Trends & Tactics: Cutting Through the Mobile Hype

The number of consumers buying stuff in stores using their mobile devices nearly tripled last year. But the Federal Reserve, which came up with that factoid, cautions mobile-payments enthusiasts not to whoop it up too much because the increase in mobile payors is not statistically significant.

The Fed’s finding came from a study about mobile banking and payments that the central bank released in late March. The study, called Consumers and Mobile Financial Services 2013, is the Fed’s second such effort and is based on a November 2012 online survey conducted by GfK (formerly Knowledge Networks). Nearly 2,600 respondents completed the survey.

The results tend to deflate the hype surrounding mobile payments while still offering hope that many consumers eventually will use mobile phones as replacements for payment cards and cash. The user base today is still quite small despite the intense development of new mobile payment services by tech companies, processors, banks, and a few retailers such as Starbucks Corp.

For example, 6% of survey respondents reported waving or tapping a mobile phone at a cash register last year to make a purchase, compared with just over 2% of respondents who reported doing that in the first survey, for 2011. The Fed warns, however, to treat the 2012 results with caution.

“The small number of respondents who make this type of payment means that the change in use from 2011 to 2012 is not statistically significant,” the survey report says. A Fed spokesperson did not return a Digital Transactions request for comment.

In addition to POS purchases, the survey asked about other forms of mobile payments such as bill payments, charitable donations, person-to-person payments, and other transactions using a mobile phone. Researchers also asked about the technology respondents used for mobile payments, including short-message service (SMS) or text messaging, mobile browser, and mobile applications.

In all, only 15% of respondents had made any form of mobile payment in 2012, up modestly from 12% in 2011. Among them, the most common form of payment was bill payment, at 42%, followed by online purchases at 35%.

The percentage of mobile payors making those two types of payments actually declined slightly from 2011, but those making P2P payments increased to nearly 30% from 21% in 2011. Fifteen percent of respondents reported receiving money last year from another person via a mobile phone, up from 8% in 2011.

Only 2% of mobile-payment users reported using Google Inc.’s Google Wallet and a similar fraction said they had used Square Inc.’s Pay With Square, now known as Square Wallet.

Survey takers asked those who did not make mobile payments to chose one or more of a dozen reasons listed for not doing so. The most frequently cited reason, picked by 38% of the group, was, “I’m concerned about the security of mobile payments”.

Not surprisingly, the Fed reported that younger consumers are adopting mobile payments faster than other age groups. Respondents ages 18-29 accounted for only 22% of the survey base but 38% of those reporting having made a mobile payment last year.

The Fed found little correlation between income and mobile-payment use, except at the opposite ends of the income scale. Consumers making less than $25,000 a year (23% of mobile-phone users) were less likely to have reported making a mobile payment last year (17%), while 28% of those making more than $100,000 reported having made a mobile payment despite comprising only 24% of mobile-phone users.

Paper Recedes from ACH Originations

The final numbers are in on 2012’s automated clearing house network transaction volumes, and they tell a familiar story: more transactions are entirely electronic, and fewer are originating from paper-check conversions.

Total ACH volume grew 4% in 2012 to nearly 16.8 billion transactions from 16.1 billion the prior year, ACH governing body NACHA reported last month. The value of ACH payments increased 9% to $36.9 trillion.

WEB, an ACH code primarily for consumer debits through online bill payments, proved to be a star among NACHA’s numerous transaction codes. WEB’s volume jumped 10% to 2.95 billion transactions last year from 2.68 billion in 2011. WEB now accounts for nearly 18% of ACH volume.

In contrast, WEB’s paper-based cousin, ARC (accounts receivable conversion), slipped 7% to 1.86 billion transactions. ARC is the code for paper-check bill payments mailed to lockboxes and converted to ACH transactions. WEB’s volume surpassed ARC’s for the first time in 2010.

Mike Herd, managing director of ACH network rules at Herndon, Va.-based NACHA, notes that WEB being more than a decade old but still growing at a high rate indicates a big market for “native,” or all-electronic, ACH payments still waits to be tapped as consumers abandon check writing.

“For it to be growing by 10% or more is really a positive sign,” says Herd.

NACHA also has spread WEB’s wings to cover more transactions, such as Internet-initiated mobile payments and person-to-person credits.

“The variety of payments continues to expand,” Herd says. “[Mobile] is a nascent area that is going to have some impact in coming years.”

A related code for bill payments, CIE, for customer-initiated entry, grew nearly 8% to 168 million transactions in 2012. CIE transactions are ACH credits produced when consumers initiate a bill payment through an online-banking site.

