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The Problem With Mobile Payments

Worldwide mobile payments are estimated to exceed $235 billion this year, but North America only accounts for a small slice of that. Your phone is your camera, calendar, favorite gaming device, and more. When will it finally become your wallet?
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You’re out at a restaurant with a group of friends, the lights are low, dinner is over, and everyone’s ready to cap off the evening. The only problem is that it’s a busy night and your waitress hasn’t been seen for the better part of an hour. There’s no way to get the check, let alone divvy up the bill among cards and cash. What to do?

Cover, a company founded by former attorney Mark Egerman and developer Andrew Cove in September 2012, will soon have you pulling out your phone to pay your tab at your own leisure. Their app, which launches in New York City in October, is a new spin on mobile payments, systems that allow users to transfer money via smartphone. With Cover, simply check in to a restaurant, choose how much of your table’s bill you want to pay at the end of dinner, and the money will be sent directly to the restaurant, freeing you to just walk away.

Cove and Egerman recently raised $1.5 million in funding and are selecting an initial round of restaurants to launch with. Yet Cover faces a harsh reality: The United States still has a long way to go when it comes to mobile payments. Worldwide mobile payments are estimated to reach $235.4 billion in 2013, according to a June study by Gartner. North America will account for about $37 billion, but that’s only half the $74 billion predicted for the Asia-Pacific region. Africa is a major player, too—by 2016, Gartner predicts that it will even surpass Asia, hitting $165 billion.

Like books, another technology that’s centuries old but still very effective, cash is holding on to its dominance as a medium for exchanging value because it’s convenient, consistent, and its users believe in it.

The U.S. lags far behind retail mobile payment systems in Japan and Korea, and even lacks the universal solutions of Kenya and Afghanistan, where peer-to-peer programs like M-Pesa allow money exchanges via text message. It’s not that the U.S. doesn’t have the technology; users just aren’t convinced that mobile payments are actually necessary. “The status quo isn’t broken,” Egerman told me.

Many developing countries lack a stable financial infrastructure, making mobile payments a better choice. The private companies that run these systems operate outside of the traditional state-run banking system, moving to a transnational level. Their digital platforms create pathways for money that evade possible corruption issues and bureaucratic slowdowns. When you can’t trust your bank to take care of your money, it’s that much easier to trust your cell phone.

In contrast, our country’s banking system still works perfectly well for the majority of customers. Ninety percent of the 115 million households in America have bank accounts, according to a 2012 report from the Federal Deposit Insurance Corporation, and the combined checking and savings accounts of Americans currently make up around $8 trillion, according to the Federal Reserve.

Recent innovations like PayPal and Google Wallet, which Gartner’s report noted was “struggling to gain traction” in part due to the lack of adoption of near-field communication technology that makes it simple to transfer information between devices, aren’t taking the place of familiar debit cards and cash. Newer start-ups like Clinkle and Lemon, or cryptocurrencies like Bitcoin and Ripple, lack institutional credibility. Replacing our entrenched monetary infrastructure is costly and convincing users is an uphill battle.

Success in mobile payments is not so much about coming up with the right solution as the right problem to solve. Rather than attempting to turn all of our money digital, it’s more effective for companies to think about a small-scale human issue, like how to get buyers a cup of coffee faster—Square is now working with Starbucks to create a custom digital account system—or avoid a particularly painful task, like shelling out for the check after a meal, as Cover does. The company has “a very tight vertical,” Cove said. “It means we can fight a much more focused battle.”

Cover improves on the money experience by allowing you to not think about it. It’s designed to be “as frictionless as possible, so people focus on what matters, which is hanging out with your friends.” Cove said. “It’s more than just the absence of pain; the rest of your night feels different.” They use the same strategy as Uber, an app that lets users call and pay for taxis at the touch of a button, removing the sting of waiting and the potential embarrassment of exchanging money.

Yet as the financial crisis made clear, it’s unwise to not think about where our money is going and how it’s getting there. As unregulated private companies increasingly control the flow of our digital cash, it will become more difficult to tell what fees are being taken where, and it only takes one major hack or disruption for the government to jump in—which could catalyze a much-needed dependable mobile payments solution in the U.S.

In a recent article, New York Times technology reporter Jenna Wortham complained that she was “still waiting for her phone to become her wallet.” She might have to wait a while longer. Like printed books, another technology that’s centuries old but still very effective, cash is holding on to its dominance as a medium for exchanging value because it’s convenient, consistent, and its users believe in it—at least here in the United States. It doesn’t need a total replacement quite yet.

“We’re still in a primitive time for mobile payments products,” Cove said. “We’re building things because we can, not because they’re necessary.”