Over the past 40 years, the field of behavioral economics has emerged to explain why humans make irrational decisions. We talk with one of the pioneers of the field to find out what’s behind the choices we make, and how we can use this knowledge for good.
Handing cash to your babysitter or swiping a credit card at the store may soon be obsolete, as QR codes and digital readers make it possible for individuals to transfer money to each other by “bumping” cell phones. The potential for this new payment system is huge and the race is on to define the technology and dominate the market. Tech Tuesday examines the players and the dueling devices in the emerging realm of mobile payments.
- Joseph Bailey Research Associate Professor, Decision, Operations and Information Technologies at the Robert Smith School of Business, University of Maryland
- Andy Schmidt Research Director, CEB TowerGroup
- Frank Gruber CEO and Executive Editor, Tech Cocktail
The new PayPal app allows people to send money to family and friends from an iPhone:
MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. It's Tech Tuesday. Picture this: You and a group of friends go out to dinner. When the bill comes, you offer to put the total on your credit card, and everyone else says they'll pay you their share. Instead of digging in their wallets for cash, your friends each type the amount they owe you into their cellphones, tap their phones against yours, and in that bump, transfer money from their bank or PayPal account to yours.
MR. KOJO NNAMDIThanks to existing technology that cellphones makers are installing in new phones, person-to-person mobile payments are now possible. What's more common at this point are cellphone apps, like Google Wallet, that allow people to make mobile credit card payments at participating stores around the country. Experts say it's only a matter of time before mobile payment technology evolves to the point where everyone has it and trusts it enough to leave their credit cards and cash at home.
MR. KOJO NNAMDIJoining me to explore the promise and the perils of mobile money are Joseph Bailey. Jo Bailey is a research professor at the Robert H. Smith School of Business at the University of Maryland. Jo Bailey, thank you for joining us.
DR. JOSEPH BAILEYThanks for having me.
NNAMDIAlso with us in studio is Frank Gruber. He is CEO and executive editor of Tech Cocktail. Frank Gruber, thank you for joining us.
MR. FRANK GRUBERThank you.
NNAMDIAnd joining us by phone from Boston is Andy Schmidt, research director at the consulting firm TowerGroup. Andy, thank you for joining us.
MR. ANDY SCHMIDTThanks for having me.
NNAMDIIt's a conversation that you, too, can join by calling 800-433-8850, or you can join the conversation on Twitter by using the Tech Tuesday hashtag, can send email to firstname.lastname@example.org, or simply go to our website, kojoshow.org, and join the conversation there. How would you feel about using your cellphone to pay for groceries or to settle up a tab when you're out to dinner with friends? Call us, 800-433-8850. Andy, PayPal has an app that allows iPhone users to send each other money by bumping cellphones. How does that work?
SCHMIDTWell, the way it works is that the phone leverages one of two things, either the proximity center that's built into the phone or an NFC chip that would be added to the phone, either into the handset itself or onto, say, a cover or other way of attaching the chip to the mobile device. And through that, the PAYware and pay can transfer value either by touching the phone or even just by waving the phone near each other.
NNAMDIYou mentioned NFC. That's near field communication, correct?
SCHMIDTYes. It is.
NNAMDIPeople walk up to the counter at Starbucks, hold up their cellphone to pay for their latte. How does that work, and how is Starbucks using mobile money technology to become a leader in this area?
SCHMIDTSure. So the Starbucks application is based off of the QR code, or quick response code. It's also known as the 2-D barcode. And that's primed to a prepaid or loyalty program that they have. What happens there is you boot up the app. You display the QR code that's tied to your particular account. You put -- you wave that in front of the reader at the point of sale, and it deducts it automatically from your account.
SCHMIDTThat, so far, is the most successful mobile payments application so far. They processed over 26 million payments last year, starting from mid-January to Dec. 31.
NNAMDIJo, Google Wallet is a cellphone app that lets you leave your credit cards and store loyalty cards at home in a partnership with MasterCard. It allows you to tap and pay with your cellphone. How does Google Wallet work, and how well is it doing in attracting users?
BAILEYSo in terms of how it works, I think, you know, Google Wallet has captured a lot of consumer data and consumer loyalty by having people create log-in accounts and by doing payment across a number of different vendors. And the Google Wallet app is an extension of kind of their current business strategy and looking at ways to go ahead and get merchants to go ahead and trust Google to do the clearing of payment. And, again, it's all tied back to your main Google account. In terms of how they're doing, Google is doing amazingly well.
BAILEYClearly, they're leveraging their current network that they have of -- among existing users. But, of course, I think they're struggling in the sense that they don't really understand, I guess, the transactional space when it comes to some of the retail in the non-e-commerce environment. So one of the things that Google has realized, I think, with a lot of its, I think, you know, geostrategy -- in other words, looking at Google Maps and stuff like that -- is to really reach out and, you know, do everything from send trucks to neighborhoods and kind of have that local mass.
BAILEYSo I think Google is recognizing it's difficult to get that critical mass of local vendors to accept the Google Wallet unless it either develops strategic partnerships or it's able to go ahead and create kind of an army of people to go ahead and encourage retailers to adopt its wallet. But, again, they're in a great position because they've got that install base of users.
NNAMDIFrank, let's look at the technology involved in mobile payment system. In the case of businesses accepting mobile payments, some of them use a scanner to read a quick response code or, as Frank mentioned earlier, the QR code, it's called, the square black-and-white codes that seem to be replacing barcodes in a lot of places. What happens in that exchange?
