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The Mobile Wallet

Although it's not here quite yet, the day of the mobile wallet is quickly approaching. However, before most of us feel comfortable keeping more information than we already do on our smart phones, there are a number of hurdles--both actual and perceived--that need to be overcome. With this in mind, the Federal Trade Commission issued a document based on a workshop that it hosted a year ago entitled "Paper, Plastic ...or Mobile."

The FTC has identified several particularly troublesome areas that are putting the collective brakes on speedy implementation of a ubiquitous mobile payment environment, even though conceptually it makes a good deal of sense. Issues related to data security, privacy and dispute resolution are the primary problem areas, all of which are being addressed by different sectors of the wireless wallet world.

Every time I hear about a security breach with a bank or major retailer, I take one giant step back from wanting to share my banking and/or credit card information on-line. I am additionally wary of wireless financial transactions because of the inherent uncertainty of what happens once I hit the "send" button. There are multiple players between consumers and merchants, and each one of these segments is equivalent to a moving part which has vulnerabilities of its own. As the old adage goes, a chain is only as strong as its weakest link.

While it's in the best interest of the fledgling industry of wireless transaction management to make its processes secure, with so many layers between the consumer and merchant, it's risky--at best--for consumers to share confidential information without any sort of assurance that it will remain confidential. In a mobile transaction process, one other critical weakness is the fact that unlike a traditional credit card transaction, in the mobile payment world, all consumer data is stored in a single location, creating yet another significant vulnerability.

Despite all of the times when a transaction is handled properly and security maintained, the risk can still be high: once the information is compromised, the ensuing problems for the consumer (and merchant) are significant. Besides, most people are unaware of the additional layers between consumer and merchant and have no idea that the blame likely lies with those in between and not either the merchant or the consumer!

Privacy is the second major hurdle for mobile payments. On the most basic level, even the most vigilant consumer is at risk because, as has been previously mentioned, there are many layers of processes between the consumer and merchant. However, even if all of those parts function well, and even if privacy policies are detailed for a consumer before he/she initiates a transaction, the practical problem is that given a smartphone's screen size, such policies are extremely difficult to read. This is aside from the fact that most people don't read them anyway. But if you chose to do so, you'd have a very hard time because the type is just so small. That's not anyone's fault--it's just a limitation of the technology.

The third major challenge in the mobile payments market involves dispute resolution. Rules (federal and state) that protect consumers in credit card transactions are not available or applicable to consumers who make mobile payments and charges. For legal purposes, mobile transactions are treated similarly to gift cards, where there is no safety net in the event that a transaction, for whatever reason, goes south. In some transactions where it is hoped that consumers will make purchases and have those purchases appear on a wireless bill (where, for example, Verizon Wireless offers the same services as does Visa), the opportunity for difficulty becomes, to use a technical phrase, "ginormous."

This is because wireless providers are not banks. While they are able to offer some similar services, wireless providers do not have the obligations--or offer the protections--that licensed and regulated financial institution do. Issues including cramming, where unauthorized charges are placed on a consumer's phone bill, and problems related to international transactions--both fall into this dangerous territory.

Technically, there are four types of payment processes. Near field communications (NFC) uses electromagnetic radio fields to create contactless communication between devices like smartphones or tablets. Contactless communication allows users to wave a smart device (phone or tablet) over an NFC-compatible device to transmit information without needing to physically connect the devices.

Mobile applications or "apps" provide various capabilities to smart devices. Games and offerings such as iTunes are well known apps. In fact, at a seminar I attended earlier this year on mobile payments, I was told that the largest processor of mobile payments currently is Starbucks, and this is a direct result of its mobile app (which I just downloaded onto my phone--there's one less card I have to carry around...)

Services like Google Wallet (Google was the host of the seminar I attended) enable consumers to make purchases through use of their existing Google accounts. This has yet to catch on hugely, but its time will come. For more information, see

The fourth type of payment processing is mobile carrier billing, which has been previously mentioned. With this process, payment is made through a smartphone, with charges appearing on the consumer's wireless phone bill. The challenge with this method is primarily related to dispute resolution, since as mentioned, wireless providers are not banks and do not offer the same level of security, privacy or anything else as do heavily-regulated financial institutions.

Perhaps as an acknowledgment of the complexity of the issues raised by the evolution of mobile payments, almost a year prior to the FTC's report, the Federal Reserve published its own report titled "Consumers and Mobile Financial Services," which raises many of the issues that affect banks and other licensed financial service providers. The Fed's report underscores that particularly for those individuals whom the Fed deems as either "unbanked" or "underbanked," mobile financial services (including primarily banking and payments) provide a better alternative to those consumers than do payday loan, check cashers, rent-to-own services and/or pawn shops. According to the Fed, while there are a significant number of Americans without any sort of bank account, the number of Americans without a wireless device is considerably less. For these individuals, the issues of security and privacy are less compelling than they are for individuals with formal banking relationships who have been slow to adopt this payment method.

With all of the challenges defined previously, major market players including Google, Starbucks and others are banking on (yes, pun intended) the belief that as a society we will continue to evolve towards a wireless wallet world. Once critical kinks are worked out (and those that exist today are not insignificant), the widespread adoption of mobile payment processes will benefit not only consumers, but merchants as well. Among other advantages, the cost to merchants (including charities who stand to benefit from more ways to collect donated funds) to process a mobile transaction is considerably lower than it is with a credit or debit card.

Ultimately, the ability to carry a smaller, smarter (and lighter) device--once the security and privacy challenges are addressed--will outweigh the current challenges of security and privacy.

Remember cash?