Mobile payment options are fast becoming deeply embedded in our daily lives. Going to a weekend flea market? You can instantly pay a small business owner through an app-facilitated bank transfer. Need to pay parking but the coin machine is down? No worries, the city council now takes digital wallet payments.
Mobile payments have been sparking small revolutions throughout global history since the first innovations were introduced in the 1990s. In the United States, digital payments really took off with the 1999 emergence of Paypal, the ubiquitous digital payments company which helped kickstart the digital wallet boom. You could also look to China, where a smartphone-savvy population and low-tech QR payment systems by WeChat Pay and Alipay transformed the market.
But there remains a slice of the global population that is firmly holding onto their cash. Take for example Japan, where a seemingly tech-forward society is still extremely wary of mobile payment options. A recent report noted that “four out of five” transactions in Japan are still made with cash — compare that with South Korea, where 90% of payments take place online. 38% of the respondents to a US-centric Pew survey perceived mobile payments as being “poorly protected” compared to prepaid, debit or credit options, despite mobile payments including as many safeguards as traditional payment options.
The mobile payment options in today’s market have to be able to prove themselves as reliable as possible to make a meaningful breakthrough. Currently this isn’t necessarily the case and there are likely any number of reasons for this. So the question is, to what extent are today’s current mobile payment options reliable? Is it merely an issue of security or are there other factors at play? Do Japan’s consumers have a point?
Is security still a challenge?
The first law of any financial product is that it has to be secure, and it’s pretty understandable why most people remain apprehensive as to the security of their personal details and funds. If you think about it, who would you trust: a longstanding bank with built-in protocols, the very appearance of security; or the new-ish challenger bank where you can pay out hundreds of dollars with a swipe of a finger?
Reportedly, only half of millennials — the demographic most likely to be using mobile payments on a regular basis — believe their banking apps are secure. Comparatively, less than half of users above the age of 65 trust mobile payments services.
There is good reason to worry about mobile app security. In 2016, a Consumer Card Fraud Study from ACI Worldwide and Aite Group, found almost a third of consumers have experienced card fraud. Between 2013 and 2018, global card losses have increased by an annual 18%, while a 2015 Nilson Report found that global card losses would exceed US$35 billion in 2020.
Both credit and debit cards remain the foundation of many mobile payment systems. Most services, like GrabPay or Apple Pay, will require a card to get connected to your bank account. However, credit and debit cards are uniquely susceptible to the kinds of security concerns many users have about mobile payment platforms. There is little security to be had if your card gets stolen, and the numbers printed on the cards aren’t password protected.
Mobile payments aren’t totally immune either: lost smartphones, phishing scams, using public wifi, and generally weak device security all contribute to security challenges. Some of these issues are caused by human error, which is altogether a different problem that is difficult to correct with a simple software update. Just as many innovators are looking for ways to strengthen payment systems, fraudsters are also looking for new loopholes to exploit.
For the most part, most fears about the security of mobile payments are largely overblown. Studies have shown that mobile payments are potentially much more secure than cards or cash, thanks to tokenisation technology, cryptograms and two-factor authentication applications.
Yet news about financial fraud leaves strong impressions in the mainstream consciousness because they tend to happen on a large scale, and often with disastrous consequences. Many mobile payment platforms have an uphill to do to convince users of their strong security systems, without which they don’t have a chance of strengthening their market share.
Challenging the uptake barriers
Which leads us to the next challenge of building a reliable mobile payments network: uptake.
This is an asymmetric problem. In many (largely Asian) countries, the adoption rate of mobile payments systems has grown at a fast clip. More than 79% of Chinese smartphone users used mobile payment solutions between May and October 2018. In the US, only 25% could say the same.
Southeast Asian countries have had varying degrees of success, though generally speaking the region is outpacing many other countries in terms of mobile payments growth. It is expected that by 2021, as much as 70% of Southeast Asians will be using a mobile payment option. Vietnam leads the pack, based on a PwC survey which found that the country’s usage of mobile grew by 24% between 2018 and 2019.
The growth in the region can largely be attributed to the huge number of digital wallet options being offered by both fintech startups and established banks looking to reach a huge unbanked population. For example, established players such as Alibaba-affiliate Ant Financial or Tencent are partnering with local businesses, while startups such as ride-hailing app Grab are spinning off their own digital wallets.
Yet the reliability of any mobile payment network is also built off the back of the width of its network. If your user base is relatively small, it is difficult to create enough of a network that can make mobile payments a reliable and regular option. For users, there are of course issues of security and cost, but there is also the other side of the equation which we have to consider: the merchants.
Merchants form an important part of the network. Without the buy-in of merchants, mobile payment services will struggle to convince consumers to get onboard.
While there are any number of reasons why a merchant would not want to join up with a new mobile payment system, one reason stands out: cost. Outdated understandings about payment acceptance systems still abound. Businesses can spend between 2 to 2.5% on credit card processing fees, and many banks still charge exorbitant prices for renting or buying terminals. With the emergence of much cheaper mobile payment systems, these costs are going down — if not largely disappearing — but old habits die hard.
Change is still happening
Objectively speaking, it is hard to say that mobile payments are thoroughly reliable systems for making the everyday transactions in our lives. There are still too many factors to consider, too many unaddressed gaps, too many security considerations to take into account.
And yet, change is still coming to the market. Consumers are adopting mobile payments at a steady rate, and merchants will respond to growing demand for faster and more convenient payment options, especially as costs go down. The future will look very different.
In fact, it’s already looking very different. The coronavirus pandemic sweeping across the globe has already pushed many consumers towards contactless mobile payment options, and many are already opting to shop online. This does look like the new normal and is not going away anytime soon.