GRUBERYeah. So scanners and barcodes have been around since, actually, the '50s when they first, you know, kind of came about and then really didn't get adopted till the '60s and into the '80s, you know. So they've been around a while. The technology has changed over the years to, you know, from -- it used to be just to find a number, like, to literally find a product number, and, now, it's to actually embed data.
GRUBERSo, you know, simple barcode are on everything. You know, any store you go into, you can see it. But they've evolved now to these QR codes, which you can actually have actionable items come out of. So everything from linking up to a URL or, you know, allowing somebody to email, you know, give an email address or potentially even SMS somebody through, you know, linking up with one of these codes.
GRUBERSo the way it works is similar in the barcode. There's a certain specification. So, you know, barcodes was reading like the white space between the actual code itself. It still uses similar technology, but it uses a -- instead of using a scanner, it uses a photo. And it aligns certain characteristics that are in a code to make that transaction work.
NNAMDISo it's not a scanner that's used. It's...
NNAMDI...more something that's...
GRUBERIt's a question picture, yes.
NNAMDISo it's a picture.
NNAMDIThe other technology that allows mobile payments to work is called near field communication.
NNAMDICan you explain how that works?
GRUBERYeah. So that came out of something called RFID. RFID has been around -- let's see, when did that come out? Look -- just -- it's about -- I think around the -- say, it was of the '80s or so, maybe the '90s. And near field is actually relatively new. It's, you know, around 2000 timeframe is when it came out. More or less, it was something where -- you actually have two devices that connect in a very small field, so centimeters apart.
GRUBERSo you -- like, you have a phone that has a chip or something in it that ultimately connects with a tag or another device that then sends a frequency back and forth. And that's how they communicate. Whereas...
NNAMDII used to remember when I had a Palm Pilot.
NNAMDII used to be able to do that if somebody else had a Palm Pilot. You just put them together.
GRUBERExactly. Yeah, so it's kind of come full -- yes. It does...
GRUBERIt's funny how that, you know, stuff just keeps...
NNAMDIMy Palm VX, Jo.
GRUBERI had one, too.
BAILEYI think I had one as well, yeah.
GRUBERWe'd beam things around, right? And beam contact information.
GRUBERSo that, you know, technology -- the technology behind it has changed, but, more or less, the idea is similar. But you can do that with these NFCs in comparison to, like, a RFID is more -- less, you know, you want to put an RFID tag on something, you'll be able to then track it and do it in a longer range. So let's say you want to put it on your wallet. You can then have a device that literally tracks your wallet.
GRUBERAnd so they're starting to use that technology for, obviously, finding things, for a number of different, you know, ways within manufacturing and things like that.
NNAMDIIt's a Tech Tuesday conversation on mobile money. Will a cellphone bump replace cash? You can call us at 800-433-8850. Do you think the U.S. is ready to get rid of plastic credit cards and cash and pay for everything with our cellphones? 800-433-8850 or join the conversation on Twitter by using the Tech Tuesday hashtag. In order for mobile payments to become really ubiquitous, we'll all need cellphones equipped with NFC, near field communication. Do you foresee that happening in the near future, Jo?
BAILEYSo my gut reaction is to say no. And, again, I hate to be a downer about technology on a Tech Tuesday here...
BAILEY...because I think the technology is actually very exciting. But I think the -- what's technically possible and kind of what consumers want may not be the same thing. I think, specifically, when you take a look at our smartphones and our devices and whether it could be used for payment, it's exciting if you don't have cash. But it's amazing how wonderful cash is when you do have it. You don't have to worry about it being charged.
BAILEYIt could fit in your pocket. If you lose it, it's not such a big deal. There's a level of anonymity with using cash that you may not get from using a smartphone. So I think, for those reasons, I think that it will be difficult for some of the stuff to take off. And, also, there's the generational change. So, again, when you take a look at ways in which we're comfortable using technology, oftentimes ones that are going to be a little bit more disruptive might take a full generation of users to adopt it, even if the technology, frankly, is very stable and maybe even very scalable from a cost perspective.
NNAMDIWhat do you say, Frank?
GRUBERYeah. I think I kind of agree with you on the technology side. I think we've still got a long way to go. We're still at the beginning of the mobile revolution. Let's just take it, break it down to some simple facts. Batteries aren't where they need to be yet. Like, your battery...
NNAMDIWell, it's going to come to that later, yeah.
GRUBER...does not last -- I mean, you can't walk more than, you know, a certain amount of time without having to recharge, right?
GRUBERSo -- and that's, you know, glaringly true when you're constantly using other apps and things like that. So I think they need to improve batteries in order for this to really take off. I don't think we want to, you know, strap ourselves to one technology, like, so NFC may not be the technology of the future. It might be something that's like a short term, and then there's something we don't even know about that could come about that just trumps it.
GRUBERThere's companies that are doing things that are bypassing NFC to be able to do transactions. One of them is actually a startup called Dwolla. They're out of Iowa. And they've been really disrupting the space by being able to do this transaction without having to connect through an NFC.
NNAMDIWell, what do you say, Andy Schmidt? Do you think we'll be seeing this happening in the near future with cellphones equipped with near field communication? Or are you like our other panelists saying that, you know, cash is still very convenient and, you know, every time I go to the airport, the doctor or dentist office, I'm fighting people to recharge batteries in the two outlets that they have there? What do you say?
