypaymanlinfc{maliooorolhardaia 32.8 

Losirg my phone IX"havirg my phmtlslolen 16.6 

Maiware or viruses being inslalled on my phme 2.7 

Olher 1.7 

Refused lo answer 0.6 

Number of respondanls 745 

TableB.41 Assummglhallhe reason(s)iOUdo nol 

currently use mobile payments was addressed, which of 

the following activities would you be Interested In 

performing with your mobile phone? 

Percenl, excepl asnoled 

Makirg payments directly 10 another person 

Wavirg (J( tappirg my mooile phme at Ihe cash regisler to pay 

for a purchas9 

Pa~ngbilisonliM 

Transferringmoney tofrieooslX"tamiiyin anolhercounlry 

Usingyour mobilephoMasa 'virtual wallel' loreplaceall the 

cardsyoucurrenilycar!"1inYOtrwallel 

8uyiroggoOOs (J( servicesonliM 

ReceMnWusirog coupons on your phooe 

Receiving specials and disCOlllI ofiers based 00 yoor Ioc:ation 

Other paymenl·relaled aclivines 

Refused lo answer 

Number of respondenls 

Table B.42 Please rale Ihe secu"ty of SMS (Iexl 

messaging), 

Percenl, exceplas noled 

Ve!"1safe 

Somewhalsafe 

Somewhalunsafe 

Ve!"1unsafe 

000'1 know 

Refused lo answer 

Number of respondenls 

17.1 

17.2 

34.4 

16.6 

21.9 

27.7 

21.6 

11 

15.2 

1,780 

83 

30.1 

16.4 

10.8 

33.1 

1.2 

2,002 

March 2012 53 

Very safe 5.6 

Somewhalsafe 36 

Somewhalunsafe 18.8 

Veryumafe 7.6 

Oon'lkncm 30.2 

Refused lo answer 

Number of raspondanls 2,002 

Very safe 7.4 

Somewhalsafe 32.9 

Somewhalunsafe 15.1 

Very unsafe 6.8 

Oon'lkncm 36.1 

Aefused lo answer 1.8 

Number of raspondenls 2,002 

Very safe 5.1 

Somewhalsafe 27.8 

Somewhalunsafe 20.7 

Veryumafe 11.2 

Oon'lkncm 33.9 

Aefused lo answer I.' Number of respondenls 2,002 
77 


32912055.eps

54 Consumers and Mobile Financial Services 

TableB,46 Would you like 10 use your mobile phone for any 

of the following purposes, assuming they were made 

avatlabletoyou? 

Percenl, exceptasnoled 

8uythiI)Jsatthepoint ofsaie 252 

Trackyourfinancesoo adailybasis 31.1 

Organire aootrackgift cards,loyalty and rewa rd poinis 21.4 

Compa epriceswhenshop~1lQ 47.9 

As a lickel for buses, lrains, (fsubways 18.7 

As a key 10 enter your house 18.4 

Purctlaselicketstoevents 22.9 

As am60lbership card(e,g" museums,gym,e\c.) 24.2 

Toreceive andmarragediscoonloffersandcoopons 30.5 

To receiYll otfers and prOOlotions based on wilere you are 33 

As a/orm ofpholoidenliftcalion 23.4 

Refused to answer 18 

Number of rtlSpOndenis 2,002 

Table B.47. Banks can offer a service whereby checks to be 

deposited are photographed using your camera phone and 

the image is sent over the mobile Internet during a mobile 

banking session so that the bank can deposit the funds 

into your account without you having to present the 

physical check,The bank then sends a notification 

acknowledging receipt of the deposit. If your bank offered 

this service, how likely would you be to use it? 

Percenl, excepias noled 

I alreaclyuse il 

Veryl ik e~ 

Somewhallikely 

Somewhalunlikely 

Very unlikely 

Refused to answer 

Number of respondents 

y~ 

N. 

Refused to answer 

Nurmer of respondents 

3.9 

13.7 

24.1 

20.8 

36.4 

1.1. 

2,002 

58.' 

41.1 

0.' 

2,189 

y~ 

N. 

Refused to answer 

Nurmer of respondents 

57.6 

41.6 

0.7 

2,189 

Table 8,50 Online shoppmg IS when you go to a merchant's 

website through your web browser or an apphcatfon and 

make a purchase, Have you ever used your mobile phone 

for onlme shoppmg? 

Percen~ex eptasnoled 

y~ 

N. 

Refused to answer 

Nurmer of respondents 

y~ 

N. 

Refused 10 answer 

Number of respondents 

'" N. 

Refused 10 answer 

Number of respondents 

'" N. 

Nurmer of respondents 

16.4 

82.3 

I., 

2,002 

19.4 

79.4 

1.2 

2,002 

12.3 

86.7 

0.9 

2,002 

656 

34.4 

393 
78 


32912056.eps

Yoo 

No 

Refusad10 answar 

Numb6rof r6SpOndenis 

16 

832 

0.7 

2,002 

TableB55 Has reading product reviews on your mobile 

phone while shoPPing ata retail store ever changed which 

Item you ended up purchasing? 

Percenl,exceplas noled 

Yoo 76.9 

No 22.5 

Refusedloanswar 0.6 

Number of r6SpOndents 189 

~ 67.2 

No 32.1 

Refusoo' to answer 0.7 

Numb6r01 respondenls 371 

Table B,5), Thinking of the most recent time that you used 

your mobile phone to check your account balance or 

available credit before making a large purchase, did you 

decide not to buy that particular item because of the 

amounl of money left in your account or the amount of your 

available credit? 

Percenl,exceplasnaled 

Yoo 

No 

Refused 10 answar 

Numb6rof r6SpOndenis 

59.2 

405 

0.3 

141 

March 2012 55 

Table B.58 Have you signed up to receive coupons or 

specIal offers by e-mail from retail stores In the past 

12 months? 

Percen4exceplasnoled 

.. 

No 

Refused 10 anSWef 

Number of respondents 

Y~ 

No 

Refused 10 answer 

Number of respondenls 

37.9 

fJJ.7 

l' 

1,200 

73.4 

25.8 

0.8 

881 

Table B.60 Have you ever signed up to receive 

coupons/offersfroma website such as Groupon or living 

Social? 

Percen~excepl asnaled 

Y~ 

No 

Refused 10 answef 

Numb6rof respondenls 

Y~ 

No 

Numb6rof respondenls 

28.2 

70.5 

1.1 

2,200 

56.7 

43.3 

657 
79 


32912057.eps

56 Consumers and Mobile Financial Services 

Table 8,62, New mobile contactless payments are 

becoming available from some banks, credit card 

companies, and transit operators, These let consumers tap 

or wave their mobile phone at a terminal instead of swiping 

a card. If you were offered the option of using this service, 

how likely would you be to use it? 

Percenl,exceplasnoled 

I alreacr,ou:leil 

Veryli e~ 

Somewhallikely 

Somewhalunlike~ 

Veryuntike~ 

RefllSed 10 answer 

Number of respondenls 

Table B 63 How Itkely do you think It IS that mobile 

contactless payments will become a major form of 

payment In the next five years? 

Percen~excepl asnoled 

Verylike~ 

Somewhallikeiy 

Somewhalonlikely 

Veryuntike~ 

000'1 know 

Refused 10 answer 

Number of respondenls 

I 

9.9 

23.1 

22.4 

42.3 

13 

2,002 

16.7 

33.3 

15.5 

11.5 

21.8 

1.1 

2,002 

Table B 64 How much responSlblltty do you hav, for 

maintaining the household budget and managing 

household Income? 

Percenl,exceplas noled 

Nooeoralmostnone 

Som, 

Shar9dequal~withothmhouseholdmembers 

Mrol 

All or almost al l 

Refused 10 answer 

Number of respondenls 

11.6 

10.9 

26.9 

13 

36.3 

13 

1,2!Ml 

NOII6oraimoslrone 

Some 

Shar9dequal~wilholherhollSehoidmembers 

Mrol 

All or almosl aD 

Refused 10 answer 

Number of respondenls 

None or almost rone 

Som, 

Shar9dequal~wilhotherhollSehoidmembers 

Mrol 

All or almosl aD 

Refused 10 answef 

Number of respondenls 

None or almost rone 

Som, 

har9dequa ~wilholherholtieholdmembers 

Mrol 

All or almosl aD 

Refused 10 answer 

Number of respondenls 

15.2 

11.5 

18.9 

10.8 

42.1 

16 

1,2!Ml 

9.1 

16.3 

24.8 

13.3 

34.8 

1.7 

1,2!Ml 

12.1 

9.9 

35.4 

11.7 

30 

0.9 

1,2!Ml 

Table B 68 00 you or anyone In your household use a 

program or website to track household finances (for 

example, QUicken, Mlnt.com, Excel, or a website provided 

by your bank)? 

Percen~excepl asnoled 

Yro 

No 

Refused 10 answer 

Number of respondenls 

21.3 

78.1 

0.6 

1,2!Ml 
80 


32912058.eps

Less ltlan a yea r 

01)9 to two years 

Ttroo to fiWl yea rs 

More\tlanfiveyears 

Refused 10 answer 

Numb6rof respondenis 

10 

12 

14 

15 

20 

21 

24 

25 

26 

27 

30 

31 

35 

., 

45 

50 

50 

Refused to answer 

Number of respondents 

Table B.71 Do you use your mobrle phone to track 

purchases and expenses? 

Percenl, exceplas noled 

Yoo 

No 

Refused 10 answer 

Nurmer 01 respondents 

15.6 

17.9 

22.9 

42.7 

0.8 

514 

3.3 

12.6 

10.4 

7.1 

11.5 

6.3 

2.9 

0.6 

3.1 

65 

18 

OA 

4.8 

6.4 

0.1 

0.2 

5.8 

0.5 

0.2 

7.7 

0.2 

05 

0.3 

0.1 

0.9 

0.3 

5A 

514 

7.3 

91.7 

2,002 

March 2012 57 

A mooile application lorexperne tracking 38.3 

Aspreadsheet 10.1 

Online (usirg lheweb browser to access a website) 47.6 

Sendtextmessag6S 12.1 

Takenotas ina not€9ad Of word processor 21.1 

ReluSEld 10 answer 3.4 

Number of respondenls 115 

2.9 

2.7 

16.6 

10.4 

5A 

15.4 

0.8 

0.3 

0.5 

10 58 

12 OA 

13 01 

14 OA 

15 8.8 

20 7.5 

25 2.8 

30 42 

40 2.1 

50 0.3 

123 0.2 

Refused 10 answer 12.6 

NUrMerof respondenls 115 

TableB.74 You previously mentioned that you receive text 

alerts from your bank What kind of text alerts do you 

receIve? 

Percen~except 3Sooied 

low-balal'CEl alerts 66A 

Payment due aJerls 31.7 

Savingremi16ers 3.1 

Fraudalerls 30.3 

Other 18.2 

Number of respondents 111 
81 


32912059.eps

58 Consumers and Mobile Financial Services 

Transferrad mmeyinlolhe acC{)untwiththe low balance 57.6 

Oeposited moooy into the accoontwith the low balance 16.2 

Roooced my spandi!'oJ 41.1 

Noneoitlie ab CNe 15.9 

Number of respondenis 78 

Yes, by alo! 37.4 

Yes, by a litlle 40.4 

No 22.2 

Number of respondents 

Table B.77 Imagine that the mterest rate on your savings 

account was 1 percent per year and mflatlon was2 percent 

per year, After one year, how much would you be able to 

buy with the money In this account? 

Percenl,exceplas noled 

More Itlan today 5.6 

Ex~Hythesama 20.9 

lessll1anlOOaY 70.4 

Refusoo' to answer 3 

Number of respondenls 1,2!Ml 

Table B 78 Considering a long lime penod {for example, 10 

or 20 years),whlCh asset normaliy gives the htghest 

return? 

Percenl,exceplas noled 

Savirgsaccounls 15.3 

U.S, lJoofflrnmentboOOs 15 

Stoc:ks 55.8 

Refused to answef 3.9 

Numb6r01 respondenls 1,2!Ml 

Table B.79 If an Investor who only owns two stocks right 

now decides to Instead spread their money among many 

different assets (I e., more stocks, add bonds, add real 

estate),thelrnsk of losing money on their entire portfolio 

will do what? 

Percen~excepl asnoled 

hcrease 

Decrease 

Slay ItJe same 

Aelused 10 answer 

Number of respondenls 

T", 

False 

Aelused to answer 

Number of respondenls 

11 

52.4 

22.5 

4.1 

1,2!Ml 

76 

20.3 

3.6 

1,2!Ml 

Table B,81 Suppose you owe $1,000 on a loan and the 

Interest rate you are charged IS 10 percent per year 

compounded annually. If you didn't make any payments on 

thiS loan, at thiS Interest rate, how many years would It 

take for the amount you owe to double? 

Percen~excepl asnoled 

Lessthanlwoyaars 11.7 

&tweentwoandfi~~rs 23.8 

Rveloni1eyears 34.2 

T6fl years or more 25.8 

Aelused to answer 4.5 

Number of respondenls 1,2!Ml 
82 


32912060.eps

TableB,82 Imagine that your car breaks down and 

reqUIres $400 worth of repairs In order to dnveagam 

Based on your current financial situation, how would you 

pay for this expense? If you would use more than one 

method to cover this expense, please select all that apply 

Percenl,excepias noled 

Put it on my credil card 36.4 

With 1M money currently in my checking account ".8 

By taking money rut of my savings 21.5 

Using money from a bank loan. lir.e of credit, or O'Ierdralt 3.4 

Byborrowirgiromairierdorfamitymember 17.5 

Usi nga paydayloanordepositadvance 2.9 

Bypavmirgsomalhirg 6 

Other 5.7 

Refusad 10 answer 2.9 

Number of respondenls 2,2!Ml 

Take subslalltial financial risks expecfirg to earn substantial 

reru rns 3.3 

Take above a~erage ~nancial risks expecting 10 earn above 

a~erage rebns 14.6 

Take average financial risks expectillQ to earn a~erage raltrns 36.9 

Not willirg to take any finaocial risks 42.5 

Refusootoanswer 2.6 

Number of responde nls 2,2!Ml 

Table B,84. Suppose that you are the only income earner in 

the family, and you have a good job guaranteed to give you 

your current income every year for life, You are given the 

opportunity to take a new and equally good job, with a 

50-50 chance that it will double your income and a 50-50 

chance that it will cut your income by one-third 

(33 percent), Woutd you take the new job? 

Percenl,exceplasnoled 

y~ 24.1 

No 73 

Refusad 10 answer 2.9 

Number of responde nls 2,2!Ml 

March 2012 59 

Table B,85 Now suppose that the chances were 51Hi0 that 

It would double your Income and 50-50 that It would cut 

your Income by halt (50 percent) Woutd you stili take the 

new Job? 

Percen~excepl asooled 

y~ 

No 

Refused 10 answer 

Number oi respondents 

36.2 

63.1 

0.7 

547 

Table B,86 Now suppose that the chances were 51Hi0 that 

It would double your Income and 50-50 that It would cut 

your Income by one-fifth (20 percent) Would you now take 

the new Job? 

Percen~excepl asooled 

y~ 

No 

Aefusedto anSW6f 

Number of respondenls 

,.. 

Mala 

Female 

.&(10018-29 

.&(10030-44 

.&(Ies45-ro 

.&(las over 60 

Less than high schoof 

lighscho~degree 

Somecotteo;J8 

Bachelor's deg ree or higher 

While, noo·Hispanic 

Black,non-Hisparic 

Olherandtwoormoreraoos, non-Hispanic 

Hispanic 

LessthanS25,00J 

S25OOJ-S39,993 

S40,OO)..S74,993 

S75,oo)"S99,993 

Greater than Sl00,OOJ 

Married 

UlYflarrioo,widowed,divorced, orlivirgwill1 

partner 

Northeasl 

Midwool 

Sooth 

W~t 

Emp~ed 

Ur.emplO)$:!butinlaborlorce 

Not in labor force: relired,disability or olher 

ObservatioflS 

46.6200 

0.4841 

0.51 59 

0.2139 

0.2599 

0.2755 

0.2507 

0.1267 

0.3035 

0.2875 

0.2822 

0.6795 

0.1158 

0.0679 

0.1369 

0.2154 

0.1734 

0.2623 

0.1293 

0.2195 

0.5279 

0.4721 

0.1842 

0.2174 

0.3659 

0.2324 

0.5559 

0.0970 

0.3470 

2.200 

22.5 

76.8 

07 

1,687 

16.9178 

0.4993 

0.4993 

0.4101 

0.4:)87 

0.44GB 

0.4335 

0.3327 

0.4599 

0.4527 

0.4502 

0.4668 

0.3200 

0.2516 

0.3438 

0.4112 

0.3787 

0.4400 

0.3356 

0.4140 

0.4993 

0.4993 

0.:)877 

0.4126 

0.4818 

0.4225 

0.4970 

0.2961 

0.4761 
83 


32912061.eps

60 Consumers and Mobile Financial Services 

10-29 24.6 10.6 20.1 

3<>-4, 30.' 16.8 16 

,&-59 24.7 32.5 27.2 

60. 20.3 40.1 26.7 

Nu.mer01 respondenls 1.358 64' 2,002 

Table B.89 Use of mobile banking In the past 12 months by 

age 

Percenl,exceplasnoled 

10-29 '35 16.8 22.4 

30-44 35.7 24.1 17 

,&-59 14.7 301 26.9 

60. 6.1 28.4 23.7 

Nurmer of respondents 371 1,626 1.998 

Table B 90 Use of mobile payments In the past 12 months 

by age 

Percenl,extepiasnoied 

... 18-29 37.3 20.3 22.4 

30-44 35.9 25.6 26.9 

'&-59 16.9 28.5 17 

60. 10 25.7 23.7 

Number of respondents 213 1,700 1,993 

Whiffi,Noo-Hisparic 73.3 68.8 71.8 

Blac~Non-HispanK: 7.6 13.4 9.4 

Other. Noo-Hispanic 5.7 ' .8 5.4 

Hispani:: 12.4 12.2 12.3 

2+ Races, Non-Hispanic 1.1 0.7 

Nurrberof r6SpOndenls 1.358 64' 2,002 

Table B.92 Use of mobile banking In the past 12 months by 

race 

Percen~elcepl as noted 

While, Noo-Hispanic 60.3 11.5 69.2 

Blac~Non Hispanic 16.2 10 11.3 

Oth&f.Noo-Hisparic 5.1 5.8 5.6 

lispanic 17. 1 11.6 12.8 

2+ Races, Non-Hispanic 11 1.1 11 

Number of respondents 371 1,626 1.998 

Table B.93 Use of mobile payments m the past 12 months 

by race 

Percen~excepl as noted 

While,f/oo-Hispanic 58.3 70.8 @.3 

8Iack,f/on-Hispanic 12.9 10.9 11.2 

Other, ~oo-Hi$paric 7. 1 5.' 56 

Hispanic 20.9 11.6 12.8 

2+ Races, ~on-Hispanic 09 1.1 1.1 

Number of respondenls 113 1,700 1,993 

Table B.94 Use of online bankmg on a desktop,laptop, or 

tablet computer In the past 12 months by gender 

Percen~exceptasooted 

Female 

Male 

Number of respondenls 

51.9 52.3 52.1 

48.1 47.7 47.9 

1,358 644 2,002 

Table B.95 Use of mobile banking In the past 12 months by 

gender 

Percen~excepl as noted 

... Female 53.4 52.9 53 

Male 46.6 47.1 47 

Number of respondenis 371 1,626 1.998 

Female 55 52.7 53 

Male 45 47.3 47 

Number of respondents 113 1,700 1,993 
84 


32912062.eps

TableB,97 Use of online bankmg on a desktop, laptop, or 

tabletcomputermthepast12 months by education group 

Percenl, exceplasnaled 

less lIlan highsc hool 5.2 16.7 8.9 

Highschool 23.1 41.3 29 

Some college 32.9 25.1 30.4 

Bac~lor'sdlllJeeo ~r 38.8 16.9 31.8 

Nurnber01 respondenls 1,358 644 2,002 

less lIlan highschool &5 12.1 10.7 

Hig,school 21.5 31.8 29.6 

Some college 39 27.4 29.8 

Bachelor'sdlllJaeorhi~r 34 28.8 29.9 

Nurnberof respondenls 372 1,626 1.998 

Less lIlan highschool 7.2 11.2 10.7 

Highschool 27.9 29.9 29.7 

Some college 37 28.7 29.7 

Bachelor'sdeg"aeorhilj1er 27.9 30.1 29.9 

Nurnberof respondenls 213 1,780 1,993 

March 2012 61 

Table B.l00. Use of onlme bankmg on a desktop, laptop, or 

tablet computer mthe past 12 months by mcome group 

Percen4excepl asnoled 

lessthan $25,00J 10.1 27.1 15.6 

525.00>-139,999 17.2 19.3 17.9 

$40,(0)...$74,999 28.5 27.1 28.1 

$75,(0)...$99,999 15.9 11 14.4 

SI00,OOJorgrealer 28.2 15.5 24.2 

Nurnberof respondenls 1.358 644 2,002 

lessthanS25,00J 12.8 19.9 18.4 

S25,OO)...S39,999 19 16.6 17.1 

S40,(0)"'574,999 27.5 26.5 26.7 

575,(0)...599,999 12.9 14 13.8 

Sl00,OOJorgrealer 27.9 229 24 

Nurnber01 respondenls 372 1,626 1.998 

less than 525,00J 19. 1 18.5 18.5 

525,(0)...539,999 20.6 16.7 17.2 

S40,oo)"'S74,999 23 27.2 26.7 

575,(0)...599,999 11.7 14 13.7 

5100,OOJorgrealer 25.6 23.6 23.9 

Nu rnber01 respondenls 213 1,780 1,993 
85 


32912063.eps

www.federalreserve.gov 

0312 
86 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM SANDRA F. BRAUNSTEIN 

Q.1. Now that the Federal Government will be participating in the 

Automated Clearing House to distribute Government benefits like 

social security, growth trends for electronic payments should accelerate at an even faster pace going forward than the double-digit increases we have seen for the past few years. Please describe your 

perspective of role the Federal Reserve should play in regulating 

and facilitating electronic payments in the post- Dodd-Frank world, 

with an emphasis on how the Federal Reserve can contribute to 

maximizing the economic benefits of new technology. 

A.1. Federal Government benefits have for decades been provided 

through automated clearing house (ACH), or ‘‘direct deposit,’’ payments to beneficiaries’ accounts at depository institutions, and for 

many years the vast majority of benefit payments have been made 

in this manner, rather than by check. Making the payments electronically is generally less expensive, faster, and more secure than 

making them by check. For example, delivery of paper checks to 

benefit recipients may be delayed, and the checks, once received, 

may be lost, misplaced, or stolen. 

In December 2010, the U.S. Treasury issued a rule to increase 

further the usage of electronic payments for the disbursement of 

Government benefits. The rule requires anyone applying for benefits on or after May 2011 to receive all payments electronically via 

direct deposit to a deposit account at a depository institution or via 

a prepaid card. Treasury has contracted with a commercial bank to 

make Direct Express® Debit MasterCard® prepaid card accounts 

available to recipients who will not be receiving benefits via direct 

deposit; these cards can be used like other debit cards, and funds 

that recipients receive through the card are FDIC insured. There 

is no cost to sign up for the card and no monthly fee, although 

there are fees for some optional transactions (such as making more 

than one ATM withdrawal in a single month). The Direct Express®

card enables benefit recipients who do not have bank accounts to 

avoid fees associated with cashing benefit checks. Recipients currently receiving benefits via checks will be required to switch to an 

electronic payment method by March 2013. 

Also in December 2010, the U.S. Treasury issued a rule establishing requirements that apply to the delivery of Federal payments to prepaid cards other than the Direct Express® card. Under 

the rule, a prepaid card is eligible to receive Federal payments only 

if the card account is Federally insured, the card is not attached 

to a line of credit or loan agreement under which repayment from 

the account is triggered upon delivery of the Federal payments, 

and the issuer of the card provides the cardholder with all of the 

consumer protections that apply to a payroll card account under 

Regulation E (12 CFR part 1005). 

With respect to benefits that are received on a Direct Express®

card or prepaid card meeting Treasury’s requirements, Regulation 

E (12 CFR part 1005), which implements the Electronic Fund 

Transfer Act of 1978 (EFTA), limits a recipient’s liability for unauthorized electronic fund transfers out of the recipient’s benefit account (e.g., if the card is lost or stolen). The Dodd-Frank Act transferred the Board’s rule-writing authority with respect to most conVerDate Nov 24 2008 10:31 Jan 18, 2013 Jkt 048080 PO 00000 Frm 00090 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\329710.TXT JASON
87 

1 ‘‘Cost Savings From Electronic Payments and ATMs in Europe’’, August 2003, Working 

Paper No. 03-16, at http://www.frbatlanta.org/filelegacvdocs/epconfhumphrey.pdf. 

sumer protection laws, including most of the EFTA, to the Consumer Financial Protection Bureau. Under Regulation E, cardholders who dispute a transaction within 2 business days of learning of the loss or theft of their card cannot be held liable for more 

than $50. Those who dispute a charge within 60 days of an account 

statement reflecting the unauthorized transfer cannot be held liable for more than $500. Finally, the regulation provides consumers 

with specific error-resolution rights in the case of an unauthorized 

transaction. 

The Nation’s retail payment system is becoming increasingly 

electronic, largely reflecting consumer preferences. The Federal Reserve continues to promote the safety and efficiency of the Nation’s 

payments system through the Reserve Banks’ role as providers of 

payment services and the Board’s regulatory role. In addition, the 

Federal Reserve will work cooperatively with the private sector to 

identify and remove barriers to innovation and efficiency. And, finally, when appropriate, the Federal Reserve will act as a catalyst 

to greater efficiency, safety, and accessibility within the payments 

system. 

Q.2. Sweden, the first European country to circulate bank note currency in 1661, is at the forefront of the move to a cashless economy. Its aggressive move to electronic transactions has resulted in 

a dramatic drop in robberies of banks and securities trucks and 

shrinkage of the ‘‘tax gap.’’ Has the Federal Reserve quantified the 

costs reductions and economic benefit derived from migrating to 

mobile/Web payments? 

A.2. The cost reductions and economic benefits derived generally 

from migrating paper-based payments to electronic payments have 

been supported by theoretical analysis and some empirical 

verification. For instance, the Federal Reserve Bank of Philadelphia issued a 2003 working paper showing that the shift from 

paper-based payments to electronic payments and from branch offices to ATMs may result in an annual costs savings of 1 percent 

of the gross domestic product. 1 Over a 10-year period, the Federal 

Reserve has reduced the cost of per-item processing by one third 

through the electronic clearing of paper checks. 

For mobile payments specifically, the benefits in relation to costs 

are uncertain. The United States has a well-developed and efficient 

payments system and enabling mobile payments requires investments by the consumers’ banks, merchants, and others. Research, 

however, also suggests that the long-term benefits to society of having a convenient, effective mobile wallet with complementary services that go beyond mobile payments (for instance, the ability to receive targeted ads and promotions and to monitor and manage account balances from any location) could be significant. 

In terms of the example of Sweden’s move to a ‘‘cashless economy,’’ it may be helpful to provide some perspective from Sweden’s 

central bank, the Riksbank. The Riksbank reports that cash and 

cards are the dominant payment methods used in Sweden today at 

the point of sale. The Riksbank data show that cash usage has decreased since the 1950s, but that trend has been driven by an inVerDate Nov 24 2008 10:31 Jan 18, 2013 Jkt 048080 PO 00000 Frm 00091 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\329710.TXT JASON
88 

crease in card-based payments; neither e-money nor mobile payments are yet well established in Sweden. In addition, the decline 

in bank robberies in recent years has been driven primarily by 

changes in technology and operations. Specifically, the amount of 

cash in the bank offices has been reduced and replaced by deposit 

machines and automated teller machines. Also, the shrinkage of 

the tax gap has been affected by recent legislation that requires 

companies to have certified cash registers and to offer customers a 

receipt, which makes cheating on cash accounting much more difficult. Carriers have taken actions to increase safety, including 

GPS systems in cars and cash bags, improved ink security systems 

in vehicle safes and cash bags, personnel training, and stricter 

screening of cash transporters. Despite these actions, armored carrier robberies have increased. The Riksbank believes that the cash 

usage will continue to decrease but that cash nevertheless will continue to be a prominent means of payment for the foreseeable future. The impact of new methods of payment, such as mobile payments, on the future demand for cash in Sweden is uncertain. 

Q.3. The ‘‘Consumers and Mobile Financial Services’’ report issued 

by the Board of Governors in March 2012 concludes that the consumers’ doubts about the security of mobile financial transactions 

impede the growth of this new technology. What concrete recommendation would you make to improve mobile security for financial stakeholders as well as consumers? At the same time, what 

steps should be taken to assure that privacy rights are protected? 

Please identify all stakeholders that need to be considered, and all 

regulatory agencies that will be involved. 

A.3. It is important that multiple stakeholders involved in a mobile 

payment transaction share responsibility for ensuring mobile payment security and protecting consumer privacy rights. Stakeholders include mobile carriers that sell and enable mobile phones 

for payments and oversee the handset and chip manufacturers’ security requirements, financial institutions that issue debit and 

credit cards and/or hold consumer bank accounts that are accessed 

from the mobile wallets, card networks (debit, credit, and prepaid), 

mobile solution providers, merchants, and consumers. This nascent 

market would benefit from mobile stakeholders jointly developing 

technological standards and guidelines that support different mobile payment technologies and alternatives to prevent attacks on 

mobile payment data and facilitate the development and implementation of consistent, integrated security measures. For example, 

mobile stakeholders should collaborate to develop an effective mobile payments security program that applies appropriate security 

measures and tools. Such a program could— 

• Include a simple customer security toolkit showing consumers 

how to protect their mobile devices, mobile wallets, and payments data by using antivirus software to ensure the applications downloaded are safe from viruses and malware; creating 

passwords for login and mobile wallet access; loading software 

that enables the phone to be remotely wiped, locked, or deactivated if lost or stolen; and detecting and reporting fraud or 

other security breaches. 

89 

2 In May 2012, the FTC issued a report on Protecting Consumer Privacy in an Era of Rapid 

Change, which identified best practices for businesses to protect consumer privacy and give 

them greater control over the collection and use of their personal data and urged mobile providers to work toward improved privacy protections, including disclosures. In December 2011, 

the MMA published its Mobile Application Privacy Policy Framework, which addressed privacy 

issues and data processes of many, but not all, mobile applications. 

• Recommend implementation of appropriate security tools for 

different mobile technologies, including the use of end-to-end 

encryption for any mobile payment transaction stored on the 

phone, remotely on a file server, and when data are in transit 

over the wireless network to protect consumer personal data 

(bank account and card numbers and passwords). 

• Create a certification process and standard procedures to safely set-up mobile phones and wallets, including certifying vendor applications before they are loaded into mobile wallets and 

certifying wallets before they are put into the secure container 

in the phone. Certification and testing will help to ensure that 

data processed are encrypted and safely stored, and that applications are virus and malware free. 

From a privacy perspective, mobile stakeholders should pursue 

jointly developing best practices that identify, standardize, and 

build controls that protect consumer data on mobile phones and address transparency and choice. Smartphones enable mobile payment apps to capture a broad range of user information automatically, including a consumer’s geolocation, phone number, contact 

list, call logs, unique IDs, and other data stored on the device. In 

addition to protecting against security breaches, industry could develop business practices for using and sharing this data, within applicable statutory and regulatory requirements. As initial steps, it 

could be helpful to review the Federal Trade Commission (FTC), 

Mobile Marketing Association (MMA), and other privacy guidelines 

developed to help protect consumer privacy in the mobile space, 

with emphasis on transparency, disclosures, consumer choice, and 

education. 2 It also could be helpful to inventory best practices in 

the United States and globally to ensure that they include strong 

privacy protections that encompass the entire mobile stakeholder 

community and address transparency, consumer education, and 

consumer choice. Consumers should understand their rights and 

obligations when they make mobile payments, especially with multiple parties involved in a mobile transaction. Mobile payment companies also should give consumers the ability to restrict using or 

sharing any information that is not necessary to complete a transaction. 

Further analysis of existing laws may be needed to ensure that 

consumers are adequately protected. A legal framework exists to 

address the payment activities of insured depository institutions— 

collectively, ‘‘banks.’’ This framework includes consumer protection 

statutes, such as the Gramm-Leach-Bliley Act’s privacy provisions, 

the Electronic Fund Transfer Act (EFTA), and the Truth in Lending Act, as well as the bank supervisory process. To the extent that 

nonbanks are involved, whether and the degree to which Federal 

or State statutes and rules are applicable depends on the 

nonbank’s role in the transaction and the specific provisions of the 

particular statute or rule. Due to the different types of service proVerDate Nov 24 2008 10:31 Jan 18, 2013 Jkt 048080 PO 00000 Frm 00093 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\329710.TXT JASON
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3The Mobile Payments Industry Workgroup represents major mobile payment stakeholders, 

including mobile carriers, banks, card networks, payment processors, Internet payment providers, mobile chip manufacturers, mobile solution providers, merchants, and mobile and payment trade associations. 4Pursuant to the data collected in the Board of Governors of the Federal Reserve System 

Consumers and Mobile Financial Services survey. 

viders (bank and nonbank) and the wide variety of payment arrangements that are in place and under development, a number of 

regulators may have authority over various aspects of mobile payment transaction, including the Federal bank regulators, the Consumer Financial Protection Bureau, the Federal Trade Commission, the Federal Communications Commission, the Treasury Department’s Financial Crimes Enforcement Network, and State 

agencies. However, given the fast-paced nature of changes in this 

area and the potential for significant improvements in consumer financial services through mobile payments, further fact-finding 

would aid that analysis and would be helpful to ensure that any 

legislative or regulatory proposals do not stifle the very innovations 

that would benefit consumers overall. 

It is important that mobile payment stakeholders and public 

agencies take steps to develop coordinated programs for consumer 

education and awareness related to securing mobile payments and 

protecting consumer privacy. For example, the Federal Reserve 

Bank of Boston Payments staff will continue to work with mobile 

payment stakeholders through the Mobile Payments Industry 

Workgroup to help facilitate such security and privacy initiatives. 3

Q.4. In its 2011 Annual Report of Competitive Market Conditions, 

the FCC cited forecasts that more than half the Nation will use 

smart phones to conduct numerous banking transactions by 2015; 

among consumers between the age of 18 and 35, over three-quarters of them will bank by mobile device. Do you agree with the 

FCC projections? 

A.4. Smartphone usage is increasing rapidly in the United States. 

The Board’s recent Consumers and Mobile Financial Services survey found that just under 40 percent of Americans between the 

ages of 18 and 35 were smartphone users in December of 2011. 

Smartphone users are much more likely to use mobile banking 

than other mobile phone users: among those consumers between 

the ages of 18 and 35, 56 percent of smartphone users had used 

mobile banking in the past 12 months compared to 11 percent of 

nonsmartphone users. 4 As more and more consumers have 

smartphones and the number of financial institutions offering mobile banking and mobile payment services increase, it is reasonable 

to assume that the proportion of the population that use these 

services will also increase. However, although Federal Reserve and 

industry data can help us understand directional trends, it is more 

difficult to project the specific future penetration rate for these mobile financial services. 

Q.5. According to surveys within the ‘‘Consumers and Mobile Financial Services’’ report, the 11 percent of the adult population 

classified as ‘‘underbanked’’ are more dependent on mobile services 

than the general population; almost two-thirds of ‘‘underbanked’’ 

pay bills with their mobile phones to pay bills, compared to less 

than half of all mobile phone users. In the final words of this reVerDate Nov 24 2008 10:31 Jan 18, 2013 Jkt 048080 PO 00000 Frm 00094 Fmt 6602 Sfmt 6602 L:\HEARINGS 2012\329710.TXT JASON
91 

port, ‘‘The prevalence of mobile phone access among minorities, 

low-income individuals, and younger generations creates the possibility of using mobile technology to expand financial inclusion.’’ 

Since 23 of the top 25 banks offer mobile banking, should we modify regulation of community development and investment initiatives to include expansion of mobile services, accompanied by security protocols and consumer awareness programs? 

A.5. The manner in which traditionally underbanked consumers 

may be accessing mobile financial services is an interesting aspect 

of the report. Because the technology and business models are so 

new and still evolving, it is unclear to what extent mobile services 

may ultimately complement, augment, or supplant more traditional 

means of delivering financial services to consumers, including consumers without banking relationships and those who are banked 

but also use alternative financial services. The Federal Reserve will 

continue to monitor this aspect of the marketplace. Given the stillevolving nature of the technology, it may be too soon to consider 

statutory or regulatory changes. Changes such as those you suggest 

may be warranted in the future if they would be effective to expand 

financial inclusion through the offerings of mobile products and 

services. 

92 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

MOBILE PAYMENTS IN THE UNITED STATES: MAPPING OUT THE ROAD 

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I. Executive Summary 

In January 2010, the Federal Reserve Banks of Atlanta and Boston, through their Retail Payments 

Risk Forum and Payments Research groups, convened a selected set ofkey players in this country's 

emerging mobile payments ecosystem. The goal of the meeting was to facilitate a discussion among all 

involved parties as to how a successful mobile payments (as opposed to mobile banking) regimen could 

evolve in the U.S. 

Over the past 15 months, the self-named Mobile Payments Industry Workgroup (MPlW) 1 met five 

times to share information and ideas, discuss the barriers and opportunities resident in mobile payments, 

and ultimately, to suggest a vision for the building blocks of an efficient and ubiquitous mobile payments 

environment. Ultimately, the discussions of this group, along with additional industry dialogue and 

literature research, constituted a body of input to the development of a research paper regarding the future 

for point-of-sale (POS) mobile payments in the United States. 

This paper, drafted by the Boston and Atlanta Reserve Bank payments research teams, does not 

necessarily reflect the opinions of the Federal Reserve Banks, the opinion of the Federal Reserve Board of 

Governors, or the opinion of any individual member of the workgroup. Rather, the paper represents the 

collective views of the authors based on the inputs noted above. The paper depicts the current mobile 

payments ecosystem in the U.S.; discusses barriers, gaps, and opportunities; and sets forth a set of 

foundational elements that workgroup participants believe are fundamental to the development of a robust 

mobile payments environment. This "vision" for the future is built upon the recognition that the current 

environment faces many challenges and that success will require extensive collaboration between 

participants to ensure that consumers see a homogenous solution as they do today in other payment 

channels such as checks, ACH, and cards. Moreover, it must be a solution based on agreed upon 

standards, rules, and practices that ensure seanlless interoperability regardless of the handset, mobile 

carrier, financial institution, payment network, or merchant location involved in any individual's desired 

transaction. 

The foundational components of success suggested by the work group include: 

I. The proposed environment is best defined by the concept of an "open mobile wallet." 

2. The mobile infrastructure would likely be based on Near Field Communications (NFC) 

contactless technology resident in a smart phone and merchant terminals. 

1 Use of the MPIW in this paper represents the existing workgroup or a modified version of the group in the future. 
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3. Ubiquitous platforms for mobile should leverage existing rails, including the ACH network for 

non-card payments, and support new payment types that meet emerging needs. 

4. Some form of dynamic data authentication would be at the heart of a layered mobile payments 

security and fraud mitigation program. 

5. Standards would be designed, adopted, and complied with through an industry certification 

program to ensure both domestic and global interoperability, including a standard to ensure that 

devices used to facilitate mobile payments do not create any electronic interference problems. 

6. A better understanding of a regulatory oversight model should be developed in concert with 

bank and non-bank regulators early in the effort to clarify compliance responsibilities. 

7. Trusted Service Managers should oversee the provision of interoperable and shared security 

elements used in the mobile phone. 

During their discussions, the MPIW debated the need for a new entity in the ecosystem directed at 

assisting the various parties to resolve issues of mutual concern and codify solutions in such a way as to 

facilitate interoperability and ubiquity. While many members felt that such an entity may be useful in the 

future, the general sense was that it was too early in the evolution to fully understand how such an entity 

might be constituted and what its role might be. In the meantime, the MPIW indicated a desire to meet 

again, perhaps with some additional attendees, to continue to discuss issues resident in the foundational 

components discussed above. 

