Smart phones and tablets will revolutionize how merchants manage customer relationships, but new technology that enables consumers to pay by swiping their phone rather than a credit card will produce only evolutionary changes, Professor Michael Katz testified in Congress July 10.
Katz, the Sarin Chair in Strategy and Leadership, was among three experts to testify before the U.S. Senate Committee on Banking, Housing, and Urban Affairs in part two of a hearing on "Developing the Framework for Safe and Efficient Mobile Payments."
Katz said the largest driver of widespread adoption of mobile payments will be the ubiquity of smart phones and mobile devices and the information they convey about where consumers are and what they are doing.
To make his point, Katz described this hypothetical example: On a warm summer day, a mobile payment app alerts a coffee retailer at 10:45 a.m. that a person who usually buys a cup of coffee by 10:30 a.m. is leaving her office and has yet to visit a coffee shop. Taking into account the heat and the coffee retailer's uncrowded café, the retailer could send an email or text message to the consumer offering a discount on an iced coffee if she visits the store three blocks away in the next 30 minutes.
"This information can be analyzed to predict consumer behavior and used to generate personalized, context-specific, merchant-to-consumer communication delivered in real time," said Katz. "The ability to predict consumer behavior and send such targeted messages is a very powerful marketing tool that will be worth tens of billions of dollars annually to merchants."
Katz cited three obstacles to revolutionary change triggered by mobile payments:
- A chick-and-egg problem: Merchants don't want to bear the cost of a new payment service if only a few consumers us it, and consumers don't want to sign up for a new payment service if few merchants accept it.
- Convenience: While a "digital wallet" could be more convenient than a traditional wallet packed with multiple payment cards, traditional wallets are going to be necessary for some time to hold driver's licenses and insurance cards.
- Security concerns: Katz noted that surveys show consumers question the security of mobile payments.
Katz is a former chief economist of the Federal Communications Commission and former deputy assistant attorney general for economic analysis in the Department of Justice's Antitrust Division.