SCHMIDTI'd have to agree with the rest of the panel about the NFC argument. It's still going to be two to three years away before we can get meaningful deployment. And part of that is that you would have to have the retailers deploy NFC readers at the point of sale. The research that we've been doing at CEB TowerGroup indicates that the merchants just aren't quite ready yet. They're still waiting to see what it's in it for them.
SCHMIDTBack to the part about other technologies getting there first, I do think that that is true. A local startup here in the Boston area called Paydiant is working with QR codes at point of sale tied to individual payment cards and allows you to select which payment type you want to use at point of sale, so incredibly convenient and truly emulates the way that we use our wallets today by tying in loyalty cards, payment cards and the like.
SCHMIDTWill cash ever go away? No, I don't think so. Again, the convenience and the -- quite frankly, the anonymity of cash is something that will keep it going for some time. It's just a matter of how much cash can you take out of circulation or out of the payment stream by using our mobile devices to do so.
NNAMDI800-433-8850 is the number to call. Were you an early adopter of online banking? Are you comfortable moving your money around electronically or not? Call us, 800-433-8850. Here is Judith in Cambridge, Md. Judith, you're on the air. Go ahead, please.
JUDITHGood morning -- or good afternoon. My son Randy is a co-founder with Square and Card Case, and my husband downloaded that app for his iPhone and was able to take credit card payments for people donating to our local cold weather shelter to donate bedding and beds. And it -- and we just -- and we give it out to people because our son sent us a whole bunch of them, and we tend to give them out to people at street fairs. And we just think it's a wonderful thing, and to not be able -- not to even have to whip out your credit card using Card Case is a pretty exciting thing.
NNAMDIIndeed. Andy, Square is getting a lot of attention. It's a tiny credit card reader from a San Francisco-based startup company with which, Judith, our caller's son is associated with. Andy, how does it work? Who's using it?
SCHMIDTLet's see. So the way it works is it's a card reader that literally plugs into the audio port of your mobile phone. And what it has in it is a magstripe reader. So you attach it to the phone, and you can then just swipe the card as you would at a normal point of sale, let's say a big box store. The users for this range anywhere from yard sales to small businesses to Girl Scouts. The convenience is currently unparalleled. You have to pay 2.75 percent per transaction.
SCHMIDTBut you don't need to -- yes, exactly. There's always a hook. But the -- you don't need a long-term merchant agreement in order to do so. PayPal, just last week, rolled out a direct competitor to that called PayPal Here. Same basic idea, that you have a -- it's called a dongle that you plug into the audio port. A slight difference there is that the pricing is a touch lower. But you also don't even need the card to make the payment. They have some software built into the application that allows you to take a picture of the card, even take pictures of checks, and process those for payment as well
NNAMDIWell, I wanted to go to a break, but I couldn't because we got this post on our website from Aditya (sp?) about Square. Aditya says, "About a year ago, I heard a lot about Square, which is a cool concept where you can swipe your credit card on your Android or iPhone or iPad device. I bought one of those and thought it would be great to use in fundraising or just casual business, such as lawn mowing for neighbors or selling Girl Scouts cookies outside the Metro station."
NNAMDI"However, I have yet to find anyone even using this technology. It would be great if your guest could comment on the established system and whether people would be willing to switch to these new concepts. I sense a great deal of skepticism about security concerns." Have you encountered that at all, Andy?
SCHMIDTActually, yes, so -- and there is a great deal of skepticism around mobile payments in general. The Federal Reserve just rolled out a study this past week about that. And security is the main issue. The Square reader does have, or is alleged to have, a security vulnerability in that it doesn't know if a card is present. And there was a -- an exploit (word?) at the Black Hat Security Conference last year where one could take a -- I believe it was a $10 stereo cord and 100 lines of code and turn it into a card skimmer.
SCHMIDTSo that definitely is a concern, and security around these types of things does need to be addressed. The -- you know, Google Wallet recently had some security concerns as well, and it's something where the industry really, I think, needs to work the kinks out before we can get comfortable about widespread (unintelligible).
NNAMDIWant to also talk about Square's business model, but we do have to take that short break right now. If you have already called, stay on the line. We'll try to get to your call as soon as possible. You can also go to our website, kojoshow.org, and join the conversation there, or send email to email@example.com. Keep up with the conversation on Twitter by using the Tech Tuesday hashtag. We're discussing mobile money on Tech Tuesday. I'm Kojo Nnamdi.
NNAMDIIt's Tech Tuesday. Mobile money: Will a cellphone bump replace cash? We're inviting your calls at 800-433-8850. We're talking with Frank Gruber. He is CEO and executive editor of Tech Cocktail. Joseph Bailey is a research professor at the Robert H. Smith School of Business at the University of Maryland. And Andy Schmidt is research director at the consulting firm TowerGroup. He joins us by telephone from Boston.
NNAMDIWe were talking about Square before we went to the break, and Square's business model raises the question of who makes money on these mobile transactions. Square will send you the card reader for free, but, as Andy pointed out, it charges 2.75 percent of each transaction. That means for every $100, you've got to pay them $2.75. Should we expect to pay a fee to make mobile payments, Joe?
BAILEYI think so. I mean, ultimately, we have the intermediary is taking on some of the risk, so it's not surprising that they're going to take a bite of the action. And, I guess, there was a question about how much. I think the 2.75 percent kind jumps out and says, oh my goodness, that's a lot of money for an intermediary to take on the risk when maybe there's not much risk associated with that. But your caller, Judith, I think, talked about how wonderfully, if you will, liberating it is to have a technology like Square.