Additionally, the group discussed the need for an industry "roadmap" that could focus short term 

investment and accelerate progress. Once again, the general sense was that the complexity of the 

environment and diversity of participants would make this a daunting task. Efforts to specifically 

prescribe such a roadmap could create results that are inconsistent with the outcome eventually produced 

from natural market forces. Therefore, the group decided that defining such a roadmap this early in 

evolution of mobile payments in the U.S. might stifle innovation. 

The benefits of this document and the underlying participative work effort will be revealed by what 

happens ne:\1. This paper is intended to be a vehicle for socializing a concept or model for an efficient, 

secure, ubiquitous, and convenient mobile payments evolution in this country to a much broader group of 

industry players. They, in tum, must ultimately agree to support or modify the ideas contained herein as a 

means of moving forward, recognizing that the opportunity to achieve maximum benefits may be best 

realized by acting sooner, rather than later. 

The ability of the two convening Reserve Banks to organize and facilitate the discussions that led to 

the publication of this document, in addition to the ongoing and highly engaged participation of a diverse 

group of mobile ecosystem players, speaks to the potential success of idea-sharing and demonstrates that 
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collaborative efforts could work. The authors would like to thank all the participants for their engagement 

and contributions to this work. A note of special thanks goes to Steve Mott of BetterBuyDesign, who 

contributed heavily to this effort. 

II. Introduction 

Almost daily a new mobile payments venture is announced that makes it possible for a consumer or 

business to use mobile phone technology to enable or enhance the payment process. Initially, the focus 

has been on enabling a mobile device to be used as a browser, accessing existing internet-based banking 

and retail systems. More recently, attention has turned to the use of an application-enabled mobile phone 

as a payment form factor, substituting for a check, cash or a card to eventually create a mobile virtual 

wallet. Financial institutions are testing these capabilities, as are numerous non-banks, including some 

who operate in the internet space. 2 In some cases, the phone is simply used to initiate a card payment, but 

in other cases it is used to create a direct transfer to another individual or business using an existing bankcentric clearing and settlement capability (e.g. ACH), or an online payment service provider. Another 

variation embraces the concept of sending SMS (text) messages via mobile phone carriers, who perform 

the clearing and settlement function, as experienced in the successful program to funnel aid to Haiti in the 

wake of its earthquake disaster. 

The concept of mobile banking and payments has resonated in many developing countries where 

lack of a physical banking or payments infrastructure exists3 Mobile payments have enabled financial 

inclusion for individuals and small businesses that are more remote from banks to overcome the 

limitations of physical transportation and utility systems. Mobile payments have even created a new 

currency in the form of airtime minutes. The evolution of mobile payments in the U.S. has followed a 

different path because of the well-defined banking and payments infrastructure already in place in the 

U.S. As a result, U.S. mobile payments have advanced more slowly; and many pilots, while conceptually 

interesting and educational, have failed to produce evidence of a currently sustainable business case. U.S. 

consumers are fortunate to have many different payment methods available to them, so the need for a 

fully deployed mobile payments alternative is not as obvious. Additionally, the cost of deploying the 

physical software and hardware elements of a ubiquitous mobile infrastructure is significant and must be 

justified in the face of uncertain consumer demand. 

Nevertheless, there is growing evidence that mobile payments will become a significant element in 

the U.S. payments landscape in the future. A recent government report estimated that 18 percent of U. S. 

2 For example, Google, Amazon and PayPal, all who accept payments for internet purchases, are involved in mobile payments. 

3 Merritt, Cindy. 2010. "Mobile Money Transfer/' Retail Payments Risk Forum, Federal Reserve Bank of Atlanta, September. 

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households do not have a bank account4

, a key variable in the attractiveness of mobile payments in 

countries where the majority of the population is unbanked. However, in the U.S. it is not anticipated that 

the unbanked will be the take-off point for mobile payments. It is likely to be the smart phone user. 

About 34 percent of U.S consumers now own a smart phone and that number is growing at a compound 

annual growth rate of 17 percent5 Most large U.S banks offer customized banking applications for smart 

phones. Contactless mobile 6 technology provides additional capabilities resident in chips that can reduce 

payments fraud and potentially the cost that merchants bear to ensure their card brands are PCI compliant. 

Finally, the U.s. continues to become a more mobile society where consumers are motivated to use their 

time wisely. All of these factors point to the potential success of mobile-based payments and related 

activities in the future. 

Most firms that would benefit from the long term deployment of mobile payments are eager to 

understand the details associated with successfully deploying a mobile payments infrastructure and 

accelerating progress wherever possible. Consequently, the Retail Payments Risk Forum at the Federal 

Reserve Bank of Atlanta7 and the Payments Research Group at the Federal Reserve Bank of Boston8 have 

collaborated to provide a setting for mobile industry participants to meet and discuss ways to move 

forward. This Mobile Payments Industry Workgroup (MPIW) is comprised of organizations representing 

the end-to-end mobile value chain. Since early 20 I 0 they have met quarterly to discuss the reality of 

mobile payments and discern the way forward. Many of the discussions were first time events involving 

participants who had not previously engaged in face-to-face conversations, yet through this process some 

agreement has been reached on a number of key variables applicable to a perceived formula for mobile 

payments success in the U.S. 

Present at the meetings were mobile carriers, issuing and acquiring banks, card brands, payments 

processors, credential manufacturers, trade associations (including merchants), mobile software solution 

vendors, handset makers, and large online payment service providers. To focus the discussion of'\vhat is 

possible," the participants learned more about each other's business propositions, engaged in group 

activities aimed at understanding what cost and revenue factors were present, discussed various barriers to 

success, and contributed input to a basic set of characteristics that would be common to a successful 

mobile payments architecture. 

' FDIC. 2009. "National Survey of Unbanked and Underbanked Households," December. 

5 Javelin Strategy & Research. 2011. "Mobile Wallets: With the New Mobile Network Operator Joint Venture Isis, Are Cards and 

Cash Ready to go Mobile in 2011)" January. 

6 Contactless mobile and mobile NFC will be used interchangeably throughout this paper. 

7 http://www.frbatlanta.orglrprfl 

s http://www.bostonfed.orgleconomiclcprclindex.htm 
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These discussions occurred in a very dynamic U.S. payments environment. Even as the MPIW was 

meeting, new mobile pilot programs were announced (some involving workgroup participants), the 

Durbin Amendment to the Financial Reform Act was adopted, other new mobile technologies were 

launched, and an initial interchange price regimen was proposed by the Federal Reserve Board of 

Govemors. Nevertheless, the focus of the group has been on long run success in the creation of a 

profitable and ubiquitous mobile payments infrastructure. The chicken and egg challenges of merchant 

deployment and consumer usage were debated, the roles of banks and telecoms clarified, and different 

infrastructure models were discussed. Ultimately, it became clear that significant success was likely to 

come as a result of collaboration directed at identifying necessary standards and encouraging efficient 

implementations, rather than independent action. 

In essence, this paper is intended to be a framework for more widespread industry discussion and 

debate that could lead to more sustainable progress in improving overall U.S. payments system efficiency 

and integrity than might occur otherwise. In the sections that follow, we define the composition of the 

mobile ecosystem, describe a vision for a successful implementation, address the potential benefits and 

drawbacks of mobile deployment, outline the obstacles and barriers to be addressed, identify the 

components of an industry business case, set forth key standards issues for discussion, explore various use 

case scenarios, and propose possible directions moving forward. 

Ultimately, the value of this work lies in its overall acceptance and use, recognizing that the 

payments system environment today, while stable and secure, may be affected by any number of factors, 

including the broad spate of legal/regulatory activity emanating from Congress, therefore making it 

difficult to move to a single agenda. 

The MPIW realized that there are various terms used in the mobile ecosystem that need to be 

explained or clarified. Consequently, we have included a glossary of key terms in Appendix I. 

III. U.S. Mobile Payments Infrastructure Today 

While mobile payments, as opposed to mobile banking, applications have gained notable recent 

success in other parts of the world, they are just beginning to emerge in the U.S. Mobile payments for 

physical goods and services (e.g. POS and transit) imply the use of near field communications (NFC) 

con tactless technologies that are not yet prevalent in the U.S., even in the card world. While NFC-like 

contactless technologies (e.g. barcodes, stickers, micro SD chips) have been appearing in the market 

recently, the emerging common standard for POS mobile transactions is near field communication (NFC). 

NFC enables a transmission using a very short-range wireless connectivity technology with the capacity 

to execute payment transactions, and a secure element that securely stores information such as identity 

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credentials and financial value. The appeal of NFC is that it is compatible and interoperable with other 

current systems, e.g. transit and security. In essence, it is not a new technology and works with existing 

hardware, secure elements and communication protocols9 NFC-enabled mobile payments have the 

potential to be the universal contactIess payment technology if necessary stakeholders have the economic 

incentives to adopt it 

The slow evolution of contactless mobile payments in the U.S is also indicative of a number of 

barriers that exist, as discussed in more detail later. As examples, the card networks, issuers, and 

acquirers have developed robust fraud analytics around mag-stripe technology and NACHA has 

developed monitoring processes which have mitigated ACH risk to a certain degree. Stakeholders are 

reluctant to invest in terminals and handsets in the absence of more certainty around changes to the 

infrastructure and the risk of making the wrong business decisions. The cost for merchants and issuers to 

invest in new device readers at the POS and for contactless chip-enabled payment devices, including 

cards, phones, and possibly other form factors, is significant 

Essentially, as discussed below, each primary stakeholder in the mobile payments ecosystem has its 

own ideas about how mobile payments should be developed and implemented, creating potential conflicts 

and barriers to development of a ubiquitous, interoperable solution for mobile payments. The market is 

moving quickly and there are still issues not fully resolved. So, there is benefit to convening the mobile 

stakeholders regularly to discuss the rules and framework of the mobile ecosystem as it evolves. 

Mobile 11etwork operators (MNOs) own customer billing infrastructures that they can leverage to 

add value to existing voice and data services. While financial services such as mobile payments may 

represent an extension to existing customer relationships, the MNOs are new to financial services and 

have expressed concern about assuming material credit risk, based on their limited experience in 

providing consumer protections for financial services. However, the MNOs are experienced in providing 

subscriber acquisition and authentication, device provisioning, customer support and value added 

services, all necessary for increasing mobile payments. Additionally, they are a vital enabling technology 

channel for mobile payments. 

US. fi11a11cial i11stitutio11s have not offered mobile financial payments because of a perceived lack 

of a good business case, although the grol'1h in mobile banking implementations and recent mobile 

payment trials signal this may be changing. Financial institutions have the opportunity to add value to 

customer depository services with the addition of mobile technology and realize customer retention 

benefits as a result. With their long time experience handling payments, addressing customer 

authentication and authorization requirements, and enforcing Know Your Customer (KYC) rules, 

9 While there are othersecurity options in addition to the secure element, e.g. cloud-based systems, this paper focuses on a 

secure element embedded in the phone. 

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financial institutions are well postured to settle payments to a consumer's account and to employ risk 

management programs that ensure regulatory compliance for money laundering, consumer protection, and 

other risks. Basically, financial institutions want to remain at the center of a customer's account 

relationship by issuing payment credentials and applications on the mobile device as they do in the 

physical payments world today. 

Ha11dset ma11ufacturers must produce smart phones capable of including NFC technology and 

related security software and then pair with the MNOs to provide utility to the consumer. How to handle 

functionality around locked vs. unlocked phones, authentication, and the ability to use the mobile phone 

for NFC payments without the networl< all need to be addressed. Furthermore, technology needed on the 

handset to accommodate mobile payments is changing rapidly (eg SIM, micro SD, NFC sleeves) in 

order to address security challenges and compliance with MNO and payments certification. Yet, handset 

manufacturers around the world are beginning to issue standard handsets in volume that will embrace 

such technology in the next year or two. 

Trusted Service Ma11agers (TSMs), building on their role in the card world, have emerged as the 

entity responsible for provisioning credentials to secure elements in mobile phones as a necessary tool to 

provide the type of transaction security users will accept. Depending on the size and scope of a ISM, 

other functions may include provisioning/account set-up; ensuring compliance with security requirements 

for software, hardware, handsets, chips and applications; fraud and risk management; and customer 

service and support. Customer support might include handling device/service questions and resolution 

relating to secure element use; developing and maintaining user documentation for best practices; support 

and assistance for operating system and mobile application software upgrades and mobile vendor 

certification; lost/stolen/upgraded phone notification to customers; handling billing questions; and 

reporting fraudulent transactions. 

Mercha11ts are critical stakeholders in the chicken and egg equation of mobile payments adoption. 

Merchants are interested in secure payments at the point of sale, timely settlement, manageable 

investment in infrastructure, relief from costly data protection inspection obligations, and reasonable 

interchange for transactions. Without widespread merchant acceptance, it will be difficult for NFC 

mobile payments at POS to achieve mass adoptionW 11 Merchants must plan for and adopt the POS 

terminal technology necessary to work with wireless devices developed and deployed by the MNOs and 

handset makers. Depending on the application the merchant may need to interact with a particular bank. 

When the payments application used in a mobile transaction is a card application, the merchant must 

10 National Retail Federation. 2010. "Mobile Retailing Blueprint: A Comprehensive Guide for Navigating the Mobile Landscape," 

version 1.0.0. White paper, May. 

11 Merchant Advisory Group. 2010. "Open the Curtains in the Payment System - Merchant Advisory Group Recommendations 

on the Mobile Transformation Opportunity." 

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work with an acquiring bank to begin the clearing and settlement process. For ACH at the point-of-sale, 

the merchant must integrate with an originating FI. 

Intermediaries/third party processors and online payment service providers have emerged to 

provide the enabling technology for mobile financial services or to serve as intermediaries in the 

payments supply chain. These processors and online payment service providers, mobile software solution 

vendors, and application and hardware developers are partnering with financial institutions or MNOs for 

the provision of mobile proximity payments. The third party non-banks see mobile as a new market 

opportunity and must be included in any infrastructure plans for mobile payments. They may also 

consider the existing environment too constrained by regulation and entrenched providers and seek to 

disrupt the payments ecosystem with a new offering. 

Consumer demand for mobile technology is very high, but their interest in mobile payments is 

uncertain due to their lack of experience using mobile devices for that purpose. Consumers have many 

safe and efficient payment choices in the U.S. so the case for shifting to mobile payments must include 

new features and value. The rapid advance of electronic payments in the United States is a testament to 

the fact that ultimately, consumers want payments that are convenient, inexpensive, and secure. 

Payment Card and ACH Neflvorks all playa key role in the mobile payments ecosystem, although 

at this stage of the evolution, each network has chosen a different path to implementation. Some are 

partnering with mobile carriers to develop new ventures, while others are working with banks and transit 

authorities to test different or new forms of mobile wallets. NACHA is analyzing its rules to properly 

route new mobile payment transactions. Regardless of the interim actions, credit and debit card accounts 

will be critical to the long term success of ubiquitous mobile payments, given their dominant base of 

customers. 

Regulators must participate in the evolution of mobile as the regulatory framework for mobile 

payments is fragmented with respect to MNO and other third party participation in the provision of 

payment services. In business model examples where payment flows leverage existing value chains of 

networks and payment clearing and settlement systems such as the card brands and the ACH, existing 

regulatory oversight and consumer protections are expected to prevail. However, questions are arising 

about the legal liabilities and responsibilities of new parties to the payments transaction, which may be 

governed by agreements between the stakeholders in the value chain. Participants desire clarity of the 

new regulatory structure and want to know how to be proactive in addressing consumer protection issues 

such as identity management, cyber-security and prepaid mobile accounts. Dialogue between FI 

regulators, the Federal Communications Commission (FCC), the Federal Trade Commission (FTC) and 

the Department of Commerce, and with mobile indust!), stakeholders is necessary to ensure that emerging 

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mobile payments services are conducted in a way that enhances safety and integrity in U.S. payment 

systems. 

IV. Long-Term Vision For the Future Environment 

As the MPIW discussed the future over a series of fi ve meetings. a vision for the long-term mobile 

ecosystem emerged, in terms of successful business models and the important components of a mobile 

payments operating framework, such as standards and guidelines. While not all parties agreed in full, a 

decision was made to intentionally limit the scope of the effort to mobile payments at the point-of-sale. 

The group acknowledged that the mobile framework is not tiedjust to payments and that there is a need to 

look at opportunities to drive m-commerce, including value-added features such as coupons, rewards, 

clinical services, etc. The group further recognized that mobile has the potential to be a key component in 

making and/or securing remote payments and authenticating payments made via internet or card (i.e. 

card-not-present transactions). However, that possibility was viewed as something the group could 

discuss going forward. 

The group opined that the potential societal benefits created by mobile-enabled payments 

technology, including the potential to reduce payments fraud and expand financial inclusion, portend a 

future where the mobile phone becomes the consumer's wallet and provides a seamless customer 

experience. This new mobile wallet will be enabled by NFC contactless technology embedded in the 

mobile handset so that it can store secure payment and identity information, as well as provide a secure 

access channel to payment services. 

Ultimately, the successful mobile-enabled payments network will leverage a set of common 

standards and open platforms to ensure global interoperability. In a perfect world, mobile-enabled 

payments will be as interoperable as card payments are today, where consumers can use cards for 

payments anywhere in the world. Ubiquity will be achieved by creating a set of standards for payment 

applications that co-exist in a mobile wallet open to all card (credit, debit and prepaid) networks as well 

as ACH, that work across all carriers, and are accepted by all merchant POS terminals across all borders. 

It is therefore critical for all participants in the future mobile payments environment to work 

together to design a model for interoperability that has the advantages of the card model and includes 

global industry standards. While the emergence of competing proprietary offerings encourages 

innovation, it also bears the risk of creating silos that may impede the development of critical mass 

needed to ensure a successful payments network. While workgroup participants were not in a position to 

establish consensus with respect to specific standards, all agree that the long-term vision of a successful 

mobile payments system in the United States will occur through the creation of mutually agreeable 

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foundational principles. The goal of these principles will be to foster an interoperable mobile payments 

ecosystem; one that accommodates the customer of any financial institution or mobile carrier, thereby 

eliminating the need for compulsory customer movement between carrier or card brand (a common 

complaint today) and allows the customer to use multiple payment methods wherever merchants accept 

them. It is likely that a mutually agreed upon strategy will be necessary to provide the guidance and 

incentives to foster the evolution and migration to a ubiquitous mobile environment. 

Business models 

The major mobile stakeholders must detemline the appropriate business model for the mobile 

payments infrastructure. The decision is complicated by the need to converge payments and mobile 

communications. The creation of a combined model requires the cooperation of multiple parties, 

including financial institutions, mobile operators, payment networks, technology service providers, chip 

and handset makers, and ultimately, merchants and consumers. While the MPIW did not discuss the 

different models at length, the consensus generally pointed to the possible co-existence of three basic 

business model scenarios within the mobile payments ecosystem (operator-centric, bank-centric and 

collaborative). In the operator-centric model the MNO owns the customer relationship for payments 

made using the mobile phone. In the bank-centric model banks own the customer relationship and mobile 

payments are processed over traditional payment networks (credit, debit or ACH). Each model could be 

utilized depending on the type and value of a purchase; the payment venue (e.g. physical POS, remote 

POS or internet); or other payment scenario. 

The collaborative model (see Figure \) emphasizes the need for an entity that would manage or 

work with all the parties in the mobile payment ecosystem to facilitate an efficient, holistic environment 

and provide oversight, business rules and standards for multiple service providers. This entity would 

serve as a neutral third party to assist other participants in creating a level playing field to facilitate faster 

and fuller market adoption. On behalf of all participants, it could tackle business issues of mutual need, 

such as determining the relative liabilities of each party, creating business standards and operating rules 

for handling customer problems, and leveraging the best practices and expertise of each individual mobile 

stakeholder. 

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Figure 1: Collaborative Model 

The remainder of this section discusses how the different stakeholders might function with and 

without a collaborative framework in the mobile payments ecosystem. 

Mobile Network Operators, working with partnered handset manufacturers, would continue to 

control access to the mobile channel and have secure elements configured into their offerings. However, 

they have limited experience with payment-related application or cryptographic data and while they have 

extensive account management experience, they have little experience dealing with banking and payment 

rules and regulations to protect consumers. Without collaboration of some sort, they would need to build 

new capabilities that go beyond their core business competencies to support mobile devices with broad 

mobile commerce capabilities; establish thousands of new relationships with financial account holders; 

and develop complex data centers that comply with industry security standards. Finally, MNOs would 

have to develop reciprocal agreements for commerce with each other so that account access could travel 

as easily from device to device as phone numbers do currently. In a collaborative model these elements 

could be managed by each party agreeing to a central set of guidelines. 

Payment Card Networks have existing infrastructures for credit and debit contactless transactions 

and already perform a rules-making and fee-allocation capability related to card processing and 

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settlement. However, they lack access to the customer's DDA account and related data. Without 

collaboration they may not be able or willing to reach agreements about sharing data between competing 

entities. 

Financial Institutions would continue to be at the center of their customers' financial activities, 

having a more trusted relationship and access to their own customer data, as well as secure data center 

capabilities that allow them to directly serve existing clients. Consequently, banks are well positioned to 

move consumers to new technology. However, banks will need the interoperability necessary to handle 

mobile payments involving other banks' customers and those customers who use different mobile 

carriers. Otherwise, without an open wallet, an FI would be able to work only with its own customers, 

unless it had bilateral agreements with other banks and carriers. Absent some scheme that facilitated 

multilateral relationships, having hundreds of bilateral agreements between banks and MNOs would be 

inefficient and fragmented, and not work well for mass adoption. 12 

Payment Transaction Processors and Online Payment Service Providers would continue to 

provide multiple-account payment processing services, perform credit and debit card provisioning and 

have existing extensive relationships with banks, merchants, credit card networks, pre-paid account 

service providers and technology providers. They would also have an extensive data support 

infrastructure to securely handle large amounts of financial and transactional data. While they might be 

able to provide more agnostic services for handling various credit and debit instruments, without 

collaboration they would need to establish multiple relationships with mobile carriers and expand 

relationships with banks to fully service consumer account management. 

Mobile Technology Solution Providers, which include mobile payment application developers 

and TSMs, such as those who provision smartcards, secure elements and NFC chips, have the most 

experience and expertise with complex technology. While they may have collaborated on technical 

standards, such as [SO 14443, they have limited experience in dealing with payment rules and regulations 

to protect consumers. Technology providers would need to develop two-way relationships with carriers 

and banks, and with each other, since in some cases they are direct competitors. 

A successful future mobile payments ecosystem requires an open payments system with 

interoperable services based on industry accepted formats, and technology standards that allow multiple 

parties to transact freely, but with some coordination and structure to ensure safety and efficiency within 

the mobile payments system. A collaborative model could provide stakeholders the opportunity to 

leverage their respective competencies for the collective good of the payments system overall. However, 

the number of stakeholders in the mobile ecosystem creates a more complex model that will require time 

12 For example, NACHA rules and ACH operator agreements create the effect of widespread multilateral agreements. 

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in which to establish industry nonns for agreements and standards that will govern the interrelationships 

and their roles, responsibilities and liabilities. In addition, the MPlW was concerned that excessive 

coordination can sometimes stifle innovation. 

Consequently, the MPlW felt that it was premature to consider such a model in the current market 

and it was decided to leave this discussion for a later time . Interestingly, a nascent version of the 

collaborative model was announced in November, 2010, by AT&T Mobility, T-Mobile US and Verizon 

Wireless, that includes a card network (Discover) and a bank issuer (Barclays Bank U.S).13 The joint 

venture, referred to as IsisTM, is chartered to pilot a national mobile commerce network and an NFC 

mobile wallet. Isis will need to establish the rules of engagement, standards and customer needs within 

its collaborative effort and plans to have the scope and scale necessary to introduce mobile commerce on 

a broad basis, hoping to make it available to all interested merchants, banks and mobile carriers going 

forward. 

V, Strategic Fundamentals of the Vision 

The U.S. mobile payments market, particularly in the last year, has begun to move down what 

appears to be an obstacle filled path, absent any shared vision regarding key principles for success. All 

parties recognize at some level, however, that they share some common goals. Ideally, mobile commerce 

participants need to be able to flourish equally in the mobile ecosystem. FIs, merchants, payment 

networks and carriers need to be able to reach their own customers (and potential new customers) with 

innovative product offerings. Consumers should benefit from products and services that are standard and 

secure and that make purchase decisions easier for them, while a ubiquitous mobile commerce 

environment will provide the desired revenue opportunities. Further, through the implementation of 

common standards, costs can be reduced and integrity of the network increased. 

As the MPlW met over the past year, the group's increasingly candid discussions led to a series of 

shared observations (or shared vision) about the nature of the necessary underpinnings of a successful 

B On November 16, 2010, AT&T Mobility, T-Mobile USA and Verizon Wireless announced formation of a joint venture chartered 

with building IsisTM, a national mobile commerce network to fundamentally transform holV people shop, pay and save. With 

mobile payments at the core of their offering, they plan to create a mobile wallet that ultimately eliminates the need for consumers 

to carry cash, credit and debit cards, reward cards, coupons, tickets and transit passes. Isis expects to introd uce its service in key 

geographic markets during the next 18 months. A TI, T-Mobile USA and Verizon Wireless collectively provide wireless services to 

more than 200 million consumers who will have access to the Isis service. Isis will utili ze Discover's national payment network 

initially, which is currently accepted at over seven million merchant locations in the U.s., to develop an extensive mobile payment 

infrastructure for the jOint venture, and Barclaycard US as the first issuer. See http://www.paywithisis.coml/t/news/ 

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future move to mobile NFC payments in the U.S. What follows is the workgroup's assessment of a set of 

foundational principles necessary to achieve mass adoption of NFC mobile payments in the U.S. These 

principles will require stakeholders to tightly coordinate efforts to develop a fully integrated end-to-end 

mobile payments process and represent a set of fundamental "business requirements" for success. The 

more rapidly they are achieved, the sooner the benefits of mobile payments will be realized. 

Foundation Principles 

I. Open Mobile Wallet 

A successful model for the future should be based on a standard definition of an open mobile 

wallet, one that carries broad payment and merchant/marketing value options for consumer choice. Such 

a platform would embrace a technical architecture that enables the wallet to support a wide range of 

payment methods and networks, would comply with agreed upon industry business rules and standards, 

would employ a secure element or container in the mobile phone to interface with the mobile payment 

applications, and would utilize appropriate wallet protocols and processes, such as the ability for multiple 

payment applications to share the wallet. The mobile wallet would exhibit all of the flexibility resident in 

a physical wallet today, including payment-related functions such as loyalty program applications. 

Current and planned contactless card/mobile NFC (pilot) deployments are not true mobile wallets 

by this definition as they offer constrained payment options which limit consumer choice and utility. 

Since the MPIW views mobile marketing, advertising and promotions, as well as transit, as primary 

business case drivers for NFC payment deployment (i.e., payment capabilities are a 'qualifying' factor in 

the business case, but not a 'differentiating' factor), there will be a need to understand and perhaps 

provide input on or recommend standards for security (including accommodating multiple payment 

options and applications with multiple secure elements in the handset chip accessing multiple regulated 

banking networks), privacy, compatibility and interoperability. 

2. Implement a mobile NFC conlactiess scheme with a specific (embedded) hardware componentlhal 

mayor may not include a micro SD form faclor. 

The NFC scheme should be based on an industry standard, capable of supporting all payment 

methods and networks, able to comply with business rules and standards and reside in a secure container 

in the mobile phone to interface with mobile payment applications. The contactless NFC solution 

developed must work globally and in all venues (retail, transportation, as well as ATMs). Contactless 

payments employing computer chip security and near field communications (NFC or radio wave) 

technology based on ISO 14443 via mobile devices represent a preferred embodiment of future payments 

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in the U.S. When used at the POS, the contactIess fonn factor should follow established contactIess 

standards as endorsed by ISO and NFC industry groups, such as SmartCard Alliance, NFC Forum, 

Mobey Forum, etc. Who would be responsible for designing and developing the solution needs to be 

detennined. Minimum compliance requirements for adoption should include dynamic data 

authentication, m-wallet contactIess functionality and a secure element in the mobile phone. 

Utilizing NFC contactless technology for mobile payments assumes that handset manufacturers will 

commit to putting NFC chips on a large number of new smart phones by some future date. It also 

assumes that the majority of merchant tenninals in the US. will simultaneously be upgraded to 

contactIessfNFC. Having some idea of when NFC mobile will be implemented, even without a fonnal 

roadmap, would help the merchants plan their investments. Achieving such synchronization, however, 

will require an extraordinary amount of collaboration, absent a highly participative forum for such 

discussions. 

3. Establish a ubiquitous platform for mobile payments that uses existing clearing and settlement 

channels and rails (credit, debit, ACH, prepaid, carrier billing) but allows for new rails as they are 

developed. 

The existing clearing and settlement rails are the necessary foundation for the mobile payments 

platfonn in order to create opportunities for mass adoption and consumer choice. While new payment 

channels may be created in the future, the MPIW supported the use of existing clearing and settlement 

systems to exchange payment infonnation and value. Given the ubiquity of the ACH network, and the 

growing modes and ease of access to it, the ACH option may be critical for supporting a customer's 

desire to use mobile payments to replace physical cash or check transactions (i.e. non-card transaction) by 

enabling funds to change hands between parties via direct debit and credit. In addition, merchants who 

are too small (in sales volume and/or revenue) to qualify for accepting credit/debit cards could use ACH 

on the mobile phone to accept electronic payments in place of cash or checks. 

4. Adopt dynamic data authentication for long-term integrity and security in all card-based 

transactions and across all channels. 

Dynamic data authentication protects cardholder and other payments data by making each mobile 

payment transaction unique. A valid cryptogram is generated for each transaction, which is then verified 

when the transaction is authorized. The cryptographic value, including transaction-specific data elements, 

is validated through the tenninal with the network to protect against fraud. The chip device (card or 

phone) must be present to generate a valid cryptogram, which is verified online or offline when the 

transaction is authorized. Many issuers already are providing contactIess payment cards with dynamic 

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cryptograms, which is how contactless transactions have improved payment security. Dynamic 

authentication technology on mobile phones would lower fraud because, absent the sequential codes on 

the embedded chips, stolen payment card information could not be used to make counterfeit cards or 

fraudulent online transactions. In addition, the group noted the possibility that this technology could, over 

time, be applied to the card-not -present venue. 

5. Develop and adopt a global interoperable platform in the u.s. for standards and certification of 

payment methods for an open mobile wallet, applications, NFC, etc. Leverage existing standards 

where possible. 1

4 

Using a special carrier-issued chip in the phone, consumers currently enjoy the ability to use their 

mobile phones on a global basis. Adding payment functionality to the phone, however, presents a number 

of challenges, particularly in the area of compatible standards. There are several existing mobile standards 

bodies such as GSMA, GlobalPlatform, ETSI (European Telecommunications Standards Institute) and the 

NFC Forum. Differences in what each standards body addresses and gaps in coverage for mobile 

payments will need to be identified and resolved, particularly where there is no overarching standard 

today, as is the case for a TSM in the U.S. Standards for implementing a secure element structure and 

technology must also be developed to ensure that a secure platform is open and works with multiple 

applications in the mobile wallet. 

Absent a coordinating body, the industry will be hard pressed to analyze applicable global standards 

and the impacts to the different industry stakeholder groups, determine if changes to the standards are 

needed to accommodate contactlesslNFC mobile payments and what the timeline and resource 

requirements would be . For the near-term (3-5 years) there is likely to be a wide array of initiatives to be 

aware of, provide input to, and consider incorporation of for deployment and operation in the U.S. 

Full-NFC deployment will involve several infrastructure elements (e.g., a variety of secure 

elements in handset chips; multiple payment options with separate regulatory requirements in open 

wallets; management of security and operational services; etc.). 

The industry will also need to consider how to address configurations other than full-NFC, such as 

micro SD cards or NFC stickers that perform lightweight implementations of NFC transacting. Some 

view these 'NFC-lite ' deployments as preceding full-NFC in the US., and there are notable pilots 

involving banks underway and planned. Others view NFC-lite deployments as more likely to continue to 

occur after full-NFC attains critical-mass adoption, filling in with limited functionality, but sufficient 

security for users of less-advanced handsets, (i.e. backwards compatibility for awhile). The former view 

might relieve the industry from expending efforts that distract or dilute mapping out the infrastructure 

14 See Appendix IV for a discussion on current standards activities. 

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requirements for full-NFC, but the latter view raises the perennial need for the industry to figure out how 

to accommodate users who lag behind the technology adoption curve. 

Finally, additional standards may need to be developed or modified to ensure that the NFC RFID 

chip communication does not interfere with other wireless network communication. The CTIA can 

potentially conduct tests to address this issue within its existing device certification initiatives; and 

improve clarity of member-driven initiatives for device certification. Working with CTIA members, 

terminal vendors, financial services providers and regulators, such as the FCC, the MPIW could assist in 

development of a comprehensive consumer, merchant and ecosystem-wide education and monitoring 

program. 

6. Regulatory Clarity 

Mobile transacting will cross over domains covered by multiple regulatory agencies- the 

FedIFDIC/OCCINCUA for banks, the Department of Commerce for identity protection, the FCC for 

wireless carriers, and the FTC for consumer product protection. IS The MPIW wants to understand sooner 

rather than later the regulatory focus and oversight regimen of each agency in the mobile payments world, 

as well as the applicability of current regulations and laws to the mobile environment, in order to avoid 

potential missteps as they proceed to develop mobile payments solutions. This was viewed by all parties 

in the MPIW as a key priority for the Fed to initiate and initial steps have been taken to begin dialogues 

with these agencies. A workgroup assigned to identify regulatory gaps, with supporting resources beyond 

the original MPIW membership, would assist in such an effort. 

7. Trusted Service Managers should oversee the provision of shared security elements used in the 

mobile phone. 

There are several companies that manufacture secure elements. The TSM role would be to manage 

and control the provision of the secure elements in the mobile phones. The TSM may also perform other 

account management functions as discussed earlier. 

Focusing on the core principles discussed above, the MPIW indicated a desire to continue meeting 

following a period of broader review of these principles by all stakeholders in the industry. The sense 

was, that absent any other inclusive industry forum, the continuation of the MPIW, perhaps in some 

expanded form, would benefit the stakeholders in the mobile ecosystem by providing a venue for the 

group to begin resolving some of the barriers and issues related to the list offoundational elements in 

order to successfully incorporate them into a mature system. For example, obstacles that need to be 

15The new Consumer Finance Protection Bureau (CFPB) may ultimately weigh in on consumer protections for mobile payments. 

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resolved over the next 3-5 years to achieve true commercial adoption ofNFC payments at retail POS 

may include commercial availability and widespread adoption of smart phones containing NFC chips; 

secure element resolution (ownership, standards, etc.) and implementation; identification and resolution 

of technical and business risk and security issues; agreement on the best business models; implementation 

of contactIess readers at an acceptable number of merchant locations; agreement between regulatory 

agencies on regulatory requirements, assignment and changes (even ifthe regulatory changes have not 

yet been legislated); consumer and merchant education plans; etc. Many ofthese activities will likely 

need to be completed in overlapping periods, with some dependencies. 

The MPIW also discussed the concept of developing an industry roadmap for moving forward, 

perhaps as a vehicle to clarify direction and encourage faster adoption of necessary change. Typically, 

such a roadmap might document a detailed explanation of the potential barriers to mobile payment 

adoption and recommend approaches (with costlbenefit analysis) to address them. A roadmap might also 

include best practices for the technology (hardware, software, terminals, chips); security (EMVI6 or 

something similar), dynamic data authentication, secure element (what is in the secure element and how is 

information involving payment credentials protected, etc.); interoperability; vendor/application 

management, vetting and certification; consumer relationship management (including enrollment, service 

and support for phone usage, recovery if lost or stolen, problems if bad applications downloaded); 

liabilities (who is responsible for exception handling and problem rectification); fraud and risk 

management practices to address consumer and merchant security; and regulatory protection and 

education. 

In its full est form, a roadmap could also discuss consumer use from an academic, non-competitive 

basis. It could identify the consumer value proposition, which is critical for achieving broad adoption. It 

could address ways to understand what motivates consumers and how to convince them of the benefits of 

switching payment methods. The roadmap could highlight ways to develop a viral marketing program to 

build mass adoption. Obtaining a better sense of consumer and merchant preferences and concerns would 

enhance the roadmap. In other industries, as well as payment associations such as NACHA, roadmaps are 

augmented by shared surveys directed at various stakeholders, which in this case would be consumers and 

merchants. 

Ultimately, the workgroup felt that it would be premature to try to develop a roadmap that would 

influence the broad range of mobile payment stakeholders. The mobile payments industry is in its early 

stages of development in the U.S. and is characterized by experimentation and pilots which typically 

inform longer term thinking. Moving too early to determine common ground, establish standards, and 

16 EMV is used today in other countries for card payments. The MPIW discussed briefly the possible intersection of EMV with 

mobile payments in the u.s. For a more detailed discussion, see Appendix II. 

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develop rules of exchange could stifle innovation and reduce consumer choice. Further, certain key 

elements of the mobile payments infrastructure are still in pilot phase globally, implying that the adoption 

of standards (such as NFC standards) may, in some cases, still be a work in progress. In essence, the 

group felt that attention would be better focused on some selective baniers and issues in the short term 

and that an industry roadmap might better be approached in the longer term, if market forces produce 

inefficient outcomes. 

Finally, the workgroup touched on another key issue - the role of the consumer helping to secure 

the future mobile environment. The group felt that future discussions should also include a plan to get 

consumer buy-in on shared responsibility for risk management. Unlike what unfolded with e-Commerce, 

where "zero liability" policies by the primary card brands produced a flood of repudiated transactions and 

so-called 'friendly-fraud' (along with a black market in stolen mag-stripe card credentials often fed by 

irresponsible cardholder behavior), the mobile venue needs to be better. That is, consumers need to buyin to their role in ensuring a secure, private and efficient payments system and correct the bad habits they 

developed online. Consumer education related to security is critical for them to understand and know 

how to identify fraud risks on their end, assist in fraud prevention, and use the security tools that will be 

available to them in the mature mobile environment. Collaborating in some form to provide such 

education is a topic that needs to be addressed. Ultimately, the educational process must be coordinated, 

supported and, potentially enforced within the mobile ecosystem with a goal of helping consumers 

understand why they should upgrade to more secure handsets and employ best practices for usage in order 

to protect themselves and the entire mobile payments ecosystem from harm. 

VI. Potential benefits of contactless mobile payments ecosystem 

The creation of a contactless mobile payments infrastructure in the U.S. would provide a number of 

definable benefits, including improved fraud reduction capabilities, improved cost efficiencies for 

merchants and issuers, better data privacy, international compatibility, and reduced risk of settlement. 

Fraud reduction 

The contactless mobile platform, replete with chip capabilities, can take advantage of the 

intelligence of the chip and the resultant layering of security tools to provide security features not present 

in today's mag-stripe environment where skimming and counterfeit production are prevalent. The 

contactless mobile solution provides the framework for the enhanced security present in the EMV 

chip+PIN card environment, while also introducing new security layers unique to the mobile phone, 

including password protection to operate the mobile phone and access applications securely embedded in 

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the phone. Once at the mobile menu, access to individual mobile banking and payment applications can 

be further password protected. The EMV chip-based card, which can be replicated in the mobile chip, 

(although standards for contactIess EMV must still be developed), contains individual account credentials, 

which can remain encrypted to the reader while an authorization is in progress (in some robust 

implementations). The PIN is also encrypted between the card and the reader, adding a second 

authentication factor dynamically to the transaction authorization. 

Adding mobile data, such as location awareness, phone numbers or carrier accessed device IDs 

(e.g. MSISDNs or MDNs), can enhance account data, which banks use for risk management and the 

passing of encrypted tokens and PINs. Among cooperating stakeholders in the mobile ecosystem, 

utilizing all the data fields and information available with the mobile transaction end-to-end can logically 

and technically make the mobile transaction even more secure. 