Reflecting the decline of consumer check writing in stores, two ACH codes for point-of-sale payments, point-of-purchase (POP) and back-office conversion (BOC), both saw volumes recede. POP declined 8% to 454.4 million transactions and BOC slipped 2% to 191.7 million. Volume under the TEL code for telephone-based ACH transactions declined 5% to 349.1 million transactions.

In all, native electronic payments grew 6% over 2011 and now make up 85% of total ACH network volume, NACHA said. Total check-initiated transactions declined 7%.

The ACH network’s original code, PPD (prearranged payment and deposit) credits, which dates back to the early 1970s and covers direct deposit of paychecks and government benefits, grew 5% to 5.14 billion transactions in 2012.

International ACH transactions (IAT) proved to be the ACH’s network’s fastest-growing payment type last year, booming 50% from a small base to 43.9 million transactions.

NACHA says ACH transaction quality continued to improve in 2012. The unauthorized debit rate declined for the 10th year in a row to 0.0298% of transactions from 0.0300% in 2011 (“Good News, Bad News About ACH Fraud,” page 19). The rate covers both fraudulent transactions as well as those returned for other reasons, such as administrative errors. Herd did not have figures on what fraction of returns are fraudulent. The overall network return rate declined slightly from 0.98% in 2011 to 0.97% last year.

Look Who’s Getting into Merchant Funding

Long the domain of independent sales organizations and specialty lenders, the merchant cash-advance business is attracting a new player: PayPal Inc.

The long-time e-commerce kingpin plans to test the waters for cash advances to U.S. online merchants after piloting such services in the United Kingdom.

Finance companies and merchant processors have offered cash advances to brick-and-mortar merchants for years, but many banks and non-bank lenders have shied away from e-commerce merchants because of the risk, according to Janinne Dall’Orto, senior manager at Linthicum, Md.-based First Annapolis Consulting Inc. But the entry of PayPal, a subsidiary of online marketplace eBay Inc., shows there is a market opportunity in lending to Web-based merchants.

A specialty lender to Web-based small businesses, Atlanta-based Kabbage Inc., recently announced that it had received a new $75 million debt facility to expand its business.

“I think they [PayPal] came to fill a void in the merchant cash-advance space,” Dall’Orto says. “Other than Kabbage, who focuses on online merchants, there are not that many advance companies that provide advances to online merchants.”

PayPal revealed it was eyeing the U.S. merchant cash-advance market during an eBay investor event. The San Jose, Calif.-based company didn’t give many details about its coming test, but it is expected to start this year and be modeled on the British program, which is now being rolled out.

The U.S. pilot will come through PayPal’s online spot-credit unit, Bill Me Later, which eBay bought in 2008. Bill Me Later gets funding from WebBank, a Utah-chartered industrial bank.

Merchant cash advances typically involve a merchant committing a portion of its future credit card sales to the advance provider in return for up-front capital. Such advances usually don’t come cheaply. In an example provided by PayPal for its U.K. program, a £12,000 ($18,300) advance deposited into the merchant’s PayPal account is to be repaid over seven months, with the merchant paying a total of £15,240 ($23,200), or 27% above the principal.

PayPal’s partner lender in Britain is United Kapital, which will lend a business up to £25,000 ($38,000) in the PayPal program.

While costly, merchant cash advan­-ces have been the only source of credit for many small businesses. The business boomed before the recession, according to Dall’Orto. But even in the good times, many advance providers stayed away from e-commerce retailers because of the high perceived risk.

PayPal’s entry signals not only that the economy is recovering, but also that cash-advance providers are willing to take a new look at Web-based merchants, Dall’Orto says. In this respect, PayPal may have an advantage because of its experience in providing payment services to thousands of eBay-based merchants.

“PayPal is well-positioned to provide cash advances to the online merchant base,” she says. For an eBay retailer, “PayPal has a lot of historic information about that merchant for underwriting.”

A PayPal spokesperson says the coming test shows how Bill Me Later “has changed our model” and funding mix. “Now it’s a revenue stream,” he says.

A spokesperson for a leading merchant cash-advance company, New York City-based Capital Access Network Inc., says by e-mail that PayPal’s announcement “demonstrates the momentum behind and increasing credibility of alternative finance products, which Capital Access Network pioneered.”

The spokesperson wouldn’t comment in detail about PayPal, but says that after Capital Access’s 15 years in the business, “we have learned what these small businesses really need is an experienced merchant-finance partner.” The company’s brands include AdvanceMe and NewLogic.