BAILEYSo if you're, let's say, at an arts and crafts fair, and a merchant is taking Square, all of the sudden now, even if you have $50 in cash, if you see a $150 bracelet, you know, you think, all right. I'll go ahead and make this sale happen. And so for a retailer that previously couldn't, let's say, get to that level of commerce because people aren't walking with as much cash, you could say, well, 2.75 percent is a lot for Square. But that's a huge mis-transaction for a small retailer.
BAILEYSo, ultimately, who's making money? It's the small merchant that previously couldn't take the credit card. And, of course, it's the intermediary who's really taking on not just the same amount of risk that a normal retailer is but probably an increasing level of risk with some of these small merchants.
NNAMDIWhat do you say, Frank?
GRUBERNo, I agree. I mean, we use Square a lot for our business, and we wouldn't be able to take credit cards without it real time. So I think -- yeah, I think it's a price of doing business, really. And it helps you get to the next level.
BAILEYYeah, and I know we were talking earlier about the fact that we were looking at adoption and the fact that maybe consumers wouldn't adopt it. But, really, if we take a look at the supply side of the market, right, the merchants that previously had been locked out of being in the kind of mobile commerce, I think these new technologies are very liberating for them.
BAILEYIt gives them an opportunity to play at a level where they previously hadn't played. And it could make a whole new business models, you know, available and opportunistic, including nonprofits who are maybe trying to collect money and donations. So one could imagine going to a nonprofit fundraising event, and, as you enter, you can go ahead and bump on a silent auction table and go ahead and transfer money. That's very exciting.
GRUBERI've also -- oh, I'm sorry.
NNAMDIGo ahead, please, Frank.
GRUBERI was also seeing them, you know, seeing Square implemented in coffee shops rather than registers or replacing registers with iPads. And I've seen it at cupcake shops...
NNAMDIYep, I've seen that, too.
GRUBER...in Portland, Maine, out of all places, a cupcake shop using Square and an iPad versus the big old register.
NNAMDIHere's Tim in Rockville, Md. Tim, you're on the air. Go ahead, please.
TIMHi, Kojo, I love your show, man. I would -- I have to agree with your guest there about it being a generational thing and whether older people are going to come around this technology. And I think sometimes, the acronyms scare people off.
TIMWhen I first turned on the radio, I came in at kind of the middle of the show. And I heard all these acronyms thrown around, and I really didn't know what you were even talking about until later in the conversation. But I think that those kind of things are going to scare, certainly, older people off, people who are used to cash or used to writing a check...
NNAMDIThings like QRC, Quick Response Code. Things like NFC, near field communication.
TIMYes. Exactly. Yeah. I didn't know what you were talking about. Exactly.
NNAMDIBut you know PIN, don't you? You have a PIN number.
TIMYes. And, actually -- yes, I do have a PIN number.
TIMAnd I think that -- because that's an older technology...
NNAMDIOne acronym at a time, I guess, you're saying, huh?
TIMYeah. Yeah, a little bit. And I use that -- I had (unintelligible) somebody was coming to clean up my yard. And they had one of those scanners, and they couldn't make it work.
NNAMDIOK, here -- Frank, you wanted to give some advice to Tim?
GRUBERYeah. No, I agree. I think that they're -- they are scary words and acronyms, and I think we've seen that before with other technologies. I think that the way that this is going to kind of evolve is that the brands -- like Square, like PayPal, like, you know, all these different brands, Dwolla -- are going to kind of help make it easier for people to understand. You know, ultimately, the technology is not going to matter.
GRUBERYou know, at the end of the day, people aren't going to need to know that. I think the brands make it easy enough. I think that you're going to need to know, you know, MasterCard or Visa versus Square.
BAILEYYeah. But, I mean, if you think about it, so MasterCard and Visa are very trusted names in this.
BAILEYAnd when they're looking at kind of the nascent stage of this technology evolution, they're not going to lend their names when they don't have full control over what some other merchants, the small merchants are doing. So you mention the fact that, you know, maybe that a merchant doesn't know how to plug in their Square card into their audio part in their iPhone properly. Well, how is Visa going to go ahead and look if someone walks away from that transaction and say, oh my goodness, you know, Visa's, you know, betting on the wrong technology here for mobile payment.
BAILEYSo I think some of the incumbents in this space are kind of letting it play out a little bit...
BAILEY...and not trying to, you know, maybe act too quickly on this. They understand that this is happening. There are no dummies there. But they want to go ahead and see kind of how things shape out. And, Tim, I think we need your help coming up with some better words to go ahead and describe this technology. I think the Tim system of mobile payments might be better, Tim. What do you think?
TIM(unintelligible) with that.
NNAMDIAnd, Tim, stop pretending that you're old. Stop pretending that you're old. I know how old you are.
NNAMDITim, thank you very much for your call. And I'm glad you brought up the banks because that allows me to move on to Ron in Washington, D.C. Ron, you're on the air. Go ahead please.
RONThank you for taking my call.
RONMy question is, will this new technology be a threat to established credit card companies like Visa and MasterCard? In other words, will it be disruptive for them, or will these new companies use their -- those companies' back office methodology, et cetera, et cetera? That's my question.
NNAMDIAndy Schmidt, you might want to address that because it's my understanding that banks do want a piece of this mobile payment business. But go ahead.