The mobile phone can also be used as a security tool for financial payments made at the physical 

POS and over the internet. The customer is always available, real-time, during a mobile payment 

transaction. If a network or issuer wished to authenticate customers with a real-time SMS challenge 

question, application or phone call, it could do so. 

Furthermore, in addition to dynamic data for authentication, the mobile channel can support the 

other big fraud reduction initiative in the U.S.: preventing fraudulent transaction accounts from being setup using credentials that might have been exposed (credit card numbers, demand deposit accounts, social 

security numbers, etc.). Better account set-up requires improved registration and enrollment processes, 

with higher levels of identity verification accessibility and utilization. The enrollment process for mobile 

banking and payments applications, including NFC provisioning and set-up with device-internal 

protections, could materially improve the registration and verification process. The additional enrollment 

process supplements the Frs own account-sign-up mechanisms and enables a much broader set of data 

about the enrollee to be collected. 

It will be important to measure fraud reduction resulting from the use of a mobile phone vs. other 

payment methods to see how much mobile helped to reduce fraud. This may be difficult to do if 

companies are not willing to be transparent and share their fraud numbers and costs. Bank and other trade 

associations such as the ABA and AFP collect fraud data from surveys. The CTIA has a voluntary 

requirement for its members to complete an annual survey and report anonymously so perhaps they could 

help collect mobile fraud data through a survey. 

With proper changes in regulations, this broader set of data has the potential to be shared within the 

mobile ecosystem. Full NFC implementations, augmented by encryption that works with the secure 

elements embedded in the phone, make superior payment account and user ID protections readily 

available. Ultimately, this benefit can result in both lower PCI compliance costs and lower fraud losses. 

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The MPlW can help maximize the opportunities for overall fraud reduction by working with the 

players to develop and implement fraud reduction standards for the entire environment that avoid the 

possibility of the network safety relying on the lowest common denominator. In addition, the group can 

work with the other parties to enforce standards and pursue bad actors 

Merchant cost efficiency 

The one-time cost of conversion to mobile payments may be viewed as a barrier (as described in the 

next section), but the ongoing and future benefits may be substantial. For example, mobile may provide 

an opportunity for merchants to reduce PCl inspection costs over time, I J and reduce the costs and risks of 

storing sensitive data, as mag-stripe data exposure is eliminated. Short-tenn or one-time costs, including 

costs arising from merchant liability to issuers for accounts compromised from data breaches (in a magstripe/open-credential paradigm), are projected by some merchants to exceed the actual costs of fraud in 

the future if the industry stays with a mag-stripe standard. Many large merchants acting unilaterally are 

adamant about ensuring consumer payment choice, and appear to be prepared to support a number of 

alternative payment systems that take advantage of mobile and contactIess capabilities. This includes 

advanced commitments and investments by merchants in chip+PIN for both offline and online 

transacting, which signals a growing understanding of the long-tenn business requirements. 

Lower issuer costs 

In the mobile payments environment, card issuance costs can be reduced by electronic downloads 

replacing expensive physical card distribution programs ove r the long-tenn. However, plastic cards are 

expected to co-exist with mobile phone payment options for several years, which will impact cost 

savings. And, current VISA and MasterCard rules require issuing of cards along with mobile accounts, so 

customers will carry cards and phones for a few more years. Costs to access TSMs and secure elements, 

uncertain at this time, must also be factored in. However, customer validation and activation can be 

simplified through more efficient, fully digital, and more secure (through the Global Platfornl standard) 

payment account provisioning, set-up and maintenance via the mobile channel. This would, in time, 

offset costs associated with phasing out mag-stripe cards. Loading cards to the mobile wallet will be less 

risky. Lost phones can be secured and remotely deactivated in ways that cards, wallets and purses cannot 

be, and there is evidence that consumers are much more attentive to the status of their phones. (Industry 

research states that it takes a consumer 4-8 hours to realize he lost his wallet, but only one hour to realize 

his phone is lost.) This can reduce fraud from lost payment accounts and make restoration of payment 

capabilities much faster and easier. 

17 See Visa Europe announcement at 'http://usa.visa.com/download/merchants/bulletin-tip-02091Lpdf: 

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Data privacy 

The mobile channel can give a consumer the ability to opt-in or -out of applications and services 

offered by sellers and advertisers on a timely, case-by-case basis to control and limit access to private 

information. This requires the mobile channel to have effective and efficient regulatory check-points and 

roadmaps to ensure that the consumer has sufficient protections. Mobile can also have the broader benefit 

of triggering a proactive national agenda to drive toward consumer protections that lend themselves to 

individual preferences, versus universal blocks or hurdles that waste expense and effort to disable when 

circumstances warrant. Once again, standards developed collaboratively and orchestrated by a central 

party can enhance the data privacy process. 

International compatibili~v with a c/tip+PIN standard 

Implementing the international chip+PIN standard (or some yet to be defined alternative) generates 

additional benefits for the NFC mobile phone by making mobile transactions more fraud resistant. 

Ongoing mobile EMV pilots in Europe demonstrate continued evolution toward that end. Considering a 

near-term deployment of contactless chip+PIN mobile in the U.S. allows us to anticipate change and 

move in lock step with the rest of the world. 

Economies of scale and cross selling 

Mobile NFC technology is also being considered in non-payment and non-banking venues, such as 

transit and health care. As a result, investments in mobile payment technology may be shared over time, 

creating better economies of scale that will drive down the cost of future mobile solutions. The 

convenience and efficiency of the tap-and-go format can support many other applications that provide 

value-added services. Examples include high volume, high speed ticketing in transit venues; tap-and-go 

for parking meters, parking lots, and vending machines, and a variety of health care applications (e.g. 

making integrated, approved and authenticated purchases of medical products and services for insurancedefined accounts like Flexible Spending and Health Saving Accounts). Integrating rewards programs 

(from banks, merchants and third parties) can efficiently and effectively be orchestrated via mobile NFC 

wallets and applications as well-potentially increasing ROI for those progranls. 

Consumer convenience, security and efficiency 

Surveys continue to show that consumers want to save time. Tap-and-go payment schemes can 

overcome the limitations and inefficiencies of 'self-checkout' and tum it into a sought-after mode of 

transacting, particularly when coupled with emerging shopping applications where the phone is used as a 

scanning device and barcode reader. Education programs can help consumers and small businesses 

understand that mobile technology has the potential to provide an even safer environment than exists 

today if implemented correctly. Consumers also want payment choice, and if possible, ways to 

consolidate all the cards in their physical wallets. 

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Increased relevance of marketing, promotions and advertising 

The current one-way, one-size fits all broadcast-mode of buyer-seller interaction can be replaced 

with one-to-one, integrated communications and location-aware, real-time capabilities of mobile 

transacting. Services will need to be somewhat customized to reach different consumer demographics, 

since digitally oriented younger adults are more willing to opt-in to highly personalized services and 

commercial interactions, while older adults may avoid them. Recognizing that there are existing 

marketing regulations, use of the mobile channel for more extensive marketing may create gaps. 

Therefore, developing a regulatory roadmap will ensure that the industry invests wisely and appropriately 

to develop services that work in the interests of buyers and sellers without jeopardizing consumer 

protections. A properly guided mobile marketing, promotion, and advertising environment may create 

efficiencies and improvement in relevance, and convert wasted costs and investments into profitable new 

transaction streams that benefit participants in the mobile ecosystem. 

VII. Obstacles to Implementation 18 

Despite the exciting business prospects and other benefits of transacting payments by mobile 

phone, there remains a significant amount of skepticism about how necessary, and how affordable, the 

transition to mobile NFC payments and, logically, their extension to EMV or similar standards, will 

actually be. The convergence of several major changes in the payments environment might finally be 

wearing down this traditional reluctance to change the status quo. Ironically, the unexpected attraction to 

mobile NFC increasingly appears to be the catalyst to finally moving from the mag-stripe paradigm to a 

payment system more fitting to today's digital economy and lifestyle. How and why this is happening 

makes a great study in consumer preferences and technology transformations. 

At least four obstacles to implementation of a mobile NFC payment option with the breadth of 

impact thought by some to change the entire payments paradigm must be addressed and resolved: 

• Cost of deployment 

• Lack of adoption for contactIess with cards 

• Disruptive changes in the status quo for existing payments parties 

• New revenue models and how to fund the changes necessary to create the mobile ecosystem 

t8 See Appendix IdrlSleve Mott's perspective 01 contrasting views on what motivates participants in the U.S. mobile payment 

ecosystem. 

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Cost of deployment 

The biggest obstacle to any transformation is the cost of the change. Upgrading the existing 

payments infrastructure from mag-stripe to smart cards and PINs has long been resisted by both FIs and 

merchants due to the apparent lack of a business case for the necessary investment. However, there is a 

growing sentiment that the conventional 'wisdom' about chip+PIN might have changed due to the need 

for global interoperability, as well as increased interest in moving to contactIess payments on mobile 

phones. 

One key factor about the lack of justification for shifting to chip+PIN might be the realization that 

the costs of PCI compliance (and clinging to mag-stripe) could soon exceed the costs of actual fraud. 

Ironically, merchants, who bear most of the costs of attempting to comply with these card credential 

protections, and who are increasingly exposed to financial liabilities to compensate issuers for mag-stripe 

fraud from data breaches, would pay more to avert mag-stripe fraud than issuers experience from the 

fraud itself. So, any substantive innovation in payments seems likely to devolve quickly from whether to 

replace mag-stripe to what technology to replace it with and how fast. Mobile NFC advocates make the 

case that their technology can facilitate this transition in a number of ways, and may prevent the need for 

a substantial build-out for chip+PIN contact cards in the process for the U.S. 

ContactIess advocates, including most big merchants, some of whom have already deployed 

terminal systems capable of supporting contactIess chip+PIN technology, argue that the rest of the world 

is making steady progress moving to con tactless. However, because of the overlap between the card 

world and mobile payments, some mobile stakeholders believe that it will be necessary to support both 

contact and contactIess options in cards for some time, which if the market proceeds in that direction, will 

be more expensive. 

Slow market adoption of contactless to-date 

Why should the U.S. also consider moving to NFC on mobile phones when the first generation of 

contactless has by some accounts been a disappointment? 19 Three reasons stand out for the apparent 

slowness in consumer adoption. First, consumers don't really have an incentive to try or use contactless, 

vis-it-vis their other, familiar payment modes. With respect to more than half the cards issued, consumers 

aren't aware they can do contactIess. Additionally, it is difficult for consumers to figure out which 

merchants accept this format. Finally, banks have done little in the way of promotion, and have done a 

poor job of explaining to consumers that they will be safer with contactIess. 

"In the marketplace since 2004 with an estimated 70 million cards and fobs available for use in 150,000 merchant locations, 

but too few transactions to report so far. 

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The concept of mobile NFC is thought by many to address these constraints to consumer adoption 

by being fun to use, accessible to almost anyone with a mobile phone, and supportive (if the payment 

'wallet' is open) of a multitude of payment choices, including prepaid for the un- or under-banked. 

Mobile devices can offer added security by providing more information to augment verification and 

integration of 'full ' NFC, where the radio-wave chip and antenna enable the NFC application to interface 

with the secure element in the device's chipset. Two-way NFC capabilities may also offer another way 

for consumers to receive and redeem offers, promotions and coupons from merchants and third-partiesincluding many innovative exchanges based on location-awareness of mobile devices 20 

The card networks primed the pump for merchant adoption of first-generation contactless 

payments, subsidizing the costs and deployment of several hundred thousand terminals, largely in the 

expectation that contactless would prove faster at checkout, cleaner to handle and therefore a good 

alternative to cash payments at the counter. But for the most part, the only payment options available are 

signature-based credit and/or debit, replacing cash transactions that typically cost less than a nickel to 

process with a signature-<:ard transaction that costs $.15 to $.75 or more. This has not incented merchant 

support (such as prompting and assisting consumers to try the mechanism out). Additionally, merchants 

want to see equipment that looks the same and doesn 't require retraining staff. Mobile stakeholders must 

work harder to identify a compelling need for merchants to accept contactless payments. 

It is worth noting that as of February, 2011, industry estimates indicated there were 70 million 

contactless devices (mostly cards) and 150,000 contactless merchant terminals in the U.S. Despite the 

obstacles, this evolution of contactless cards at POS has been valuable, preparing and providing the 

industry with the experience needed to move to the next phase of contactless payments with mobile 

phones. 

Merchants, from a variety of recent reports and publications, appear to have high expectations for 

the coming transformation in the payments environment. In particular, they are pushing for more 

payment choices with contactless, and pricing that better reflects the common view that mobile 

contactless-by virtue of being capable of greater safety and efficiency-should cost less than problemprone mag-stripe payments. In the new consciousness of the raft of recent consumer-protection and 

merchant-assisting legislation, lower costs should be reflected in more advantageous pricing to merchants 

and lower purchase prices to consumers. 

The NFC deployment configuration supports this new perspective by making an open payment 

wallet possible; even merchant-provided payment options (e.g., private label, store-card based, stored 

value) could be offered. That gives the consumer a full set of payment choices, and the possibility of 

enjoying automated rewards and loyalty benefits managed by the NFC/chip interaction. 

20lt is expected that offers, promotions, and coupons will also be distributed over mobile data channels. 

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The big inducement for merchants with mobile NFC contactless goes beyond the basic payment 

transaction. Two-way communications between the customer and the merchant enable more value-added 

innovations such as location-aware prompting to visit a store; identification of the consumer upon 

entering the store (to receive customized offers and promotions); facilitation of product promotions and 

coupon exchanges while shopping; and even a faster and more convenient self-checkout. And while it is 

fair to speculate that the mobile NFC version of contactIess will engender much more merchant support, it 

is not possible at this time to estimate the revenue benefits associated with this concept. 

Mobile NFC also enables the marketplace to bypass an aging, interim technology deployment 

(EMV contact cards) and focus investment resources on where the market appears to be headed in the 

future. This opportunity to save money and time should enable the new, mobile payments 'ecosystem' to 

build out a robust and efficient infrastructure that can benefit all parties. 

Ingrained Consumer and Merchant Payment Habits 

Perhaps the greatest barrier to change in the U.S. payments system over the past thirty years has 

been the consumer's comfort with the status quo. Check usage has just begun to decline over the past 

decade and even then at a reluctant pace. It took a decade to get consumers to utilize ATMs in meaningful 

numbers. POS systems were technically feasible in the early 1970s, but did not come into meaningful use 

for two decades. A significant number of beneficiaries still do not select direct deposit of government 

benefit payments and legislation may be required to achieve the last mile of change. 

Merchants have understandably geared their changes to respond to consumer demand, not lead it. 

The cost of investments in new technology at the point-{)f-sale and the need to retrain staff to use new 

technology are clear deterrents to unnecessary change. These forces also tend to maintain the status quo. 

Further, in the face of stiff competition, the banking industry has moved over the years to giving 

away most services (with the exception of credit carrying fees), offering them free of charge to the 

consumer; and focusing instead on charging for exceptions. Such practices have become a comfortable 

norm, making it difficult to use pricing as an incentive or disincentive to evoke change. 

Finally, over the last fifty years, new payments options have been developed, but virtually no 

options have been eliminated. The consequence of this approach is inefficiency as a wide range of 

payment solutions continue to be supported, and even enhanced at the margin, despite apparent 

inefficiency. 

Faced with these existing norms, consumers and businesses don't have a compelling need for 

changes in payment methods. Similarly, financial institutions faced with many competing investment 

opportunities in the wake of the economic crisis are not actively pushing change. As a result, progress in 

realizing a ubiquitous mobile payments ecosystem in the U.S is likely to be relatively slow unless a 

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paradigm shift occurs in a key variable, such as fraud experience or regulatory change, or development of 

a truly new functionality that does not exist in current payment methods. 

Revenue Uncertainties 

Regulatory impacts are cutting away at many sources of card revenue and the market practices that 

make this revenue possible. Therefore, it is natural for the conventional payment industry providers to be 

concerned about the need to make incremental investments in a market in which timing of benefits is 

unknown, and about the uncertainty over whether they will be able to achieve the same position in the 

new payments paradigm that they had in the old, given the pressure on fees and the onslaught of new, 

non-bank competition. 

Convergence of the wireless and banking sectors creates another perceived threat to revenue 

stability. It is assumed that both carriers and banks believe they own the mobile payments customer, 

provide the bulk of the value for mobile payments, and are attracted by the possibilities of increasing 

revenues related to transacting over phones. There is, at least, the potential for rivalries between the two 

powerful industries and many calls for cooperation in order to produce an effi cient payment capability 

with fair compensation and return on investment for building out the necessary infrastructure. 

Merchants, however, appear to be adamant about not wanting two big contenders in the payments 

'food chain.' Instead, they point out that mobile payments ought to be safer and more efficient with the 

combination of both sources of data and network security from both industries, and that this lower risk 

and cost should be reflected in more attractive pricing/or the merchants. Merchants propose a shift from 

the prevailing view that payment fees should constitute the financial foundation for a mobile transaction 

system, to a new perspective that payment capabilities might establish the basis for a new payment 

paradigm infrastructure, but not be the primary revenue model per se 21 

Many of the participants in the old and the new payments ecosystem have expressed support for the 

development of a visionary infrastructure and a regulatory roadmap to help chart out what infrastructure, 

market practices and technology requirements can be expected and approved so that they can make the 

incremental investments needed that will be justified by viable business cases that are exposed to no 

surprises or undue risks. 

Reaching such collaborative and enlightened cooperation will be a substantial challenge and might 

require a steady, sure hand from regulators from both the banking and the wireless industries to ensure an 

even playing field. Moreover, it is important to reach a quick consensus on what is required, and what 

21 National Retail Federation. 2011. "Mobile Retailing Blueprint: A Comprehensive Guide for Navigating the Mobile Landsca pe," 

January. The blueprint describes new ways for buyers and sellers to interact more efficiently and more gratifyingly with mobile 

NFC-setting the stage for revenue models based on mobile marketing, promotions, and advertising. 

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should be shared and non-competitive in the infrastructure, in order to develop and approve cross-industry 

standards to make certain the new, mobile digital payment system for the 21 ,I century is even more 

reliable, ubiquitous, and robust than the one it will be replacing. 

VIII. Conclusion 

This document is a work product stemming from the discussions of a Mobile Payments Industry 

Workgroup that was organized and convened by the payments research teams at the Federal Reserve 

Banks of Boston and Atlanta. While the ideas expressed in this document about a future success path for 

mobile payments in the U.S. are not directly attributable to any single member, they do represent a shared 

view of the participants about a way forward. Yet, even as the group met over a fifteen month period, 

many participants engaged in fonnative, independent partnership efforts to announce pilot initiatives to 

begin the exploration of mobile payments opportunities in this country. In many cases, the underlying 

concepts of these pilots are consistent with the vision expressed in Sections IV and V of this document; in 

other cases they are not. But, in all cases these independent efforts signal an appetite to pursue mobile 

payments as an important future strategy for payments efficiency, security, and convenience. 

In essence, the concepts expressed in this paper represent a good entry point into the evolving 

mobile space that could create a more sustainable and efficient ecosystem through collaboration and 

sharing wherever possible. Group members ultimately thought that this could be a better way of doing 

business- agreeing early in the process on ways to build a highly ubiquitous and interoperable ecosystem 

model, while still competing fiercely on customer facing products and services. Moreover, by 

collaborating on key issues such as standards and rules of engagement, the sense was that the U.S. would 

be better positioned to be a part of a global mobile payments system that recognizes the flexibility and 

mobility ofthe phone as a payments instrument. 

In other countries where mobile has emerged more rapidly, a central body from government, or one 

sponsored collectively by key private sector stakeholders, has helped organize and direct collaborative 

solutions. In some small way, the facilitating efforts of the two Reserve Banks noted above represents a 

microcosm of the benefits of having a central entity with no apparent "skin in the game" work with 

industry leaders to advance discussions. By providing administrative and thought leadership, the 

convening Reserve Banks were able to maintain a level of momentum that has resulted in this work 

product being developed in what, by industry standards, is a relatively short period of time. More 

importantly, though, the organizations that participated as members of this work group remained engaged 

throughout, while clearly expressing their independent views on very difficult key issues. Many of the 

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participants were meeting face to face for the first time and consequently the group went through a 

"getting to know you" period that eventually led to a willingness to share more openly for the benefit of a 

long term outcome desired by all. The need to establish a more enduring collaborative industry body is a 

decision that lies ahead, following a period of industry experimentation. Similarly, the benefits of 

establishing a cohesive industry roadmap for the future are yet to be determined, based upon the future 

identification of meaningful barriers to progress. 

Ultimately, the value of this workgroup's efforts will be measured by what happens ne).i. Clearly, 

there are many more parties who will need to support the ideas set forth in this document, including the 

benefits of a central coordinating entity to work on behalf of all parties to create a roadmap for the future. 

Forums for engaging these parties may need to be established. This can only be achieved through broad 

circulation of the ideas in this paper and a decision by significant market leaders to foster further 

collaborative work. Existing industry trade groups and membership organizations will need to be an 

important part of this process. While there are notable precedents of success with such collaborative 

endeavors in the U.S. and overseas, there is also a long list of initiatives that ultimately failed because 

parties did not see the tradeoffs of independence and collaboration as beneficial. In many of these 

occasions, the underlying concepts never carne to market or never achieved maturity because the 

obstacles to success could not be removed through independent efforts. 

Yet, the opportunities and benefits of doing business differently with mobile payments in this 

country seem significant and the obstacles to success do seem daunting. Working together to pursue a 

common high level vision does appear to promise lesser investments over time by all parties and more 

rapid accrual of benefits than other options. Moreover, through enlightened collaboration, we all might 

benefit from the perceived view that if we get mobile payments right, it can be the entree point to making 

other financial transaction services safer and more efficient. Beyond that, figuring out how to master 

fully flexible, digital and real-time transacting in payments and banking services might generate ways to 

bring more security and efficiency to other transactional domains, such as health care, government 

licensing, and even voting. 

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APPENDICES 

I. Glossary of Mobile Terms 

II. Cost of Converting to EMV in the U.S. 

III. Elements of a Mobile Payments Business Case 

IV. Mobile Payments Standards in the U.S. 

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APPENDIX I - Glossary of Mobile Terms 

Term Description 

APRU (Average Revenue per • Commonly used financial benchmark measuring the average 

User) monthly revenue per mobile subscriber 

CDMA (Code Division • Technology for digital transmission III which multiple 

Multiple Access) frequencies are used simultaneously with each user having a 

unique code 

• Each group of users has a shared code and only users associated 

with that code can understand each other 

• Used to send voice, data, and signaling data (such as dialed 

telephone number) between mobile phones and cell sites 

• Used in several countries including the U.S. and S. Korea 

Contactless CardlDevice • Use of either radio frequency (RF) or infrared technology to 

allow a payment card or mobile device and the POS terminal to 

communicate or transact without physical contact 

• Contactless technology is popular with mass transit, road toll and 

physical security access applications which require fast 

transaction speeds. 

• Consumer holds the contactless card, device or mobile phone in 

close proximity (2-4 inches) to the merchant POS terminal and 

the payment account information is communicated wirelessly via 

radio frequency (RF) 

Cryptogram • A numeric value that is the result of data elements entered into an 

algorithm and then encrypted; commonly used to validate data 

integrity. 

DDA (Dynamic Data • Protects cardholder and other payments data by making each 

Authentication) mobile payment transaction unique. A valid cryptogram is 

generated for each transaction, which is then verified when the 

transaction is authorized. The cryptographic value, including 

transaction-specific data elements, is validated through the 

terminal with the network to protect against fraud and skimming. 

The chip device (card or phone) must be present to generate a 

valid cryptogram, which is verified online or offline when the 

transaction is authorized. 

Downloadable Mobile • Program residing on a mobile device 

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Application • May be pre-installed by the MNO or handset manufacture but 

usually downloaded by the end-user, either via MNO or FI, or 

directly from the mobile phone store 

EMV - Europay, MasterCard, • Technical specifications and standards developed jointly by 

Visa Specifications (EMV) Europay International, MasterCard International and Visa 

International outlining the interaction between IC (integrated 

circuit) chip cards and terminals to ensure global interoperability 

• Standard for interoperation ofiC (chip) cards and IC capable POS 

terminals and ATMs to authenticate credit and debit card 

payments 

• Purpose of EMV standard is to allow secure interoperation 

between EMV compliant IC cards and EMV compliant credit card 

payment terminals globally 

• EMV based credit card payment systems improve security (with 

associated fraud reduction), and the possibility for better control 

of 'offline' credit card transaction approvals 

• IC card systems based on EMV are known also as chip and pin 

GSM (Global System for • The most widely used digital standard for mobile or telephony 

Mobile Communication) • Open, digital cellular technology used to transmit mobile voice 

and data services 

• Has international roaming capability, allowing users to access the 

same services when travelling abroad as at home in over 210 

countries 

ISO 78 16 • ISO standard for chip cards with contacts. The EMV standards 

are built on ISO 7816. 

ISO 14443 • ISO standard for contactless chip cards 

• ISO 14443 defines two types of contactless standards: Type A 

(Philips Mifare) and Type B (Motorola) 

• Type C (Sony) is also \\~dely used in Asia Pacific, but not yet 

formally adopted by ISO 

ISO 18092 • ISO standard for NFC 

MMS (Multimedia Messaging • Standard for mobile messaging systems that enables message to 

Service) include multimedia objects such as images, audio, video, and 

rich text as well as plain text in SMS 

Mobile Banking • Access to bank information such as account balances and recent 

transactions via a mobile device 

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• Includes infonnational and transactional services, including bill 

pay, funds transfers, alerts 

Mobile Bill Pay • Ability to set up and pay for various bills via a mobile device 

• Mobile bills could be paid through mobile banking or through a 

third party or mobile operator 

Mobile Ecosystem • A complex set of interconnected entities and relationships which 

interact to fonn a stable functioning payments system 

• Ecosystem includes all payment system participants in the 

mobile payments environment, including financial institutions, 

money service providers, handset makers, technology service 

providers, mobile network operators, merchants and consumers, 

etc. 

Mobile Marketing • Provision of advertising for mobile transaction services 

Mobile Payment • Payment initiated from a mobile device. Mobile phone is 

involved in the initiation and/or confinnation of the payment 

• Payer mayor may not be 'mobile ' or 'on the move' 

• Mobile phone facilitates payment between the two entities in a 

C2B payment 

Mobile Parking (m-parking) • Type of m-payment 

• Ability to pay for car parking using a mobile device, typically 

via text messaging or possibly with a downloadable application 

Mobile Commerce • Purchase of digital content such as ringtones and music, or 

physical goods in the same way a consumer would purchase over 

the internet 

• Analogous to an e-commerce transaction 

Mobile Coupon • Token, typically issued as a marketing or sales promotion, that 

can be redeemed at a participating physical or digital merchant 

• Typically an incentive in the fonn of a discount on purchase 

goods 

• Can be considered a subset of m-marketing, although the coupon 

itself may represent a cash value and may therefore be more 

directly transactional 

MobileRDC • Use of camera-equipped mobile phones for check image capture 

as a stand-alone application or as part of a broader mobile 

banking solution 

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Mobile Remittances • P2P mobile transaction that crosses national borders 

Mobile P2P • Person-to-person mobile payments 

• Transfer of funds from one individual to another via a mobile 

device within the borders of a specific country 

• Uses SMS to send text messages with payment instructions to 

third parties, such as the bank accounts of customers, suppliers, 

or family members 

• P2P payments very popular in developing countries through 

service providers such as M-Pesa 10 Kenya and Smart 

Communications in the Philippines 

Mobile Ticketing • Ability to pay for , load and store mass transit tickets 

electronically on a mobile device 

Mobile Top-up • Transferring funds from a funding source (bank account, credit 

card, etc.) to top-up minutes on a prepaid mobile account 

• Minutes may be used as an equivalent for cash, allowing the 

mobile account to become a stored value 'wallet' 

Mobile Wallet • Software application loaded onto a mobile phone to manage 

payments made from the mobile phone 

• Can centrally and simultaneously store multiple applications 

managing customer account/transaction information with 

financial providers, public transit agencies, or third part entities 

such as health clubs, schools, and office or apartment buildings 

• Can also be used to hold and control a number of other 

applications (for example, payment and loyalty), in much the 

same way as a physical wallet holds a collection of physical 

cards 

• On-<levice storage technology allowing for the controlled and 

secure partitioning of information such as payment cards, 

coupons, mass transit tickets and medical information 

Mobile Web • Version of internet created to be accessed on mobile phones. 

Also know as mobile internet. 

MNO (Mobile Network • Also known as mobile carrier, the telecommunications business 

Operator that provides mobile phone service to end-users 

• Has its own frequency allocation of the radio spectrum 

• Has the required infrastructure required to provide mobile phone 

service 

MYNO (Mobile Virtual • Business that provides mobile phone service but does not have 

Network Operator) its own frequency allocation of radio spectrum or all of the 

infrastructure required to provide mobile phone service 

Mobile originated SMS billing • Payment method via SMS where the payee originates the 

payment by sending an SMS text message to the customer 

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Mobile terminated SMS billing • Payment method via SMS where the intended payee closes the 

payment by receiving one or more SMS messages 

NFC (Near Field • Wireless technology enabling communication between devices 

Communications) over a short distance 

• Used in mobile POS payments solutions 

• Short range, high frequency, standards based wireless 

communication technology which enables the exchange of data 

between devices in close proximity (less than two to four inches 

distance) 

• An extension of ISO 14443 RFID proximity-card standard that 

combines the interface of a smartcard and a reader into a single 

device 

• Communication occurs when two NFC-compatible devices are 

brought within four centimeters of one another 

• NFC can operate in one of two modes: passive or active 

• NFC contactless transactions clear over existing credit card or 

bank payment networks, not over wireless networks 

• Because transmission range is so short, NFC-enabled 

transactions are inherently secure 

NFC Sticker • A token containing RFID technology, allowing for the transfer of 

information between the token/sticker and the reciprocal 

contactless reader (e.g. mass transit access gate, contactless POS 

terminal, etc.) 

OTA (Over-the-air • Transportation of messages wirelessly and without landline 

provisioning) • Method of distributing new software updates to mobile phones 

or provisioning handsets with the necessary settings with which 

to access services such as MMS or WAP 

POS (Point of Sale) • Location where a transaction occurs, which is usually a retail 

store or similar venue, including public transportation, taxi cabs, 

restaurants, etc. 

• Equipment used by the merchant to complete the payment 

transaction 

Premium SMS • An SMS message fo r which the sender pays a higher fee than 

normal to cover the expenses for a good or service delivered 

Proximity mobile payment • Payment to a physical merchant that is initiated from an NFCenabled mobile phone held in close proximity to the merchant's 

POS equipment 

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Remote mobile payment 

RFID (Radio Frequency 

Identification) 

SD Memory Card Imicro SD 

chip 

Secure Element 

Short code 

SIM (Subscriber Identity 

Module) 

• Payment initiated from a mobile phone to a recipient (person or 

device) where the recipient is not in the immediate area 

• Automatic identification method that relies on storing and 

remotely retrieving data using devices call RFID tags or 

transponders 

• An RFID tag can be attached to or incorporated into an object to 

identifY using radio waves 

• RFID tag contains an IC (integrated circuit) to store and process 

information and an antenna to receive and transmit the RF signal 

between devices (e.g. mobile device and a POS reader) 

• Secure digital memory card for removable memory in mobile 

devices 

• Used as a means of adding additional memory 

• Micro SD chip is a much smaller version of the SD memory 

card, which is now being used as a bridge to add contactIess 

memory to mobile devices not equipped with means to interface 

with contactless POS terminals vIa RFlC and perform 

lightweight implementations ofNFC transactions 

• Platform where applications can be installed, personalized and 

managed, preferably over-the-air 

• Combination of hardware, software, interfaces and protocols that 

enable secure storage and use of credentials for payment, 

authentication and other services 

• Location of the security components, including confidential 

information, within the mobile phone 

• Location can be the SIM, a separate secure chip in the phone, or 

an external plug-in card 

• Special shortened telephone numbers used mainly to address SMS 

and MMS messages from mobile phones 

• Widely used for such things as TV voting, ordering ringtones, 

charity donations, requesting product information, and mobile 

services such as SMS search services 

• Also known as short numbers or Common Short Codes (CSC) 

• Removable smart card within a GSM mobile phone 

• Securely stores the service-subscriber key (mobile user account) 

used to identify a mobile phone to the network 

• Configured with information essential to authenticating a GSM 

mobile phone, allowing a phone to receive service whenever the 

phone is within coverage of a suitable network 

• SIM card allows users to change phones by removing the SIM 

card from one mobile phone and inserting it into another mobile 

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SMS (Short Message Service) 

TSM (Trusted Service 

Manager) 

2D Barcode 

phone 

• SIM card can be partitioned to store multiple fonns of data 

• Can be used to host applications such as mobile banking 

applications 

• Service for sending messages of up to 160 characters to mobile 

phones 

• Communications protocol allowing the interchange of short teAt 

messages between mobile phone devices 

• Neutral trusted third party intennediary or service provider that 

manages downloads of applications to mobile wallets 

• Securely distributes and manages contactless services for the 

application service providers' customers using the MNO 

networks 

• Provides a single integration point to all mobile operators for 

financial institutions, transit authorities and retailers that want to 

provide a payment, ticketing or loyalty application to their 

customers with NFC-enabled mobile phones 

• Owner/manager of the master key that controls the Secure 

Element platfonn. This allows the TSM to control and authorize 

service providers to install applications on the SE 

• Provides services to manage the secure download and Iife-<:ycle 

management of the mobile NFC applications for the Fls, transit 

authorities and retailers 

• Does not participate in any contactless transactions using NFC 

devices 

• Key functions include interconnecting with MNOs and 

application service providers; enrolling new customers; updating 

user interfaces; managing customer databases; managing 

application lifecycles; managing value-added service such as 

ticket reloading; and guaranteeing end-to-end security 

A 2D (two-dimensional) barcode is a graphical image that stores 

infonnation both horizontally -- as one-dimensional bar codes do -- and 

vertically. As a result, 2D codes can store up to 7,089 characters, 

significantly more than the 20-<:haracter capacity of a one-dimensional 

barcode. 

2D barcodes enable fast data access and often used in conj unction with 

smart phones. The user photographs a 2D barcode with the camera on a 

phone equipped with a barcode reader. The reader interprets the 

encoded URL, which directs the browser to the relevant infonnation on 

a Web site. This capability has made 2D barcodes useful for mobile 

marketing. 

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UICC (Universal Integrated • Chip card used in mobile terminals in GSM and UMTS networks 

Circuit Card) • Ensures the integrity and security of all kinds of personal data 

• Typically holds a few hundred kilobytes 

UMTS (Universal Mobile • A third generation (3G) cell phone technology using CDMA as 

Telecommunications System) its underlying air interface 

USSD (Unstructured • Messaging technology unique to GSM phones 

Supplementary Service Data) • In contrast to SMS, which is a store-and-fonvard delivery 

system, USSD provides a continuous online session 

• Associated with a real-time or instant messaging type phone 

service 

• Response times are generally quicker than those used for SMS 

• It is a popular platform for mobile banking in South Africa 

W AP (Wireless Application • Open international standard for applications that use wireless 

Protocol) communication 

• Principal application is to enable access to the internet from a 

mobile device 

WAP Browser • Provides the basic services of a computer based web browser but 

simplified to operate within the limitations of the mobile phone 

• Program on mobile device that facilitates access to the mobile or 

'real' internet from the mobile device 

• Commonly used web browser for small mobile devices such as 

cell phones. 

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APPENDIX II - Cost of Converting to EMV in the U.S. 

In 1998, the Tower Group conducted a detailed study of the cost of converting to EMV contact 

cards 22 The total costs- most of which would have to occur at and with the POS systems- were 

calculated to be $12.8 billion. That year, total bankcard fraud, as affecting the banks, was estimated to be 

less than $1 billion- about a nickel per $100. So it was difficult to make a business case on those 

numbers. 

Yet the rest of the world was proceeding apace with planning deployment of EMV chip+ PIN specs, 

which Europay (now a part of MasterCard), MasterCard, and Visa had developed and contributed as a 

global standard just a few years before. The specification provided for interoperability and synonymous 

security for encrypted chip card and PIN credit, debit and stored value payments. 

Europe was experiencing much higher rates offraud than the U.S due to the lack of ubiquitous and 

cost-effective telecommunications infrastructure needed to conduct reliable and fast real-time 

authorizations. The U.S., on the other hand, enjoyed the world's best communications infrastructure. But 

there was still a lingering realization that eventually, if the rest of the world went to EMV chip+PIN, and 

the U.S. stayed with mag-stripe, payments fraud would migrate to the U.S., and U.S. travelers and 

merchants would be disadvantaged by not being able to transact with smart cards. At one point, Visa and 

MasterCard even proposed mandating the use of chip cards by 2005; that mandate never materialized. 

By 2001 , Tower Group re-checked its study on switchover costs to chip+PlN23 This time the total 

was $13.4 billion. Merchant costs- adding in the need to accommodate the fast-growing online marketwere projected to be three-fourths of the costs (bank authorization system upgrades accounted for 17% 

and bank network upgrades another 8%). Once again, there was no compelling business case. 

Fast-forward to late 2009, when the Smart Card Alliance estimated total U.S. card fraud losses in 

2007 at a still-modest $1.7 billion, but indicated that total fraud was dramatically underreported, citing an 

estimate by the Mercator Advisory Group that adding in all merchant costs and the associated costs such 

as data breach forensics, lawsuits, undetected fraud, and misclassified issuer losses, the total cost might be 

more like $16 billion, much of which was borne by merchants 2 4 A Kansas City Federal Reserve paper, 

written by Rick Sullivan in 2010, estimated payment card fraud of about $3.7 billion (using 2006 data), 

adding in the often unreported merchant costs I 25 

11 Tower Group. 1998. "Smart Cards in the u.S.: An Infrastructure Cost Analysis," June. 

" Iacobuzio, Theodore. 2001. "Smart Cards in the u.S.: An Infrastructure Cost Analysis (Redu,)," Tower Group, February. 

14 SmartCard Alliance. 2009. "Fraud in the u.s. Payments Industry: Fraud Mitigation and Prevention Measures in Use and Chip 

Card Technology Impact on Fraud," October. 

25 Sullivan, Richard J. 2010. "The Changing Nature of u.S. Card Payment Fraud: Industry and Public Policy Options," Federal 

Reserve Bank of Kansas City, Economic Review, Second Quarter, pp. 101-132. 

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Importantly, the Alliance wamed that retention of the mag-stripe on cards and POS readers would 

begin to dilute the fraud reduction benefits for countries that deployed EMV chip+PIN. Moreover, the 

growing dangers of data breaches, with big surges in compromised mag-stripe credentialed accounts, 

would inevitably require something other than a 'do-nothing' response. 

In 2010, Javelin Strategy & Research echoed these concerns with their updated estimate of the cost 

of converting to chip-based contact cards (perhaps EMV, perhaps not) at $8.6 billion." One of the 

lingering deployment cost factors remains deployment of PIN-pads and terminals to cover the estimated 

60-70% of retail, card-accepting locations that don't have them yet. In the Javelin report, part of the 

motivation for moving to chip cards has now become the need for a true end-to-end encryption solution to 

data breach generated fraud and the growing costs and specter of PCI compliance. For example, by mid2010, estimates to upgrade existing merchant locations that already process PIN-{febit to comply with 

new PCI requirements might cost upwards of $20,000 per store. 

The most important argument for EMV contactless is that it could be materially cheaper to 

implement than contact cards. For example, in the convenience store industry, two-thirds of the outlets 

pump gas. The average store incurs an average of $700 of card fraud per year. PCI compliance costs 

$1600 annually-making that a stretch for business case justification all by itself. Outfitting the pumps 

with remote smart-cardlPIN readers would cost an estimated $50-60,000 per store/gas station27 With 

some 8% of retail sales in this retail vertical, EMV contact cards represent a huge hurdle. But contactless 

phones, communicating to inside the store via a Wi-Fi hotspot, could wind up costing less than $5000 per 

store. 

