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Although they started out as wireless telephones, today's technologically sophisticated mobile devices (cellphones or digital assistants) can be used for other purposes, including conducting financial activities such as mobile banking1 and mobile payments.2 Since the use of these devices for this purpose is a relatively new innovation, the future of mobile financial services largely depends on consumers' response. In her paper titled "An Examination of Mobile Banking and Mobile Payments: Building Adoption as Experience Goods?,"3 Julia Cheney uses the economic concepts of "experience goods" and "learning by doing" to gain insight into how consumers' adoption of mobile banking and mobile payments might evolve.
Consumer adoption of mobile cellular phones has increased dramatically: There were more than 2.1 billion subscribers worldwide in 2005, or 34 percent of the world's population. In addition, people around the world are increasingly using these devices for a range of nonvoice services, which may include sending short message service (SMS) text messages and accessing the Internet. Applying the theory of experience goods, Cheney argues that consumers' increasing breadth of experience and familiarity with using their mobile devices in nonfinancial situations could naturally extend into using them for financial purposes.
Julia Cheney, Industry Specialist, Payment Cards Center, Federal Reserve Bank of Philadelphia
In addition to providing text messaging and Internet access for mobile financial transactions, mobile phones, Cheney notes, can be enabled to conduct contactless "proximity" payments via near field communication (NFC) chips. This technology was originally developed to facilitate proximity or contactless payments with a plastic payment card and is now being tested with mobile phones. However, she points out several barriers to broad adoption of the mobile cellular phone for contactless payments in the United States, including the limited number of phones that currently include NFC chips. This provides consumers with limited opportunities to gain experience with mobile NFC payment capabilities or to build on the experience through learning by doing. Furthermore, the adoption of contactless card payments by merchants and consumers is still relatively limited in the U.S., providing little opportunity for consumers to build experience with this technology. Cheney posits, however, that the conditions in other countries with growing experience with NFC-enabled mobile payments, such as Japan, may lead to more rapid consumer adoption in these markets. In the U.S., she suggests that growing use of NFC technology in highway and public transit applications may provide the necessary experience factor that could ultimately lead to broader payments adoption.
In her analysis, Cheney notes that there is considerable variation in the global use of mobile phones, familiarity with SMS text messaging, broad band Internet access, and chip-enabled proximity payments — all ingredients of mobile financial service applications. Globally, half of all handsets are web-enabled, and a quarter of these handsets are being used to access content on the Internet. Also, web-enabled phones are much more common in developed than developing countries, where broad band Internet access is still too costly for most consumers. As she details in her paper, the resulting differences in experiences associated with mobile devices and technologies are likely to affect the paths of consumer adoption of mobile financial services in different parts of the world.
Cheney considers three additional factors that will likely affect adoption patterns, including financial inclusion opportunities, data security concerns, and industry coordination issues. Addressing the issue of financial inclusion, she notes that the differences in patterns of mobile financial services adoption are most apparent when examining consumer experiences in developed versus developing countries. Mobile banking may be seen as just another service channel complementing existing well-functioning alternatives in countries with more developed banking systems. In developing countries, on the other hand, mobile payments may emerge as the only electronic payment method available to a large segment of the population that operates outside mainstream banking systems. Thus, the adoption of mobile financial services in less-developed nations can potentially be significant in compelling service providers and governments to make financial services more inclusive.
Last, Cheney notes that beyond the experience factors, concerns about data security and coordination challenges faced by providers of financial services and telecommunications are two other factors likely to affect consumer adoption. She suggests that the adoption of the mobile channel as a means to manage bank accounts or to make payments will be affected by the degree to which consumers are concerned about the security of mobile devices. Similarly, to the extent that financial services firms and telecom providers cannot satisfactorily resolve coordination issues around the economics of mobile financial services and their respective regulatory regimes, consumers' adoption of mobile financial services will also be affected.
The application of the theories of experience goods and learning by doing to the mobile financial services market provides a framework for better understanding the likely trajectory of consumer adoption. Specifically, Cheney argues that consumers' experience with mobile devices, SMS text messaging, online banking, and contactless payments can be seen as foundations for the successful adoption of mobile banking and mobile payments. Also, financial inclusion, data security, and coordination issues present both opportunities for and challenges to adoption. Ultimately, Cheney views the mobile channel as having the potential to become the primary way through which consumers conduct their financial business, particularly in developing countries and among unbanked communities in developed nations.