SCHMIDTNo, it's absolutely right. And the thing to keep in mind, as we think about the security and the convenience of these mobile payments, is that the vast majority of these mobile payments will be processed using credit card networks. So Visa and MasterCard, American Express, Discover will all have a role to play. The challenge for banks and for the card companies themselves is to make sure that they are the primary player in terms of processing or in terms of being the card in the wallet.
SCHMIDTSo they will have just the same challenges with alternative payment providers, like PayPal, like Dwolla, that they would in, say, the online world. It's just transferring the battleground a little bit to the mobile device.
MS. KOJO NNAMDIAnd it's my understanding that Bank of America, Wells Fargo and Chase are launching a joint venture called clearXchange. Andy, how will that work?
SCHMIDTThat's right. It's supposed to be a P2P payment exchange, and the idea is that anyone at one of those three banks will be able to make a person-to-person payment to anyone else at one of those three banks. The idea is found in terms of it being a bank-run P2P network. The challenge that they're going to run up against, however, is that PayPal has been doing this for over a decade. So they're able to focus on a much more flexible model, which involves mobile number and email.
SCHMIDTAnd while clearXchange says that they will be adopting this format by having it be a closed system, again, across these three banks, it really does limit the upside. You know, the -- we've seen institutions overseas like Barclaycard over in the U.K. with their new payment application, which will, after a short period of time, enable an anyone-to-anyone type of P2P payment, and that's really the direction the market has to go.
NNAMDIRon, thank you very much for your call. Joe, the mobile phone companies are entering the payment marketplace through the summer. AT&T Mobile and Verizon are launching a test of a system called Isis. How will Isis work?
BAILEYWell, first, we have to understand why the mobile players, I think, want to get into the space. It makes sense, right? I mean, when you buy a phone, it's pre-packaged with a number of different applications. And so the more applications that you can get that are pre-packaged, that tie you into a particular application or particular network, makes sense. Frankly, I'm not sure how Isis works, the details of it.
BAILEYBut I suspect that it has very much like some of the other payment systems, which it'll probably have a chip like the near field communications chip or it'll have some embedded technology, usually some encryption technology as well, which is tied into kind of unlocking your phone to go ahead and approve for payment. But, again, I think the key there is they're banking on the device not being decoupled from the application, which is going to allow this. But I think, Frank, you probably have more details.
GRUBERNo. Actually, you've (unintelligible).
NNAMDIAndy, yes, it's my understanding that Isis initially launched with Discover Card but found that that was not a good business model.
SCHMIDTThat's right. And that was the first reaction that the market had to the Isis Wallet, which is an NFC-based payment solution. The idea was that you had the three of the largest mobile network operators in the United States working with one of the smallest card processors or card schemes, and so it presented the image of a huge funnel and a tiny, tiny pipe for processing, that and the prospect of needing to get a Discover Card just to participate. Since then, the partnership has expanded.
SCHMIDTMasterCard, Visa and American Express are all going to be accepted over the Isis payment network. But the thinking is that those three brands also wanted to get their own offerings up and running before committing to being part of the Isis Wallet.
NNAMDIOn now to Gary in Darnestown, Md. Gary, you're on the air. Go ahead, please.
GARYGood afternoon. Thanks for taking my call. I was enjoying the program as always. My question for the panel is, could you, please, comment on trends outside the U.S. market in mobile transactions? Based on my own experience in Finland a number of years ago, I saw mobile phone users using their mobile devices to open garage doors and execute transactions on -- at vending machines. I'm curious what's happening outside the U.S. market where penetration rates are much higher even than they are here in the U.S. Thank you.
BAILEYYeah. So, first of all, Finland may not be the kind of example of an average country outside the United States. Finland, of course, home to Nokia, is always on the leading edge of some of the mobile device technology. And they're very proud of their developments, and they have a lot of kind of government support for helping put these things in place. So there is no technical reason why the U.S. couldn't even be doing those things, having cellphones open up garage stores or even payment processing at a vending machine that's, you know, in your office.
BAILEYBut I think the question for the European market really is how carrier-independent a lot of the cellphone devices are. So we talked earlier about Isis and the fact that having a carrier-dependent device kind of allows for the new possibilities of application services. Europe is actually very difficult to go ahead and penetrate the market, probably outside of Finland, mostly because the device really is unlocked with the carrier and, therefore, can be moved around. And so you don't have these collaborations taking place.
BAILEYI would say Asia is a very exciting place mostly because credit cards don't necessarily have that install base that you do, let's say, in the United States, that there is a lot of kind of small consumer-to-merchant type of interaction. And I think some of the most exciting stuff is happening there. I don't know, Frank, you're (unintelligible)...
GRUBERI would agree with you. Yeah, Asia is -- has kind of been ahead of the curve as far as mobile payments and adoption of everything from QR codes to NFC. I think that other markets as well, India, another one -- what's your first point in contact in a lot of these markets is the mobile device, so it's -- they've been working on that longer.
NNAMDIWell, here is one the problems that people have. We got an email from Constance in Silver Springs, who says, "With mobile payments, you're really giving up a lot of your privacy." How did I know this would come up? "With Google Wallet, do we want to give Google even more information about us? And the phone company, do you really want them to know that much about you? And do you really trust anybody to take just the right amount of money from your account?"