Some estimates suggest that EMV contactless could cost merchants as little as half the expense of 

deploying contact card readers (although banks and networks would likely experience little change in 

their conversion costs). However, to accommodate foreign travelers coming to the U.S. with EMV contact 

cards, a reasonable number of ATMs, travel venues, entertainment centers and food service facilities 

likely would need to accept the contact version, and U.S. issuers would still have to issue contact cards to 

U.S. travelers abroad. 

26 Javelin Strategy & Research. 2010. "End-to-end Encryption, Tokenization and EMV in the U.s.," January. 

27 National Association of Convenience Stores estimate. 2010. 

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APPENDIX III - Elements of a Mobile Payments Business Case, by Steve Molt's 

Changing the way people pay is difficult enough in any era, given the stability, predictability and 

fiercely preserved status quo the U.S. card payments system has achieved over the past half-<:entUl)'. By 

introducing technology (two-way NFC mobile handsets with chip-based security) that departs from the 

plastic card paradigm and can simultaneously become a catalyst for elimination of the magnetic-stripe 

infrastructure, the embryonic mobile 'ecosystem' discussed here is propelling an unprecedented 

disruption in business models-one that has old and new payments providers scrambling to come up with 

viable business cases. 

The contention between old and new, legacy and future, and conventional versus value-added 

depicts the divergent interests of the mobile ecosystem as the participants jockey for position. 

Fundamentally, this is a $300 billion industry'9 in which many established companies such as Visa, 

MasterCard, their big bank members, Amex, Discover, processors like First Data, Global Payments and 

TSYS, equipment manufacturers, and thousands of independent Sales Organizations (IS0s), and many 

others (including consulting companies, law firms, and industry organizations) have profited substantially 

for decades. 

New entrants, which include non-traditional payments companies with considerable presence such 

as PayPal, intuit, Apple, and Google in addition to the giant wireless carriers (A TT, Verizon, T-Mobile 

and Sprint) and the handset manufacturers and application providers, are moving concertedly into the 

space with new technology innovations and business models. Consumers-especially smart phone 

users-appear to have put themselves up for grabs, constantly pushing and testing the borders of the 

walled garden of payments. And merchants, which have moved to the forefront of the discussion due to 

their singular role in deciding which of these innovations for mobile checkout at POS to embrace, are 

wielding unprecedented influence in both political and economic elements of this transformation. 

Such robust participation suggests the dawning of a new 'payments' ecosystem, from which many 

more 'parties' will contend for portions of the emerging new revenue models for mobile transacting. If 

the new paradigm is chip-based contact cards, as many expect, the infrastructure replacement cost could 

easily be in the $8- 12 billion range- 75% of which would logically be bome by merchants in terminal 

upgrades 30 

One of the lingering deployment cost factors remains deployment of PIN-pads and terminals to 

cover the estimated 60-70% of retail, card-accepting locations that don 't have them yet. Online 

deployment of PINs is viewed as much easier, with most of the EFT networks and several of the big 

28 This section is adapted from a series of articles written by Steve Mott, Principal, BetterBuyDesign, 2009-2010. 

29 McKinsey & Co. 2009. "Payments Industry Roadmap." 

30 Javelin Strategy & Research, 2010. 

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processors now adopting software-encrypted PIN-debit capabilities. No additional infrastructure is 

needed by consumers, merchants or issuers in order to process these transactions over the internet. 

Perhaps for the first time in this country's conversion to electronic payments, the sustaining 

business case appears unlikely to be made principally on garnering new transaction fees or reducing 

payment processing costs. Rather, it will likely be made by wholly different cost avoidance and revenue 

drivers altogether. And several external influences are converging to suggest that the new ecosystem will 

be driven far more by new revenue drivers than 'tolls' for doing payments. 

What follows is a general discussion of the elements to a business case, as well as an assessment of 

the potentially important business case ingredients for the major players in the ecosystem. At this time, it 

is very difficult to place meaningful estimates on the potential value of each business case element. This 

will become more possible over time as various pilots are performed, new regulations are finalized, and 

new technology is unveiled. However, it is important to recognize that the factors discussed below be 

evaluated as part of a holistic business case assessment both by individual firms and, perhaps, by industry 

overseers as part of an effort to understand any public policy issues that may emerge. It is also important 

to note that while few have demonstrated a clear business case for the full adoption of a mobile NFC 

payment infrastructure in the U.S. to date, the vast range of announced pilots are evidence of widespread 

interest and anecdotally, many key players are sensing that the time is near. 

External Influences on the Business Case 

There are a number of disruptive changes occurring in the world of payments today that are 

upsetting the status quo, and continuing to push conversations about new payments technology, such as 

incorporation of mobile phone payments, to the over-arching issue of the need to overhaul/replace the 

existing mag-stripe infrastructure: 

I. Security issues with mag-stripe/stolen credentials 

Funding terrorist operations with stolen credit card and debit card credentials-which can be 

easily obtained from hundreds of black market websites for often less than a dollar-raises 

questions about how long the U.S. can persist in supporting current mag-stripe technology, when 

chip-based security for credentials is the standard for every other developed country in the world. 

NFC payments, using a contactless chip in the handset that houses secure elements that 

protect account credentials, and communicates them securely through the NFC chip and antenna to 

the terminal, represents a new payments paradigm. Current and future cost avoidance 

opportunities and jilfure reputational risk costs stemming from a move from mag-stripe to a mobile 

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based NFC world should become part of any business case analysis. Data associated with this 

move can be gleanedfrom current and proposed initiatives in other countries. 

2. PCI compliance requirements and costs 

Recent merchant association estimates (most recently from a survey by the Merchant 

Advisory Group in October 20 I 0) project the amount of money merchants have spent to-date on 

trying to comply with PCI data protection requirements to be $20 billion or more, with annual costs 

expected to exceed $2.5 billion by 2014- more than the reported bank cost of payment card fraud 

itself. If accurate, such an investment would have easily paid for conversion to chip and pin 

technology. Merchants are uncharacteristically motivated to abandon the mag-stripe paradigm in 

order to rid themselves of this burden alone. 

NFC payments securing account credentials from the handset chip to issuer authentication in 

a widespread deployment has the potential to greatly reduce merchant PCI issues. Those aspects of 

PCI compliance that can be satisjied by a robust mobile implementation should be factored into a 

business case assessment. 

3. Endemic Fraud 

Most payment card fraud containment activities in the past five years have related to PCI 

compliance, rather than attacking the sources of fraud, JI leaving the industry with an ambient issuer 

fraud rate about $.05 on $100 in spend. That means absolute fraud losses continue to grow with 

volume, and if merchant and third party fraud losses are counted in the conventional estimate of 

about $2 billion in ambient card fraud (U.S issuers only), future fraud losses could be 5-10 times 

that amount with all parties' losses counted in. 

It is getling more difficult to justi'!y continued investments in tweaking the mag-stripe 

infrastructure- versus investing in stronger, more digitally capable technologies- such as jilll NFC 

payments using secure elements and electronic wallet jimctionality. Future estimates of growth in 

fraud losses need to be a part of the business case, as opposed to historic costsJ2 

4. Exported fraud 

11 VISA submission to the Federal Reserve in anticipation of the proposed rulemakings regarding the Durbin Amendment to the 

Dodd-Frank Financial Reform Act, fail, 2010. 

"In late 2009, when the Smart Card Alliance estimated 2007 total u.s. card issuerfraud losses at about $1.7 billion, but 

indicated that total fraud was dramatically underreported, citing an estimate by Mercatorthat adding in all merchant and 

associated costs such as data breach forensics, lawsuits, undetected fraud, and misclassified issuer losses, the total cost was 

closer to $16 billion --much of which was borne by merchants. 

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By clinging to mag-stripe, the U.S. also forces overseas deployers of chip+PIN cards to retain 

the mag-stripe on the cards they issue so that their customers can use them when in this country. 

Similarly, merchants overseas must prolong use of mag-stripe terminals to accept cards from U.S. 

customers. In effect, the U.S. is 'exporting' fraud to overseas issuers and merchants; yet few U.S. 

issuers are converting to EMV so far, and Visa and MasterCard are still non-committal on how fast 

they might support a conversion to EMV. 

EMVCO has completed its initial contactless specification but needs to ensure that it 

conforms to generic use and interoperability, while Visa and MasterCard state their conversion 

plans and aim for the same kind of compatibility. 

5. Regulatorv impacts on signature-based card rates and pricing practices 

The Durbin Amendment to the Dodd-Frank Financial Reform Act could result in outcomes 

that reshape debit card economics and competitive practices. For example, some suggest that in 

aggregate, the prospects for continued use of signature debit will dim in favor of PIN-debit. An 

estimated cut of 75% of interchange rates, to a cap of $.12 per transaction, may challenge existing 

business models for alternative payments in place today. Also, the current regulatory impetus seeks 

more competitive debit network access choices for consumers and merchants. 

In open wallet configurations, where multiple payment types and networks can be 

accommodated, NFC payments can satisJY emerging requirements for broader payment choice. 

Final regulations on interchange and options will create a new business case environment for some 

of the critical parties that may carry over to the mobile environment. 

6. Technology shift in consumer behavior 

A persistent move is underway to on-the-go, real-time, mobile transacting as part of a 

versatile digital lifestyle for the young, including a new cohort of mobile bankers. Downloading of 

applications on increasingly sophisticated smart phones, coupled with the opening up of payment 

networks (e.g., PayPal, Visa, Intuit, MasterCard, etc.) for applications development, portends 

unprecedented opening of access for payment transactions. Mobile handsets have begun replacing 

wallets and pocketbooks with younger and tech-savvy consumers, and offering break-through 

utility and innovations in lifestyle. 

While NFC- 'lite' architectures (e.g. , micro SD) may satisJY some of the utility of these 

innovations today, there is growing evidence of a concerted move to filii, two-way NFC-enabled 

handsets- which will both accommodate digital lifestyle enhancing applications and support the 

commercial innovations discussed below. Use of mobile NFC solutions in symbiotic non-payments 

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areas will have an "improved economy of scale " effect on payments applications that could bring 

about improved unit costs. 

7. Technology cost improvements. 

In growing technology markets, prices characteristically improve over time as sales volume 

grows and standards are adopted. Because of the state of the mobile evolution in Europe and 

elsewhere, NFC standards are emerging and terminal manufacturers are deploying systems that 

already contain elements to support various types of non-mag-stripe card offerings, as well as 

mobile NFC. In fact, some U.S merchants have already deployed such capture devices, while 

others have such plans, and still others are positioned to add on new technology. 

This implies that the business case for merchants may not be as daunting as predicted in the 

whole. If so, the chicken and egg problem of customer demand and ecosystem ubiquity may 

diminish. 

8. Improved buver-seller interactions at POS 

A slower growing economy overall, with little opportunity to raise prices when so many 

consumers (and businesses) are struggling financially, has propelled merchants to pursue new 

business models that improve on the poor historical results they have experienced with 'broadcastmode' advertising, marketing and promotions, such as free standing coupon inserts in newspapers 

or store circulars. Instead, they are determined to use mobile technology to influence new 

customers to sample their stores, spend once they get in stores, try products the merchants (and 

manufacturers) are pushing, and exchange infomlation that helps attract, grow and retain the 

relationship over time. 

Two-way NFC enables real-time, location-aware interactions that combine shopper behavior 

and history with tailored, one-to-one promotions and integrated loyalty programs. As a result, 

some merchant groups are advocating a concerted move to contactless technology- bypassing the 

costs of deploying contact cards where possible. Moreover, the merchant business case for mobile 

is significantly enriched, if not substantially justified, by the marketing opportunities resident in 

mobile payment alternatives. 

These influences taken together will shape which business models will survive or get traction in the 

decade ahead for the key participants in the evolving mobile payments ecosystem. In particular, if the 

U.S. payments market is indeed beginning to migrate to chip secured account credentials and PIN 

verification of cards at merchant terminals/network interconnections (whether based on the EMV standard 

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or something perhaps better), there will be many doubts about what interim technologies to invest in until 

or unless a new payment paradigm takes hold. 

But there are fundamental conflicts that exist at the level of basic business interests of many 

participants in the new ecosystem that further complicate the decision on whether and to what extent to 

cooperate in a symbiotic sharing of new, non-competitive infrastructure. The differences in the business 

case pros and cons for the major participants are themselves revealing of the complexities inherent in 

transitioning a previously isolated business model to a more holistic one that can support the need to scale 

to huge volumes, provide security in ubiquitous retail environments, and interoperate in a seamless and 

transparent fashion. Replicating those attributes will be a daunting task. 

Conventional Payments Stakeholder Business Challenges 

Starting with the existing, conventional payment card transaction providers-banks, bankcard 

associations/networks, processors, and terminal providers-for whom the status quo-recent regulatory 

changes in interchange and banking fees notwithstanding-has produced a sustaining and substantive 

business opportunity, participating in the emerging mobile ecosystem presents unusual business case 

challenges. 

Banks 

Twenty years ago, banks depended primarily on interest rate arbitrage for the bulk of their eamings. 

Today, more than two-thirds (cite?) of bank revenues come from an assortment offees, charges, and other 

pricing for services. Tomorrow, banks will earn billions less from consumer fees and pricing (e.g., on 

checking account overdrafts), and an estimated 75% reduction of interchange revenue on debit cards. 

Pressures are expected to mount to lower merchant costs for credit cards as well. For the top 10 banks, 

which control over 90% of credit card revenues, and get 20-30% of overall payment revenues from credit 

cards, the economics of the signature-based payment cards status quo is declining dramatically. So a lot 

is riding on making sure that bankcard payment options make it into new venues like mobile. 

Implementing EMV contactless could be materially cheaper to implement than contact cards in 

some retail sectors that have resisted any wholesale change at POS. For example, in the convenience 

store industry, two-thirds of the outlets pump gas. The average store incurs an average of $700 of card 

fraud per year. PCI compliance costs them $1600-making that a stretch for business case justification 

all by itself. Outfitting pumps with remote smart-cardlPIN readers would cost an estimated $50-60,000 

per station (according to the National Association of Convenience Stores). With some 8% of retail sales 

in this retail vertical, EMV contact cards represent a huge hurdle. But contactless phones able to 

communicate into the store via a Wi-Fi hotspot could cost less than $5000 per store. 

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The banks, and their card payment associations, argue that they already provide consumer access 

through hundreds of millions of existing payment accounts, and merchant acceptance at 8 million 

locations. Moreover, they have global networks that already scale to huge volumes and generations of risk 

management experience. So the business case for their participation in mobile NFC payments is: 'use 

what's already there' and adapt the existing infrastructure to evolving needs. The question, of course, is 

at what level of economics for what participants? And whether they will manage a chip+PIN paradigm 

with more flexibility and balancing of compensation than exists with the mag-stripe model. 

Bigger banks experience an intensity of reactions from these influences, owing to both the 

considerable money they have historically made on signature-based, mag-stripe cards-at least until the 

coming year- and the investments made in both online and mobile banking and card use. Smaller Fls 

face a quandary of their own, contrasting a keen and growing desire to be relevant to the digital savvy, 

under-35 cohort of financial services customers, and the need to find a way to obtain infrastructure 

services to allow them to do mobile banking, mobile payments, mobile marketing, and- prospectivelychip and pin. Those are daunting choices and investments to make at a time in which industry wide debit 

card revenues might drop by $15 billion or more. 

Payment Networks 

While fundamentally aligned with their bigger banking members, Visa and MasterCard as public 

companies are increasingly driven by the mandate to drive more transactions across their networks- {wen 

if they come from non-banks/non-members. Step-by-step, these publicly traded payment networks have 

pushed into prepaid, con tactless, P2P payments and more recently, versions of NFC-based payments, 

doing pilots with both bank members and non-banks. And, they are not as impacted financially by the 

regulatory changes sweeping the current payment card business. So, it is logical to expect them to be at 

the table for any consideration of mobile payments infrastructure and business opportunities. 

What is not so certain is the business case for the ecosystem's use of their networks, and ascribing 

to their network rules and requirements. After decades of exerting material influence over industry 

pricing, the mobile payments paradigm in the new regulatory environment appears to be seeking different 

revenue models going forward- particularly those where the mobile handset interaction in merchant 

locations fo sters real-time, location- and customer-aware decisions on purchases, and where big and 

powerful non-banks (e.g., wireless carriers) are key players. 

Closed-loop charge card companies like American Express and Discover stand to play intermediary 

roles in architecting new variations of mobile payments, as recent market initiatives indicate. Because 

they have nearly the same merchant acceptance 'pipes' as the credit card payment networks, and can offer 

national access for tens of millions of consumers with their payment cards, they can be a factor in any 

new business calculation. For them, the business case is new transaction volumes from potentially new 

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customers who utilize them for mobile applications, with merchants still willing to pay prevalent credit 

card transaction fees. 

Non-profit payment netwOlXs such as the ACH network and other PIN debit networks also provide 

payment utilities for their financial institution members of all sizes. Volume is also important to these 

networks as they develop rules to balance the appropriate amount of innovation with risk management for 

the benefit of their FI members, which enable valuable solutions for their clients. 

Processors 

Payment card processors are a lynchpin to the existing infrastructure, but will be called upon to 

make major changes to their network configurations- particularly to accommodate passing encrypted 

account credentials through their terminals and networks straight through to chip and pin implementing 

issuers. This is not a trivial task. For example, in order to minimize the deployment changes required in 

processor environments overseas when EMV was implemented, Visa and MasterCard have temporarily 

permitted use of static authentication of chip card transactions (rather than dynanlically generating unique 

data) and decrypting the account credentials at the merchant terminal so they could pass through the 

processor network to the issuers. Similarly, processors were given two-and-a-half years longer to become 

PCI compliant than their big merchants were, meeting these requirements only by mid-year 2010 as 

mandates. 

Like the payment card associations, the key economic driver is the volume of the transactions, 

versus the interchange fee rate. So as long as processors can derive a business case for making the 

infrastructure changes, they would be largely indifferent as to what type of payment was being generated. 

Moreover the liability shift that accompanies robust implementation of chip and pin would largely make 

processors' lives easier, and perhaps lower cost due to the reduction in charge-back and other exception 

handling costs. 

But, with some exceptions, many processors have remained silent on the much-discussed mobile 

'transformation', and have focused on preserving the funding levels that the payment card industry has 

historically generated, for as long as possible. That is perhaps understandable in a part of the business 

that has borne the brunt of price compression from both merchant discount fees and the associations' 

pass-through of acquirer fees for many years. Their clear concern: how many of which alternative 

payment types and technologies must they tool-up to support? 

Termillal Mallufacturers 

For several years now, higher end POS terminals have spawned a rich array of functionality to 

support PIN-debit, prepaid, ACH, barcode, and even biometrically authenticated applications. A standard 

terminal now contains hundreds of potential applications that need only simple downloads or on-site 

programming to activate. Such application-migration now extends to EMV contact card reading 

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capabilities, as well as vanilla contactless tap-and-go radio signaling. Attaching a full-NFC reader to 

these temlinals is fairly straightforward, and can cost about $300. Some recent quotes for both EMV 

contact card and contactless combination readers are around $400 per terminal, if deployed together. For 

these participants of the ecosystem, change is usually a good (and profitable) occurrence. 

Such forward-thinking infrastructure planning has been embraced by some of the nation's biggest 

merchants. For example, Wal-Mart, BestBuy and HomeDepot- among others- are currently able to 

accept EMV contact cards around the world, and Wal-Mart has publicly predicted EMV transactions in 

the near-term (BestBuy and HomeDepot were also early adopters of contactless tap-and-go). Meanwhile, 

hundreds of smaller merchants in U.S states along the Canadian border are already accepting EMV card 

payments from their foreign shoppers using cards issued by Canadian banks. 

The sticky problem with terminals, however, is the business case for getting the millions of smaller 

merchants to upgrade their terminals. For example, there are roughly 400,000 merchants still using 

Verifone Tranz330 terminals which were first introduced in the mid-1990s. These terminals have limited 

applications for largely mag-stripe only transactions, and subject the system to much inefficiency-like 

the ability to commit rudimentary fraud (e.g., with forced draft capture). Many of these merchants are 

likely to protest even POS upgrades that cost them only a few hundred dollars-just as they have resisted 

PIN-debit pads over the years, even though the additional monthly cost is typically less than a dollar. 

Merchant Requirements 

A primary but until recently reticent player in any payment ecosystem is the merchant base. 

Perhaps emboldened by a recent surge of support from Congress, regulatory agencies and the courts and 

with an unusual sense of unanimity, U.S. retailers have largely embraced the mobile transformationpartly as a way forward from a payments business model largely unchanged over decades, but mostly as 

an opportunity to gain one-to-one relationship connections with customers, and truly drive incremental, 

competitive sales. 

To that end the National Retail Federation introduced a report in mid-2010 (updated in January 

20 II) called the Mobile Retailing Bluepri11l, containing an extensive list of innovations that NFC-enabled 

and other mobile payments could bring to the retail sector33 At the end of 20 I 0 the Merchant Advisory 

Group published a set of policy and infrastructure recommendations to put their spin on what should be 

done implement the Blueprint as soon as possible. 34 Among the suggestions: focus deployment on EMV 

contactless, bypassing EMV contact card deployment where possible, to avoid transitional investments in 

technologies that will not be essential in the future. 

33 National Retail Federation. 2011. 

34 Merchant Advisory Group. 2010. 

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Most importantly, though, the merchants active in contactless and NFC mobile payments 

implementation seek an 'open wallet' configuration, where consumers can load as many payment choices 

as they want, and merchants can search for the payment options they prefer in the transaction session. 

Such choices would include standard credit and debit account options, but would not be restricted-as 

they are today for the most part-from doing PIN-<iebit, prepaid, merchant private label, or even ACH 

transactions. Transactions from third parties- Pay Pal, BlingNation, Obopay, Western Union- could coexist with those from the traditional payment brands. There is even talk of cross-merchant acceptance of 

closed-loop, private label, merchant-provided credit and prepaid options 

Such new requirements from such an important part of the mobile payment ecosystem foretell a 

much more competitive environment for transacting than has ever existed before, and makes the notion 

that both banks and carriers could build their business cases mainly on joint assessments of payment fees 

a much less likely route for tomorrow's revenue model. In other words, the business case for NFC 

payments must go beyond the payments component. 

Other Ecosystem Participants 

New participants in the mobile payment ecosystem (e.g. wireless carriers, application 

providers/markets, handset makers, security providers, system integrators, trusted service managers, etc.) 

all have their own revenue and profitability objectives. Until very recently, they expected some portion of 

payment fees to drive the business case for their participation. While much of the arms-length jockeying 

between banks and carriers for ecosystem support over the past two to three years concerned which 

industry would charge the fees (to merchants) and how those fees might be divided up, the recent 

merchant 'activism' (and apparent exploration of market alternatives) has changed the nature of the 

'conversation' toward who provides what value, and what is fair compensation for that value. 

Wireless Carriers 

Three of the big carriers announced ajoint NFC initiative (called Isis) in conjunction with Discover 

and BarciaysCard in November 2010. Details were sparse, but the idea was that the built-in NFC wallet 

would be restricted to carrier-specified payments, and the carriers- rather than banks-would eann the 

interchange portion of merchant fees. Several reports on Isis concluded that besides aversion to any 

restrictions on payment choice, some merchants were disappointed that a new revenue model that 

improved on the interchange convention had not materialized. 

If nothing else, this announcement put the payments world on notice that some big players with 

deep pockets wanted to participate. The carriers' ability to package and bundle services built around 

heavily marketed handsets demonstrates their ability to steer consumers to more and more advanced 

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end outreach necessary to spur consumer adoption. Moreover, Isis fueled consideration that, while 

carriers were clearly seeking new sources of stable revenue for a wireless business that underwent 

constant price compression, the other assets they brought to the mobile table were very important to factor 

in to the ultimate business case. Certainly their ability to operate huge networks undergoing rapid change, 

and their ability to incorporate relentlessly evolving technology with persistent risk management 

challenges made them a worthy partner for mobile commerce. 

The biggest revelation was the possibility that carriers, who collect unique handset identification 

numbers, the cell phone number associated with a registered account, a location over a specific network, 

and other verifying data, could become valuable fraud mitigation partners with banks, which know a 

purchaser's registered account number, associated authenticating information, bank account history and 

behavior, and usage pattems. In combination, mobile payments could be materially safer than any other 

payment mechanism, and the properties of end-to-end digital transmission and authentication points could 

make mobile payments more efficient as well. Regardless of all the above motivations, carriers stand to 

handle and charge for more traffic across their networks than experienced in traditional non-mobile 

payments systems. 

Application ProviderslMarketers 

Any observer of the explosive phenomenon of Apple iPhones and their cavalcade of applications 

(including dozens of payment utilities for both consumers and merchants) can see where the mobile 

payments market is headed. While Apple itself operates as a walled garden (including a set of NFC 

patents), the application provision market for open Google Android, Blackberry and other handset 

operating systems ensures that complete payment choice-and self-sufficiency-is a safe bet among 

smart phone users (28% of the marketplace at year-end 2010)35 

For some of these companies (e.g., PayPal, BlingNation, Obopay, and Western Union), capturing 

incremental payments is the business model, and garnering payment fees drives the business case. For the 

most part, these companies gain merchant and bank acceptance at slightly lower fee levels than standard 

signature-based cards. In a post-Durbin world, however, there is no certainty that these base-level rates 

will prove sustainable. So even they will need to find other sources of revenue in the value they add. 

For online marketers morphing to the mobile environment, such as Google, marketing sources of 

revenue-i.e., paid searches, lead generation fees, linked advertising, etc.-promise to be as rich as on the 

internet. In fact, in their previous payments foray for the online market (Google Checkout), the search 

goliath attempted to make payments transparent to the advertising and marketing propositions-a useful 

analogy for mobile, perhaps. 

3S Composite estimates of CTIA, ABI Research and other industry research firms. 

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Moreover, the ability to add real-time, location-aware, one-to-one granularity to essentially 'blind' 

online interactions offers the potential for much higher fees and profits from results superior to those 

online. Such optimism is borne out by the surging number of mobile coupon tests being conducted in the 

marketplace. Initial results of user take-up appear very encouraging for all participants-including 

merchants which appear willing to pay high rates for consummated purchases than can be demonstrated 

as incremental and/or taken from competitors. 

Technology Providers 

Most of the other components of the mobile payments ecosystem sell infrastructure and/or related 

services to the others. Such technology includes handsets, security components, communications and 

systems integration, and even shared-services configurations such as Trusted Services Managers (TSMs). 

Most of these participants are dependent upon a fully secure, two-way NFC paradigm becoming 

commonplace in the neJ>.12-3 years. Accommodating secure payments is viewed as an essential baseline 

service that will attract the consumer to other high-value activities, and that, in tum, will further increase 

demand for their products and services. 

To some degree, these participants can 'prime-the-pump' for new infrastructure. For example, 

Nokia's announcement in late 2010 that all of its smart phones from 2011 forward would be full NFCenabled help dilute skepticism that an NFC critical mass would ever appear. Google 's recent 

announcement that Android 2.3 would support NFC payments, coupled with reports that millions of 

NFC-enabled phones were already in the Android pipeline, further buoyed confidence and expectations in 

this ultimate baseline configuration for mobile payments. 

To-date, mobile technology providers tend to embed their products and services in packages crafted 

by the carriers, and more recently by Apple, Google, and Microsoft-as these computing companies 

expand their presence into the mobile marketplace. The real costs of this technology (e.g., full NFC 

components for GSM handsets is believed to cost an incremental $5-$10) is often not visible to the 

public, but must be accounted for in a business case for some member of the mobile payments ecosystem. 

But that business case does not have to be based on payments functionality alone. 

Regulatory Road Map/Shared Infrastructure Decisions 

All of these uncertainties make business planning precarious, and companies hesitant to invest. So 

representative constituencies of all of these participant groups have asked the Fed to coordinate with other 

regulatory agencies (such as the FCC and FTC) and provide a 'regulatory road-map' of what functions, 

activities, and implementations would be viewed as permissible over the next three to five years. These 

mobile payments ecosystem players are also asking for clarity on what infrastructure can/should be shared 

on a non-competitive basis. 

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For example, security is certainly a foundation for market cooperation, as evidenced in TSMs for 

smart cards worldwide. But other business services that might be critical to market adoption in the U.S., 

such as standardized contracting among 16,550 banks and credit unions, 5,000 wireless carriers, and 

millions of merchants, notification services for lost handsets and even (perhaps especially) coordinated 

risk management are all under consideration. 

So the foundational notion that has emerged is to compete on the marketing and personal service 

value propositions- but not on generalized transaction capabilities. In this sense, payments become a 

qualifYing factor for standardized applications and components of shared infrastructure that protect 

eveIYone, but the mobile marketing, advertising and promotional components become the bases for 

differentiation (and therefore competition). As such, mobile marketing services become the heart of the 

business case for NFC payments. (Note: This is really a good point. Let's see if we can incorporate it in 

the new vision part of the document also.) 

Thus, the mobile marketing business case drivers-mostly still to be determined in an empirical 

way-should be viewed, and researched, as part of a brand new theoretical construct. Under this 

construct, payment choice, with open and/or interoperable mobile wallets, will enable the market to set its 

own prices-in all likelihood as a function of actual costs. And superior customer value in facilitating 

efficient and effective transacting should engender contributions (financial or otherwise) from both buyers 

and sellers for the new value they receive. Whether that value materializes as purchase commitments 

from consumers, or incremental purchase bounties from merchants, the specific mechanism is less 

important than the concept that real value provided will find a path to fair compensation. 

54 
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32912118.eps

APPENDIX IV - Mobile Payments Standards in the U.S. 36 

Mobile payments require multiple industry participants to work together. If collaboration is 

difficult, adoption will be delayed. Difficulty may arise because the industry is made up of many small 

participants who are heterogeneous and have very different preferences, because there is a culture of 

distrust, or because of legal restrictions. All of these issues playa role in the evolution of mobile 

payments. 

Because there are over 16,000 banks and credit unions but just four major mobile carriers (who 

account for nearly 90% of the handsets used) in the U.S. , industry-wide agreements on technology 

standards and business policies are very difficult to coordinate and negotiate to reach consensus. Bilateral 

negotiations between a single bank and a single carrier are much easier, but the market share of customers 

having accounts with both the bank and the carrier for any given pair of institutions is likely to be small, 

lowering the value of any resulting agreement. The number of parties involved in each transaction: a 

mobile carrier, a handset manufacturer, a payment network, a mobile software vendor, a bank, a 

merchant, and a consumer also make it more difficult. The parties must agree on who is responsible for 

verifying the consumer's identity, resolving disputes, handling customer service, etc. 

Coordination problems may be exacerbated by the possibility that the significant players (banks and 

mobile carriers) both consider the users to be their customers and therefore may want to "own" the 

relationship with the customer and the rich set of information that mobile payment services yield31 And 

even though four mobile carriers dominate the wireless market, there are 5,000 wireless carriers in the 

U.S. in total. Nearly all are small, localized carriers that serve customers in rural areas of the country. 

The FCC does not want those rural carriers to disappear as the industry evolves, so it will be important to 

integrate them into the mobile ecosystem. 

Open industry-wide standards, involving all stakeholders, are necessary to achieve mass adoption 

of mobile payments. The alternatives are not simple. For instance, mobile carriers could offer payment 

services without the involvement of banks, perhaps by limiting consumers to pre-pay accounts or by 

offering consumer credit themselves. Alternatively, a single carrier could contract with a single bank to 

offer payments services. These types of approaches are feasible, but they face serious hurdles. Limiting 

consumers to pre-pay accounts reduces the attractiveness of the produc~ and offering credit services 

brings carriers into an unfamiliar industry at a large scale, with important regulatory obligations. To 

succeed on a large scale by contracting with a single bank, consumers must agree to transfer their 

financial relationship across institutions, something they are often hesitant to do. 

36 Excerpts from Crowe, M" M. Rysman and J. Stavins. 2010. "Mobile Payments in the U.S. at Retail Point of Sale: Current 

Market and Future Prospects." Federal Reserve Bank 01 Boston Public Policy Discussion Paper, No. 10-2. 

31 McCarthy, B. 2008. "Mobile Payments: The Linchpin olthe Mobile Commerce Economy," White Paper, First Data. 

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32912119.eps

The U.S. is making important progress in developing an industry standard for the technical details 

for how mobile payments might work, thus overcoming substantial negotiation costs in this regard. 

Current Mobile Standards Efforts 

The development of open industry-wide standards through collaboration of industry stakeholders 

may be the best path towards successful adoption of mobile payments. importantly, an open standard for 

mobile payments is under development currently. The financial industry standard-setting group ASC X9 

is developing U.S standards, and ISO is developing an international version of the standards. 38 The X9 

and ISO standards will specify how a mobile phone securely formats messaging and data elements and 

delivers that information over payment rails. Any bank, mobile carrier, or other vendor that develops its 

service in compliance with the standards would be able to participate in the mobile payments market. At 

this stage, prospects for the ultimate development of mobile payment standards appear to be strong, 

although their readiness is at least 18 months away. However, developing a standard does not ensure that 

it will be adopted. 

Although standards are currently in place for the transmission of data either remotely or by 

proximity from a mobile device to allow for mobile commerce, gaps exist and need to be addressed in 

order to provide an efficient and secure mobile commerce environment. While ISO 14443 describes the 

physical characteristics of proximity hardware and NFC standards enable the exchange of data wirelessly, 

the following work efforts are unden¥ay to address the gaps. 

ISO TC681SC7IWGIO Mobile Banking I Payments (InternationaQ 

The ISO study group, convened by the U.S., has identified areas for development of an 

international standard and will be formally developing standards for the following areas: 

• Mobile person-to-person payments, involving a financial institution intermediary 

• Life cycle management of banking/payment applications 

• Banking alerts 

• Banking account Inquiries 

• Banking solicitations and offers 

• Payer to the secure element authentication 

• Discovery of device capabilities 

• Technical report on business oriented security requirements 

38 ASC X9 (Accredited Standards Committee X9j is an industry nonprofit association composed of members of the financial 

services industry. ISO (International Organization for Standardization) is a network of national standards institutes of 162 

countries, one member per country. It is the world's largest developer and publisher of international standards. 

56 
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For the new work item, the group recognized that Payments break down into two broad areas, 

proximity and remote. There is a consensus that models for point-<>f-sale payments will heavily leverage 

the standards in place for NFC contactless payments. The workgroup will set new standards for "Life 

Cycle Management of BankinglPayment Applications" as well as "Person to Person" payments, including 

remittances, focusing on mechanisms that leverage clearing and settlement through established banking 

channels. These standards will include messaging between parties as well as bill and invoice payments. 

For banking the workgroup will focus on three areas: "Alerts," "Inquiries" and "SolicitationslBank 

Offers." Each will leverage existing standardized technologies, e.g. Short Message Services (SMS), 

Instant Messaging (1M) and Really Simple Syndication (RSS). For authentication, the workgroup will 

develop standard interaction models for "Payer to the Secure Element," standard means for the 

identification of "device capabilities", and document "business oriented security requirements" for sound 

banking practices. 

X9.112-3 -Mobile Commerce (Domestic) 

The mobile environment accumulates numerous risk factors, such as: unattended ternlinals, cardnot-present transactions, untrustworthy platforms, and persistent wireless connections. Further, the 

mobile network operator (MNO) infrastructure may not provide sufficient security that can be relied upon 

by the financial services industry. From a security perspective mobile commerce suffers all of the sanle 

vulnerabilities as the internet and wireless environments combined; and from a business perspective it 

encompasses three disparate industries: financial services, mobile telecommunications, and 

manufacturing mobile platforms. 

Areas within scope of this standard include but are not limited to the following: 

Mobile transactions, including sending and receiving messages for payments, banking, and 

commerce 

Mobile payments for person to person (PZP), person to business (P2B), and small business to 

business (SB2B), including credit card, debit card, and electronic funds transfer (EFT) 

transactions 

Areas not in scope because they are addressed by other ANSI or ISO standards include: PIN Management 

and Security; Biometric Information Management and Security; Key Management and Security; and 

mobile marketing (e.g. advertisements, coupons, loyalty programs, catalogs). 

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(149) 

DEVELOPING THE FRAMEWORK FOR SAFE 

AND EFFICIENT MOBILE PAYMENTS—PART II 

TUESDAY, JULY 10, 2012 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:02 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. Good morning. I call this hearing to order. 

Today’s hearing is the second in a series of hearings that will examine the mobile payments marketplace. Building on the information collected at the first hearing, this hearing will focus on the 

benefits of mobile payments to consumers and businesses as well 

as the obstacles to adopting this new form of payment. As discussed at our first hearing, this Committee’s jurisdiction extends 

over all financial services and payment systems regardless of the 

company that delivers the service. 

Today’s panel of academics is at the forefront of mobile payments 

research. Each has spent much time studying this topic either 

through an economic or legal lens. They will discuss the benefits 

of mobile payments including, among other things, enhanced data 

privacy and fraud protection, consumer convenience, expanded access to mainstream financial services for the underbanked, merchant cost savings, and streamlined marketing and promotion opportunities. 

Additionally, we have asked them to discuss obstacles to adopting mobile payments. Some potential barriers to adoption are levels 

of consumer awareness, information security, fraud and privacy 

concerns, compatibility of business models, development of industry 

standards, deployment costs for merchants, and regulatory uncertainty. 

The bottom line is that as the mobile payments system evolves, 

it is important for this Committee to understand how they work in 

order to provide proper oversight so that these payments can be secure and convenient. I look forward to today’s testimony. 

I want to remind my colleagues that the record will be open for 

the next 7 days for opening statements and any other materials 

you would like to submit. 

Now I will briefly introduce the witnesses. 

150 

Michael Katz is a professor of economics at the University of 

California, Berkeley, and the Sarin Chair in Strategy and Leadership. 

Sarah Jane Hughes is a university scholar and fellow in commercial law at the Maurer School of Law at Indiana University. 

And Thomas Brown is an adjunct professor at the University of 

California, Berkeley School of Law. 

I thank you all again for being here today. I would like to ask 

the witnesses to please keep your remarks to 5 minutes. Your full 

written statements will be included in the hearing record. 

Mr. Katz, please proceed. 

STATEMENT OF MICHAEL L. KATZ, SARIN CHAIR IN STRATEGY 

AND LEADERSHIP, PROFESSOR OF ECONOMICS, UNIVERSITY OF CALIFORNIA, BERKELEY 

Mr. KATZ. Chairman Johnson, thank you for inviting me to appear before you today to talk about mobile payments. 

As everybody knows, America’s consumers are increasingly connected via smartphones, tablet computers, and other mobile devices. A lot of people have predicted that this is going to lead to 

a revolution in how people pay when they go into a bricks-and-mortar merchant. And, in particular, what people are focusing on is 

near-field communication, which is a technology that allows your 

phone to communicate with the merchant’s point-of-sale device so 

that you can swipe your phone the way people today swipe credit 

and debit cards. 

I disagree with those who think it is going to revolutionize payments. Just to put it in short, near-field communications is about 

communications that happens at the 1- or 2-foot level when you are 

actually at the checkout. But I think the really interesting and exciting developments here are really about what happens when the 

consumer is in the neighborhood of the merchant, because your mobile phone gives the merchant a way to know that you are there 

because of location-aware services and then to reach out to you and 

encourage you to come into the merchant. 

So I think there is going to be a revolution in mobile payments 

that is going to spring from smartphones and tablets, but that revolution is not going to be in the way we pay, but it is going to be 

in the way that merchants interact with their customers. 

Let me step back for a moment and ask how we are going to get 

from where we are today to where I think we are going. 

Today, merchants and consumers already have access to a wide 

range of options. They have got cash and checks, credit and debit 

cards. These options are easy to use, they are widely accepted, and, 

importantly, they are trusted. Moreover, most consumers already 

have established relationships with payment service providers, and 

merchants have made substantial investments in equipment, systems, and training to support existing payment services. So if new 

payment services based on smartphones and tablets are going to 

compete successfully, they are going to have to offer merchants and 

consumers additional value when compared with current options. 

