In one of our first posts, Channel Shifts, we noted the projected rapid growth in mobile banking. A recent study by the Federal Reserve confirms this trend with nearly 21% of mobile phone users reporting they have used mobile banking in the past 12 months. Another 11% think they will probably use it within the next 12 months.
While mobile banking appears to be taking off, the Fed study suggests that consumers may be slower to adopt mobile payments. The Fed reports that only 11% of mobile users have made a mobile payment over the past 12 months. Primary barriers to adoption of mobile payments include security concerns, lack of perceived benefit of mobile payments and ease of use of cash or credit cards (see below chart).
Source: "Consumers and Mobile Financial Services", Board of Governors of the Federal Reserve System, March 2012.
McKinsey’s recent “Global Mobile Payments Survey”, which polled consumers who access financial services via their mobile device, also shows limited adoption of mobile payments. Of those surveyed who use a smartphone, 24% report using their mobile device to make a remote payment, but only 15% have used their phone to send personal payments or to transact at the point-of-sale. This limited adoption of mobile payments appears to be linked to consumers’ lack of enthusiasm for key benefits offered by mobile payments as depicted in the following chart.
Source: "Understanding Consumer Adoption Drivers: Insights From the McKinsey Global Mobile Payments Consumer Survey", McKinsey & Co., May 2012.
Both the Fed and McKinsey studies suggest that certain consumer segments are leading the way in terms of mobile payments adoption. According to the Fed study, 73% of mobile phone users who made a mobile payment in the past 12 months were younger than 45 years old. McKinsey’s study supports this finding – segments most receptive to mobile payments have substantially lower average ages than the least receptive segments. Hispanics and the underbanked are two additional demographic groups that currently use mobile payments at higher rates than the general population.
Despite the modest consumer adoption of mobile payments to date, a widely cited Pew Research Center study reports a majority (65%) of industry experts believe mobile payments could replace cash and credit cards both online and in stores by 2020. Their position is best summarized by a quote from John Pike, Director at GlobalSecurity.org:
“So many people are already accustomed to buying a cup of coffee with a credit card that smart device swiping is only a very small next step.”
A number of these experts also cited the explosive growth of smartphones and other mobile devices and the potential for greater security as reasons why mobile payments will replace established payment methods, such as cash and credit/debit cards.
How realistic are these predictions of the demise of cash? According to the Cleveland Fed, cash is the single largest payment method with nearly one-half of total transaction volume being paid using cash. The use of cash has been growing at an average annual rate of 4% since 1990. The number of banknotes in circulation has grown from just over 20 billion in 2000 to over 30 billion in 2011. Given the ubiquity of cash today, a near-total shift away from this payment method by 2020 seems improbable. It also seems clear some segments will increasingly rely on mobile payments while others will continue to rely on cash or other payment methods.
To remain relevant, financial institutions will need to monitor the changing payment preferences of the segments represented in their customer base to ensure that their future payments capabilities are aligned with their customers’ needs.