NNAMDI"Unlike cash, you can't see the money when you pay, and once it's gone from your bank account, it may not be coming back. There are too many ways for the payee or the criminal to get away with it given the lack of settled law in this area. This is an idea that's way not ready for primetime." You think Constance is being appropriate or a little too careful, verging on paranoid?
GRUBEROh, I think Constance is welcome to do whatever Constance wants to do, which is one reason why we're not going to see this be taking off anytime soon. We're going to have to go ahead and convince the Constances of the world that this technology is ready for primetime. Absolutely, you're giving up some of your anonymity and your -- and privacy when you're going out and conducting commerce this way. So if you're concerned about it or wary about it, you're going to go ahead and stay away from that.
GRUBERBut, of course, Google has a very good business reason to go ahead and make sure that it is a trusted provider. And that trust is going to go ahead and make people like Constance, who might have any type of fraud or problems, make Google kind of overcorrect for any instances that might be there.
NNAMDIAnd, Constance, we got this email from Jo, who says, "I used the iPhone Swipe last weekend to buy a t-shirt at the D.C. Roller Derby. The receipt was sent via text or email. It was easy, and it worked great."
GRUBERWas that Square or was that...
NNAMDIShe didn't say.
NNAMDIJo did not say. And we won't be saying for another few minutes or so 'cause we're going to be taking a short break from this Tech Tuesday conversation on mobile money. But you can still call us, 800-433-8850. Do you use Google Wallet or one of the other mobile payment systems? What has been your experience? 800-433-8850 or join us on Twitter by using the Tech Tuesday hashtag. I'm Kojo Nnamdi.
NNAMDIWelcome back to our Tech Tuesday conversation on mobile money with Joseph Bailey. He's a research professor at the Robert H. Smith School of Business at the University of Maryland. Frank Gruber is CEO and executive editor of Tech Cocktail. And Andy Schmidt is research director at the consulting firm TowerGroup. And before we went into that break, Frank, you wanted to talk about Dwolli? (sic)
GRUBERDwolla, yes, so it's...
NNAMDIDwolla. And I know Andy has to go, so let's get it in right now.
GRUBEROK, sure. So we talked -- I think Ron called in with a question about disruption in credit card companies. And I think the interesting thing here is that companies like Square and PayPal and some of these others are going to have a transaction cost, and then there's also going to be a credit card transaction cost on top of that. So you're actually getting double paying or double dipping there. So Dwolla kind of took a different approach in that they don't work with credit cards. They only work with banks.
GRUBERSo you connect to your bank, and you can send money that way. They only take -- instead of taking that 2.75 percent or whatever it was that we mentioned earlier, they only take a quarter, like 25 cents per transaction. So it's a different model. They've been really disruptive in the space. They're based out of Iowa. They're backed -- venture backed, but it's by a credit union, of all places. That's actually the credit union that spun out of John Deere tractors, so really interesting story out of Iowa.
NNAMDIJoe, I'm saving $2.50 cents on that transaction if I'm only paying a quarter for it compared to the 2.75 percent.
BAILEYYeah, you are. And isn't that great?
BAILEYNow, you just got to find someone who takes it.
NNAMDIWell, Andy, you've followed the mobile payment system so you can advise clients. Who are your clients? And what are you telling them about this technology?
SCHMIDTSure. So our clients are financial services institutions and the vendors itself for them. So, you know, CEB TowerGroup really fits at the nexus of business and technology. And what we're advising them on is that it -- mobile payment is the way of the future. Smartphone adoption has reached a distinct point where more than 50 percent of new mobile phone sales are going to be smartphones. Phones are getting more capable and are getting more, you know, quite getting more portable.
SCHMIDTNow, the issue that was raised earlier about the battery life certainly remains, especially in some of the Android handsets, but that's something that will be overcome. The challenge right now is making the banks' customer base comfortable with the concept of mobile payment. One of the ways that they're doing that is introducing intermediate technologies and really bridges to mobile payments, like mobile remote deposit capture as part of the mobile banking offer where you take a picture of your check and deposit it that way.
SCHMIDTBut on the vendor side, we're also walking them through, you know, what the risk profile for the institutions happens to be. They're very interested in creating flexibility for the -- for their customers, both on the consumer side and the corporate side. But they also need to make sure that that offer is secure and that offer will give them the flexibility that they need in terms of payment type. And then, lastly, it's just an issue of deploying alongside some of the other offers that they already have in place.
NNAMDIAndy, thank you so much for joining us.
SCHMIDTThanks for the opportunity. Look forward to talking to you soon.
NNAMDIAndy Schmidt is research director at the consulting firm TowerGroup. Still with us, of course, are both Joseph Bailey and Frank Gruber and you who have joined us by telephone. We'll start with Paul in Great Falls, Va. Paul, you're on the air. Go ahead, please.
PAUL(unintelligible) My comment really has to do with -- and question has to do with (unintelligible) I use my United Visa card to pay for everything, from a postage stamp to a tank of gas. What will the affinity relationships be? So in other words, what's in it for me? I've heard that vendors will be charged 2.75 percent and 25 cents and whatnot. My question is: what's in it for me? What do I get if I use one of these devices?
NNAMDIAnd, Joe, one of the big stumbling blocks the nationwide adoption of QR codes, near field communication, is that people like Paul would have to buy new devices to read these codes. What would it take for Paul and other merchants to make that investment? What's in it for him?