Cool technology alone is not going to be enough. 

Now, from the merchant perspective, mobile payments will be attractive if they do one of two things, and ideally both: one would 

151 

be to lower the merchants’ costs of completing transactions, say by 

charging lower fees to the merchants or somehow speeding up the 

checkout process; the other benefit, and the one I want to focus on 

because I think it is potentially much larger, is attracting additional consumer patronage. 

So how will mobile payment services attract customers to bricksand-mortar merchants? Survey research shows that what consumers want are payments that are widely accepted, are easy to 

use, and are trustworthy. So how do mobile payments stack up 

against the competition? 

When it comes to paying at bricks-and-mortar merchants, the extent of acceptance is a weakness rather than a strength. Indeed, 

mobile payment services face a chicken-and-egg problem. Specifically, a merchant does not want to bear the expense of changing 

its checkout process to accommodate a new payment service if 

there are few consumers who use that service. Similarly, a consumer does not want to sign up for the payment service if very few 

merchants accept it. But, of course, if everybody waits for everybody else to join the new payment service first, it is never going 

to get off the ground. 

Now, there are several potential solutions to the chicken-and-egg 

problem, but all of them rely on one common underlying factor: 

There has to be some source of benefit that makes it worthwhile 

to invest in overcoming the chicken-and-egg problem. So we are 

back to looking for a source of consumer value. 

Now, an NFC-enabled digital wallet can be more convenient and 

possibly easier to use than a conventional wallet filled with multiple payment cards. But it should be noted that we are not going 

to be able to give up our conventional wallets anytime soon because 

we still need our wallets to carry our driver’s license, insurance 

cards, and things like that. Once those go digital, we may have a 

different situation, but right now we do not. 

Moreover, we have to ask ourselves: Is it really that much easier 

to swipe your phone than to swipe a smart card? So I believe in 

the short run that ease-of-use benefits are going to be too limited 

to be a significant driver of adoption. 

So that leaves trust as a source of value. Security and privacy 

are two elements of trust. Consumer surveys show, unfortunately, 

that people question the security of mobile payments, and indeed 

mobile payment systems do have points of vulnerability, such as 

the radio interface, that card-based systems do not. Moreover, 

through the use of malicious code downloaded through apps or Web 

browsing, a smartphone can be compromised without the attacker’s 

having to attain physical proximity. Consequently, security is not 

going to be a positive driver of mobile payment adoption anytime 

soon. And, unfortunately, things do not look a lot more promising 

for privacy. Consumer surveys show that many consumers are worried that mobile payment companies will collect too much information and that they are going to misuse that information. 

So if we come up short on ubiquity, ease of use, and trust, where 

is the value that is going to drive these things? I think the answer 

is, as I said at the beginning that the way merchants are going to 

use the capabilities that mobile phones bring and mobile payments 

do, is to collect vast amounts of information about consumers, anaVerDate Nov 24 2008 10:31 Jan 18, 2013 Jkt 048080 PO 00000 Frm 00155 Fmt 6601 Sfmt 6601 L:\HEARINGS 2012\329710.TXT JASON
152 

lyze that information to develop predictions of consumer behavior, 

and then use that information and the ability to communicate with 

their customers to deliver personalized, real-time, context-specific 

messages to encourage consumers to come into the store. 

Let me close by just giving an example of the possibilities you 

could have with this. You could have a coffee retailer get an alert 

from a service provider saying, you know, here is one of your regular customers. Normally by 10:30 she buys a cup of coffee. However, today it is 10:45, she still has not bought a cup of coffee, but 

we notice she has just left her office. Do you want to send her a 

message encouraging her to come into your retailer that is three 

blocks away? The retailer could check its store, find out that it is 

not very crowded, check the fact it is a hot day, and send a message to the consumer saying if you come into our store in the next 

30 minutes, we will give you 20 percent off on an iced coffee. That 

is an incredibly powerful potential marketing tool, and that is 

where I think the real benefits and the real power of mobile payments are going to lie. I think we will see NFC in the future, but 

it is really going to be something that is an extension of existing 

payments. It is not the revolution. 

Thank you. 

Chairman JOHNSON. Thank you, Mr. Katz. 

Ms. Hughes, please proceed. 

STATEMENT OF SARAH JANE HUGHES, UNIVERSITY SCHOLAR 

AND FELLOW IN COMMERCIAL LAW, MAURER SCHOOL OF 

LAW, UNIVERSITY OF INDIANA 

Ms. HUGHES. Senator Johnson, thank you so much for the invitation to be here. Other Members of the Committee, I appreciate this 

opportunity. 

Dr. Katz has already raised a few of the issues that I would have 

covered, and I had broken my prepared remarks down into five 

points that I thought offered benefits and five points that I thought 

changed compliance costs or otherwise imposed some obstacles to 

the adoption of mobile payments by merchants. So I may edit my 

remarks in order to take advantage of what Dr. Katz has already 

given to the Committee, but the Committee has my full statement. 

I would also like to flip from the end of my remarks a point that 

I want to be certain to make, and that is that, in thinking about 

regulating mobile payments, I think it is important to recognize 

that this is probably not a one-solution-fits-all-possible-providers 

situation. So that the banks, the telecom providers, the app providers, intermediary payments processors, and merchants all may 

have the need for certain protections and rights, and the customers 

in dealing with them along this pathway of multiple players in a 

single-payment transaction. The disparities in the roles that they 

play in mobile payments could be recognized in suitable forms of 

regulation, but it is vital that we not create a situation—and we 

may have it now—where one form of regulation drives people into 

unregulated silos or channels of opportunity or where they can go 

to silos that are less regulated and save a lot of compliance costs. 

So that if you are going to regulate, you need to think about how 

to do it in a way that does not reward a certain group of players 

153 

at the expense of merchants and consumers and competition in 

general. 

Now, returning to the five or at least an edited version of the five 

pros and the five expenses. Dr. Katz has already made the case for 

mobile payments possibly being quick and having certain 

functionality, and I agree with him. I think that there is a secondlevel point, and that is, taking mobile payments has a particular 

potential benefit to small business owners because it allows them 

to collect sums from consumers, and this may help them expand 

their roles in the economies. This may be particularly true for 

small-dollar payments as opposed to large-dollar payments, and I 

think that it is also true that trust plays a factor. 

In the cab coming here today, I noticed the cab driver’s willingness to talk about paying for a $2 cup of coffee but his reluctance 

to think about making a $200 car note payment with a mobile device at this point. So we will see how this expands. 

The third is that there is a lot of talk about mobile payments 

helping merchants deter fraudulent charges—and the customer as 

well—because each of them gets a real-time signal. That may or 

may not be the case, but it is something for us to think of as a potential benefit. 

I agree with Dr. Katz that there are huge opportunities, indeed 

perhaps the most important opportunities, to build customer loyalty, to do geolocation in individually directed marketing to customers, that those are far ahead of anything that traditional payments have had to offer. 

We also have something Dr. Katz did not talk about: merchants’ 

abilities to reach consumers who do not have checking accounts— 

they are unbanked—or those who are in areas where there are relatively few banks and where access to an ATM machine may be 

more scarce than it is in major metropolitan areas. I spent some 

of my childhood in Missoula, Montana. I spent some of my childhood in Butte, Montana. My mother was born in North Dakota and 

spent some of her childhood. It is a long way to an ATM in some 

parts of this country. In Bloomington, Indiana, it is not, but in 

other places it is a really long way, especially to a branch of a financial institution these days. 

The unbanked and underbanked use smartphones right now to 

make certain kinds of payments because it helps them have access 

to the marketplace that people who live in metropolitan areas already enjoy. 

So Dr. Katz has talked about the fact that mobile payments have 

interception risks and malware problems and all of those things, 

that they allow harvesting of information, but they do not relieve 

merchants of the costs of compliance with chargebacks, with other 

security costs, of payment data, integrity concerns, and by that I 

mean protection against alteration, replication, or misdirection of 

payments, of the time to explain to consumers the kinds of issues 

involved in making mobile payments if the consumer is not familiar, and they do not talk about the added risks that the banking 

industry is concerned about of many more people being able to access and maintain consumer deposit or checking account information. 

154 

My last point is one that your invitation specifically asked to 

have addressed, which is that taking mobile payments will require 

merchants, and others in the process, to have to think about 

whether they are supposed to comply with privacy laws, with 

record retention laws, and with laws that are designed and regulations that are designed to deter and detect money laundering and 

terrorist finance, including dealing with countries we are not supposed to deal with, and specially designated nationals who are 

kingpins in the drug industries or gun running and the like. 

With that, Mr. Chairman, thank you. 

Chairman JOHNSON. Thank you, Ms. Hughes. 

Mr. Brown, you may proceed. 

STATEMENT OF THOMAS P. BROWN, ADJUNCT PROFESSOR, 

UNIVERSITY OF CALIFORNIA, BERKELEY SCHOOL OF LAW 

Mr. BROWN. Thank you, Chairman Johnson, Ranking Member 

Shelby, and Members of the Committee. I very much appreciate the 

opportunity to come and address the subject of mobile payments 

with two distinguished colleagues in academia, Professor Katz and 

Professor Hughes. 

Like Professor Katz, I believe that mobile payments are going to 

revolutionize the way commerce takes place, and like Professor 

Katz, I do not believe that that is a revolution that will begin at 

the point of sale in brick-and-mortar stores. Rather, I believe that 

mobile technologies are changing the way people accept payments 

fundamentally. 

It used to be a really complicated thing to have the opportunity 

to accept payments. Today, anybody pretty much anywhere can get 

a mobile reader in a little packet like this, download an app, plug 

the device into their phone, and accept payment cards on a mobile 

device. All of the misery associated with complying with the contractual process imposed by the card networks and the banks has 

been largely eliminated. This is a fundamental change in how consumers and merchants have the ability to interact. 

Most payment applications from a consumer perspective—and I 

have two that have been around for a while: cash, which I am sure 

most people here are familiar with; and payment cards, which I 

suspect most people are also familiar with—are, from the standpoint of a consumer, mobile. Most of us carry our wallets wherever 

we happen to be, and in those rare instances where we do not have 

our wallet, we tend to notice it and try to find it. 

The really profound change associated with mobile payments is 

that we now carry point of sale devices with us at all times. This 

is bringing lots and lots of merchants into the electronic payment 

infrastructure square into it, and others have signed up—literally 

millions of informal merchants—to accept electronic payments. 

That is one important change. 

The other change is how it is affecting how established merchants interact with their customers. Professor Katz talked about 

the interaction with customers in the store or near the store. Now, 

instead of having to check out at the point of sale, we can make 

our purchases in the aisle. We can also make purchases outside of 

the store. One of my favorite mobile payment applications is the 

Apple Store app, not to be confused with the App Store, which you 

155 

can also download and access through the Apple Store app. It turns 

your mobile device into a mobile checkout. So I can be outside of 

the Apple Store, identify purchases that I want to make, make the 

purchase through my mobile device, take the item off the shelf 

when I show up at the store, and walk out without ever having to 

present a payment credential at the point of sale. 

These changes are what is truly revolutionizing commerce, bringing together industries that we used to think of as entirely separate—telecommunications, financial services, and retailing. 

What are the implications? Well, this revolution raises a number 

of different questions. The first—and it is a natural one—is: this 

is new, so we must have to regulate it. The second is concerns 

about privacy because, obviously, all of these transactions involve 

the flow of information, and we know or we have a sense that these 

mobile devices gather a lot more information about us than other 

ways that we are used to engaging in commerce. And then, finally, 

there are questions of compatibility, and let me try to briefly address all three of these. 

With respect to existing regulation, let me assure the Committee: 

the payment industry, and the mobile payment piece of it, is heavily regulated. It is heavily regulated both at the Federal level and 

the State level. A mobile payment provider confronts some very important choices about how they offer their products. They can obtain licenses at the State level, or they can contract with an existing chartered institution who will sponsor their payment application. 

But those are just table stakes. If you then want to offer that 

product to consumers, you confront a long list of Federal and State 

requirements. I am not going to go through all of them, but we are 

all familiar with them, hopefully: TILA, the EFTA, the Bank Secrecy Act, OFAC. Offering a consumer financial services product in 

this country is a very complicated proposition. We do not need new 

rules. 

To the extent that we want to decrease barriers to entry and increase innovation, I would suggest that Congress attend to the 

complicated regulatory and licensing issues that exist at the State 

level. Whatever benefit might exist from State licensing is completely eliminated by having each State license every payment provider in the United States. 

Second, privacy. Professor Katz uses a wonderful example of 

somebody who goes to a coffee store and then misses their daily appointment and receives an offer. Well, it does not take a huge leap 

of imagination to think through an example that might make us 

a little uncomfortable, which is, instead of receiving an offer from 

the cafe that you generally visit, you receive an offer from the 

doughnut shop across the street that you have never visited. Although we might like the first kind of offer, I think the second offer 

seems a little creepy. That creepiness instinct tends to vent itself 

in wanting to prevent people from sharing information. I want to 

suggest that that is not the answer, and the reason can, I think, 

be found in a couple more hypotheticals. Instead of imagining 

somebody missing their appointment in the city and receiving an 

offer from someplace across the street, let us suppose that the person is in a new city, and they receive an offer from a merchant who 

156 

says, ‘‘We know that you like Blue Bottle Coffee back home in San 

Francisco. Why don’t you try Elixir in Philadelphia? We think you 

will be happy.’’ 

The first offer might make us feel a little uncomfortable; the second offer, maybe not so much. And regardless of how concerned we 

are about the extent to which one offer seems creepy and the other 

does not, restricting the sharing of information, which tends to be 

the framework that we use for most privacy legislation in the 

United States, does not prevent the offer from being made. It simply encourages the firms to merge or to integrate. 

If people cannot share information that is then used to support 

mobile payment applications, what that leads to is firms combining 

under a single roof. So, if the doughnut store owner and the coffee 

store owner are owned by the same person, then you can receive 

the offer, but not if they are separate. I think instead of focusing 

on sharing, we should focus on consequences. 

And that leaves me just a little bit of time to discuss compatibility. This is a very complicated subject. I will not go into it in 

detail. I will say compatibility problems can be a concern. They 

might not be a concern. There is no one-size-fits-all solution to 

them. Fortunately, we have a legal framework in the United States 

that addresses these issues quite well in the antitrust laws. 

Thank you. I am more than happy to answer any questions that 

you might have. 

Chairman JOHNSON. Thank you for your testimony. 

As we begin, I will ask the clerk to put 5 minutes on the clock 

for each Member. 

Mr. Katz, what is the biggest obstacle to widespread adoption of 

mobile payments by consumers and merchants? And how can it be 

overcome? 

Mr. KATZ. I think there are two levels at which to answer that. 

I think at one level the biggest obstacle is the lack of real value 

right now given that we in the United States have so many payment instruments that work extremely well. We have very well developed credit and debit markets, so we have tough competition. 

And so where that shows up, I think, is really this chicken-and-egg 

problem, that everyone wants to wait to see everybody else get onboard with the system. And there are solutions to that, as I mentioned, so let me just say a couple words about it. 

One of the things that will help, as Mr. Brown was saying or 

touched on, is compatibility, and I think we will see compatibility 

in point-of-sales devices. I think once we get onboard with that and 

see point-of-sales devices that work both with mobile phones but 

also with existing smart cards and work with the Visa and 

MasterCard systems in particular, I think then we will see merchants start adopting these things, and that will give us a path 

going forward. 

Chairman JOHNSON. Ms. Hughes, how would you expect small 

merchants to be affected by widespread adoption of mobile payments? Are mobile payments providers likely to compete in cost 

with existing payment providers to the benefit of small businesses? 

Ms. HUGHES. Mr. Chairman, I think the small business providers 

are already beginning to realize some of the benefits of mobile payments. Ice cream shops, people who have transactions, many transVerDate Nov 24 2008 10:31 Jan 18, 2013 Jkt 048080 PO 00000 Frm 00160 Fmt 6601 Sfmt 6601 L:\HEARINGS 2012\329710.TXT JASON
157 

actions—coffee shops, doughnut shops—of $10 or less are seeing 

the application such as the one Mr. Brown suggested—I am borrowing your prop—where the reader is on the phone or where it 

is possible to tap the phone in close proximity to another reader 

and have the information be shared. 

The costs of using a system such as the one Mr. Brown mentioned, Square, is considerably lower than what is happening in a 

comparable transaction using a credit card or debit card rail right 

now. I am on the board of a tiny nonprofit, and last year, because 

of our interest in trying to save costs, we switched to Square, and 

we reduced our average transaction charge by about 1.05 percent 

per transaction. So, in other words, instead of paying about 3.75 

percent in interchange fee, our end, for the transaction, we paid 

about 2.7 percent for the transaction. 

The other way in which this helps small businesses, it helps artisans and craftsmen, it helps farmers at farmers’ markets, places 

where they do not often have electrical support for their credit card 

processing machine, but they do not want to just use plain old 

paper credit card slips because they cost more to process, and the 

amounts of the sales are often not enough to support the fee that 

will be charged in the traditional debit and credit modes. 

So there are cost savings, to which Mr. Brown alluded in his remarks, and I thought quite well, but without the specificity of the 

example that I have just offered for this purpose. 

Chairman JOHNSON. Mr. Brown, when a consumer makes a mobile payment, what information is collected and what is the information used for? With whom is the information shared, and do consumers have a say? Should there be limits on the information that 

is collected and how the information is used? That is a mouthful. 

Mr. BROWN. It is, and I notice we only have 2 hours for the hearing. 

[Laughter.] 

Mr. BROWN. I am not going to try to answer it in all of the detail. 

It is a question that goes to the heart of what is happening with 

mobile payments, and let me try to answer it by identifying a couple of different ways in which mobile payments happen. 

Professor Katz has talked a little bit about NFC applications. 

The most familiar is the Google Wallet that you can sort of wave 

at and tap on a phone to execute a payment in a brick-and-mortar 

environment. I have talked a little bit about the mobile devices and 

mobile shopping cart. So these are two sort of archetypes for these 

kinds of transactions, and the information that is collected and 

processed in connection with these transactions is different. 

When the mobile phone is being used simply to replace the swipe 

from a payment card, for all intents and purposes, the only information that is being passed among the parties to the payment 

itself—so merchant, processor, network, issuing bank—is the information associated with authorizing and settling that payment. 

When the mobile device is being used as a shopping cart, so 

we’re essentially taking a payment application and combining it 

with the ability to fulfill purchases, there is a lot more information 

that may be hosted or held by various participants in the chain associated with the delivery of that experience to the customer. 

158 

So what does that mean? We can take Amazon as an example. 

Amazon has a mobile Web site that you can visit on your mobile 

device and through which you can make a purchase. We often 

think of Amazon as the merchant associated with those transactions, that is, that Amazon actually owns the good that it is providing to the consumer. In fact, Amazon acts as a platform for a 

number of small merchants who are selling through the Amazon 

mobile Web site. And when you make a payment to Amazon, Amazon processes that payment and then delivers it to the merchant. 

Amazon as the processor and platform in that example often 

hosts the shopping cart information and then uses that to, among 

other things, make recommendations when you visit the Amazon 

platform. 

So the short answer to the question about what information is 

taken and how it is used is there is no single answer, but hopefully 

those two examples give some sense of the differences. 

Do consumers have a say? This is a very interesting question. 

And the answer is, for the most part, when you are using the mobile device as a shopping cart, with Amazon, with Apple, with most 

of the other mobile shopping cart examples that I can think of, the 

terms of service from a consumer perspective with respect to the 

use to the consumer do have a provision that explained to the consumer, at least in some sense, how the host or provider of that 

service can use the consumer’s information. 

I think that then leads to the next question. What rules exist 

with respect to the enforcement of the promises that are made? 

And should there be regulation with respect to the collection of the 

information? So let me talk about enforcement first. And the answer is yes, we actually have an enforcement mechanism for that. 

That is largely what the FTC has done in its privacy enforcement 

efforts. There was an article in today’s Wall Street Journal about 

an enforcement action currently pending before the Commission related to Google and Google applications that subvert or go around 

the privacy provisions that are built into the Apple app store. So 

this provides an example of how existing law is being used to police 

consumer expectations with respect to how the information is being 

used. But this is a very complicated set of issues. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you, Mr. Chairman, and thank you to 

all of you for your testimony. 

I wanted to start, Professor Hughes, with your point about how 

mobile payments can help the unbanked and the underbanked, and 

specifically if you could share any more thoughts about how we 

make sure that mobile payments become a pathway to financial 

services that are healthy, if you will, and supportive to this underbanked or unbanked community versus being a pathway to predatory practices that we have seen plenty of times in other venues. 

Ms. HUGHES. That is a very interesting question. Thank you. The 

adoption of smartphones by underbanked persons is one of the 

most interesting phenomenon in this whole space because many 

people who are underbanked do not—they are either underbanked 

because they live in locations where there are not very many depository institutions from which to choose or they do not really 

159 

have enough money to sustain an account or they have lost the 

privilege of having one. 

The unbanked are in a similar situation, but they may never 

have had a checking account because they could never afford it or 

because they have come to the United States from places where the 

banking system was not well trusted. 

As a result, smartphone technologies replace two very important 

functions in a contemporary American resident’s life: access to the 

Internet and access to financial services. Those are so powerful 

forces in our economy at this point that it is very important to protect, as you have suggested, access and to hope that access will be 

on terms and conditions that respond to needs and are not unfair 

or deceptive in the way in which they are applied. 

The cost issues for the consumer after you acquire the device 

that you are going to use—the tablet, the smartphone, or whatever—may be very similar from the consumer’s perspective to the 

cost that the consumer would have if the consumer had to go and 

get dollars, had a credit card, which they may not have because 

sometimes those take large up-front fees or deposits or things that 

these consumers may not have. 

So just as it looks to us like we process checks at par but the 

costs are really embedded in the system, the costs here are embedded in the system. And with credit and debit transactions, they 

may, in fact, be buried. 

So the consumer may or may not incur more costs, but if you 

think of the time savings of not having to go to the ATM, not having to carry cash, assuming that you have an ATM to go to, not 

paying a fee to cash a check if you were paid by check or a fee to 

get your money out of your payroll card account if you have been 

given a payroll card account, the opportunity to load your payroll 

into your mobile device and use it as a replacement access mode 

like a check or a credit or a debit card for monies that you may 

have on deposit other places are all enormous. 

It is a huge marketplace. There are at least 30 million adults in 

this country who do not have adequate bank access. I think the 

number is considerably larger than that, but the figures I see talk 

about at least 30 million. Some have projected as many as 50 million people in the country who do not have access to banking accounts. 

Senator MERKLEY. Thank you, Professor, and I will not ask you 

more on this. I will just note that we have plenty of challenges 

with, for example, prepaid debit cards that then have all sorts of 

hidden fees. You acquire a balance, and you pay $20 if you use the 

card for the first time. You pay $20 if you use it. Every month you 

pay $20, or whatever. It is continuous fees. And I can see those 

being very hidden, even more hidden, if you will, in the context of 

an electronic platform, and we could end up with a world that expands with very expensive costs to working people. And we also 

have the potential for solicitations for payday loans that are 300 

percent interest, 500 percent interest, where it is, you know, click 

here and the first thing you know you have got a very expensive 

loan that you did not have a full sense of that you might have if 

you had to go to a brick-and-mortar location and discuss it. 

160 

So it is just kind of a thought that we should have that in the 

back of our mind as this powerful new frontier—as we enter it. 

I want to switch gears a little bit to Professor Brown, and if I 

understood your comment correctly, you were arguing against any 

restriction on the sharing of information between groups that collect that information on consumers, arguing that it simply encourages, if you will, a horizontal ownership structure. My first kind of 

reaction to that was a little bit of doubt about the argument you 

were making in that if I have a company that I am dealing with 

that I can check out their privacy policy, I have at least some instrument as a consumer to pick and choose ones that have a privacy policy. But if there are simply no restrictions on their sale of 

my information, I have lost any ability to control that or to respond 

as a consumer to the different offerings from different folks. If I 

could just get a little more sense from you on this. 

Mr. BROWN. Sure. What I want to emphasize is that I think with 

respect to privacy and information security, we should focus on bad 

consequences, identify those, and think of ways that we can minimize their potential for arising and minimize the potential that the 

party that is in the least position to avoid them ends up bearing 

the consequence. 

So let me give you some examples of this. The Do Not Call list 

is an example. The caps on liability to consumers for unauthorized 

transactions under Reg E and Reg Z are other examples of this. 

With the Do Not Call list, many of us do not want to receive calls 

that interrupt our dinner, and this is a totally natural thing. We 

do not like to get them in the Brown household either. Those calls 

originate not because my telephone information is collected and 

shared by merchants, but because my telephone number can be 

auto-dialed by somebody. I am allowed then to identify my number 

as a number that should not be auto-dialed. That is a focus-on-consequence approach. Reg Z and Reg E do much the same. With Reg 

Z, if there is an unauthorized transaction on my credit card, my liability is capped at $50 when I provide notice to the credit card 

company. As a consumer, once my information is out there, there 

is not much that I can do to prevent somebody else from obtaining 

it and then using it in a fraudulent manner. So I am not what we 

would call in the common law, the least cost avoider. There are 

other people in that payment stream—the merchant, the network, 

the bank that issued the card, the merchant that subsequently accepts my information—who are all in a better position to avoid that 

transaction than me. 

Senator MERKLEY. I see your point, and you are arguing in favor 

of the equivalent of do-not-call-type strategies that, regardless of 

who has the information, which is a powerful tool for consumers. 

Mr. BROWN. Right, because I think focusing on sharing just leads 

us into things that end up not helping people. Gramm-Leach-Bliley 

is the best example. We get these long notices every year that no 

one reads, and we think that we are protecting people’s privacy interest, but, all we are really doing is giving a subsidy to the post 

office—which may itself be useful but is not necessarily advancing 

the privacy interests or this creepiness concern. 

Senator MERKLEY. I do think the post office is happy about that. 

[Laughter.] 

161 

Mr. BROWN. Yes. 

Senator MERKLEY. Thank you. 

Chairman JOHNSON. We will proceed to a second round. 

Mr. Katz, I will ask you the same question as I asked Mr. Brown. 

When a consumer makes a mobile payment, what information is 

collected and what is the information used for? With whom is the 

information shared? And do consumers have a say in it? 

Mr. KATZ. So as Mr. Brown was saying, that is indeed a complicated question and a more complicated answer. Let me amplify 

a few of the things he said. 

The actual payment transaction does not necessarily provide any 

additional information at all compared to a traditional credit card 

transaction. But one of the things that could really change things 

when we are talking about mobile is that there is a lot of other information that goes along at the same time that you typically do 

not have with a credit card. 

So, for example, although you can infer the customer’s location 

from where he or she used a traditional card—and, in fact, Visa 

has a system now that does that and sends you a message because 

Visa knows where you are using your creditor. With mobile payments and GPS-enabled phones, there is way more ability to track 

people. 

But I think in all of this, it is not so much the change that there 

is going to be more information collected. Credit card companies 

have unbelievable amounts of information about us today. In fact, 

unfortunately, I went through something where someone in my 

family had stolen something from us and run off to another State, 

somebody we had been taking care of. We ended up determining 

who our friends were that we did not know existed before, what 

State she had run off to, where she was living, how she had gotten 

there because we had a trail of gas station receipts. We were able 

to build a really detailed picture of this person’s life, and this was 

something that happened 15 years ago using credit card information. 

So the information is already out there. I think what is really different is that the ability to do data mining, to do big data analysis, 

to actually process and use all the information, I think that is really what is changing, not so much what is being collected but the 

ability of companies to process and to use it. 

Now, that said, I mean, we are getting ever more, because of people being connected with cell phones, people being on, you know, 

various social networks. But as I say, the information is out there. 

How it is used? It is used in a lot of different ways. That is certainly something that is changing and evolving. But as I say, it is 

going to be increasingly used to target marketing messages and 

deals and special offers that are personalized to the consumer. 

In terms of consumers’ control over it, I am all in favor certainly 

of having a legal framework that gives consumers the ability to 

take control if they want to. I suspect that most consumers are not 

going to want to take control and that what we will see, which I 

think we have a history of in the United States, is consumers voicing a lot of concerns about privacy, but then when they learn that 

they can get, you know, 10 cents off on a Big Mac if they give up 

their privacy, they will give it up. 

162 

So I think it is a challenging issue. We can give consumers a lot 

of tools to protect the information. I am rather pessimistic whether 

consumers will make use of those tools. 

Chairman JOHNSON. Mr. Brown and Ms. Hughes, what protections do consumers have if fraudulent, unauthorized, or inaccurate 

mobile payments are made to their account? What types of disclosures do consumers receive about risks associated with fraud and 

theft and the protections they have? Mr. Brown, let us start with 

you. 

Mr. BROWN. This is another question that can be complicated 

based on the different archetypes for executing these transactions. 

If we take the two examples that I gave before—and there is actually a third where the transfer is more like a remittance, but I am 

just going to exclude that and talk about the prepaid wallet and 

the sort of credentialing Google Wallet-type structure. 

With the mobile wallet on the Google model, where it is just a 

credentialing device, the protections and the disclosures that the 

consumer receives are those that are associated with whatever payment device the consumer has loaded into the wallet. I have a credit card here, so Reg Z would apply. If it is a debit card, Reg E 

would apply. Consumers Union has identified some real border 

cases where there is some question as to whether the particular instrument would be covered, but those I would characterize as real 

edge cases. 

When you move into a mobile wallet—a stored-value-type product—the way I tend to think of it, and the way most of the providers of those services disclose the consumer protection, is that the 

wallet itself is covered by Reg E. That means that if I use my mobile wallet that is then backed up by a backup funding source and 

I end up in a dispute with the recipient of the transaction, that the 

transfer from my account to the recipient’s account—Dwolla operates a system along these lines—would be protected by Reg E. 

Typically, if you look at the terms of service associated with the 

providers of services like this—Dwolla is one, PayPal is another— 

you will see an outline of the protections that the consumer receives. Bill-to-mobile services raise some additional issues, and billto-mobile services on the whole generally disclose to consumers 

what the risks are. But there are some questions as to whether the 

coverage originates under the EFTA or the Truth in Billing Act 

and some additional State laws. So that is a short answer. 

Chairman JOHNSON. Ms. Hughes, do you have anything to add? 

Ms. HUGHES. Well, I would certainly agree with Mr. Brown that 

there are sufficient protections under Reg Z and Reg E right now. 

I think there may be some confusion to resolve through education 

with consumers about which of those are applying to which transactions. That is a big issue in my mind. And I do also agree with 

him that bill-to-mobile, which is basically both a matter of contract 

and a matter of the Truth in Billing Act, may add a layer of confusion to consumers that needs to be addressed through consumer 

education. I think this whole area could benefit from consumer 

education. 

But I do think that we want to ensure that there are adequate 

and readily available and easily understood means for addressing 

payment alteration. That is what I said when I talked about payVerDate Nov 24 2008 10:31 Jan 18, 2013 Jkt 048080 PO 00000 Frm 00166 Fmt 6601 Sfmt 6601 L:\HEARINGS 2012\329710.TXT JASON
163 

ment data integrity, the possibility of a replication of a payment, 

that is, somebody who makes the payment more than once with 

only one authorization for the purpose. And, in addition, oddly 

enough, and the further the consumer is away from the merchant, 

the possibility of misdirecting a payment is an issue that is going 

to come up. Somehow I am going to misdial that phone number. 

I guarantee you I am going to misdial that phone number, but that 

is a different problem. 

So I think that there are areas where additional work would be 

helpful. I think that instead of additional disclosures at this point, 

I would favor very enhanced education, but I would be willing to 

assist if disclosures come up in framing what I think would be appropriate disclosures. 

Mr. BROWN. Can I add to that? 

Chairman JOHNSON. Yes. 

Mr. BROWN. I think Professor Hughes makes an important point 

that I want to amplify with respect to disclosures. I think when we 

talk about disclosures, we are maybe talking about two different 

things at the same time, and it is helpful to separate them. 

On the one hand, there is information that is available about 

services. In some ways, that is what I think of as the disclosure. 

Consumers, by and large, are not the audience for that information. They tend not to page through the long terms of service associated with these services. That is information that academics, the 

FTC, and researchers make use of. Consumer Reports can evaluate 

different services and provide and educate consumers about which 

ones might be better and which ones are worse. 

There is a separate issue about what gets communicated to consumers and when, and I think when we merge these two issues, 

we lose something, because I think a lot of times consumers are not 

particularly interested in getting long disclosures at the point that 

they are deciding to sign up for the service. They are deciding to 

sign up for the service because they want to complete some transaction—they want to do something. And reading a long disclosure 

is just not part of what they are excited about in wanting to complete that transaction. 

So I think we should be careful to distinguish these two points, 

so maybe thinking about what information people should make 

available publicly about dispute rights versus what information 

needs to be disclosed to the consumer when they are signing up for 

the transaction or when they are engaging in a particular transaction. 

Chairman JOHNSON. One last question relative to information security for the entire panel. Some experts claim that mobile payments are more secure than traditional payments while others 

claim that they pose additional threats to consumer safety and privacy. In your opinion, which side is right? Or are both sides right? 

Mr. Katz, let us begin with you. 

Mr. KATZ. I guess being an academic contrarian, maybe I would 

say both sides are wrong. 

[Laughter.] 

Mr. KATZ. What I mean by that actually is the following: I think 

a lot of the debates are actually not about mobile, even though people act as if they are. So one of the things proponents of mobile 

164 

being more secure—one of the points they will make is, well, we 

can have two factor identification and we can use biometrics. Well, 

actually, as I understand it, the best way to do biometrics is not 

to use somebody’s cell phone. The best way to do it is to have the 

customer either say here is who I am or use a phone or use a traditional payment card, just something to say here is who I claim I 

am, and then have the merchant access the data base to check 

what biometric information the customer should then provide, and 

the merchant to have the equipment that—you know, let us do retinal scans. The merchant should control the retinal scan. Why 

should I trust somebody’s iPhone if he comes in and says, oh, yeah, 

I just did a retinal scan on Mike Katz, he is Mike Katz. I mean, 

the merchant is going to want to use its own equipment. 

So I think all this stuff about biometrics which I often hear associated with mobile really is not about mobile. And I think there is 

a lot of that that goes on. 

I think the answer is that we could make the systems a lot more 

secure than they are, but it is a question—in both mobile and traditional payments, and it is really a question of cost, and the industry has made the judgment to date that it is cheaper to deal with 

the fraud that occurs and just, you know, bear that than to try to 

have systems that are harder to tamper with. 

Now, that said, I think that at least initially we are going to see 

the mobile systems are going to be less secure. And in terms of 

something about privacy, I noticed on the Web site of a company 

whose name I will not mention, but there were products that featured prominently in this hearing today, that company, it turns 

out—when you sign up with them, if you pay and you use this 

great service where you can pay using a merchant’s mobile phone, 

if the merchant types the merchant’s email address into the mobile 

phone, when you pay, anything you do in the future, the receipt 

goes to the merchant, not you. So, for example, if you pay your taxi 

driver and your taxi driver types his address into the mobile phone 

when you pay, the next time you go to the supermarket or something and use that service, the receipt goes to the taxi driver. That 

is not high-quality privacy. That is not something that has to be 

inherent in a mobile system, but it is something we see in the one. 

And so I think what we are going to see is the following: I think 

what is really exciting about mobile and what is going on is it is 

bringing new players in the industry who are bringing in various 

forms of innovation, a lot of which has nothing to do with the mobile stuff. So with Square, coming in and charging lower fees to 

merchants, that is not because of the mobile part. It is because 

they have decided to aggregate small businesses’ business and then 

go to Visa and MasterCard and get a lower rate. Basically, they 

have engaged in merchant service fee arbitrage. 

Now, is it a coincidence that Square is doing that at the same 

time that they are bringing out this new innovative payment reader? I think, no, it is not a coincidence. The technology let a new 

company come in with new ideas, but a lot of the new ideas people 

are bringing in are not really about mobile. 

So what I would say is that the technology has created opportunities, it is bringing in new players, those new players are then 

bringing in a whole lot of new ideas and innovations, often which 

165 

are not really tied to mobile. So it is a great thing, but I think we 

want to be careful about tying too much of that to mobile. I would 

say that even with the underbanked. I mean, I think—I do not understand actually what mobile does for the underbanked that you 

could not do already beyond—and I understand this is how the 

underbanked do use mobile, that they can check real-time balances 

all the time. But, of course, I can use—I could have a mobile app 

to check real-time balances even if I never made a mobile payment 

in my life. 

So on all of these things, I think it is really important to separate out which part is mobile and which part is innovation, because 

if we try and tie them too much together, it just may give us the 

wrong perspective. 

I should turn things over to my fellow panelists. 

Chairman JOHNSON. Ms. Hughes, what do you think? 

Ms. HUGHES. Well, I think Professor Katz has given us a very 

provocative possibility to imagine, and I am inclined to agree that 

many of these innovations have very little to do with mobile. They 

are just payments innovations or great arbitrage opportunities. 

But I would make one simple point, and that is that the more 

people who have their hands on data based on the experience of the 

last few years in particular, the more opportunities there are for 

the introduction of malware or interception of payment data. As I 

mentioned earlier, the banking industry is quite concerned about 

this and about possibly weak incentives for some of these people 

who are not quite at the merchant and not quite at the bank not 

to have strong enough protections in their own systems. 

When we have events such as happened with Global Payments 

not so long ago, a processor, we realize that the more people that 

have hands, the more problems could happen. Now, that is not 

unique to mobile. The thing that might be unique to mobile is an 

enhancement of the number of players in any particular payment 

transaction. That could be problematic. 

Chairman JOHNSON. Mr. Brown. 

Mr. BROWN. I guess I will play the contrarian and be a little optimistic on this point. Although I think it is possible to identify some 

potential downsides, as Professor Katz and Professor Hughes have 

done on the information security issue, I think it is also important 

to recognize that the transition from traditional form factors for 

payments to mobile and the emergence of some of these new technologies that mash up payment functions with other commercial 

functions introduce both new data that people can analyze to 

produce better outcomes with respect to risk and fraud and, second, 

make it easier to introduce dynamic data into the payment infrastructure. 

The issue that creates the risk associated with credit card fraud 

is that the data on the card, both the physical manifestation and 

what is visible on the mag stripe, is static, not dynamic. So once 

it is obtained, it can be used in some circumstances to generate a 

transaction at another merchant. That is an issue with how the 

data currently resides. 

When we make the transition to a mobile device, we have the opportunity to introduce dynamic information, and we can do it in a 

way that is easier. As Professor Katz would point out, if we are 

166 

really concerned about dynamic data, can’t we do it with mag 

stripes? And the answer is yes, though no one is. This inflection 

point provides an opportunity to introduce new data that has the 

potential to make retail payments even more secure than they already are, which, frankly, if you look at the reported fraud numbers on the major payment card systems, is pretty remarkably secure under the existing infrastructure. 

Chairman JOHNSON. I would like to thank our witnesses for their 

very interesting testimony. 

The Committee will continue its series of hearings on the development and adoption of mobile payments in the fall. 

This hearing is adjourned. 

[Whereupon, at 11:04 a.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 

167 

PREPARED STATEMENT OF MICHAEL L. KATZ 

SARIN CHAIR IN STRATEGY AND LEADERSHIP, PROFESSOR OF ECONOMICS, UNIVERSITY

OF CALIFORNIA, BERKELEY

JULY 10, 2012 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for inviting me to appear before you today to talk about mobile payments. 

America’s consumers are increasingly connected via smart phones, tablet computers, and other mobile devices. Many people have predicted that the use of nearfield communications (or NFC), a technology which allows consumers to pay by 

swiping their phones rather than their credit or debit cards, will revolutionize consumer payments at bricks-and-mortar merchants. I disagree. I believe the changes 

associated with NFC and so-called digital wallets will be evolutionary, not revolutionary. There will be a revolution resulting from the ubiquity of smart phones and 

tablets, but that revolution will manifest itself in the ways merchants manage their 

relationships with their customers. 

