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As mobile payments emerge as an increasingly valid alternative to cash, checks, and credit and debit cards, many institutions are examining the potential benefits and concerns.

As recently as a few years ago, there were rumbles in some corners that NFC stood for “never for commerce” rather than “near-field communications.” But by the end of this year, 5 percent of the worldwide base of 600 million to 650 million NFC-equipped phones will be used at least once a month to make contactless in-store payments, Deloitte predicts. By contrast, in mid-2014, just 0.5 percent of the 450 million to 500 million NFC phone owners did the same.¹

Mobile payments, or mPayments, are emerging as a valid alternative to cash, checks, and credit and debit card transactions in the U.S.² They are expected to grow to $722 billion in transaction value globally by 2017,³ driven by a combination of government support,⁴ increased smartphone and application usage,⁵ and the promise of a better shopping experience.⁶ mPayments at point of sale (POS) terminals, a specific form of mPayment that allows customers to pay in a store using a smartphone in much the same way as they would make a standard credit card transaction,⁷ represent the fastest-growing segment in mPayments, with transaction values expected to grow 34 times from 2014 levels to reach $118 billion in 2018.⁸

The mobile payments tide has definitely turned, according to the more than 2,500 executives, managers, and business analysts who attended an mPayments webcast hosted by Deloitte in July. Sixty-one percent of attendees said they “absolutely” expect mobile payments will become as commonplace as cash and credit cards are today. A mere 10 percent expressed no interest in using mPayments (See Figure 1).

Given consumers’ growing interest in mobile payments, financial services firms, retail organizations, and technology, media, and telecommunications companies are exploring the likelihood that mPayments will open up new types of customer interactions, says Rakesh Kumar, a principal at Deloitte Consulting LLP. For instance, mPayments platforms are likely to enable payments at unattended points of sale such as vending machines, parking meters, and parking garage gates, Kumar says.

Meanwhile, a number of disruptors are moving into the field, threatening financial services institutions’ traditional hold on transactions and potentially unlocking new revenue streams. These entrants include device manufacturers such as Amazon, technology companies such as Apple Inc., Google, and Microsoft, and mobile carriers such as Verizon and, to an extent, Vodafone. In addition, mPayments startup Square has existed for several years and been widely adopted by consumers. Companies at the forefront of mPayments will have the opportunity to collect transaction fees and gather vast volumes of consumer data, which could allow them to sell advertisers on targeted marketing campaigns, Kumar says. As such, these disruptors have the potential to either complement—or compete against—established payment providers.

mPayments Risks and Security Considerations

mPayments offer a range of opportunities for firms pursuing them, and also pose risks for enterprises that are part of the payments processing value chain today but are not aggressively pursuing mPayments. For traditional financial services providers such as card issuers and payment networks, “the risk of becoming simply the transaction platform, and losing customer engagement, is very real,” says Eric Piscini, a principal at Deloitte Consulting. Various payment providers are responding to this encroachment by exploring and investing heavily in new mPayments solutions, partnerships with technology companies, and participation in startup initiatives. Many are also considering the importance of positioning their institution’s credit or debit card as the default card a consumer enters into an mPayment app.

On the consumer side, security is perhaps the biggest concern about mobile payments. Fifty-seven percent of U.S. consumers either discontinue or reduce their relationship with a company that’s suffered a major data breach.⁹ During the webcast, when asked which factor is most important in selecting a mobile payments provider, a full 50 percent responded “security capabilities.”

Moving beyond these fears “requires informing end users that mobile payment solutions are more secure than many other forms of payment,” Piscini says. When a consumer pays using an NFC device, the consumer’s credit card number is not transferred, which means, unlike in traditional credit card transactions, the information would not be revealed in the event of data breach. Financial services institutions building their own platforms are also investing heavily in security capabilities, he says.

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As payments increasingly go mobile and disruptors enter the field, organizations are in a position to not only capture new revenue streams beyond traditional transaction fees, but also offer a faster, more convenient payment experience for their customers. “The best way for customers to experience mobile payments is when they don’t even feel they’re dealing with payments,” Kumar says.