By Stephen Gibb

The volatile economic climate of the recession means that banks, merchants and consumers are all looking to improve the efficiency of their financial transactions, whether they be from person to person, to merchants, between institutions or across international borders.

As consumers, we are increasingly struggling to pay off personal loans, credit card debt is mounting and direct debit payments are increasingly popular with merchants and banks.

At the same time, our technology uptake is on the rise.

So are consumers, merchants and banks missing an opportunity to develop a cost-effective, efficient and more convenient payment method using personal technology?

Credit where due
The current methods of managing the inflow and outflow of consumer credit in the West are dated, inefficient and often involve more third parties than necessary, such as credit card associations, independently run transaction networks and affinity partners.

In today’s lending environment, banks can deploy solutions that enable them to reduce their business costs and risk, and enhance the user experience by moving towards electronic payments to process transactions much faster.

Traditionally, customers receive a credit card statement with a deadline for payment. After a period of waiting and perhaps a reminder or two, the customer posts a check which takes three days to clear once received. In the interim, the bank’s cash position is impacted.

Direct debit payments have similar negative implications for consumers. Direct debits provide little flexibility, with payments leaving a customer’s account on exactly the same day every month, regardless of available funds.

In contrast, mobile payments can provide a new method of transacting that is beneficial to consumers, merchants and banks.

Mobile payments can provide customers with more flexibility in their bill payments, allowing them to choose when the payment leaves their account every month and so ensure that they always have sufficient funds.

Mobile payments can also provide regular balance reminders after transactions at a low cost, making it less likely that consumers will overstep their spending limit and saving on process overheads. In this way, mobile payments can also improve the cash-flow of banks and merchants.

Text books
During a recession, merchants also tend to spend more money on debt collection services, ranging from letters demanding payments to court action.

Online bill payment has become increasingly popular in countries with a developed telecoms and broadband network.

However, using the ubiquitous mobile phone, merchants can send payment reminders by SMS in order to decrease their expenditure on debt collection even further.

Mobile payments provisioning also allows customers to make instant payments against the outstanding balance through their mobile phone, although currently merchants may still be required by regulation to send some bills by mail or electronic mail.

In cases where the debt is purely accidental, the high read-rate of text messages means that the reminders are more likely to reach their intended recipient than letters or phone calls.

A series of escalating messages – for example commenting that the customer has not replied to the previous message – can also be highly effective in dealing with the deliberate non-payment of debts, as text messaging carries with it a sense of urgency that letters no longer possess.

The convenience of being able to pay the balance instantly through the same interface is likely to greatly increase the rate of successful payment reminders and to help consumers avoid penalty fees for late payments.

This is crucial considering that, in 2007, consumers paid $18.1 billion in penalty fees to credit card companies. This figure is up more than 50 percent since 2003 and accounts for approximately half of the industry’s $40.7 billion in profits, per Hoffman Brinker.

Mobile payment reminders can also be set to allow for minimum/maximum payment amounts and to increase the charge by a set percentage if a payment is not made after a certain time period.

Mobile pays
The adoption of mobile payments is likely to be driven by merchants and financial institutions who are exploring ways of saving money through improved collections and back-office cost savings.

At the same time, even though consumers are likely to be more risk averse during economically challenging times, they will take up the service if they are given clear benefits, such as convenience and flexibility.

Given this, the recession may actually increase the uptake of mobile payment solutions.

Adoption of mobile payment solutions can drive merchants’ profit margins and mobile payments providers can use the existing network of trusted merchants that exist in these markets, rather than trying to set up their own network.

Stephen Gibb is Paris, France-based chief information officer of Upaid. Reach him at [email protected].