Today, merchants and consumers already have access to a wide range of payment 

options, including cash, checks, and various payment cards. These options are easy 

to use, widely accepted, and trusted. Moreover, most consumers already have established relationships with payment service providers, and merchants have made significant investments in equipment, systems, and employee training to utilize these 

payment services. In order for new payment services based on smart phones and 

tablets to compete successfully, these services will have to offer merchants and consumers additional value in comparison with current options. Cool technology alone 

will not be enough. 

Merchants will be attracted to mobile payments if those services either lower the 

merchants’ costs of completing transactions or attract additional consumer patronage. How will mobile payment services attract customers to bricks-and-mortar merchants? Surveys demonstrate that consumers want payment services that are widely 

accepted, easy to use, and trustworthy. So how do mobile payments stack up against 

the competition? 

When it comes to paying at bricks-and-mortar merchants, the extent of acceptance 

is a weakness, rather than strength. Indeed, mobile payment services face a chicken-and-egg problem. Specifically, a merchant does not want to bear the expense of 

changing its checkout process to accommodate a new payment service if there are 

few consumers who use that service. Similarly, a consumer does not want to sign 

up for the payment service if there are few merchants who accept it. But if everyone 

waits for everyone else to join first, the new service will never get off of the ground. 

There are several potential solutions to the chicken-and-egg problem but all of them 

rely on a common underlying factor: there has to be some source of benefit that 

makes it worthwhile to invest in overcoming the chicken-and-egg problem. So we 

are back to looking for the source of consumer value. 

An NFC-enabled digital wallet can be more convenient and possibly easier to use 

than a conventional wallet filled with multiple payment cards. It is worth observing, 

however, that most of us are going to have to carry conventional wallets anyway, 

at least until drivers’ licenses and insurance cards and the like also go digital. Moreover, is it really that much easier to swipe your phone than a smart card? In the 

short run, ease-of-use benefits appear to be too limited to be a significant driver of 

adoption. 

That leaves trust as a source of value. Security and privacy are two critical elements of trust. Consumer surveys reveal that many consumers question the security 

of mobile payments, and indeed mobile payment systems do have points of vulnerability, such as the radio interface, that card-based systems do not. Moreover, 

through the use of malicious code downloaded through apps or Web browsing, a 

smart phone can be compromised without the attacker’s having to attain physical 

proximity. Consequently, security is not going to be a positive driver of mobile payment adoption any time soon. Things do not look more promising in terms of privacy. Consumer surveys reveal that many consumers worry that mobile payment 

companies will collect too much personal information and that that information will 

be misused. 

If ubiquity, ease of use, and trust all create too little value to drive widespread 

adoption of mobile payments, what will? I believe the answer lies in the very information that consumers worry will be misused. The widespread adoption of smart 

phones and other mobile devices with increasing capabilities has made it possible 

to collect detailed data about where consumers are and what they are doing. This 

information can be analyzed to predict consumer behavior and used to generate personalized, context-specific, merchant-to-consumer communication delivered in real 

168 

time. The ability to predict consumer behavior and send such targeted messages is 

a very powerful marketing tool that will be worth tens of billions of dollars annually 

to merchants. 

A hypothetical example illustrates some of the possibilities. A mobile payment app 

might alert a coffee retailer at 10:45 a.m. that a person who on most days purchases 

a cup of coffee by 10:30 is just leaving her office and has yet to visit a coffee shop 

today. Taking into account the summer heat and the fact that the retailer is not 

very crowded right now, the retailer could send an email or text message to the consumer offering a 20 percent discount on an iced coffee if she comes into the store 

three blocks away in the next 30 minutes. In summary, information and communication lie at the heart of the coming mobile payment revolution. 

Mobile payments represent the convergence of three industries: telecommunications, banking, and Web services. This industry convergence is going to lead to 

complex regulatory convergence as well. The interplay of economy-wide antitrust 

policy and privacy regulation with the sector-specific regulatory regimes for banking 

and telecommunications is going to be problematical for the industry. It may also 

confuse consumers and given them false senses of security and/or risk. However, 

properly implemented, regulation could foster well-placed consumer trust and, thus, 

promote the adoption of mobile payments. Given the importance of information and 

the complexity of the issues involved in regulating the collection and handling of 

it, public policy concerns regarding privacy will loom large for years to come. 

Thank you again for inviting me to appear before you today. I would be happy 

to answer any questions you might have. 

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INCREASING CONNECTEDNESS AND CONSUMER PAYMENTS: 

AN OVERVIEW 

Michael L. Katz* 

1 May 2012 

* This paper was commissioned by the Federal Reserve Bank of Kansas City. 

Two discussants, Don Kingsborough and Hal Varian, provided helpful 

comments on an early draft I gratefully acknowledge Nokia Corporation's 

financial support for Berkeley's Program in Business Model Innovation. 
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CONTENTS 

I. INTRODUCTION AND OVERVIEW ............................................................................ 1 

II. DOES ANYONE WANT MOBILE PAYMENTS (OTHER THAN 

MOBILE PA YMENT PROVIDERS)? ........................................................................... 6 

A. WHAT Do USERS WANT FROM PAYMENT PRODUCTS? ........ ....................... 7 

1. Merchants' Desiderata ................................................................................ 7 

2. Consumers' Desiderata ........ ....................................................................... 8 

B. WILL iNCREASING CONNECTEDNESS ENABLE PAYMENT SERVICES THAT 

BETTER SATISFY USER DESlRES? ............................................................. 12 

1. Merchant Perspective ................................................................................ 13 

2. Consumer Perspective .. ............................................................................. 14 

III. IT'S ALL ABOUT THE BENJAMINS, AND THE BENJAMINS ARE 

ALL ABOUT THE INFORMATION ........................................................................... 22 

A. I SAW WHAT You Dill, I KNOW WHO You ARE. .......... .... . .... 22 

B. SEARCHING NEAR OR FAR FOR A VALUE PROPOSITION .... .. .. .. ..... .... .. .. ..... . 25 

C. WHO WILL CONTROL CONSUMER INFORMATION? .......................... ..................... 28 

D. REGULATION, REGULATION, REGULATION .. ................. . ....... ......... ... .. .... 31 

IV. GETTING FROM HERE TO THERE ......................................................................... 33 

A. CONSUMER TRUST .... ... ..... ... ... ... .... .. .... .. .. .. .. ...... .. ... ... ... ... .... .. ..... ... .... .. ........ ... ...... 34 

B. NETWORK EFFECTS AND THE CHICKEN-AND-EGG PROBLEM ..... ... .... .. .... .. . .... ...... 35 

V. WHO WILL DO WHAT? .............................................................................................. 41 

A. DON'T GET CARRlED AWAY WITH CARRIERS. . . . ...... ... .41 

B. 

C. 

D. 

E. 

GIVE BANKS CREDIT ... .. .. .. .. ... ... .. .. .. .... .. .. .. .. .. .... .. .. .. .. ... ... . ..... ... ... .. .. .. ........ ... .. .... 46 

WITHER iNCUMBENT PAYMENT CARD NETWORKS? ..... .. .. ..... .48 

WEB-SERVICES COMPANIES ................... ........... ........ ............. ........ ........... .......... 48 

WHAT ABOUT APPLE? ................ .. ............. . .. ...... ..... .49 

VI. CONCLUSION ................................................................................................................ 51 
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I. INTRODUCTION AND OVERVIEW 

1. This paper presents a view of the future consumer payments. Specifically, I opine on 

two questions. First, will the broad trends of consumers' increasingly being connected via 

mobile access devices and engaging in social networking be likely to revolutionize consumer 

payments? Second, if so, what roles will be played by the various payment participants (e.g, 

consumers, merchants, banks, mobile network operators, and nonbank intermediaries)? 

2. This is a rather daunting task. Fortunately (for me, at least) confidently making 

sweeping predictions that fail to materialize is something of a mobile payments industry 

tradition. In that spirit, I will use the occasion to make my own sweeping and, possibly, farfetched predictions. 

3. In short, I believe that, in the United States and other advanced economies, the 

ubiquity of always-connected individuals with access to computing power, coupled with the 

near-total loss of privacy due to social and technological factors, will lead to evolutionary 

developments in core payment services but revolutionary changes in services that are built on 

the information collected through payment services.' Moreover, I think that core payment 

services will become only one component of broader constellations of services that: (a) 

provide consumers an integrated user experience when dealing with merchants, and (b) 

provide merchants with customer relationship management and marketing services, in 

addition to payment services. 

Throughout, when talking about either fi xed or mobile access devices, I will be agnostic as to 

whether the computing power lies in access device itself or the cloud. 
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4. The evolutionary changes in payments will come in the form of additional payment 

options that largely are extensions of existing payment options (e.g., the extension of credit 

card networks to mobile-commerce transactions, and the use of smart phones as smarter smart 

cards through the use of near field communication (NFC)). In the short term, we may see new 

mobile payment products that are complementary to, and offered separately from, existing 

payment products. In the long term, I predict that successful payment products will provide 

consumers the convenience of one-stop shopping. That is, these payment mechanisms will be 

useful for mobile commerce, e-commerce, and traditional bricks-and-mortar commerce, and 

they will be so whether the consumer is buying virtual or tangible goods and services. Widely 

useable payment services will also have the advantage of allowing the service providers to 

collect more comprehensive information about any given consumer. 

5. I believe this latter advantage will be an important one because the revolutionary 

services building on mobile, connected computing and social networking will be those 

services that allow merchants to target their customers based on the information collected 

through payment and social networks. Both of the trends identified in the opening of this 

essay will help incite revolution. First, connected individuals can be identified and tracked so 

that detailed information about their environment and actions can be collected, analyzed, and 

used to generate personalized, context-specific communication that can be delivered in real 

time. Second, social networks can allow the identification of an individual's revealed 

preferences, demographic characteristics, sources of influence, and influencer value. The 

ability to predict consumer behavior, know the consumer's context, and send personalized 

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messages can give merchants very powerful marketing tools, worth tens of billions of dollars 

annually2 

6. Technological and social trends will lead to the convergence of three sectors around 

payment systems: telecommunications, banking, and web services. The communications 

sector will provide fixed and mobile Internet access services that will serve as bases on which 

innovative services will be built Entities in the banking sector will extend credit and provide 

trusted brands. Lastly, a wide range offirms from the web-service sector may be involved, 

with particularly important roles played by social-networking, search, and online-advertising 

providers. 

7. Any given mobile payment service requires the tacit or explicit cooperation of a wide 

range of parties to succeed, including mobile operating system (OS) providers, app 

developers, mobile access device original equipment manufacturers (OEMs), wireless 

telecommunications carriers, financial institutions (e.g., credit-issuing banks and merchantacquiring banks), payment network operators, and possibly others. All of these parties are 

also potential rivals seeking to appropriate profits for themselves. Hence, although these 

parties must cooperate with one another to create value, they compete to capture that value. 

Similar forces arise with respect to the customer-relationship-management and targetedmarketing services that are based on the data collected through payment services and social 

networks. 

As discussed below, the increased understanding of consumer behavior may also have benefits 

for payment products themselves in terms of improved customization of credit terms and 

more-effective fraud detection and control. 

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8. The battles to capture value will occur on several fronts. First, there may be standards 

wars and compatibility battles. I believe that merchant demand for standardization of pointof-sale (POS) transaction-capture devices will lead to the standardization of those devices, but 

that these devices will be flexible enough to interact with consumer devices in a variety of 

ways. Second, there will be struggles to control the customer relationship. However, I do not 

expect there to be one firm or one type of firm that controls "the" customer relationship in this 

area. Rather, a given consumer may have business relationships with several members of the 

relevant value net simultaneously. 

9. The most important battles for control will be over information ownership. 

Revolutionary services will be based on the unprecedented amounts of information collected 

about consumers, and this information will be extremely valuable. Many firms will adopt 

business models predicated on monetizing the information that they collect about their users. 

Consequently, there will be struggles among social networks, other app providers, payment 

network operators, mobile network operators, and even mobile access device OEMs (at least 

in the case of Apple, Inc.) over the ownership and control of this information. In the US., 

regulatory and political pressures will have significant influences on industry evolution and 

who captures value. The convergence of three different sectors is going to lead to complex 

regulatory convergence as welL The interplay of economy-wide competition policy and 

privacy regulation with the sector-specific regulatory regimes for banking and 

telecommunications is going to be problematical for the industry. Given the importance of 

information and the complexity of the issues involved in regulating the collection and 

handling of it, public-policy concerns regarding privacy will loom large for years to come. 

4 
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10. An examination of the broad forces affecting the industry gives rise to several specific 

predictions about the roles likely to be played by various industry participants: 

o The roles of firms in the telecommunications sector will change little. With the 

possible exception of Apple, Inc., I do not see wireless telecommunications carriers 

and mobile access device OEMs playing significant roles in mobile payments beyond 

offering generic infrastructure on which payments services offered by other providers 

ride. 

o The roles of banks will change little. Banks will continue to be an important part of 

the payment ecosystem as providers of credit, for which they possess unique expertise 

based on extensive experience. In addition, in the light of consumer concerns about 

privacy and security, banks may play an important role in reassuring consumers of the 

integrity of mobile payment systems. 

o Current payment card networks will playa central role if they can successfully 

innovate. Traditional payment card networks, such as American Express, MasterCard, 

Visa, and-to a lesser extent- Discover have powerful competitive advantages in 

form of trusted brands and large networks of consumers and merchant users. A 

critical question is whether they possess the organizational capabilities to innovate to 

take advantage of the new possibilities created by pervasive consumer connectedness. 

o Web services firms will play significant roles as information collectors and 

processors. Web services firms, such as Amazon, Facebook, and Google, are largely 

information collection-and-processing companies. To varying degrees, these 

companies have valuable competitive assets that include massive amounts of 
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consumer data and the ability efficiently to collect, store, and analyze those data to 

model consumer behavior. Given these assets, I expect a few of these firms to be very 

successful in this area. 

11. The remainder of this paper is organized as follows. Section II examines whether 

consumers and merchants are likely to derive significant new benefits from the types of 

payment services and features enabled by increasing consumer connectedness. The presence 

or absence of such benefits will have a significant impact on the likelihood that mobile 

payments and social-network-based payment services are likely to be widely adopted. 

Section III discusses the potential uses of the consumer information that would be collected 

by these payment services. It also discusses the likely struggle for control of that information. 

Section IV then discusses some of the possible reasons why these payment services have not 

been widely adopted to date, and it identifies some of the strategies that may overcome these 

barriers to adoption. These first three substantive sections set the stage for Section V to offer 

a predictive analysis of the likely winners and losers among the various types of firms that 

will be involved in providing new payment services. A very brief summary section closes the 

paper. 

II. DOES ANYONE WANT MOBILE PAYMENTS (OTHER THAN MOBILE 

PAYMENT PROVIDERS)? 

12. "Mobile" payment services already are offered by cash, checks, and various payment 

cards. These payment instruments are light-weight, compact, widely accepted, and easy to 

use. Rightly or wrongly, American consumers are also very comfortable with these payment 

instruments with respect to privacy and security. Moreover, most consumers already have 

established relationships with payment service providers, and merchants have made 

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significant investments in POS transaction-capture devices (e.g., card readers and cash 

registers), employee training, and supporting information technology systems to utilize these 

payment instruments. These facts raise the question: do merchants and consumers want new 

payment options based on mobile access devices and/or social networks? The answer to this 

question is important because, if merchants and consumers do not see value in a new payment 

service, then that service is very unlikely to succeed. Cool technology alone is not enough. 

A. WHAT Do USERS WANT FROM PAYMENT PRODUCTS? 

13. New payment services will be successful only if they offer merchants and consumers 

additional value sufficient to induce them to change payment methods or service providers. 

What are the sources of value to these users? 

1. Merchants' Desiderata 

i4. Logically, the ideal payment service from a merchant's perspective is one that imposes 

low costs on the merchant and is used by a large number of consumers to make purchases in 

high volumes. And, indeed, in their empirical examination of merchant behavior with respect 

to mobile payment services, Mallat and Tuunainen (2008) found "that the main adoption 

drivers are related to the means of increasing sales or reducing the costs of payment 

processing" 3 

i5. Merchants care about the complete set of costs that they incur to utilize a payment 

service. These costs include: (a) the fees, ifany, charged by the payment service provider 

(e.g., the merchant discounts charged by a credit card network); (b) expenditures on activities 

Niina Malia! and Virpi Kristiina Tuunainen (2008) ''E-xploring Merchant Adoption of Mobile Payment 

Systems: An Empirical Study," e,Se/Vice J01lma/6(2): 24-57 (hereinafter, MalIa! and Tuunainen (2008)) a! 

24. 

7 
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that must be undertaken by the merchant to utilize the payment service (e.g. , employee 

training and the wages and real-estate costs associated with using the payment service at 

check out); (c) payments to third-parties for activities related to using the payment service; 

and (d) costs incurred to detect and prevent fraud by consumers, the merchant's employees, or 

other members of the relevant payment service value net. 

16. Most merchants feel the need to accept payment services that consumers would like to 

use. Hence, merchant demand for payment services is derived in large part from consumer 

demand. Indirectly at least, merchants want what consumers want. In general, a merchant 

will be especially interested in a payment instrument that allows the merchant to attract 

customers who would not patronize the merchant absent the ability to utilize that payment 

service. Indeed, a rational merchant will accept a high-cost payment service if doing so 

allows the merchant to attract customers who would otherwise not patronize it. 

2. Consumers' Desiderata 

17. Because merchant demands are largely derived from consumer demands, it is 

particularly important to understand what consumers want from a payment service and 

whether they are likely to adopt mobile payment solutions 4 The research literature has 

identified several factors that influence consumer demand for mobile payments. In their 

survey of American consumers, Dewan and Chen (2005) interpreted the results as suggesting 

"that consumers realize the potential benefits (e.g. improved transaction speed and 

convenience) ofmPayment, but at the same time, consumers are expressing grave security 

For purposes of this paper, it is sufficient examine the drivers of consumer adoption at a broad 

level. In practice, consumer payment decisions are typically made at the transaction level, and 

the choice of payment instrument can vary with consumer characteristics, transaction 

characteristics, and payment-service characteristics. 

8 
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and privacy concerns." 5 Based on their survey of New Zealanders, Viehland and Leong 

(2007) found that convenience was a key reason for consumers to choose mobile payments, 

while being less convenient than cash, and concerns about security-particularly 

confidentiality- were prominent barriers to adoption6 In addition, the authors found that an 

aversion to paying service fees was the single reason most often stated for no using mobile 

payments.' In a more recent study, Andreev et af. (2011) found "empirical evidence that 

trust, willingness to transact, and perceived ease of use are key factors in explaining [aJ 

consumer's willingness to make an m-payment, with trust having the largest explanatory 

power." , 

18. It is useful to examine several different dimensions of consumer preferences in tum. 

19. Convenience and ease oillse: It seems to be intuitively clear that consumers want 

mobile payments to be quick, easy, and not require a lot of knowledge specific to a particular 

payment service. However, Andreev et at. (2011 , p. 122) found 

that while causation exists between perceived ease of use and 

willingness to make an m-payment, the association is relatively weak. 

This illustrates that perceived ease of use of the technology is not a 

Sunil Dewan and Lei-da Chen (2005) "Mobile Payment Adoption in the US: A CrossIndustry, Cross-Platform Solution," Journal of Information Privacy and Security, 1(2): 4-28, 

available at 

http://www.sunildewan.comluploads/mpayment Journal of Information Privacy and Securi 

.!YJ2Q1 site visited April 23, 2012 (hereinafter, Dewan and Chen (2005)), at 23. Page cites 

made to this document correspond to the version available at URL above. 

Dennis Viehland and Roslyn Siu Yoong Leong (2007) "Acceptance and Use of Mobile 

Payments," AClS 2007 Proceedings, Paper 16, Tables 4 and 5. 

Jd , Table 5. 

Pavel Andreev, Aidan Duane, Philip O'Reilly (2011) "Conceptualizing Consumer Perceptions 

of Making M-Payments Using Smart Phones in Ireland," in Researching the Future in 

Information Systems, Chiasson, Henfridsson, Karsten, and DeGross (ed.s). Springer: Boston 

(hereinafter Andreev et al. (20 II)) at 122. 

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key detenninant of consumers' willingness to make an m-payment 

using a smart phone. 

Similarly, Schierz e/ at. (2010) found that perceived ease of use was much less important for 

intention to use than was "perceived compatibility," where perceived compatibility was 

measured by the answers to questions regarding whether the respondent agreed that mobile 

payment services fit well with his or her lifestyle and the way in which he or she likes to 

purchase products and services 9 

20. Ubiquity: Consumers generally want a payment instrument that they can use to make 

payments at their preferred merchants. Hence, all else equal, the greater the number and 

variety of merchants accepting a given payment service, the more attractive one would expect 

that service to be to consumers. Although he is careful not to assert that he has established 

causation, in his empirical study of credit card usage, Marc Rysman (2007) found that a 

consumer's choice of card network as his or her favorite is positively correlated with the 

degree oflocal merchant acceptance of that network, which suggests a positive feedback loop 

between merchant card acceptance and consumer card usage. \0 

\0 

The correlation between perceived compatibility and perceived ease of use was only 0.25. 

(Paul Gerhardt Schierz, Oliver Schilke, and Bernd W. Wirtz (2010) "Understanding consumer 

acceptance of mobile payment services: An empirical analysis," Electronic Commerce 

Research and Applications, 9(3): 209-216 at 215.) 

Other authors have also examined the effects of compatibility on adoption. Because of its 

somewhat amorphous nature, I do not discuss it further in the present paper, except to note 

two points. First, because consumers' notions of compatibility can vary by transaction type 

(e.g. , quick service restaurant purchases versus major appliance purchases), these notions can 

have important effects on the types of transactions for which consumers will use mobile 

payments. Second, I fully expect the population of users obsessed with their iPhones to find 

any Apple mobile payment service to be compatible with their lifestyles. 

Marc Rysman (2007) "An Empirical Analysis of Payment Card Usage," The Journal of 

Industrial EconomiCS, 55(1): 1-36. 

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21. Security and privacy: As noted above, studies have found that consumers are 

reluctant to use payment services that they do not trust. Similarly, Mallat (2007) found that 

consumers were more willing to transact with trustworthy parties. 11 Security and privacy are 

two critical elements oftruSt. 12 

22. Credit: At the start of2012, American consumers had approximately 800 billion 

dollars ofrevolving-credit debt1 3 Manifestly, many American consumers desire the provision 

of credit by some-although by no means all-payment services. 

23. Rewards: Many consumers are more willing to use a payment service if they are paid 

to do SO. 14 Indeed, regulators in several nations (most notably, Australia) have expressed 

concern that credit-card rewards programs have led to consumers' using credit cards to a 

greater extent than is efficient. The use of rewards programs to motivate consumer use of 

mobile payment services may be a particularly important factor ifit turns out that these 

services do not offer significant additional value for consumers but do generate significant 

benefits for merchants or for payment service providers in some other way (e.g., the 

monetization of the information they collect about consumer behavior). 

11 

12 

13 

14 

Niina Mallat (2007) "Exploring consumer adoption of mobile payments - A qualitative 

study," Journal of Strategic Information Systems, 16: 413-432 (hereinafter, Mallat (2007) at 

424. 

For example, Andreev et af. (20 II, p. 123) found that "that consumer's [sic] perceptions of the 

privacy controls employed by smart phone service providers is [sic] a critical element of 

trust." 

Federal Reserve Bauk, Consumer Credit - G.19, released April 6,2012, available at 

http://www.federalreserve.gov/releases/gI9/currentldefault.htm. site visited April 27, 2012. 

See Andrew Ching and Fumiko Hayashi (2010) "Payment card rewards programs and 

consumer payment choice," Journal of Banking & Finance, 34(8): 1773-1787, and the 

references cited therein for empirical estimates of the sensitivity of consumers' choices of 

payment instruments to the presence of reward programs. 

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24. Account management tools: Clearly, consumers desire the ability to monitor their 

accounts to at least some degree in order to check their balances, review the transactions 

charged against their accounts, and keep tabs on the finance charges levied on them. 

B. WILL INCREASING CONNECTEDNESS ENABLE PAYMENT SERVICES THAT 

BETTER SATISFY USER DESIRES? 

25. What difference does it make for payment services that consumers are increasingly 

connected through mobile access devices and social networks? Consider first the effects of 

pervasive social networking. I, at leas~ lack the imagination to see social networking having 

a huge influence on payment services narrowl y defined. One could imagine embedding a 

payment service within a social network to facilitate online shopping or to transfer money 

among friends, but this strikes me as being a modest extension of the scope of existing 

services rather than a breakthrough new service. 

26. Turning to connectedness through mobile access devices, the widespread adoption of 

smart phones and wireless tablets gives rise to several capabilities, including: 15 

15 

• Consumers almost always have the ability to establish two-way communication links 

with merchants and/or payment networks. 

• Consumers almost always have memory and processing power easily accessible to 

them. 

• Consumers almost always have sensors with them, which may detect and report 

information such as location and temperature, or capture video images. 16 

Although tablets are generally more capable than smart phones, consumers are less likely to 

have tablets with them and readily accessible at all times. Hence, tablets may be the preferred 

means of engaging in e-commerce transactions at home but smart phones will be used while at 

bricks-and-mortar retailers. 

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27. In order to predict whether these capabilities will enable successful new payment 

services, one must examine if and how these capabilities enhance the ability of payment 

services to offer value to consumers and merchants. 

1. Merchant Perspective 

28. As discussed above, merchants will value payment services that make use of 

increasing consumer connectedness if those services either lower merchants' costs of 

completing existing transactions or attract additional consumer patronage. 

29. Mobile payment services might lower merchants' costs by charging lower fees than 

current services. In theory, lower fees could arise because: (a) mobile infrastructure is less 

costly than existing infrastructure, which seems unlikely in practice; (b) other features of 

mobile payments facilitate new entry, which leads to increased competition in the provision of 

payment services; or (c) mobile payments services have other revenue streams (e.g, the sale 

of consumer information), which create incentives to charge lower prices to merchants and 

consumers in order to generate additional use. Mobile payment services might also lower 

merchants' costs in other ways, such as reducing the length of time it takes a consumer to 

check out of a store or restaurant. 17 For example, Starbucks offers a mobile app to its 

customers that draws funds from Starbucks prepaid loyalty-card accounts and generates two16 

17 

I will not discuss them further, but it is worth noting in passing that there are also new features 

and services enabled by the form factors of mobile access devices compared to traditional 

payment cards. Even the smartest smart card cannot change its look and logo in real time. 

But a smart phone or tablet can. This fact opens new possibilities for co-branding. For 

example, a mobile payment account might be co-branded with petroleum company when used 

to buy gas and a department store when used to purchase clothing. 

There might be potential cost savings for very small merchants from using smart phones or 

tablets as their primary point-of-sale, transaction-capture devices (one of Square's principal 

services offers these benefits, among others). 

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dimensional barcodes that customers can use to pay for purchases by having the codes 

scanned at the point of sale. The president of Starbucks' US operations stated that a primary 

benefit of the application is the ability to speed up the checkout process. 18 

30. In terms of attracting additional customers, mobile payment services clearly are 

valuable to merchants that rely on online shopping channels; many consumers do online 

commerce via smartphones and, especially, tablets. Mobile payment services will also be 

valuable to merchants if there are other reasons that consumers value using mobile payment 

services even when not engaging in online shopping. 

2. Consumer Perspective 

31. So why would a consumer want to use a mobile phone or other wireless access device 

to pay for something? Consider how the new capabilities identified above affect the ability to 

satisfy the consumer wants identified above: 

32. Ubiqllity: At least initially, mobile payment services might serve as complements to 

traditional payment services by extending the reach of their merchant acceptance networks. 

E-commerce transactions require Internet access. Many people's first choice for an Internet 

connection is their phone or tablet This is especially likely to be true for consumers 

purchasing apps or content for their phones or who are traveling, but it is also true for many 

consumers ordering tangible goods online from home, such as when watching television in 

their living rooms. 

18 Kate Fitzgerald, "Starbucks National Push for Mobile Payments," American Banker, 

December 3, 2010, available at http://www.americanbankercomlissuesIl75 232/starbucksmobile-payments-l029437-Lhtml, site visited March 12,2012. 

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33. Convenience and Ease oj Use: Eventually, people may stop carrying wallets to hold 

cash and various identification cards, such as drivers' licenses and insurance cards. If all of 

this information were stored in a smart phone, then storing payment-service infonnation there, 

too, would be a benefit. But in the short run, people will continue to carry traditional wallets. 

This fact raises the questions: How hard is it to swipe a traditional credit or debit card, and 

why is it better to swipe a smart phone than swipe a traditional wallet with a contactless smart 

card in it? 

34. The only advantage I can see is the following. If you are one of those annoying 

people who talks on your mobile phone when you should be handing your credit card to the 

cashier, now the cashier can simply grab your phone, swipe it, and send you on your way. In 

other words, I don't see much of a benefit from swiping a phone instead of swiping a card. 

But then again, I am the sort of person who would rather talk to my dinner companion than 

spend my time in the restaurant checking in on Facebook to tell people I am having dinner. 

35. There are services that go beyond being a smarter smart card and eliminate the need 

for even contactless swiping. For example, Square has a service that does not require the 

consumer to touch his or her phone or a payment card in order to be billed.

I9 Such services 

are manifestly more convenient, but they raise issues of consumer trust. One can imagine it 

taking a long time for consumers to adopt this payment method anywhere other than 

merchants at which they shop regularly (e.g. , to get their morning coffee of quick-service 

lunch). 

19 https://sguareup.comlpav-with-sguare, site visited April 20, 2012. 

IS 
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36. Security and Privacy: Consumers might be induced to use a mobile payment service 

if they thought it were more secure and/or offered greater privacy protections than other 

payment options. Existing studies, however, indicate that many consumers hold the opposite 

view. For example, Dewan and Chen (2005) found that over half of the consumers 

responding to their survey felt that mobile payment systems were either "not secure" or "not 

secure at all," while just under halffelt these systems posed either a "high risk" or "very high 

risk" to privacy.20 The biggest concerns regarding security were whether the transactions 

would be properly authenticated and whether the data exchanged during the transactions 

would be available to unintended users 21 In terms of privacy concerns, Dewan and Chen 

(2005) found that almost half of the consumers responding to their survey expressed concern 

about mobile payment companies' collecting too much personal information; over a quarter of 

respondents were concerned that personal information in the companies' databases would be 

used for purposes consumers had not authorized; and over a quarter of respondents were 

concerned that their personal information in the companies' databases was not protected. 22 

The consumers surveyed expressed much less concern about errors in the information 

contained in the databases2 3 More recently, a consumer survey conducted in late 2011 found 

20 

21 

22 

23 

Dewan and Chen (2005) at 14. 

Jd at 15 and 16. 

ld at 17 and 18. 

Id 

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that the vast majority of consumers considered their personal computers to be more secure 

means of online shopping than their mobile phones or tablets. 24 

37. Will technological developments make mobile payments more secure? Some 

observers credit mobile payment services with having authentication based on devices (i.e., 

mobile phones) that are identified with particular individuals. But existing payment cards 

already possess this property. One might argue that mobile access devices are superior to 

payment cards as authentication tokens because the former can provide biometric 

authentication capabilities. However, those capabilities could more reliably be delivered by 

merchant-controlled POS devices that could check a consumer's claimed identity against a 

network database of biometric information25 

38. Although personal devices and biometrics do not distinguish mobile payment systems, 

consumers' having the ability to establish two-way communication links with merchants 

and/or payment networks does. Specifically, an always-connected buyer can direct payment 

to a merchant via communication with a payment network, without relying on the merchant's 

facilities 26 This means that a consumer could communicate solely with a trusted partner 

24 

25 

26 

Ann Canms, "Consumers Leery of Online Shopping with Tablets and Phones," The New York 

Times, January 27, 2012, available at http://bucks.blogs.nytimes.comJ2012/01l27/consumersleery-{)f-online-shopping-with-tablets-and-phones/, site visited April 30, 2012. 

The identity claim might be made by a consumer orally, by swiping his or her payment card, 

or by a message sent by his or her mobile phone to the merchant. 

With an NFC-based service, the consumer's mobile access device would still communicate 

with a POS tenminal controlled by the merchant. But in other cases, such as the use ofWiFi 

or traditional cellular services, the consumer's mobile access device could communicate with 

the payment network "directly." The Pay with Square service allows this to be done. 

(https:llsquareup.com/pay-with-square, site visited April 20, 2012.) 

In contrast, Square's innovative mobile card reader reportedly can easily be used to skim 

credit card infonmation. Square's defense is that all credit cards can be skimmed. ("Square 

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when dealing with potentially untrustworthy merchants. This makes the system much safer in 

terms of certain types of merchant fraud, such as card skimming. In addition, an alwaysconnected consumer can be provided real-time fraud alerts and as well as the ability to engage 

in real-time tracking of transactions. For example, with Pay with Square, a consumer gets a 

notification on his or her mobile device confirming the payment. 27 

39. Mobile systems also have vulnerabilities. Overall, the use of wireless might well be 

expected to weaken security because there are more points of vulnerability (e.g., the radio 

network) at which to hack a smart-phone-based system than a smart-card-based one. 

Moreover, through the use of malicious code downloaded through apps or web browsing, a 

smart phone can be compromised without the attacker's having to attain physical proximity. 

40. New payment services, mobile or otherwise, may have to make tradeoffs between ease 

of use and privacy. For example, in a message to merchants, Square states that 28 

[a]fter a customer elects to receive a receipt via email or text message, our 

system links the entered email address or phone number to their payment 

card. This way, the next time they pay with Square their information 

automatically populates, making the process much faster. 

Because of this feature, if you happen to enter your own information for your 

customers' receipts, you'll receive their receipts any time they pay another 

Square user with the same card. 

Although this process may be convenient, one cannot say that it provides state-of-the-art 

privacy. 

27 

28 

answers VeriFone's accusations on security of mobile credit card reader," Los Angeles Times, 

March 10, 20 II, available at http://latimesblogs.latimes.com/technologvI2011 /03/squareanswers-verifones-accusations-Qn-security-of-mobile-credit-card-reader.html , site visited 

April 20, 2012.) 

https://help.squareup.comlcustomer/portal!artic1es/l 08037 -pav-with-square-where.,;an -i -findmy-receipts-and-pavrnent-history- , site visited April 20, 2012. 

https://help.squareup.comlcustomer/portal!artic1esIl 97741 , site visited April 12, 2012. 

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41. This example brings up a broader point American consumers have a history of saying 

that they care deeply about privacy and security (especially with respect to new technologies) 

but then acting as if they care little. To the extent that mobile payments services are less 

trustworthy, consumers ultimately may not be troubled. And there may turn out to be limited 

demand for the additional security features that mobile payments systems can provide. For 

example, an e-commerce solution in which people handle payment transactions on a web page 

that is not accessed through the merchant's web page would be easy to create, yet to my 

knowledge consumers typically get to services such as those offered by PayPal by being 

redirected by the merchant's web site, and many customers are very comfortable with the 

security of those services. 

42. Credit. Mobile payment services and social network generate information on a 

consumer's context and transaction histories. Figure 1 below presents a schematic view of 

important potential information flOWS 29 As illustrated by the figure, this information could 

serve as additional input into credit scoring models (for example, if other members of your 

social network have poor credit histories, then you might receive a lower credit score than 

otherwise). 

29 There could also be flows in addition to those illustrated in this simplified diagram. For 

example, some merchants might interact with the issuing bank directly, and merchants and 

social networks might also exchange information. 

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Figure 1 

Using Additional Information to Improve Credit Offers and Rewards Offerings 

Social Network 

/ j

Stated preferences 

& friend structure 

Consumer -- Issuing Bank Merchant 

\ j

(partially)reveale! 

preferences 

Payment Network 

43. Rewards: As also illustrated by Figure I, the information collected by mobile 

payment networks and social networks could be used to improve payment-service rewards 

programs, such as airline mileage points offered for credit card use. Although card issuers 

collect considerable information about consumer transactions, to my knowledge no issuer 

today offers real-time, context-sensitive rewards. Consumer connectedness could change that. 

Sophisticated, real-time, context-sensitive payment-service rewards programs are enabled by 

the presence of consumer mobile access devices with form factors that allow the display of 

graphics. I will say more on this point when discussing the broader uses of consumer 

information in Section III below. 

44. Account management and customer service: One drawback (at least from the 

consumer's perspective) of many ifnot most stored-value cards in use today is that they are 

not readily auditable by the user In principle, a smart-phone-based stored value card could 

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also store a transaction history that was easily reviewable by the consumer. In addition, such 

a card could take advantage of consumer connectedness to allow remote recharging. More 

broadly, real-time communication with relevant financial institutions enables the provision of 

more sophisticated and up-to-date account management services, such as checking a credit 

account balance while in a store considering a purchase. 

45. In summary, the analysis of this section suggests that the changes in pure payment 

services due to pervasive mobile connectivity and social networking will be evolutionary, not 

revolutionary. Pervasive mobile connectivity and social networking will facilitate payment 

service features that offer additional value to consumers and merchants. In many respects, 

however, mobile payments primarily will be an extension of various existing e-commerce 

payment options to a new set of Internet access devices. I also think that consumers will want 

the extension to be linked closely to existing systems. I suspect that many consumers do not 

want to have to use one payment instrument for online purchases made using a traditional 

personal computer and another payment instrument for online purchases made using a smart 

phone or tablet computer. 30 

30 There may be limits to consumers' desire for one-stop shopping. For example, one 

interpretation of Pay Pal's success is that consumers want to have a limited account when 

transacting with merchants in whom consumers have less trust (this is my interpretation of 

PayPal 's apparent appeal from hiding a consumer's credit card information from a merchant 

while potentially exposing the user's PayPal password. Of course, such preferences could be 

accomplished by a single payment mechanism that had different transaction and liability limits 

for different classes of merchants. 

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III. IT'S ALL ABOUT THE BENJAMINS, AND THE BENJAMINS ARE ALL 

ABOUT THE INFORMATION 

46. If pervasive mobile connectively and social networking are not going to revolutionize 

payment services, then why are so many people so excited about mobile payments? I believe 

some are excited because they are mistaken. But others are properly excited by the potential 

of mobile payment services (and social networks) to generate vast amounts of information 

about consumer behavior, which can then be sold for tens of billions of dollars annually. 

Indeed, it may turn out to be a profitable business model for a payment network to pay 

consumers and merchants to use its service so that the network can collect information that it 

then sells to advertisers and other businesses. 

A. I SAW WHAT You DID, I KNow WHO You ARE. 

47. Connected individuals can be identified and tracked. Mobile payment transactions 

generate valuable information regarding current context and transaction histories. 31 As others 

have observed, context can include a wide variety of information, including "the location of 

the user, surrounding weather, user's current yearn, social relations with nearby users, 

bandwidth of the user's mobile device, screen size of the mobile device"32 Transaction 

histories may themselves include the contexts in which payment transactions were made and, 

potentially, even information about situations in which consumers shopped but did not 

complete purchases. In addition, consumers' participation in social networks can allow the 

31 

32 

As discussed below, consumers may also be connected through the facilities of the payment 

network itself. 

Janne Lukkari, Jani Korhonen, and Timo Ojala (2004) "SmartRestaurant: mobile payments in 

context-aware environment," ICEC '04 Proceedings of the 6th International Conference on 

Electronic Commerce, Janssen, Sol, and Wagenaar (ed.s), 575-582 (hereinafter Lukkari et al. 

(2004)), at 576. 

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identification of an individual 's revealed preferences (e.g. , what commercial postings he or 

she clicks on), stated preferences (e.g., what approval or "like" buttons he or she clicks on and 

what recommendations he or she makes to others), demographic characteristics, sources of 

influence, and influencer value. 

48. Figure 2 provides an illustrative schematic of some of the most important information 

flows 

Figure 2 

The Art of the Deal Network 

/ 

Social Network 

J

Stated preferences 

& friend structure 

Ad/Deal 

Consumer -- Network --- Merchant 

\ 1

(partiaIlY) revealed 

preferences 

Payment Network 

! 

