How mobile payment services could help low-income consumers

Apple Pay and other mobile payment services have struggled in the US. But internationally, mobile payment services are helping providing access to banking for people without bank accounts, underscoring an global divide.

Elise Amendola/AP/File
Alex Culbertson, 26, shows transactions via Venmo, the PayPal-owned app that lets users pay with a tap and a text-like message, on his smartphone in Boston in June. Adoption of mobile payment apps has been lagging in the US compared to many other parts of the world, with some observers saying the products could help improve access to banking for low-income consumers.

When Apple unveiled its mobile payment service Apple Pay last year, Tim Cook, the company’s chief executive, described it as “an entirely new category of service.”

During the company’s annual media event, Mr. Cook pointed to an image of an overstuffed wallet bulging with credit cards.

“Our vision is to replace this,” he said, to cheers from the crowd. “It’s so easy to lose your card or have it compromised, it’s no wonder that people have dreamed of replacing these for years.” He paused for effect.

“But they’ve all failed,” he said. “Most people that have worked on this have started by focusing on creating a business model focused around their self-interest instead of focusing on the user experience.”

More than a year after the company’s announcement, with Google expanding its Wallet service to create Android Pay, which is also linked to a users’ credit or debit card, it turns out that in the US, the systems are still facing an uphill battle.

Only 8 percent of users said they used either of the two products daily or weekly to make a purchase, a recent survey by the management consulting Accenture found, while 84 percent of smartphone users said they didn’t plan to use a mobile wallet app to make an in-store purchase this holiday season, according to a survey by

“I think the biggest obstacle right how here in the US is that it doesn’t solve an obvious problem,” says James Wester, an analyst at the market research firm IDC who focuses on mobile payment products. “It’s not just about the process of paying at the point of sale, it’s also about enrolling your phone, downloading an app, having a phone even, as opposed to getting a bank account or getting a credit card sent to you in the mail, or going into CVS and buying a prepaid card."

While the two surveys found that younger users were more likely to use mobile wallet apps than older people and services by PayPal and apps by retailers such as Starbucks have seen some gains, it appears that many US users see potential security issues and enjoy the ease of using other methods, particularly cash.

But internationally, mobile payment services appear to be flourishing, especially for a broader base of users who might not have previously had access to a bank account or those in traditionally cash-based economies.

Several of the services – such as M-Pesa in Kenya, Flous in several Middle Eastern countries, and Alipay in China – were developed by existing mobile phone companies or technology providers, easing the transition for many users to doing common banking tasks and sending money to friends and family using a mobile device.

M-Pesa (“pesa” is Swahili for money), for example, is operated by Safaricom, Kenya’s leading mobile provider, which is an affiliate of the European mobile giant Vodafone. It focuses on small transactions and is designed to work on simple phones by sending PIN-secured text messages.

In the US, however, mobile payment has yet to truly catch on at the same rate. While the technology is still new, consumers have many other options — including credit cards, which are the primary way US users of mobile wallets will pay for goods and services, says David Reibstein, a professor of marketing at the Wharton School at the University of Pennsylvania.

“I think a large part of is that we’ve gotten used to using credit cards,” he says. Professor Reibstein compares the process to the growing use of mobile phones, including feature phones — often more limited than a smartphone, but still equipped with Internet access — in parts of the developing world.

“The reason why cell phones were adopted faster [internationally] than in the US is because many countries didn’t have a good wired system ... and so cellular phones picked up very, very quickly," he says. "While sitting here in the US today, we might think that was fast, but really it was much slower."

Mobile payment services, observers say, have great potential to increase access to financial services for “unbanked” — people without access to a bank account — or “underbanked” consumers.

“We used to think of ‘underbanked’ as tied to geographical access points, in other words, of ATMs as a point of sale – now, geographic points are being replaced,” says Annette LoVoi, director of financial services and asset building at Appleseed, a network of public interest justice centers based in the US and Mexico. “In other words, the way I used to think of cashing a check at the grocery store when I began my financial life, it’s different now. The old geographically-based access points don’t hold up any more."

The group has advocated for the advancement of mobile banking services to recent immigrants, underbanked consumers, and people with limited English proficiency, though they say the high cost of many mobile phone plans could be prohibitive. The argument has also been embraced by policymakers.

In June 2014, the Consumer Financial Protection Bureau, the nation's consumer watchdog, launched an inquiry into mobile banking services and their potential to help low-income consumers in the US gain access to financial services and build financial literacy when traditional bank branches were out of reach.

The bureau’s report, released this month, details a widespread consensus from a diverse coalition of banks, social justice groups, and technology providers that mobile banking can help low-income consumers.

Black and Latino mobile phone users have particularly begun using mobile banking, despite owning a smaller number of smartphones, according to a 2015 survey by the Federal Reserve Bank of Boston. Last year, 39 percent of Americans used mobile payments, but the percentages are much higher for minorities. While only 34 percent of white Americans used mobile payments, they were used by 53 of Hispanic Americans and 43 percent of African Americans. 

About 36 percent of mobile banking users said they began using mobile banking more than two years ago.

Mr. Wester, the analyst, says part of the divide between the US and other parts of the world on mobile payment comes down to differing attitudes about purchasing goods and services.

In China, where mobile wallet Alipay has 350 million registered users, consumers are commonly using smartphones for smaller purchases, such as transit, food, and drinks. But while smartphones are widely-used in both the US and Europe, many European users are not tied to two-year contracts and do not pay a subsidized price for their phones, making mobile payment services seem to be more of an additional value.

But that may change as the technology improves, says LoVoi, of Appleseed, noting that the group also feels that mobile payment services should be subject to similar consumer protection laws as traditional banks.

“My sense is that this is an industry in flux, and there’s more out there now than there was a year ago,” she says. Previously, she adds, “I tried to use financial services products on my phone and they’re clunky. They’re not easy to use. I would be looking for elegance and simplicity.”

Professor Reibstein of the Wharton School says technology companies in the US have so far marketed mobile payment products to wealthier consumers, rather than targeting a broader group of under-banked users.

“There’s no doubt that Apple Pay has been targeted towards the more affluent. For example, I think one of the best applications of mobile payment is Uber, but who uses Uber?” he asks, noting that the service only works with a smartphone. Apple did not respond to a request for comment.

But as smartphone costs go down and more providers begin accepting mobile payments exclusively, the rate of adoption will increase. “I think there’s no question that mobile payments are going to end up being adopted in the United States,” Reibstein says.

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