BAILEYI think, Paul, there might be some good news here for you, that there might be an opportunity for you to even get some more benefits with your loyalty to your United Visa card. So we heard earlier -- I think it was Candice (sic) who was concerned about her level of giving up her privacy and anonymity by using some of these technologies. You've kind of made this agreement with your Visa card provider that you're going to use your Visa card for everything and, as part of that, giving up your anonymity.
BAILEYYou're going to get great loyalty points or miles, whatever it is, for your credit card. Imagine how that -- these QR codes that you're using for payment are pushed to you in an email message to say, hey, Paul, we've got a great opportunity. Use this QR code for payment at your local merchant, and you're going to get twice as many miles as you otherwise would. That type of kind of processing is impossible when you have a static magnetic stripe on the back of your credit card.
BAILEYBut if it's something that's pumped in an email and it's an automatically-generated QR code, not only the merchant have kind of a mobile commerce play, but you've got some benefit now in getting additional miles in transacting that way. So I think, Paul, if you're OK with giving up your anonymity, I think there's good news for you with mobile commerce.
GRUBERYeah. And I think you add location into that as well. You know, being in a CVS or other kind of pharmacy and you literally scan something, being able to, you know, save on that, and then obviously -- basically double-dip and get those Visa reward points as well is a win-win. I think the other thing, if I take it to the extreme, the other side, let's say we're in the future, and, you know, you don't need your wallet anymore.
GRUBERLet's just -- that's where it's going. I mean, I think that's -- we're not there yet. We've talked about batteries. We've talked about some of the security issues and things like that. But, ultimately, it'd be great if I didn't have to bring around my Costanza wallet. You know, I can literally bring all my cards. You know, I think that's where we're going, and I think it's just a matter of time. And, I mean, everyone would love that, right? Like, to just have a mobile phone. That's all you need.
BAILEYJust look at the way Starbucks has been successful...
BAILEY...with their application...
BAILEY...and trying to get people to kind of move away from the physical loyalty cards to their smartphone loyalty cards. And I think that other merchants are following it and will follow.
NNAMDIPaul, thank you very much for your call. And Tina in Fairfax, Va., I think, is also a business owner. Tina, your turn.
TINAHi, Kojo. Thanks for taking my call. Yes. I have a service business in Northern Virginia. I've been in business for about four years now. When I started the company, I had -- because we're a service business, we go to people's homes or to the client's site and perform the service and take -- collect the payment. So we're not in a retail situation where we can just stand at a register and -- or in one location and swipe something.
TINASo I have five technicians in the field. They each collect payment individually. We started by taking -- with a merchant account -- by taking credit card information by phone. It's very manual, punching all the numbers and giving authorization code. And we found that to be probably costing us about 5 to 6 percent of those revenues, which is really a lot. It doesn't sound like much, but, you know, take 5 or 6 percent of your revenue really hurts.
TINAWhen I looked for better rates to try to purchase the wireless swipers that banks give, they're extremely -- the units are, like, five, $600 apiece, and then they have monthly gateway fees. And then all the swipe fees and the interchange fees are added on top, and I find the whole structure rapacious, in fact. And so I was really happy when Square came along. We've been using it for three or four months now.
TINAMy customers love it. My technicians love it. I love it. You know, they sign with their -- they see how much we're charging. They sign with their finger on our smartphones. We send them the receipt, and it's all buttoned up for 2.75 percent. I cannot see anything wrong with that.
NNAMDIWe got a post on our website: "At Eastern Market in D.C., many vendors use Square to process their sales." We got an email from Tushar, (sp?) who says, "To the gentleman who said he'd never seen anyone using Square, I went to a music concert in Baltimore last week, and the musician was selling her merchandise using Square and an iPhone. She said it works really well, and it makes accounting easy when moving from city to city every day." Underscores exactly what Tina is saying.
GRUBERYeah, totally agree. I mean, that barrier of entry is so low now. You don't have to pay the five or whatever, $100 that she mentioned to get those devices. So I think it's allowing people, enabling people to do business, and they're not the only one. I mean, there's others in the field. PayPal here just launched Intuit, has a product called GoPayment. So there's others in the field that are doing similar things, but, obviously, Square kind of went out with the lead.
BAILEYWell, I think Square is benefiting, too, from developing this kind of repetitious brand. I mean, think about how many times they were mentioned on "Kojo Show" today, right?
BAILEYSo they're doing pretty well.
BAILEYI would say the one thing, you know, that -- again, 2.75 percent does seem high, but when compared to that 5 or 6 percent that Tina was experiencing...
BAILEY...I mean, again, it's a solution in an area where we haven't seen anybody.
GRUBERAnd you should mention that even if you do use Square and you don't swipe, they do still take that 5 percent or -- I don't know if it's exactly five, but they take a higher percentage if you key in the card, so...
BAILEYThat's right. Yeah. Swiping actually gets you...
BAILEYYeah. That's right.
NNAMDITina, thank you very much for your call. Let's go to Peggy in Olney, Md., for a slightly different point of view. Peggy, you're on the air. Go ahead, please.
PEGGYI don't mean to rant, but I do get kind of irritated with lone men and women who don't have a dollar in their pocket. I understand that technology is convenient, but it's almost like, in America, we don't use currency anymore. And this just isn't the case in the rest of the world. And, actually, that 2.75 percent adds up. I mean, the businesses have to pay for it. If you're talking about passing the cost on this consumer, oh, people would find that currency actually is a better option. Your comments, please.
NNAMDII'd be interested in hearing my panelists comment about that. First you, Joe.