Issuing Bank 

It is important to note that this diagram identifies different conceptually distinct functional 

roles. In practice, a single enterprise might serve as the social network, ad/deal network, and 

payment network. 

49. The information collected through mobile payments and social-network based 

payments could be valuable in multiple uses. As discussed above, some uses are directly 

rated to payment services, particularly the offering of consumer credit But the far greater 

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value will come from uses outside of the traditional payments sector. Once connected 

individuals have been identified and tracked, and their behavior analyzed, they can be sent 

personalized, context-specific communications from merchants as part of broader 

relationship-management strategies. 

50. The context on which the communications are customized can include elements of the 

consumer's current status (e.g. , whether he or she is near a particular coffee retailer, the time 

of day, and evidence whether he or she has recently purchased coffee) and also certain aspects 

of the merchant's current status (e.g. , whether the restaurant is crowded or empty, or whether 

the retailer has an excess stock of certain products). In terms of relationship management, 

sales histories can playa large role and can allow a merchant to reward its "loyal" customers 

with special deals. 33 A merchant could even offer social loyalty programs, whereby the deals 

offered to a set of consumers are related to the consumers' collective actions 34 

51. Consumers' current contexts and transaction histories could, in theory, be used to: (a) 

support programs of personalized pricing and customized offers or deals; (b) improve the 

targeting of advertising (including direct mail, robo-calls, and various forms of online ads); 

and (c) improve the quality ofIntemet search. For example, Facebook allows advertisers to 

target their audience with reference to users' location, language, education, work, age, sex, 

33 

34 

I place the word loyal within quotation marks because one might argue that truly loyal 

customers do not require special deals to be induced to patronize the merchant 

By way of comparison, Groupon currently facilitates offers that are sensitive only to the 

merchant's context (and not in real time) and that are very crude in terms of relationship 

management Although in at least some cases intended to serve as introductory offers that 

begin longer-term relationships, the big discounts associated with Groupon deals may 

encourage an adversarial attitude of consumers toward merchants. Groupon has what some 

observers label a "social" element, but it is among strangers and is not- in my view- properly 

viewed as a loyalty program. 

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birthday, relationship status, likes and interests, whether they are fans of the advertiser's 

Facebook page, and whether they are friends offans of the advertiser's Facebook page35 

Moreover, if it could be aggregated, the information from social networks combined with that 

from payment networks could create powerful measures of a consumer's influence on other 

consumers, and many businesses are willing to pay to identify major influencers. 

B. SEARClllNG NEAR OR FAR FOR A VALUE PROPOSITION 

52. As were several earlier years, 2012 is supposed to be the year general-purpose 

payment products based on near-field communication (NFC) take off I am doubtful. 36 This 

doubtfulness springs from the fact that other wireless technologies, such as WiFi and 

traditional cellular networks, offer a broader range of possibilities and greater potential for 

value creation. 

53. NFC can provide some incremental benefits in the form of added convenience and 

functionality at check out. For example, some consumers would very likely prefer to waive 

their phones in the air rather than swipe their payment cards in a traditional reader, and NFC 

could support additional promotional activity at check out, similar to existing instant coupons 

generated at check out. Hence, NFC may make sense for the established payment networks, 

such as MasterCard and Visa, because it provides their users one more option and may be a 

particularly useful alternative for merchants with high volumes oflow-value transactions. 

35 

36 

See http://www.facebook.comlbusiness/ads. site visited April 20, 2012. 

I believe dlat NFC is more likely ultimately to be remembered as "never fulfilled claims." 

Those readers will telecommunications backgrounds will recognize this prediction as a tribute 

to the person who first observed that ISDN stood for "it still does nothing," rather than 

"integrated services digital network. " 

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54. The really exciting possibilities, however, come from communication between the 

consumer and merchant before the consumer gets to the checkout line. 37 The widespread 

adoption of smart phones and other mobile devices with increasing capabilities is making 

possible new services and products that will revolutionize the interactions between consumers 

and merchants. 

55. The potential for mobile communications between a merchant and a consumer not 

next to the POS transaction-capture device (what might be termed "far field communication") 

has long been recognized. One example is a service known as SmartRestaurant, which was 

tested over eight years ago. This service allowed a customer to use his or her mobile access 

device to view a menu, place an order, pay for the order, and set a pick-up time38 In 

comparison with in-establishment ordering, the consumer benefited from being able to order 

and pay from a convenient location and then go through a much quicker pick-up process. The 

merchant benefited from having additional time to plan and adjust food preparation 39 

56. One aspect of the service that was critical to enabling these consumer and merchant 

benefits was that the service made use of communication before the consumer reached the 

checkout counter. Indeed, the consumer and merchant communicated with one another before 

the consumer was even at the merchant's site. Of course, people have been faxing lunch 

orders for many years. And now, people can submit orders using a fixed-line Internet or 

mobile connection. In that respect, these are evolutionary changes. 

37 

38 

39 

Like a dog taught to walk on two legs, NFC could do other things. NFC swiping stations 

could be set up in the store aisles or showrooms so that consumers could seek information on 

the products and available deals. 

Lukkari et aL (2004) at 576. 

Id 

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57. With the rise oflocation-aware devices, the possibilities for communication between 

merchants and nearby consumers become far greater and the nature of the communication can 

fundamentally change. For instance, several vendors are making use of geofencing 

technologies, whereby a potential customer is sent promotional messages ifhe or she comes 

in proximity to a designated retail outlet 40 In October 2010, for example, Starbucks teamed 

with the wireless network operator 02 to offer a geofencing program promoting Starbucks' 

Via instant coffee. When a participating consumer was sufficiently near a Starbucks store or 

a grocery store that sold Via, a discount coupon was issued via SMS41 More generally, the 

message sent to a consumer as part of a geofencing program can contain: special pricing; 

information about the retail location's address, contact information, and operating hours; and 

information about the availability of specific products 42 

58. The Pay with Square service described above al so relies on geofencing, in this case 

100-meter geo-fences based on WiFi 43 The geofencing allows the consumer to "set up 

40 

41 

42 

43 

See, for example, Chantal Tode, "Will wide-scale adoption of geofencing happen this year?" 

Mobile Commerce Daily, April 16, 2012, available af 

http://www .mobilecommercedaily .coml20 12/04/ 16/geofencing-strategies-on -the-rise-butchallenges-remain, site visited April 20, 2012. 

Placecast, "02 Case Study," available at http://placecast.netlresearchlcase studv o2.pdf, site 

visited April 20, 2012, at ° L 

For a description of one such service, see http://placecast.netlshooalerts/operators.html , site 

visited April 20, 2012. 

https://help.sguareup.comlcustomer/portal/articles!223248-new-how-do-i-set-up-auto-open-incard-case- , site visited April 20, 2012. 

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Square to automatically open your tab when you walk in the door" of a merchant. 44 

According to Square, there is no need for the consumer to touch his or her phone or wallet 45 

59. One could easily imagine other microfencing applications along these lines. For 

instance, a consumer might visit a bricks-and-mortar retailer, pick up the desired items, and 

then simply walk out of the store. RFID tags on the items, coupled with identification of the 

consumer's mobile access device, could be used to generate an automatic charge to the 

relevant payment account. Clearly many other opportunities for innovative new services 

exist. 

C. WHO WILL CONTROL CONSUMER INFORMATION? 

60. If information is where all the money will be, then intense battles to own and control 

access to that information can be expected. Figure 3 illustrates the information channels that 

may be wireless, and it provides a finer breakdown than does Figure 2. As Figure 3 

illustrates, potentially one or more of the following groups might control important pieces of 

consumer information: wireless carriers, mobile access device manufacturers, mobile OS 

developers, app developers, consumer banks, and payment networks. Consequently, there 

may be struggles for control that cut across the telecommunications, financial services, and 

web services sectors. There may also be struggles within each sector. For example, app 

developers, mobile access device OEMS, mobile OS providers, and wireless carriers all may 

lay claim to consumer information related to mobile payments. 

44 

45 

https://sguareup.com/pay-with-sguare, site visited April 20, 2012. 

M 

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Figure 3 

Who will Control Consumer Information? 

/ Social r0rk 

App/OS/ Ad/Deal 

Consumer ~ Devlce/ ~ Network -- Merchant 

Carner I 

\ Payment Network 

+-+ Communication link provided 

by mobile network operator 

1 

Issuing Bank 

61. Within the financial sector, MasterCard and Visa may have disagreements with cardissuing banks with respect to who has the rights to use transaction information. At least for 

now, both Visa and its issuing banks appear to be able to use the information: 46 

46 

Gap and Visa began a pilot of [aj real-time text message system in November 

(2010). Customers enrolled via a secure website and were sent Gap offers 

when they used their Visa cards to complete transactions that met certain 

criteria -- for example, they may have had to buy something at a store in a 

specified ZIP code, or shop during a certain time period. Once the offers 

appeared on their phones, the customers took advantage of them by showing 

Matt Hamblen, "Visa, Gap use text messages to mobile phones for promotions," 

Compllierworld, April 21 ,20 II , available al 

http//www.computerworld.com/s/article/9216060Nisa Gap use text messages to mobile 

phones for promotions, site visited April 28, 2012. See also, Sarah Perez, "Visa Launches 

Real-Time, Location-Based Discounts for Gap Customers," ReadWrileWeb, April 21, 2011 , 

available al 

http//www.readwriteweb.com/archivesNisa launches real time location based discounts f 

or gap customers.php, site visited April 28, 20 12. 

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the text messages to Gap sales clerks. 

This pilot is notable because it is my understanding that this relationship between Visa, Gap, 

and consumers was not mediated by either a card-issuing bank or a merchant-acquiring one47 

62. One could even imagine consumers controlling their own information. For example, a 

consumer might have a low-cost app that allowed him or her to control who had access to his 

or her personal information, with the possibility of demanding compensation for the right to 

use this information. Here, pervasive social network poses some interesting difficulties. 

Would your friends be allowed to sell or give away what they know about you even if you 

refused to provide the information yourself? In any event, I believe that it is implausible that 

American consumers will go to the trouble of managing their information to this degree 

unless it is made very easy to do so. 

63 . "Ownership" of "the" customer relationship is often seen as critical point of strategic 

control in economic ecosystems and might be seen as a way to control access to consumer 

information. However, there may be multiple customer relationships that come into play 

simultaneously in the area of mobile payments. A consumer may perceive him- or herself as 

having one relationship with a mobile carrier, another with a mobile access device OEM, and 

a third relationship with a financial institution. Moreover, depending on public policy and 

private contracts, a firm might have access to a consumer's information even if that consumer 

does not perceive him- or herself as having a meaningful commercial relationship. 

47 It is also notable in that it uses Visa's network to provide the location service and uses 

wireless networks solely for SMS messages, so that smart phones are not required and 

wireless carriers playa very limited role in providing the service. 

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D. REGULATION, REGULATION, REGULATION 

64. Legal and regulatory decisions regarding privacy and antitrust will very likely be 

critical determinants of who controls consumer information. For instance, as discussed 

below, the only way that I can see mobile network operators' being able to capture a large 

part of the value created by mobile payments services is if they could successfully limit the 

set of access devices operating on their mobile networks and the applications that run on those 

devices (i.e .. if wireless carriers could control who offered mobile payment services over their 

networks). Hence, telecommunications-specific and economy-wide antitrust regulation will 

play important roles in shaping industry evolution. 

65. The public-policy treatment of privacy and information ownership are likely to play 

very significant roles in the creation, as well as capture, of value from new services based on 

payment products enable by pervasive connectedness 48 For example, a study of European 

privacy regulation found that it substantially reduced the effectiveness of targeted 

advertising. 49 

66. The convergence of three economic sectors is also going to involve the convergence 

(or collision) of three or more regulatory regimes. For example, telecommunications carriers 

and financial institutions are subject to distinct, sector-specific privacy regulation and antitrust 

48 

49 

To the extent that privacy regulation distinguishes uses of infonnation within an enterprise 

from uses that cross enterprise boundaries, regulation could affect enterprise's choices of their 

boundaries. For instance, public policies that are more lenient toward within-enterprise 

transactions are likely to promote greater enterprise scope. Similar issues can arise with 

respect to antitrust policy when two divisions of a given enterprise are pennitted to engage in 

practices (e.g., exclusive contracting) that might be found to be antitrust violations if practiced 

by two separate enterprises. 

Avi Goldfarb and Catherine Tucker (2010) "Privacy Regulation and Online Advertising," 

available at http://ssm.com/abstract=1600259 ,sitevisitedMay 1, 2012. 

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enforcement regimes. And web services companies have been drawing attention from the 

Federal Trade Commission. Thus, the use of information about a consumer's mobile payment 

transactions could be subject to oversight from three or more different agencies. 

67. In addition to creating the potential for regulatory conflict, the presence of multiple 

regimes may lead to consumer confusion. Consider, for example, direct carrier billing, wh ich 

allows a consumer to make a purchase (e.g., buy a smartphone app) and have the charges 

posted on his or her wireless service billing account. According to ConsumerReports.org, 50 

Federal law currently offers protection to consumers in the event that their 

credit card or debit card is lost, stolen or misused .... If mobile payment 

transactions are linked to credit cards or debit cards, then consumers are 

entitled to the same guaranteed federal protections that apply when a credit 

card or debit card is used directly in a transaction. 

Mobile charges linked to other forms of payment don't enjoy any of these legal 

protections. If the mobile payment charge appears on the customer's cell phone 

bill, the product might escape consumer protections entirely unless the contract 

provides them. 

Given how few consumers read contracts, it would seem unlikely that consumers know the 

extent of their protections with direct carrier billing. 

68. Although industry members often are adverse to regulation, it should be noted that 

certain forms of regulation may make an important contribution to the success of mobile 

payments. In their recent study of consumers, Andreev e/ al. (2011 , p. 123) found 

50 

conclusive evidence of the association between trust and consumer's 

willingness to make an m-payment using a smart phone. By exploring trust in 

detail, our analysis illustrates that consumer's [sic] perceptions oflegal 

frameworks and the regulation of these frameworks are integral parts of trust. 

ConsumerReports.org, ''I-Mobile's "Direct Carrier Billing" Program Could Leave Consumers 

Vulnerable," August 8, 2011, available at 

http://pressroom.consumerreports.org/pressrooml20 11 /08/t-mobiles-direct-carrier-billingprogram-could-leave-consumers-vulnerable.htmL site visited January 25, 2012. 

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In addition to refusing to adopt mobile payments, consumers may engage in self-help to deal 

with privacy concerns by providing only limited or false information about themselves. 51 

From the industry's perspective, regulation may be preferable to any of these outcomes. 

IV. GETTING FROM HERE TO THERE 

69. It sometimes seems that each year begins with the prediction that it will be the year 

mobile payment services take off (with or without NFC) and ends with the prediction that the 

next year will be the one in which the take-off will occur. If mobile payments services are so 

great, what is holding them back? One possibility is that, even when one accounts for the 

value of the information generated by mobile payment services, the benefits are always going 

to be less than the costs. I think the more likely answer is that, although the benefits outweigh 

the costs in the long term, there are difficult start-up issues that must be overcome to realize 

the potential benefits52 

70. On the merchant side, Mallat and Tuunainen (2008, p. 24) found that "the barriers to 

adoption include complexity of the systems, unfavorable revenue sharing models, lack of 

critical mass, and lack of standardization." On the consumer side, Mallat (2007, § 5.6) found 

that the lack of widespread adoption by merchants was a deterrent to adoption by consumers. 

51 

52 

Peter O'Connor (2005) "Comparative Analysis of International Approaches to the Protection 

of Online Privacy," in S Krishnamurthy, ed , Contemporary Research in E-Markefing, Vol. 2. 

Hershey, PA: Idea Group Publishing, as summarized by Evelyne Beatrix Cleff, (2007) 

"Implementing the Legal Criteria of Meaningful Consent in the Concept of Mobile 

Advertising," Computer Law and Security Report, 23(3): 262-269, at 265. 

I don 't subscribe to the conspiracy theories of the sort put forth by several of the people 

interviewed in a recent Pew Research Center survey. (Aaron Smith, Janna Anderson, Lee 

Rainie, "The Future of Money: Smartphone Swiping in the Mobile Age," Pew Research 

Center, April 17, 2012, available at http://www.pewintemet.org/Reports/2012IFuture-{)fMoney.aspx?src=prc-headline, site visited April 28, 2012 (hereinafter, Smith et al. (2012)) at 

5, 16, and 17.) 

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And, as discussed in Section II.A.2 above, Dewan and Chen (2005), Viehland and Leong 

(2007), and Andreev e/ al. (2011), among others, found that consumer concerns about security 

and privacy were significant obstacles. 

A. CONSUMER TRUST 

71. Consumers' security and privacy concerns have been identified as barriers to the 

adoption of mobile payments. However, as noted above, American consumers have a history 

of saying that they care more deeply about privacy and security than their actual behavior 

suggests. I believe that people will continue to express concern about security and privacy 

but in the long run they will act as if they are unconcerned. In the short run, however, the lack 

of trust in mobile payment systems can be an impediment to adoption. 

72. One solution is to have mobile payments offered by established firms that have 

already have good reputations and are trusted by consumers. In their survey of consumers, 

Andreev e/ al. (2011 , p. 117) found "that respondents considered using a secure and trusted 

third-party payment company as the preferred method of making an m-payment for 

products/services." Similarly, Mallat (2007, p. 424) concluded that focus group participants 

were "more willing to conduct payments with trustworthy transaction parties and regarded 

established banks, credit card companies, and telecom operators as reliable mobile payment 

service providers. Banks were slightly preferred to other providers." 

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B. NETWORK EFFECTS AND THE CHICKEN-AND-EGG PROBLEM 

73 . Network effects arise when, the greater the number of users on a system, the more 

valuable the system is to an individual user 53 Network effects are prevalent in payment 

services. An increase in the number of consumers making use of a given payment service 

will-if the costs are not too high relative to the benefits- make acceptance of that pa yment 

service more attractive to merchants. And, all else equal, a consumer will more highly value a 

payment service the more extensive is the merchant acceptance network for that payment 

instrument. These positive relationships between the number of one type of payment-service 

user and the other are examples of what economists refer to as cross-platform network effects 

because they involve two different groups of platform users each of which values the presence 

of members of the other group. 54 Although the most obvious network effects are those 

associated with merchants and consumers, there are also cross-platform network effects in the 

supply of complementary products, such as smart phones and merchant POS devices that can 

communicate with one another. 55 

53 

54 

55 

For a survey of the economics of network effects, see Michael L. Katz and Carl Shapiro 

(1994) "Systems Competition and Network Effects," Journal o/Economic Perspectives, 8 

(Spring): 93-115 (hereinafter, Katz and Shapiro (1994)). 

For survey of cross-platform network effects, also known as two-sided markets, see Roberto 

Roson (2005) 'Two-Sided Markets: A Tentative Survey," Review of Network Economics, 

4(2) 142-160. 

In addition, positive-feedback effects may arise with respect to the provision of targetedmarketing services to merchants. Specifically, the larger a payment-service's merchantacceptance network, the greater the depth of information that service wi ll be able to collect 

about its consumer users because the payment service will likely capture a greater percentage 

of any given consumer's transactions. Hence, the greater the number of merchants using a 

payment service, the higher the value of the targeted marketing services that platform can 

offer to merchants. 

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74. An important implication of network effects is that a payment network can suffer from 

a "chicken-and-egg problem." In short, a chicken-and-egg problem arises when no one wants 

to belong to a network unless lots of other parties belong to the network first Specifically, a 

merchant will not want to bear the expenses of changing its checkout process to accommodate 

a new payment service if there are few consumers who would potentially use that service. 

Similarly, a consumer will not want to sign up for the payment service if there are few 

merchants who accept it Of course, if everyone waits for lots of other parties to join the 

service, then the service will never get off of the ground. 

75. There are several potential solutions to the chicken-and-egg problem. One is to begin 

with smaller groups that have strong cross-platform network effects among themselves. One 

of the most successful examples of mobile payments to date is the mobile app version of 

Starbucks pre-paid store cards. The CEO of the developer of the Starbucks application 

attributed this success to "factors like Starbucks' complete control over the point of sale, the 

use of a closed-loop system, and smartphone-toting customers who are loyal and often make 

daily visits to the brand"56 In addition, approximately 20-percent of Starbucks customers' instore purchases were made using Starbucks' loyalty card before the app was launched. 57 

76. Another approach is to adopt pricing strategies that make joining a service attractive 

even if, at present, it offers relatively few benefits. One such strategy is penetration pricing, 

whereby prices are initially set at low (possibly below-cost) levels in order to attract users to 

56 

57 

"POS Gets Smart," QSR, June 24,2011 , available at 

http://www.gsrmagazine.comlnews/pos-gets-smart. site visited March 11 , 2012. [The 

quotation in the text is of the cited article's paraphrase of what the executive said.] 

Id 

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the service. As the service becomes established, prices can be increased. A variant of acrossthe-board penetration pricing is to offer special deals solely to key early adopters. Specific 

parties may be particularly important early adopters for at least three reasons. Earl y adopters 

can: create valuable positive network effects (e.g. , a popular merchant will attract buyers to 

the payment service); help the network achieve an efficient scale of operation; and, in some 

cases, add credibility. 

77. A payment service could also offer users subsidies to cover fixed costs of 

participation. For example, a merchant typically has to incur fixed costs (e.g., the costs of 

modifying online shopping cart software) to participate in a payment service. If the merchant 

later determines that it is undesirable to participate in the service, then these costs will be lost 

Hence, these costs represent a risk of participating and create an incentive to wait until other 

parties have joined a new service and shown it to be viable. Development subsidies are one 

way to reduce the risks of membership and thus lessen the chicken-and-egg problem. 

Offering free applications to consumers has a similar effect 

78. In market with strong network effects, the degree to which different services are 

interoperable, or compatible, can also affect adoption decisions, as well as industry 

performance generally. Compatibility can reduce costs by allowing different service 

providers to share some elements of infrastructure (e.g., POS transaction-capture devices). 

Users may also be more likely to adopt new payment services because there is less threat of 

lock-in or stranding when a given piece of user equipment (e.g., a smart phone) can operate 

with multiple services. Hence, the chicken-and-egg problem is less severe. 

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79. But compatibility can also reduce or eliminate network size as a source of competitive 

advantage. Consequently, firms that have large installed bases- or firms that users generally 

expect to be particularly successful under incompatibility- may oppose compatibility. 58 

Moreover, particular standards may favor some service providers over others. Hence, it is not 

a foregone conclusion that widespread standards will be adopted and compatibility achieved 

simply because network effects are present. 

80. That said, I believe there will be standardization of merchants' POS transactioncapture devices. Merchants will likely exhibit very strong preferences for compatible POS 

transaction-capture devices, as we have today with different credit, charge, and debit card 

readers. Most merchants have limited space at checkout, and what they space they do have 

could better be used to display products rather than house multiple payment terminals. 59 

Because the demand for compatibility among POS transaction-capture devices will be so 

strong, I expect that the most widely adopted devices will work with multiple payment 

services and will drive consumer mobile access devices to have similarly standardized 

interfaces. Although these devices will be standardized, there will still be significant 

opportunities for the payment services making use of these devices to differentiate themselves 

from one another. 60 

58 

59 

60 

See, for example, Katz and Shapiro (1994) 

Note that this issue need not arise in this exact form for certain payment services based on 

WiFi and cellular networks. However, these technologies, too, will require at least some 

equipment located on the merchant's premises. 

Economic theory suggests that widespread compatibility that allows product differentiation 

would very likely maximize the joint profits of competing payment-service providers. 

Consumers and merchants might be reluctant to adopt a monopoly service, thus exacerbating 

the chicken-and-egg problem, while a lack of differentiation could lead to intense payment38 
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81. In addition to issues regarding standardization across competing mobile payment 

services, there are also issues regarding standardization across mobile payment services and 

existing payment services. Compatibility with existing services can reduce the chicken-andegg problem for new services. These considerations arise with respect to NFC. Here, the 

desires of at least some parties to maintain compatibility are evident: 61 

Visa has played a leadership role in establishing global standards for mobile 

payments, making sure that they are aligned with existing technology and 

security standards for chip payment cards and can easily be integrated into the 

existing payments ecosystem. For example: Visa payWave on mobile devices 

is compatible with existing contactless (NFC) payment terminals already 

installed at retail outlets worldwide, enabling Visa account holders to simply 

wave their enabled phone in front of a payment terminal in order to pay. 

82. Compatibility with existing systems is also valuable because, even if most consumers 

rely on their mobile phones to serve as smart cards, merchants will still have to deal with nonphone-enabled consumers for a significant period of time. Thus, compatibility will allow 

merchants avoid the costs of having to operate two systems simultaneously. 

83. The chicken-and-egg problem faced by payment services is not limited to consumers 

and merchants. These effects also apply to financial institutions and other potential 

complementors, such as mobile access device OEMs which must choose whether to install 

special features such as NFC chips on their devices. One solution to the complementor 

61 

service competition that eroded profits. From a social welfare perspective, a structure that 

allows service providers to differentiate themselves can spur innovation and long-run 

competition. 

Rebecca Robinson, "Smart Phones for Use as Visa Mobile Payment Devices," CardGllide, 21 

February 2012, available at http://www.card-guide-intemational.comI20120221191INisaCertifies-Smartphones-for-Use-as-Visa-Mobile-Payment-Devices.html, site visited March II, 

2012. 

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version of the chicken-and-egg problem is for the payment service either to subsidize the 

production of the complements or to purchase them on behalf of users. 

84. Several years ago, Wells Fargo tested a service that allowed users to make payments 

using a phone rather than a bankcard. Wells Fargo chose not to offer the service to its 

customers, in part because there was only one handset that could be used to offer the 

service. 62 Even today, most smart phones do not have built-in capabilities to communicate 

with merchant POS devices. Recently, however, Wells and other potential payment providers 

have experimented with microSD cards that can add these capabilities to existing phones,6J 

and DeviceFidelity and Spring Card Systems announced a micoSD card that can be inserted 

into an Android phone and used to make payments over MasterCard's PayPass NFC system64 

These developments highlight the need for complementary investments at various points in 

the value net. They also illustrate how some parties may be able to internalize complements 

effects by offering the complementary products to their customers rather than waiting for 

independent suppliers to offer them directly to users. 

62 

63 

Rachael King, "Wells Fargo tests smart-phone mobile payments," SFGate, January 5, 

2011, available at http://www.sfgate.com/cgibiniarticie.cgi?f=/c/a/2011l01l04IBUBTlH3TOlDTL, site visited March 11,2012. 

Id. See also Andrew Johnson, In Mobile Payments, Lack of Interoperability Threatens 

Adoption, American Banker, Dec. 9, 2010, available at 

http://www.americanbanker.com/issuesI1 75 23 5/1ack -of-interoperabilitv-I 029690-

l.html, site visited March 11 ,2012. 

Mat Smith, ''Moneto NFC microSD to bring contactiess features to any Android phone," engadget, posted 

JanU3l)' 11,2012, available at http://v.'\\w.engadgetcom/2012l01/II/moneto-nfc-micros(kontactiesspavment-Android~Phonel, site visited April 28, 20 12. 

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V. WHO WILL DO WHAT? 

85. Having discussed many of the forces that will shape competition, I next examine what 

roles will be played by the various payments industry participants, including banks, wireless 

telecommunications service providers, financial institutions, traditional card payment 

networks, and web services companies. 

A. DON'T GET CARRIED A WA Y WITH CARRIERS 

86. Wireless carriers will unquestionably provide important communication links that will 

enable both mobile payment services and mobile advertising-and-deal services. Figure 3 

above illustrates the fact that wireless carriers will provide communication links between 

consumers and payment networks, deal-and-advertising networks, social networks, anddirectly or indirectly- merchants. Despite the importance of these links, it does not follow 

that wireless carriers will be successful in capturing the value created by these services. 

87. Indeed, there is a wide variety of opinions regarding whether wireless network 

operators are like to succeed in capturing value, ranging from extreme optimism6s 

There is a game-changing opportunity here for the operators to effectivel y 

displace credit cards and banks. 

to strong pessimism66 

65 

66 

Operators will continue to attempt to insinuate themselves into the process at a 

premium rather than simply accepting their long-term fate of being minimummargin bit pipes for the masses. 

Dan Hays of PRTM as quoted by Leila Abboud, ''Telcos battle tech, bank titans for mobile 

payments," The Globe and Mail, February 14, 2011 , available at 

http://m.theglobeandmail.comlnews/technology/mobile-technologv/telcos-battle-tech-banktitans-for-mobile-payments/articlel905892f?service=mobile, site visited April 28, 2012. 

Rob Scott of Nokia as quoted by Smith etal. (2012) at 14. 

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Other commentators fall in the middle, seeing mobile network operators as playing critical 

roles but doing so by partnering with financial institutions rather than displacing them67 

88. In my opinion, the pessimistic view is very likely the correct one: telecommunications 

providers will neither significantly shape the evolution of general purpose payments in the 

United States nor will they capture significant value. Instead, they will provide essential but 

undifferentiated infrastructure. 68 The term "undifferentiated" is critical here. It will prevent 

almost all access device OEMs and telecommunications carriers from having powerful 

positions within the mobile payments value net (the one exception may be Apple). There is 

little or no need to have wireless network operators involved in planning payment services, 

and there is relatively little benefit to other parties from forming alliances with mobile 

network operators except in their roles as distributors of mobile access devices. 69 In addition, 

wireless carriers and access device manufacturers generally lack strong business relationships 

with merchants. 

67 

68 

69 

See, for example, Jan Ondrus and Kalle Lyytinen (2011) "Mobile Payments Market: Towards 

Another Clash of the Titans?" Proceedings of the 10th international Conference on Mobile 

Business, Como, Italy. 

Telecommunications finns may play much more significant roles in developing economies 

(Jd, §L) 

Some local success stories have been observed in developing countries .. 

However, these systems have been well adapted for the financial markets of 

the developing world (e.g., high penetration of mobile phones, low bank 

service penetration, lack of alternative solutions, clear economic value 

propositions for the users,) Those contexts are highly specific and far from 

the ones encountered in the developed world. 

That said, several such parties apparently disagree with my assessment and have fonned 

alliances with wireless carriers. 

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89. Mobile network operators do not want to be commoditized, "dumb pipes." But to 

avoid this fate, network operators have to provide something that cannot better be provided at 

the edge (either for technological reasons or because network operators have locked out 

rivals). 

90. Experience with fixed-line access to the Internet does not bode well for mobile 

network operators and access device OEMs. Personal computer manufacturers, operating 

system developers, and Internet service providers play no role in online payments today 

beyond providing generic infrastructure over which online payment applications run. And 

there is no reason to expect that situation to change. I don't know of anyone who expects 

fixed-line broadband Internet service providers to dominate online payments. Why should 

one expect mobile broadband providers be any different? 

91. There are a few possible reasons. For one, mobile broadband service providers in the 

United States have been able to keep much greater control over how their services are used 

than have fixed-line providers. For example, wireless carriers can limit the set of devices 

used to access their networks and have some degree of control over the applications that run 

on those devices. But blocking competing payments services would be very difficult 

92. It would be relatively easy to work around bottlenecks in mobile access devices that 

took the form of proprietary chips or capabilities. Even if there were proprietary NFC chips 

installed in smart phones by OEMs or carriers, there are add-on chips and software solutions 

that can be utilized instead. And, of course, WiFi- and cellular-based systems need not rely 

on NFC at all. In order to keep competing payment services from reaching its customers, a 

mobile network operator would have to rely on more actions specifically designed and 

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targeted to block those applications. I question whether excluding mobile payment 

applications in that way is a feasible long-term strategy either commercially or politically. 

93. The two earlier discussions the Starbucks app and bank's use ofmicroSD cards to run 

an over-the-top payment application illustrate some of the difficulties that mobile network 

operators and access device OEMs face. There is no need for wireless carriers, wireless OS 

providers, or mobile access device manufacturers to provide any features or functions 

specifically tailored to the Starbucks app. Although banks consider microSD cards to be a 

transition technology, 70 these cards demonstrate the existence of a simple work- around of 

any device manufacturer and carrier that attempted to go a different route (as long as the 

devices had non-proprietary expansion slots; once again, Apple may be different than the rest 

of the industry). 

94. The other way to avoid becoming "dumb pipes" is for mobile networks to provide 

something that is cannot- or at least is not today- better provided at the edge. For example, 

network operators may be able to provide some information that, although edge devices could 

provide, many do not Locaid Technologies, Inc , and Placecast offer geofencing services that 

use mobile network information to determine a subscriber's location. 71 Consequently, these 

services are available to consumers who do not have GPS-enabled phones. Although this 

approach may be valuable in the short run, it seems likely that, in the long run, a very high 

70 

71 

Rachael King, "Wells Fargo tests smart-phone mobile payments," SFGate, January 5, 2011 , 

available at http!lwww.sfgate.comlcgibiniarticle.cgi?f=/c/a/2011l01l04/BUBTlH3T03.DTL, site visited March 11 , 2012. 

http://wwwJoc-aid.comlabout-us. site visited April 20, 2012; Ryan Kim, "02 Turns on Geofencing for Starbucks, L'Oreal in UK," GigaOm, October 14, 20 I 0, available at 

http!lgigaom.coml20 I 01 I 01 14/o2-tums-on-geo-fencing-for-starbucks-Ioreal-in -uk/, si te 

visited April 20, 2012. 

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percentage of mobile access devices will be location aware, whether by using GPS, 

triangulation based on WiFi networks, or some other means. Moreover, in the long run, those 

devices that are not location-aware may be feature phones that lack the ability to provide rich 

graphics and, hence, will rely on SMS messages that are much less powerful marketing tools 

than those that can be provided to smart phone and mobile tablet users. I am unaware of any 

other services or features relevant to payment systems that can be offered by the core of 

mobile networks but not edge devices. 

95. There may be certain niches (albeit multi-billion-dollar niches) in which mobile 

network operators play deeper roles. For example, carrier-based billing is convenient for 

purchasing apps, ringtones, and similar digital goods for use on mobile devices. And SMSbased and carrier-based-billing solutions might have a place for low-value, spontaneous 

transactions (e.g., to pay for online voting related to a television broadcast). For mainstream 

mobile payments, however, mobile network operators' roles are likely to be limited. 

96. Similar considerations arise with respect to mobile operating system providers and 

access device OEMs. Although, in at least some instances, these parties may be more 

differentiated along other dimensions, they still will serve as relatively undifferentiated 

infrastructure for over-the-top payment services unless they are able actively to lock out such 

competitors. With the possible exception of Apple, such a strategy seems infeasible for 

access device manufacturers given the high degree of competition they face. And such a 

strategy seems unlikel y for Microsoft and RIM given their weak market positions, and 

Android given its open strategy. 

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B. GIVE BANKS CREDIT 

97. My analysis suggests that the roles of financial institutions play in payment systems 

will not change very much as the result of increasing consumer connectedness. There are two 

dimensions to this prediction: (a) banks will not branch out to play significant new roles; and 

(b) other types of institutions will not displace banks as sources of credit and stores of wealth. 

98 . My basis for prediction (a) is two-fold. First, with the exception of the bank 

controlled by American Express, few if any banks have a broad enough customer bases to 

attract merchants to a proprietary network based on a single bank's consumer customers. 

Second, I expect banks to be able successfully and profitably to extend their traditional roles 

of providing credit and serving as stores of wealth to mobile payments by partnering with 

other parties that are better positioned to develop merchant networks and the other aspects of 

new payment systems. 

99. Given the existence of various regulatory constraints, prediction (b) might almost be 

true by definition: enterprises taking over banks' roles will have to become banks themselves. 

The more interesting version of this prediction is that mobile payments will not allow 

significant entry of new firms as suppliers of credit, at least in the short run. 

100. This prediction is based on the fact that issuing credit is hard work. Just ask AT&T or 

American Express. AT&T believed that the core competence needed to issue credit cards was 

the ability to process large numbers of transactions efficiently and reliably. Given its 

experience in large-scale, highly complex telephone billing, AT&T thought it had this 

competence. AT&T entered the card-issuing business and amassed a large portfolio. 

However, the credit card industry evolved so that a critical- or, perhaps, the critical- skill is 

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the ability to process information to predict what card offers will appeal to consumers and 

which consumers will be profitable. AT&T lacked this skill and exited the industry by selling 

its credit card portfolio to Citibank. 

101. American Express also serves as an instructive example of the difficulties of issuing 

credit cards without experience or an existing customer base. American Express initially had 

significant difficulties when it first issued a credit (as opposed to charge card). When it began 

offering its Optima credit card in 1987, American Express dramatically misjudged the market 

and the risks that it faced 72 Consequently, American Express ended up suffering loan losses 

of hundreds of millions of dollars per year between 1988 and 1994, despite being an 

experienced charge card issuer and having account histories for millions of charge card 

holders.

73 Since becoming an experienced credit card issuer, Ameri can Express has become 

more successful. 

102. Banks have another competitive advantage in addition to their experience issuing 

credit. As discussed in Section IV.B above, some researchers have found that consumers 

place greater trust in established payment companies and banks. This factor speaks well to a 

continuing, central role for banks and the existing bankcard payment networks. 

103. Lastly, it should be observed that there is a further connection between parts (a) and 

(b) of this prediction: because banks have an important and profitable role to playas a 

72 

73 

According to Bernstein Research, once American Express launched the Optima card, 

"Disaster followed. The list of what went wrong is almost unbearably long. The credit 

assumptions were flawed to begin with, ... " ('The Future of the Credit Card Industry: Part 11-

Company Outlook," Bernstein Research, January 1996, at 30.) 

Id. , Exhibit 18 and accompanying text. 

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complementary piece, they do not have large incentives to try to create proprietary systems of 

their own. 

C. WITHER INCUMBENT PAYMENT CARD NETWORKS? 

104. Many people see the developments discussed in this paper as very significant threats 

to incumbent payment card networks. It is important to recognize that many of these 

developments also represent opportunities for incumbent networks. These developments 

extend the reach and increase the utility of the services offered by these networks. Incumbent 

payment card networks may be able to take advantage of these opportunities directly. These 

networks have several competitive advantages including: reputations with consumers for 

trustworthiness; large merchant acceptance networks; and lots of data, including data 

generated by non-mobile transactions. For incumbent payment card networks, the biggest 

question is whether they have the organizational capabilities to innovate successfully to build 

on their current strengths. 

105. Even if incumbent networks do not take advantage of the opportunities created by 

pervasive consumer connectedness directly, many of the services offered by companies such 

as PayPal and Square are built on top of the services of incumbent card networks. That said, 

there is a risk that some of these complementary service providers may evolve into 

competitors. 

D. WEB-SERVICES COMPANIES 

106. The rise of Internet payments has brought web-services companies such eBay, Google, 

and Facebook into the payment arena. Many of these companies are essentially information 

collection-and-processing companies, with valuable competitive assets that include: massive 

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amounts of consumer data; experience efficient! y collecting, storing, and processing that data 

at scale; high degrees of skill at processing the data to model consumer behavior (e.g., 

determining for what consumers are looking when submitting Internet search queries). 

107. The role of web-services companies will depend on how a variety of political and 

regulatory issues shake out (e.g., whether privacy regulations limit their business models), but 

I expect a few of these firms to be very successful in this area. Companies that sell 

advertising based on Internet search and social networks can be expected to make effective 

use of their ability to help merchants target their advertising in ways that pervasive consumer 

connectedness will enable. I also believe that web-services providers will extend their 

success to the business offacilitating targeted offers and customized, context-specific pricing. 

108. Will web-services companies be able to use their information as well as their 

information-collection-and-analysis skills to compete with banks by customizing credit 

products and conducting superior credit analyses? One issue is whether these companies 

would be better off selling the information to existing credit card issuers. Another issue is 

that there is more to life (and success in the payments marketplace) than information 

processing. As discussed at several points above, at least in the short run trust is a big issue. 

In my view, at present consumers can be expected to trust several of the largest web-services 

companies less than they trust their banks and traditional payment card networks. 

