The mobile payments market is evolving rapidly, with new payment intermediaries, providers and services emerging all the time. The launch of Apple Pay, Samsung Pay and Android Pay earlier this year signals the growing role of non-bank payment intermediaries in this market. Jerry Norton of CGI writes
Mobile payments technology, together with enhanced consumer expectations, are putting added pressure on banks to innovate with mobile payments, driving significant investments in this area and a renewed focus on developing more competitive and pragmatic mobile payment strategies.
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Moreover, as the mobile payment options offered to consumers increase, financial institutions will have respond faster and look beyond their own resources in order to compete more effectively with new market players. But will emerging services such as Samsung Pay disrupt the traditional payments landscape?
Both Samsung Pay and Apple Pay are based on standardised technologies developed by the international card schemes which essentially replace the physical credit card with a mobile device. In this sense they are more an evolutionary step, rather than a revolution.
Getting some standards
One of the most important aspects these "Pays" will be the consolidatation of existing industry standards for mobile payments. Just like Apple Pay and others, Samsung Pay uses Near Field Communications (NFC).
Unlike them, it also adds an emulation of the magnetic stripe used on credit and debit cards – Magnetic Secure Transmission (MST).
This means that Samsung Pay should be able to work at most existing point-of-sale (POS) terminals, regardless of whether or not they have been upgraded to handle chip and PIN.
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By GlobalDataThis will enable merchants to easily adopt the new payment method, as they won’t need to upgrade their terminals to be able to offer mobile payments to their customers.
This is of particular reliance to those countries that still rely on magnetic stripe technology e.g. the USA, which is only now rolling out chip and PIN.
As more and more merchants roll out chip and PIN and NFC-enabled POS terminals, and banks allow their cards to be stored in mobile wallets, consumers will be able to benefit from more convenience and choice. This in turn will open the way to new players and tech start-ups entering the market with solutions that leverage the underlying technology standards and payment networks provided by banks.
Setting the path ahead
In this sense the "Pays" won’t replace traditional card banking transactions but will push financial organisations to innovate faster in this space. But how can banks adapt to this rapidly changing and highly competitive environment?
First of all, the financial services industry needs to look at the underlying infrastructure that enables payments innovation. This will require a concerted effort from financial organisations and their respective national associations.
The US, Canada, UK and other European countries are already making significant efforts to improve their payments infrastructure. The UK’s Faster Payments Service is a good example of such and has led to significant improvements in bank payments in the past couple of years.
However, infrastructure itself is only half of it. Providing access to these payment frameworks for all players in the market is still an issue that needs to be addressed. Under the current model only direct members of these initiatives or organisations sponsored by a direct member can access such payments frameworks.
This could potentially limit the opportunities for new market entrants to benefit from infrastructure improvements.
Another key area that is driving innovation in the payments space is the increased collaboration between banks and third party organisations.
As the payments ecosystem becomes increasingly complex, playing solo, so to speak, could be a massive disadvantage. This is why banks are looking to create APIs (Application Programming Interfaces) that can be used by third party developers to create innovative complementary services and payment products.
The Open Bank Project is one such example. It’s an open source API and App store for banks that allows them to drive innovation in payments and other areas by using an ecosystem of third party applications and services.
Such services will enable banks to offer a wider range of web and mobile apps to their customers and compete more effectively with challenger payment providers such as Apple and Samsung.
According to Gartner, by 2016, 75% of the top 50 global banks will have launched an API platform and 25% will have launched a customer-facing app store.
To be able to make the most of this opportunity, banks need to integrate this set of services into utilities that deliver packaged payments solutions to customers.
This involves a number of challenges such as finding effective ways to protect banks’ APIs and creating an effective regulatory framework that governs how banks share certain data and technology with third party providers.
However, financial organisations are already making significant progress in this area and in the introduction of a new set of more competitive payments products and services is only a matter of time.
Banks following the tide
As the payments industry is undergoing dramatic changes banks are beginning to transform how they operate to catch-up with the innovation created by non-bank payment providers.
The launch of emerging mobile payment services such as Apple Pay and Samsung Pay marks a historic move of major technology firms into the payments arena.
However, banks will continue to play a key role in providing the underlying infrastructure that facilitates mobile payments and will increasingly collaborate with other industry players to drive innovation in banking.
This increased collaboration will transform traditional payments as we know them today and will create more opportunities for launching frictionless, easy to operate services for consumers that will revolutionise how we make payments.
