The Federal Reserve closed the official public commentary period on the so-called Durbin Amendment this week, but with billions of dollars at stake we can expect the debate over debit card interchange fees to continue. While it certainly makes sense to fight the proposed interchange rules, as debit and credit cards today account for trillions of dollars in payments activity in the U.S., bankers are advised to consider the longer-term viability of card products in light of predictions that mobile phone payments will grow quickly in coming years. If these scenarios come to pass, will cards continue to be so widely used? Will mobile payments, when they become a widespread reality, settle the interchange debate?
Consumers today clearly view cards as highly convenient forms of payment. Still, from the consumer’s vantage point, cards have their issues. Debit cards can’t “tell” the customer that he or she doesn’t have the funds to cover a purchase. A mobile phone could do that. Credit cards don’t provide immediate information on the balances currently outstanding on the card, when payment is due, what interest will add to the purchase price, and the amount of monies spent recently on certain types of purchases to facilitate budgeting – information that might impact consumer purchase behavior. A mobile phone could do that, right at the point of purchase.
While I’m not suggesting that mobile will be the death of cards, it certainly makes sense to consider how the card business will be impacted over the long term by the growing demand for mobile payments. Consider these statistics compiled by our consulting partner Phoenix Marketing International:
- Almost six million households have exited the credit card market (either voluntarily or involuntarily) over the past two years;
- While credit card ownership is declining, mobile banking is on the rise. Cell phone ownership in the U.S. has increased from 71% in 2006 to 89% in 2010, and today 11% of households use their cell phones for mobile banking;
- Not surprisingly, mobile banking participation rates are highest in the younger age groups; however, rates are also highest among upper-income households (18% for households earning $150,000 and up).
Studies from Fiserv, Javelin and others suggest that 80% or more of mobile banking usage involves balance checking, so we have a long way to go before mobile becomes the preferred method for a wider array of banking activities. Very few banks today even offer remote funds deposit or new account opening via mobile devices and none (that I know of) offer real mobile payments capabilities without the addition of a third-party service (such as Blingtags, for example).
Retailers are fighting the banking industry’s attempts to curtail the Durbin interchange rules, arguing that any delay in putting the interchange rules in place could cost merchants up to $1 billion per month in fees. Analysts believe retailers would stand to benefit enormously from mobile payment as the more efficient mobile infrastructure would allow for lower interchange rates and lower fees for loyalty and reward program participation.
We may not be far away from a world in which I can use my mobile phone to pay for many things and do so more easily and with greater confidence than I have when using a credit or debit card. My phone, for instance, could easily tell me if I have the money in my account to cover the payment or if my credit card will be accepted, eliminating concerns about overdraft fees (or embarrassment – “I’m sorry. Your card has been declined.”). My phone could alert me when I haven’t stuck to my savings plan and give me the option to immediately transfer funds to remedy the deficiency. It could allow me to more easily communicate with my financial advisor when he has ideas for rebalancing my portfolio – perhaps with options to schedule a call that links to my calendar in Outlook. It could enable me to more easily purchase more things from my bank – using cash or credit or even rewards points – and have my bank act as an aggregator of current online sales promotions from my favorite retailers.
Mobile banking also carries the promise of better two-way dialogue with customers and a medium through which banks can deliver financial education, new tools to improve a customer’s financial health, and new products and services – for which customers might be willing to pay fees. I can imagine a financial portfolio balancing tool or educational videos offered similar to iTunes 99¢ downloads.
There’s great promise in mobile banking and in mobile payments in particular. There’s perhaps even the promise that banking industry trade groups and The Merchant Payments Coalition could see eye-to-eye. Imagine that.
Ms. Sullivan is the managing partner of Capital Performance Group LLC, a Washington, D.C. based management consultancy. She can be reached at msullivan@capitalperform.com.
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