E. WHAT ABOUT ApPLE? 

109. At several points in the discussion above, Apple has been singled out as a possible 

exception to statements made about broad groups of firms. The future role of Apple Inc. is a 

big question mark for at least two reasons. First, Apple is uniquely positioned in the mobile 

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economic ecosystem. It has by far the most powerful consumer brand, and it is the most 

vertically integrated of any company. Today, Apple is the most successful mobile access 

device OEM, one of the two most successful mobile OS developers, a web-services company, 

one of the most innovative and successful bricks-and-mortar retailers, and an online payment 

company (albeit one that generally rides on top of existing credit and charge card networks 74) 

And, in 2006, Apple even filed a patent application for a system under which Apple would be 

a mobile virtual network operator. 75 Second, Apple has a history of operating closed systems 

that offer high levels of user convenience coupled with high levels of Apple control. 

110. Apple has been conducting research on various wireless payments solutions and has 

implemented some of them in its retail outlets (e.g., Apple EasyPay, which allows a consumer 

to use his or her iPhone's camera to scan an item's barcode and then pay using the credit card 

associated with the user's iTunes account)76 Will Apple be able to use its powerful brand and 

vertical integration to create a payment system that it dominates? Or will Apple be driven to 

be more open in this arena because even Apple will need to work with other enterprises 

(merchants, if no one else), and these enterprises can see how big a share Apple has taken for 

digital goods to date? 

74 

75 

76 

See http://support.apple.comlkbIHT2001 , site visited April 23, 2012. 

Appieinsider Staff, "Filing: Apple conceptualized smart MYNO system ahead of iPhone," 

Applelnsider, April 10, 2008, available at 

http://www.appleinsider.com/articles/08/041l0/filing apple conceptualized smart mvno syst 

em ahead of iphone.html, site visited May 1, 2012. 

See, for example, "Apple Gearing Up for the Coming NFC- iPhone Revolution," Patently 

Apple, April 8, 20 I 0, available at http://www.patentlvapple.comipatentIvapple/2010104/apple-gearing-up-for-the-wming-nfc--iphone-revolution.html, and Lance 

Whitney, Apple Store's new self-checkout: Nice, but not flawless," CNET, November 14, 

20 II , available at http://news.cnet.com/830 1-13579 3-57324198-37/apple-stores-new-selfcheckout-nice-but-not-flawless/ , sites visited January 18, 2012. 

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VI. CONCLUSION 

111 . I believe that consumers' increasing connectedness via mobile access devices and 

social networks will lead to evolutionary developments in core payment services but 

revolutionary changes in services that are built on the information collected through mobile 

payment services and social networks. I also believe that firms in the telecommunications 

sector will playa smaller role in payment services than they would like, while traditional 

payments services providers will playa larger role than many expect. The role of webservices companies will depend on how a variety of political and regulatory issues shake out, 

but I expect a few of these firms to be very successful in this area. For incumbent payment 

card networks, the biggest question is whether they have the organizational capabilities to 

innovate successfully to build on their current strengths of trusted brands and large networks 

of consumers and merchants. Only time will tell. 

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222 

1My prepared remarks and any remarks I may make in response to your questions reflect 

only my own views and do not necessarily reflect the views of the Trustees of Indiana University 

or the Maurer School of Law. 2Statement for the Record from Robert C. Hunter, Deputy General Counsel, The Clearing 

House Association, L.L.C. to The Subcommittee on Financial Institutions and Consumer Credit 

of the House Committee on Financial Services, June 29, 2012 [hereinafter ‘‘The Clearing House 

Association, June 29, 2012 Letter’’]. 

PREPARED STATEMENT OF SARAH JANE HUGHES 

UNIVERSITY SCHOLAR AND FELLOW IN COMMERCIAL LAW, MAURER SCHOOL OF LAW, UNIVERSITY OF INDIANA

JULY 10, 2012 

Mr. Chairman, Ranking Member Shelby, and honorable Members of the Committee, I am pleased to be invited to discuss mobile payments generally, and the 

benefits and risks that mobile payments offer to merchants and other users in the 

marketplace. 1

Mobile payments are among the most innovative payments options emerging 

across the world. They enable person-to-person and person-to-business payments 

using flip phones and text messaging (SMS) in less developed countries. In the developed States, where banking systems and telecom networks are more regulated, 

mobile payments are emerging as a handy means of making small-dollar payments 

in the person-to-person and person-to-business markets. Perhaps even more importantly in the United States, they are enabling the unbanked and under-banked to 

make payments at lower risk and cost than some of the other payment options they 

may have. 

Sponsors of mobile payments services vary significantly in size, the breadth and 

scale of the services offered, and the extent of Federal or State regulation to which 

their businesses generally, and their payments services in particular, are subjected. 

Supervision and enforcement also differ significantly. 

Mobile payments providers and developers of special mobile payments applications are attracting significant sums in capital investments, which suggest promising business models. 

Nationwide merchants such as Starbucks were early adopters of mobile payments 

options for their businesses. Paying for a coffee or a snack could be completed before 

the foam on a specialty drink disappeared. Speedier payments, however, can be associated with business decisions to lower security safeguards—at least in the credit 

and debit industries. 

Other merchants in the United States—including plumbers and participants in 

farm markets and craft shows, and increasingly nonprofit organizations—are beginning to use mobile payments to take payments from their retail customers. These 

may be small transactions for a pound of field tomatoes, medium-sized transactions 

for the plumber’s house call, or larger payments such as recurring utility, car finance or mortgage payments. But, unlike Starbucks where larger-dollar purchases 

are probably rare, nonprofit organizations can take contributions or sell quantities 

of tickets that are much larger in dollar terms using mobile payments options. 

Small-dollar and larger-dollar transactions may present different risks for merchants, consumers, mobile payments providers, and the financial institutions that 

hold the funds sent or received via mobile payments. 

So far, we have not heard much about larger-dollar payments being made for recurring purposes, such as mortgage payments or car finance installments, but there 

is little to stop that from happening from a technical or legal perspective. For these 

types of payments, banks have expressed concerns about the security of underlying 

banking account information in the hands of relatively new entrants to the payments industry. 2

Your letter of invitation laid out many possible topics for witnesses to cover. I will 

focus my remarks on benefits and costs to merchants who take or might take mobile 

payments, and also to the other regulatory and enforcement issues their participation in payments may present. In some cases, the different issues that consumers 

and merchants have in the marketplace for mobile payments may converge; on others, they may diverge. I have identified five areas in which mobile payments are 

likely to benefit our economy and why they are so attractive to merchants, and five 

areas in which mobile payments present new concerns that may need to be regulated or harmonized and otherwise may require new enforcement approaches. In 

creating these lists, I made no assumptions about how regulation will evolve. 

Turning first to potential benefits of mobile payments, I have five topics to cover 

and have provided one or more examples to illustrate the range of issues that may 

arise. 

223 

3The degree to which counterfeiting of mobile payments technology becomes an issue is yet 

unknown. 

1. Taking mobile payments is quick and functional. 

Mobile payments—whether utilizing existing credit or debit card interchange 

services or ‘‘rails’’ or the services of telecom or other providers—have the potential 

to help the owners of small businesses, small nonprofit organizations, and farmers 

and artisans who bring their goods to farmers’ markets and craft shows collect payments from their retail customers. 

Mobile payments are speedy: they take only a few seconds to process. They operate without expensive and bulky equipment. They do not require a heavy specialty 

card reader. (The ‘‘reader’’ for Square, for example, is only about an inch square and 

the connector fits into the plug on the seller’s smart phone or tablet.) Small merchants using smart phone apps also can take checks from their retail customers, 

using a feature called ‘‘remote deposit.’’ No doubt, Members of the Committee have 

seen ads from USAA and other financial institutions for remote deposits for the 

service members, veterans, and their dependents and families who USAA serves. 

In addition, mobile payments, as replacements for magnetic-stripe credit and 

debit cards, may enable merchants in the United States to skip the impending transition from mag-stripe to chip-and-pin cards and the new readers that chip-and-pin 

technologies require. Mobile readers may be less expensive than chip-and-pin systems. 

2. Taking mobile payments helps small business owners collect smaller sums due 

from retail customers and may help to expand the economy. 

Two of the leading mobile payments services providers, Square and Intuit, count 

among their merchant customers thousands of small business operators (such as 

plumbers) and nonprofit organizations (who take mobile payments for tickets sales 

and for contributions from supporters). The less time these merchants have to spend 

at tellers’ windows or in line for the ATM, the more time they have to help customers, fixing leaking showers or providing services to the community. Thus, mobile 

payments may help smaller businesses maximize their productivity and add to the 

economy’s health. 

Mobile payments also help merchants at farmers’ markets and craft fares make 

sales they otherwise might not—if the consumer involved has to stop and find an 

ATM machine before completing the purchase. 

3. Taking mobile payments may help merchants deter fraudulent charges at the point 

of sale. 

At two conferences in which I participated earlier this year, speakers explained 

in great detail why mobile payments were safer for consumers than payments with 

traditional plastic credit and debit cards; they paid less attention to whether they 

would be safer for merchants as well. 

Unlike a tangible plastic credit or debit card whose credentialing and verification 

protocols—the account number, expiration date, customer name, and security code 

printed on the card itself—remains constant, mobile payments offer a more dynamic 

set of credentials that includes the mobile device’s location at the time of the payment transaction and the ability of the mobile device to generate a unique identifier 

for every payment transaction. Dynamic credentialing is one feature that will help 

merchants—and consumers—avoid fraudulent charges. 

Some mobile payments providers such as Square offer merchants another 

credentialing device—a real-time opportunity to match the face of the person offering to make the mobile payment with the face shown on the mobile device, or with 

the same merchant’s record of the face of the person who last used the same mobile 

device to make a payment. Some consumers won’t want merchants to store their 

photos for later purposes, but many probably won’t care. 

In addition, the geolocation of using the mobile device for ‘‘proximity’’ payments 

adds a security layer. Geolocation gives merchants—as well as processors and providers—an extra level of confidence that the mobile device from which the payment 

instruction or order is emanating is in fact the proper one. 3

Dynamic credentialing, including facial recognition possibilities and geolocational 

information, offers potentially greater safety in payments than the more static tangible plastic cards on which we have relied for the past 35 years or more. 

The full-scale dynamic credentialing I have described—without going into detail 

about the technologies that support it, primarily because they are proprietary technologies in part—may not apply as functionally if the mobile device is being used 

to make a payment outside of the merchant’s own store. Thus, ‘‘remote’’ mobile payments could raise some of the same fraudulent charge issues that merchants curVerDate Nov 24 2008 10:31 Jan 18, 2013 Jkt 048080 PO 00000 Frm 00227 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\329710.TXT JASON
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4 Not having to handle cash or checks is a benefit to merchants all of itself in terms of accounting and fraud losses and speeds merchants’ ability to get the proceeds of transactions into 

their bank accounts and forward to suppliers, landlords, and other creditors. 

rently face in ‘‘card-not-present’’ transactions today in the credit and debit card payment spheres. 

We do know that the card industry has created a payment application data security standard (PA DSS), much like its relatively successful PCI DSS set of security 

standards (for payment cards). But PCI DSS is not an ironclad solution to fraud 

risks from data interception or otherwise, as we learned from the episodes that TJX, 

Hannaford Brothers, and Global Payments experienced. Each of those companies 

had been PCI DSS compliant, but none were the nanosecond following the security 

breaches they suffered. And, once a retailer or processor falls out of compliance, it 

must reprove its security procedures to qualify again. 

4. Taking mobile payments offers merchants opportunities to build customer loyalty 

through mobile-based rewards programs, geolocationally based or individually 

directed advertising, and other information about customers derived from the 

payment transaction that can be re-used. 

In contrast to traditional tangible plastic credit and debit cards that carry only 

basic credentialing and payment information, mobile payments offer merchants potential means of communicating with customers that can help merchants build customer loyalty and promote special offers. 

5. Taking mobile payments allows merchants to reach consumers who do not have 

demand deposit accounts or their equivalents or credit cards. 

With estimates of the number of unbanked adults in the United States upwards 

of 30 million households [check most recent figure—FTC or FRB March, 2012], merchants who take mobile payments may get customers who otherwise would have to 

pay in cash. 4 Unbanked consumers, particularly recent immigrants, often have 

smart phones instead of traditional computers and use smart phones—via mobile 

payments and mobile banking—to make payments to retailers and creditors. 

Unbanked persons’ adoption of mobile payments adoption is a means of reducing 

their dependence on cash and cash equivalents such as money orders, and may 

serve as the basis for reducing their costs of participating in the retail economy and 

reducing the risks associated with carrying cash. 

Now turning to possible risks or costs merchants (and consumers) may experience 

when taking mobile payments, we will see some overlap between risks present in 

credit and debit card transactions and risks in mobile payments. New risks also 

may arise. 

6. Taking mobile payments may not be free from interception risks or from malware 

applied to the data streams along the path maintained by app providers, intermediary processors, and the ultimate payor (such as the financial institution or 

telecom) that have affected the credit card industry, and thus may pose security 

risks similar or additional to those in the current payments marketplace. 

Mobile payments providers emphasize the greater security at the point of sale 

that mobile payments can provide over credit or debit cards, for the reasons I have 

mentioned above. What is less discussed is a possibility, if not a probability, that 

because the payments data and accompanying transaction data potentially move 

through more hands on their path to the ultimate payor, there is a greater likelihood of data interception (through war-driving interception as the data move from 

the mobile device to the merchant, and from the mobile device to a processor and 

then to the payor and then to the merchant—depending on the manner in which 

the payment is processed) or through malware introduced along the path. More simply put, the more participants in payments processing the greater the number of 

opportunities for interception or the application of malware. 

7. Taking mobile payments and harvesting more consumer information from these 

payments transactions places more personally identifiable information in the 

hands of merchants and the payments system participants downstream from 

merchants—and imposes on them more extensive, and possibly different dataprotection responsibilities than they formerly may have had. 

Among the counterweights to the benefits merchants may gain from having more 

information about their customers and targeted, inexpensive means of communication with them about merchants’ offers, merchants will find compliance responsibilities they may not have anticipated. The more participants in the mobile payments 

processing path, the greater the number of potential harvesters and holders of personally identifiable information and purchase histories. 

225 

5 15 U.S.C. §6501-6506 (2010). 6 16 C.F.R. Part 312 (2010). 

7 Chiesa v. 24 x 7 Digital, LLC, et al., Civ. No. 2:12-cv-03402 (Jun. 26, 2012) (consent decree 

and order for injunction and other relief). 8The Clearing House Association, Letter of June 29, 2012, supra note 2, at 1, 2, 5. 

The value of these data harvests features at least as prominently as the shares 

of available direct income from marketing the software and processing the payments 

is likely to offer—at least in the United States where payments processing had been 

become increasingly efficient (as with checks) or already has been regulated by Congress (debit card interchange and some credit card fee limitations). 

Some of these participants are not familiar with Federal and State privacy protections or with requirements of Gramm-Leach-Bliley’s Title V (Privacy) and the Federal Safeguards Rule, of the Fair Credit Reporting Act and the Federal Disposal 

Rule, or with the Children’s Online Privacy Protection Act (COPPA) 5 and the 

COPPA Rule. 6 Some participants will not be covered by either of the first two Acts 

or rules, but probably are already covered by COPPA and its rule. Having suitable 

supervision from Federal and State regulators and suitable enforcement resources 

to protect individuals and this nascent industry from bad publicity is an important 

goal. 

The State of New Jersey recently entered into a settlement with a mobile app creator whose target audience was children. 7 The action, brought in the United States 

District Court for the District of New Jersey, alleged that 24 x 7 Digital, LLC, and 

its owners Mark Yamashita and Rei Yoshioka, ‘‘collected, maintained, and transmitted to a third party, personal information about children’’ in violation of COPPA 

and the COPPA Rule. Among the elements of relief to which the defendants agreed 

was the destruction of the children’s personal information—including the information they transmitted—within five days of the entry of the order. 

An additional issue with data collected, stored, and transmitted involves its treatment in a future bankruptcy proceeding of the collector, storage operator, and recipients. The Committee may recall the public furor over the fate of children’s data in 

the early days of Internet commerce involving an online children’s toy store and a 

company called DoubleClick, and the tussle over whether the children’s personal information—as part of the debtor’s ‘‘customer lists’’ was eligible to be auctioned for 

the benefit of the debtor’s general creditors. 

8. Taking mobile payments does not necessarily relieve merchants of problems with 

charge-backs for fraudulent charges or other costs associated with data security 

problems. 

As the Clearing House Association recently explained to the House Committee on 

Financial Services’ Subcommittee on Financial Institutions and Consumer Credit, 

banks ‘‘are usually required to absorb fraud liability and always absorb the cost of 

recredentialing [the consumer] regardless of whether they had any connection with 

the underlying breach that compromised the data.’’ 8

Another aspect of this issue is that merchants will be dealing with more players 

in the payment than they may be accustomed to, and this broader array of counterparties means more contracts to negotiate and monitor. Contracts will assign settlement times, charge back rules, transactional limits, and costs. Providers may reserve the right to change the terms of these agreements frequently, and may or may 

not tolerate patterns of behavior that are less than fully compliant with the contracts’ provisions. Merchants lose eligibility to participate (as happens upon occasion 

in the credit and debit payments industries) and have little ability to be restored 

to participation in their new-found payments tools. 

9. Taking mobile payments does not relieve merchants of responsibility for payment 

data integrity or for postpayment data security, and, because of the growing 

number of payments systems participants, may increase time needed to explain 

payments to customers, increase fraud risks, and also may create new risks for 

institutions that hold funds and facilitate settlements. 

This heading subsumes two subgroups of issues. The first relates to payment data 

integrity. Merchants need tools to prevent interference with the data stream so that 

a payment of $10 remains a payment of $10 as it moves through processing. 

The second relates to postpayment data security at merchant’s own locations and 

in their databases. Merchants need to safeguard data while the payment is being 

processed and for whatever time needed to respond to charge-backs, etc. They also 

need to dispose of the data properly and safely after it is not needed for any particular purpose or ultimately not needed to comply with applicable records retention 

requirements imposed by Federal or State Governments. 

226 

Data integrity (safeguards against alteration or replication of the sums the consumer intended to pay and the merchant wanted to receive) is important is all payments transactions. We have relatively elaborate rules for checks, credit and debit 

cards, and funds transfers (wholesale and retail) to protect data integrity and resolve disputes. For consumer transactions with credit and debit cards, Federal law 

provides error resolution and liability limits. 

We also want to provide for postpayment data security. Will the same standards 

that apply to storage of credit card information post-transaction/payment apply to 

mobile payments? Will merchants be required to store personally identifiable information related to the purchase separately from the payment transaction information? Will all intermediaries who can collect and maintain data be subject to the 

same obligations—whether from Federal or State laws? 

10. Taking mobile payments may—but may not—require merchants to adjust their 

compliance with Federal statutes, regulations, and executive orders pertaining to 

the deterrence of money laundering or prohibitions against doing business with 

concerns from designated foreign States or with ‘‘specially designated nationals’’—individuals who are connected or suspected of being connected with drug 

or arms trafficking or support of terrorism—for purposes of compliance with the 

panoply of laws and executive orders enforced by the Department of the Treasury’s Office of Foreign Assets Control. 

I have left for last the law enforcement issues on my list. Mobile payments offer 

a new set of opportunities to money launderers and those who would fund terrorists. 

Their person-to-person payments capacities and their speed and ease of transport 

are factors. Their abilities to disintermediate payments or to layer payments 

through multiple sets of hands are significant enticements for money launderers. Of 

these issues, speedy processing/settlements and disintermediation are the most 

problematic. 

These laws are notoriously hard to enforce and preparing compliance plans for 

businesses eager to comply is a huge industry for law firms and consulting companies. Merchants hate these compliance responsibilities for their complexity and the 

effort required to train their rotating staffs. 

Payments disintermediation generally, and perhaps the more so for mobile payments, is likely to make it harder for Federal agents and local law enforcement to 

spot problems in local markets. Disintermediation in mobile payments also may 

hinder enforcement of AML and terrorist-finance control laws and agreements domestically and globally. 

Sellers who take mobile payments also may have compliance responsibilities—as 

will providers and processors—with State safety and soundness registration and examination regimes for money services businesses and with State privacy and data 

security breach laws. 

In closing, I have focused my remarks on domestic transactions and payments in 

which merchants in the United States and consumers here participate. Cross-border 

transactions and the payments associated with them raise other issues—issues that 

add significant dimensions to certain of the issues I have mentioned, with issues 

pertaining to charge-backs and error-resolution rules at one end of the spectrum, 

network and device compatibility in the middle, and issues pertaining to taxation 

and deterrence and identification of money laundering or terrorist support—given 

the wide array of providers and the technologies or business models they may deploy—at the opposite end. 

Banks and consumers are justifiably concerned about broader access to customers’ 

account information and the enticements that these data present to hackers, and 

even petty thieves. Consumers are justifiably nervous about the security of any personal information they convey to merchants through mobile devices and their 

geolocational tracking properties. Consumers are justifiably concerned about who 

will have access to their personal information and payment account information as 

it travels, perhaps especially about how much third-party (and Government) access 

there will be to it. 

In terms of the future of regulation of mobile payments, we may see self-regulation, the existing mix of State and Federal regulation and enforcement—or even 

some regional compacts such as those that spear-headed interstate banking in the 

1980s, additional Federal regulation or enforcement, or even a cross-border or multinational regulation and enforcement scheme. A first task is to determine whether 

the different silos of providers—banks and other financial institutions (as defined 

by various Federal laws), telecom providers, mobile app developers, and payments 

intermediaries who are in none of those industries—should be regulated under a 

common set of expectations and requirements, or should be regulated according to 

the role they play in mobile payments. 

227 

1 I am appearing today in my capacity as an adjunct professor at Berkeley Law School. In 

my private practice, I have represented and currently represent a number of clients that participate in the mobile payments industry. The opinions expressed in today’s testimony are my own 

and may not represent those of my firm or my clients. 2See, Thomas P. Brown, ‘‘Keeping Electronic Money Valuable: The Future of Payments and 

the Role of Public Authorities’’, in Moving Money: The Future of Consumer Payments 127, 132– 

133 (Robert E. Litan and Martin Neil Baily eds., 2009). 

Thank you again for the opportunity to be with you today. If you have questions 

about this statement or would like to discuss the issues I have discussed further, 

please contact me. 

PREPARED STATEMENT OF THOMAS P. BROWN 

ADJUNCT PROFESSOR, UNIVERSITY OF CALIFORNIA, BERKELEY SCHOOL OF LAW

JULY 10, 2012 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for inviting me to appear before you today to discuss mobile payments. 1

Historically, innovation in the payment industry has not been a subject of public 

interest. I attribute this relative disinterest to the fact that recent innovation in the 

payment industry has been invisible to consumers. For more than a quarter of a 

century, the basic mechanics of engaging in a payment transaction have not 

changed even for payment cards, the newest of our payment technologies: approach 

point of sale, select card from wallet or purse, hand card to cashier (or swipe the 

card yourself), and wait for a message that the transaction has been authorized (or 

declined). Although industry participants can rightly claim that they have radically 

transformed the process of authorizing the transaction in the past three decades, 

most consumers don’t see it this way. 2

The phrase ‘‘mobile payments’’ elicits a different reaction. People are genuinely excited about mobile payments. Some of this excitement stems from the eye-popping 

valuations that some providers of mobile payments have reported to the technology 

press. But much of it appears to flow from anticipation that the mash-up of mobile 

with payments will bring a bit of magic to the point of sale. Waving a phone just 

seems cooler than swiping a plastic card. 

Although I look forward to the day when I no longer have to carry plastic or paper 

to buy things, we should not, in my view, measure the success of mobile payments 

by the speed with which waving replaces swiping. Existing payment technologies 

work very well in traditional retail environments. In fact, one might say that they 

were made for each other. The retail environments that Americans experience most 

often—multilane retailers, gas stations, quick-service restaurants—were designed to 

take full advantage of the virtues of existing payment mechanisms (primarily speed 

at the point of sale). And mobile payment technologies will not soon displace the 

well entrenched incumbents. 

With that said, the bundle of technologies that we generally label ‘‘mobile’’ is rapidly transforming the payment industry. Mobile devices are being turned into Point 

Of Sale (POS) systems. This is enabling millions of new merchants to accept electronic payments. It is also rapidly changing how existing merchants engage their 

customers inside and outside of traditional retail environments. These changes hint 

at the potentially radical ways in which mobile payments will change how people 

shop, buy, sell, and pay for goods and services. It is possible— though not certain— 

that mobile payments will further undermine the distinctions between financial 

services companies, retailers and communications providers. But these really are 

just hints. At this point, it is impossible to say with any real confidence how mobile 

payments will affect banks, payment companies, merchants and customers. It is also 

far too early to pick winners (or losers) among the many mobile payment technologies and companies now emerging. 

In my view, lawmakers should be wary of claims that mobile payments need to 

be further regulated, particularly in the areas of information security and privacy. 

The payment industry, including the mobile payment piece, is already heavily regulated. New layers of regulation could easily stifle innovation and benefit some providers at the expense of others. And any new laws or regulations directed at the 

burgeoning mobile payment industry should be developed on the basis of a concrete 

understanding of the laws and regulations now in place. 

With that preface, I will describe the existing regulatory framework for the payment industry, discuss what’s truly new about mobile payments, and address potential issues related to consumer privacy and compatibility. 

228 

3For example, for mobile payment transactions involving credit cards, Regulation Z, which 

implements the Federal Truth in Lending Act, limits a cardholder’s liability to $50 for unauthorized charges. 12 C.F.R. pt. 226.12(c). Likewise, the Federal Electronic Fund Transfer Act provides similar limitations on liability for unauthorized debit card charges. 15 U.S.C. §1693g(a). 4 All federally regulated banks are required to have a written CIP pursuant to section 326 

of the USA PATRIOT Act. 5 At this time, 46 States, the District of Columbia, Puerto Rico, and the Virgin Islands have 

enacted such statutes. The National Conference of State Legislatures publishes a comprehensive 

list, available at http://www.ncsl.org/issues-research/telecom/security-breach-notificationlaws.aspx. 6See, 12 U.S.C. §5514(a)(1)(C). 7For example, under the Federal Secure and Fair Enforcement for Mortgage Licensing Act 

(SAFE Act), 12 U.S.C. §5100 et seq., mortgage loan operators enjoy uniform licensing standards 

nationwide, either through their home States’ participation in the Nationwide Mortgage Licensing System and Registry or by those States’ establishing individual systems that comply with 

certain Federal standards. 

Existing Regulatory Framework 

Participants in the mobile payments space already face substantial costs associated with complying with the existing regulatory regime. Firms that want to enter 

the business typically confront a choice between obtaining licenses on a State-byState basis or working under the regulatory authority of a chartered financial institution. And once that threshold is crossed, firms in the payment industry shoulder 

a long list of compliance obligations. 

Generally speaking, a firm that wants to enter the payment business faces a stark 

choice: find a suitable regulated chartered partner (i.e., a bank or other depository 

institution) or obtain licenses from all 50 States as a money services provider. The 

first option brings the mobile payments provider under the indirect supervision of 

the State and Federal agencies responsible for regulating the chartered partner 

(e.g., FDIC or OCC). This option also carries costs associated with revenue-sharing 

and compliance, although some compliance costs and responsibilities may be shared 

with the chartered partner. The second option brings the mobile payments provider 

under the direct supervision of various State entities. It also brings with it the initial burden of acquiring State licenses—potentially a multiyear process with associated fees and costs that can easily exceed a million dollars. Annual maintenance 

costs for State licensing can also be significant. 

Beyond this choice, firms in the payment industry must comply with a long list 

of laws and regulations. Regulation of consumer financial services is complicated. 

Payments companies—mobile payments included—are typically bound by Federal 

law providing consumers with recourse in the event of a disputed charge. 3 Firms 

that rely on a stored value purse to support their payment applications may be required to implement Customer Identification Programs and to report suspicious 

transactions to the Federal Financial Crimes Enforcement Network (FinCEN). 4

Firms that support international payments must scrutinize their operations for compliance with the requirements laid down by the Office of Foreign Assets Control 

(OFAC). Firms that store customer bank account or other payment account data are 

also subject to State laws governing notification to customers and State entities 

when that personal information is compromised. 5 Finally, although the full scope 

is still being fleshed out, the Consumer Financial Protection Bureau has supervisory 

authority over certain ‘‘covered persons,’’ including nonbanks. 6

One potential way to reduce costs is to eliminate the requirement that an entity 

must be licensed by all 50 States to operate nationally. There is no apparent benefit, 

from a prudential standpoint, of such a fragmented regulatory regime. This is not 

to say that licensing itself has no value—as in the banking industry, some supervision likely helps ensure that mobile payment companies can meet their obligations 

to consumers. This value becomes diluted, however, when that mobile payments 

company must contend with the overlapping, but not identical, regulatory requirements across the 50 States. In other contexts, State-regulated entities are able to 

‘‘passport’’ a single State license across all 50 States, so that compliance with that 

individual State’s regulations suffices to allow those entities to do business nationwide. 7

Potential Benefit: The Mobile Point of Sale 

Although most of the conversation surrounding mobile payments focuses on the 

possibility of using mobile phones instead of plastic cards to initiate transactions, 

mobile’s initial impact on the payment industry has been felt on the receiving side 

of the transaction. Existing forms of payment are mobile at least from the perspective of the consumer (i.e., with rare exceptions, our wallets and purses follow us 

wherever we go). Until recently, however, electronic payment systems were limited 

229 

8 15 U.S.C. §6801 et seq. 9 15 U.S.C. §1681 et seq. 10See, HIPAA Privacy Regulations, 45 C.F.R. pt.160. 

to environments that could be reached by fixed line communication systems. Advances on the mobile front are releasing this constraint. 

The transformation of mobile devices into Point Of Sale (POS) systems is taking 

place on a number of fronts: 

• Mobile devices have enabled millions of informal merchants to accept electronic 

payments. With an app and a small (generally free) device that plugs into the 

mobile device (known as a ‘‘dongle’’), artisans, contractors and farmers now accept payment cards from their customers instead of cash. 

• Mobile devices are changing how people shop. By equipping sales associates 

with tablets and smart phones and sending those associates onto the store floor, 

traditional retailers are turning the entire retail environment into the point of 

sale. Customers can make purchases in the aisle, rather than waiting to pass 

through the check-out line. 

• Some retailers are using their customers’ mobile devices to extend the point of 

sale outside the store. They are allowing customers to use their mobile devices 

to make purchases on their mobile phones (and tablets), go to the store, take 

the item off the shelf, and walk out of the store without ever having to present 

a payment card to a sales associate. 

• Mobile devices are rapidly changing how people purchase information goods like 

books, music, movies and software. Again, the mobile device is the point of sale. 

Consumers use their own tablets and smart phones to access digital marketplaces, purchase books, songs, apps, etc., and read, listen to and use those 

goods. 

The transformation of the consumer’s mobile device into a primary point of contact between the merchant and the consumer may have a dramatic effect on retail 

commerce. People tend not to share their mobile devices in the same way that they 

share laptops and personal computers. This creates the opportunity for merchants 

to create customized offers for consumers. Most offers currently take the form of discounts, location based offers and fairly basic extensions of traditional loyalty programs (e.g., buy nine coffee drinks and get the tenth free). 

This evolution in payment technology may make it possible for restaurants and 

other small retailers to employ some of the dynamic pricing techniques that have 

been reserved to large-scale travel businesses. Outside of the travel industry, customers in most retail environments confront a single set of prices. Although different customers may be willing to pay very different prices for essentially the same 

service, it is difficult for traditional retailers to distinguish one customer from another. As merchants use mobile payment technologies to engage more directly with 

their customers, they may begin to employ some of the same strategies used by airlines, hotels and car rental companies to maximize traffic in their stores and restaurants, setting lower prices for some customers and higher prices for others. The 

extension of dynamic pricing strategies from the Nation’s airlines to the corner store 

may not be universally hailed. 

Mobile Payments and Privacy 

In order to customize experiences for particular customers, the merchant (or payment provider) must have access to information about those customers. For example, imagine a restaurant owner trying to craft an offer to attract new customers 

to her restaurant. Our hypothetical restaurant owner would likely want to reach out 

to those customers whose spending habits indicate that they like to eat out but who 

have never eaten at her restaurant. But the restaurateur would likely want to limit 

the offer to customers who live in the local area, excluding from the scope of the 

offer tourists and people traveling though the area on businesses. Such distinctions 

immediately implicate concerns about consumer privacy. 

The legal and regulatory framework that governs the collection and use of information regarding consumers is complex and fragmented. Regulatory requirements 

vary by industry. Financial institutions and affiliated third parties, for example, 

face one set of requirements under the Gramm-Leach-Bliley Act. 8 Credit reporting 

companies face another set of requirements under the Fair Credit Reporting Act. 9

Health care providers face another set of requirements under the Health Insurance 

Portability and Accountability Act’s (HIPAA) Privacy Rule. 10 Federal law also imposes specific restrictions on the sharing of information about certain kinds of purVerDate Nov 24 2008 10:31 Jan 18, 2013 Jkt 048080 PO 00000 Frm 00233 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\329710.TXT JASON
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11For example, information regarding video or video game rental or sale records is protected 

from disclosure pursuant to the Video Privacy Protection Act, 18 U.S.C. §2710. 12 ‘‘Electronic communications,’’ meaning any transfer of information through electronic 

means, are generally protected from disclosure under the Federal Electronic Communications 

Privacy Act (ECPA), 18 U.S.C. §2510 et seq., Title I of the ECPA, known as the Wiretap Act, 

protects electronic communications while in transit. Title II of the ECPA, known as the Stored 

Communications Act, protects communications held in electronic storage. 13The Dodd-Frank Act amended Title V of the Gramm-Leach-Bliley Act to grant rulemaking 

authority under Sections 502–509 of that Act to the Consumer Financial Protection Bureau 

(CFPB). 14 Cal. Civ. Code. §1747.08(a)(1)-(2). 15Pineda v. Williams-Sonoma Stores, Inc., 51 Cal. 4th 524 (2011). 16See, e.g., J. Howard Beales, III & Timothy J. Muris, Choice or Consequences: Protecting 

Privacy in Commercial Information, 75 U. CHI. L. REV. 109, 113 (2008) (‘‘Few consumers actually take the time to read [GLB notices], understand them, and make a conscious choice about 

whether to opt out of information sharing that is not a matter of statutory right for the financial 

institution.’’). 17See id., at 118-20 (explaining that the Do Not Call list addressed the problem of unwanted 

calls at home by focusing on the consequence—the call—rather than access to the information 

necessary to produce the call—the consumer’s phone number). 

chases. 11 Special rules apply to certain kinds of information, and the rules can vary 

depending on the manner in which the information is held at the time of disclosure. 

Communications in transit receive a different set of protections, for example, than 

information at rest. 12

No single agency is responsible for administering Federal privacy law. The FTC 

has shown the most consistent interest in the subject, though the Department of 

Justice gets involved, too, particularly when a third party obtains information by 

illegal means. The prudential agencies have historically been responsible for ensuring that the financial institutions that fall within their purview adhere to the requirements of Gramm-Leach-Bliley. Dodd-Frank has further complicated this picture by severing responsibility for supervising adherence with GLB’s privacy requirements from responsibility for supervising adherence to its information security 

and disposal requirements. 13

State laws add another level of complexity. A number of States purport to limit 

the information that can be collected from consumers in connection with certain 

types of transactions. California law, for example, forbids merchants from, as a condition of sale, requiring or requesting personal identification information from consumers who use a credit card at a point of sale, 14 and the California Supreme Court 

has defined a zip code to be personal identification information. 15 And, as noted 

above, 46 States have enacted laws requiring that consumers receive notice if certain information is obtained by a third party. 

Private law also plays an important role in this area. The major card networks 

restrict the uses to which transaction data can be put. Visa’s Operating Regulations 

prohibit a merchant from disclosing a cardholder account number, personal information, or other Visa Transaction Information to any entity other than a registered 

third party agent, the acquirer, or the acquirer’s agent, and that such disclosure 

must be made for the sole purpose of (i) assisting the merchant in completing the 

initial merchant transaction, or (ii) as specifically required by law. The payment 

card networks, through the PCI Council, also regulate how merchants and other 

participants in the payment card systems may store information related to payment 

card transactions. 

This complex suite of laws does not advance a single policy objective. Much of 

Federal privacy law is based on the principle that consumers should receive notice 

and choice with respect to the use of information about them when that information 

is being used for marketing purposes. As some commentators have observed, it is 

far from clear that consumers actually want to receive such notices. 16 Other aspects 

of Federal privacy law are directed at protecting consumers against misuse of data 

that relates to them. The Do Not Call Registry and the liability caps for unauthorized transactions under Regulation Z and Regulation E fall into this category. 17

Moreover, to the extent that privacy laws attempt to enable consumers to shield 

their identities from mobile payment providers or other financial institutions, they 

work at cross purposes with Federal banking law, which as noted above requires 

firms to collect enough information about their customers to report suspicious transactions. 

This complexity should lead lawmakers and regulators to take particular care before creating new laws under the privacy banner. Most efforts to protect consumer 

privacy interests simply make it more costly for firms to collect information from 

consumers and to share that information with other firms. But information sharing 

is not a concern per se, and the focus on sharing tends to distract attention from 

231 

18See, e.g., 31 C.F.R. pt. 1022 (FinCEN’s final rule relating to prepaid access). 19See, e.g., MCI Commc’ns Corp. v. Am. Tel. & Tel., 708 F.2d 1081 (7th Cir. 1983); United 

States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003). 

the problems that give rise to the concern about sharing in the first place—the misuse of sensitive information and the failure to take care against the exposure of sensitive information to malicious third-parties. 

Compatibility 

This leaves the question of compatibility. Of the issues on today’s agenda, this is 

the most complex and nuanced. 

Compatibility (or incompatibility) issues can arise at many different levels. My 

iPhone is not, for example, compatible with my aunt’s Android device. My phone has 

a different operating system from hers, and it connects to one telecommunication 

network—Verizon—while hers connects with another—AT&T. My device supports 

some applications that hers does not. In this sense they are incompatible. But in 

another sense, they are deeply compatible. Even though the phones are different in 

many ways, I can use my phone to call or send emails and texts to hers. If we both 

have accounts with PayPal or Dwolla, I can use my phone to send her money. 

As mobile technologies grow in importance as platforms for the exchange of value, 

compatibility issues are likely to arise. Every mobile payment application may not 

work in every environment. Starbucks, for example, may choose to keep its mobile 

payment application separate from that offered by Peet’s. But incompatibility issues 

at that level should not be a source of concern. Indeed, the decision to offer a closed 

loop payment product may reflect regulatory distinctions as much as anything. 18

With that said, concerns about the interoperability of different mobile payment 

applications cannot be dismissed entirely. Both the telecommunications industry 

and the payment industry have borne witness to significant battles over network 

access and compatibility. 19 And those issues may surface again. Antitrust authorities in Europe are currently reviewing a proposed payment joint venture in the U.K. 

in part due to such concerns. 

But—and this is a perspective informed as much by my background as an antitrust lawyer as a student of the payment industry—these issues are sufficiently 

nuanced that they are not susceptible to a one-size-fits-all solution. Issues of compatibility and interoperability need to be evaluated on a case-by-case basis. Firms 

may, as in the Starbucks example above, have good reason for rendering their payment applications incompatible with the applications offered by others. But they 

may not, and in some instances, incompatibility can be a cause for public concern. 

Fortunately, antitrust law provides a well-developed framework for analyzing these 

issues as they arise on a case-by-case basis. 

Conclusion 

This is an exciting time for the payment industry. Emerging technologies are creating opportunities for financial institutions, merchants and consumers to reinvent 

commerce. This innovation is taking place against the backdrop of a very complex 

regulatory regime, and although it is possible to imagine ways in which the regulatory burdens facing firms in the area could be reduced (particularly in the area 

of State-by-State licensing requirements), this emerging industry does not appear to 

need any new regulation. 

Thank you again for inviting me to appear today. I am happy to answer any of 

the Committee’s questions.