As exciting as the prospect of being able to pay for dinner by bumping your cellphone into your waiter’s iPad is, it’s important to take futurists’ wild predictions with a grain of salt. No one has a crystal ball, after all, but most of us do have fully-functioning wallets — armed with paper that magically stores value based on what is drawn upon it, and cards that can tap into far away computer systems using the magic of magnetics and fiber-optic networks. This might be the exact problem with mobile payments, according to Dr. Fumiko Hayashi, an economist at the Federal Reserve Bank of Kansas City.

Sergio Uceda/flickr source

Hayashi spoke with recently about the “chicken-and-egg problem” that mobile payments adoption faces in the United States. The concerns she points out dovetail with some of the shortcomings in the mobile payments field that we’ve pointed out in the past. It’s nice to see someone smarter than you, who really knows what she’s talking about, confirm your hunches.

In the first quarter of this year, Hayashi wrote a paper for the Kansas City Fed called “Mobile Payments: What’s in It for Consumers?” In the paper, she argues that “the main demand-side barrier [is] the uncertain value of mobile payments to U.S. consumers.” While Kenyans, who lack access to banks, have found value in mobile payments provider M-Pesa, and Japanese adoption was fueled by adoption in mass transit, “neither factor is as important in this country,” writes Hayashi.

Payments technologies and currencies, though we may not always realize it, operate according to the same laws of supply and demand that other consumer products do. This is easy to forget, especially because as consumers, we express our demands using these things. But just like any new trinket or doohickey or thneed must, in theory, be something that consumers want or need in order to thrive, so too must payments systems. Debit cards made it easier for people to stop carrying so much cash, while avoiding the pitfalls of credit card use, and slowly became an incredibly popular form of payment. But mobile payments, for the most part, will just keep us from needing to carry debit cards, and debit cards are both a.) relatively new and b.) not all that burdensome.

Hayashi elaborates on her points for PYMNTS:

It is difficult to find “killer apps” in the U.S. In other countries where mobile payments are more popular, there are killer apps that have resolved pain points for consumers…compared with these countries, the U.S. payments system works well and pain points for consumers are relatively minor. This may impede a rapid transition to mobile payments in the U.S.

And furthermore, there are significant supply-side issues facing mobile payments platforms, which feed into demand-side issues, which then feed into one another in a vexing cycle:

For example, agreeing on which mobile technology standards to adopt is a supply side barrier, but it significantly affects the main demand side barrier – uncertainty about the benefits of mobile payments to consumers. Some of the important mobile payment attributes, such as convenience, speed, and security, depend on the technology standards. Because of the lack of clear direction about these standards, consumers may not know what they can expect from mobile payments. Suppliers of mobile payments, on the other hand, may want to determine which technology to adopt after knowing consumers preferences or needs. But it may be difficult for consumers to express their wants or needs without knowing what mobile payments are capable of. It is really a chicken-and-egg problem.

Overall, however, Hayashi thinks that “mobile payments have a lot of potential,” but that one technology will have to be agreed upon for widespread adoption to actually happen. The Kansas City Fed, like all regional Fed branches, processes checks for banks in the area. They ought to know something about payments acceptance. Checks have probably worked so well for so long, in part, because all you need is a pen and some checks, and checks don’t come in a variety of inscrutable technologies with varying degrees of security flaws.

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  • Willy, I read this article published by the Fed Economist some time back; it has some excellent commentary on our journey to making mobile payments a part of our daily existence.

    Adding a bit more to the context:- Mobile payments being a new technology will brace the chicken and egg situation; just like the world of Internet Commerce began transacting and rewriting the rules of Bricks & Mortar stores- Chicken and egg problem will remain until there is greater maturity in the market place for mobile payments. The demand will be driven by NFC or Payment enabled smart phone devices, which constitute about 2% or so of smart phone market sales- The example of M-Pesa is a person to person transfer facility, similar to smartphones that allow for transferring funds between Wells and say Chase. There is a greater demand for adoption in M-Pesa since a lot of the consumers do not have banked account or access to a bank location (very few locations). We have drive thru locations for banks in the US !!
    – Google, Facebook, and now Amazon are launching their own phones .. other than Apple… clearly more devices will create demand for use of mobile payments- Paypal using its payment network for checkout with smart phones; MasterCard and Visa doing a number of pilots; all these are creating awareness, understanding and outlining the potential for mobile payments future- How many smart phones users that bank with Chase, Wells, and Bank of America have started using the Check deposit of phone… is that a mobile payment; sure ! And mobile apps by Financial Institutions are becoming a norm… checks will be history. We are probably one of the only developed nation with such a high check usage. I lived in Australi for 5 years from 2001, and only wrote a check 5 times … once a year. Never had a need… all electronic BPay.- Companies like Square, Paypal here, and others are creating mobile payments (not NFC driven) for a new financial ecosystem for small to mid size businesses to transact on the spot
    The mobile payments ecosphere is still in its early adoption stages, but is here is stay. Standards will evolve over a period of time; ISO for a number of codes did not get created overnight and neither did EMV.

    I truly believe different countries will adopt this technology of mobile payments at a different pace and using different types of phone devices – Kenyans just need SMS service to make fund transfers; Americans will use the smartphone apps to make the same fund transfers. Mobile payments are now here to become a part of our wallet usage – deposit checks, make fund transfers, make payment to a local business using Square,… its evolving.

    Thank you again for bringing this topic to a discussion table.