BAILEYYeah. So, Peggy, I don't know if you remember. It used to be that when you paid with your credit card at the pump at a gas station, they would actually try to recollect all of their transaction fees. You'd have to pay a little bit more. And there are still some gas stations that do that, but that's kind of gone out of fashion, I guess...
NNAMDIThey still complain that's where they lose most of their money -- at gas stations.
PEGGYYou know what? It's interesting you should say that 'cause I work at a gas station. And 2 percent of $4 a gallon is a whole lot more than 2 percent of a dollar gallon. And there's no money to be made in gas stations. It costs money to sell gas, and we're the enemy, you know?
NNAMDIIf people are paying by credit card. We had a conversation about that last week, but, Joe, please continue with the point you were making.
BAILEYNo, no. I mean, I just want to say that, you know, I think Peggy is right, that maybe what we're doing is, by moving away from cash, we're moving to a society where it's the people who are helping us kind of create fluidity in the market, right, the whole idea of transacting is we can go ahead and gobble up small percentage points here and there and make a great deal of money.
BAILEYI think it's important to realize that the ones who are helping us move the bits of information around, which represent money, are taking on some risks. So I think they are at least able to capture some percentage. And I think there's still hope that as disrupted technologies go ahead and infiltrate this market that there could be some pressure on the incumbents to go ahead and lower their rates. You know, we're not there now.
BAILEYIt's too early, but, hopefully, we get to the point at where, like we've seen, let's say, with the fees associated with clearing stock transactions, how that's been moved down by a lot of the disruption in that industry, hopefully, we can get to the point of where we're seeing much lower percentage is being taken over because of the new technology, including some of the traditional means, because of the entrance in the marketplace.
NNAMDIAnother thing -- and thank you very much for your call, Peggy. Another thing that people criticize about mobile person-to-person payments, the bump payments, is that even if you touch your phone to someone else's to pay him or her what you owe, the banks still processes the transaction the same way it does with checks, meaning it takes a few days for the money to move from your bank account to your friend's account. Will that change?
GRUBERI think there's -- yeah, I think that will eventually change. But, right now, I don't see it as a huge paying point. I don't know. That's just my own personal perspective. I think it takes a little while for transactions to happen. I think even if you use your Visa or MasterCard or whatever, you know, sometimes it takes -- there's a lag there. It's not instantaneous.
BAILEYYeah, I mean, so I'll disagree maybe a little bit with this point because I think there are some small merchants that can take, you know, up to two billing cycles to go ahead...
GRUBEROh, that's -- yeah.
BAILEY...and get some of the dollars into their accounts to go ahead and buy additional merchandise. And so, you know, if you can say, we can go ahead and speed that up and actually encourage people to use some of these new payment mechanisms where there can be a quicker bank transfer, it could create a whole bunch of liquidity that small merchants can benefit from a lot.
GRUBERSo on the business side, it's definitely something we need to improve on. And the consumers are though, I mean, does it matter? I mean, that's kind of what I'm saying.
NNAMDII want to take three calls, one right after the other, because we're running of time, and they all seem to have the same kind of themes. So I'll start with Eland (sp?) in Baltimore, Maryland. Eland, you're on the air. Go ahead please.
ELANDYeah. Hi, Kojo. Thank you for taking my call. Great show. I'm calling just to piggyback of the point that was made about mobile payments in Europe. I was in Europe recently. I went to Sweden and Finland. And what I noticed is that, even without smartphones, many payments are done by mobile phones. And the bus tickets, you can get it through SMSes. You can...
NNAMDIMm hmm. Text messages.
ELAND...pay for laundry, yeah. You can pay for laundry through text messaging. How come we don't even see that in the U.S.A?
NNAMDIGlad you brought that up, Eland. Thank you for your call. I'm moving on next to Obdee (sp?) in Fairfax, Va. Obdee, your turn. You only have about 20 seconds.
OBDEEGreat. Yeah. Thank you. Yeah, same thing, how can we use that technology to send money to overseas? And also, the U.S.A., they're very much behind technology. I know a lot of people who -- in Somalia that use that technology.
NNAMDIWhy is the U.S. behind on this, gentlemen?
BAILEYI mean, I would say we're behind because what we have currently works pretty well. So there isn't as much incentive to go ahead and adopt especially the text messaging forms of payment, which, you know, may go ahead and be very attractive if you didn't had anything alternative.
GRUBERYeah. We're seeing more of those technologies arise. There's a company called Venmo out of Philly -- they're actually Philly, New York -- that is trying to do this text messaging. But you're right. It's -- we have systems in place that make it easier. You can swipe and you can do other things.
NNAMDIAnd, finally, there's Greg in Washington Grove, Md. Greg, you got about 20 seconds.
GREGAt what point do we throw away our cards and they start scanning our irises, fingerprints or computer chips embedded under our skin?
BAILEYI think that's going to be a difficult thing to get to. I think...
NNAMDINo. Greg wants a date, Jan. 2.
NNAMDISorry, Greg, we can't give you a date on that one.
NNAMDIJoseph Bailey is the research professor at the Robert H. Smith School of Business at the University of Maryland. Joe, thank you for joining us.
BAILEYThanks for having me.
NNAMDIFrank Gruber is CEO and executive editor at Tech Cocktail. Thank you for joining.
GRUBERNo, thank you for sure.
NNAMDIAnd thank you all for listening. I'm Kojo Nnamdi.
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