Jon Rutter, director, product development at First Data
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With smartphone sales continuing to grow across the globe, the number of available mobile apps soaring, and smartphone usage permeating both personal and business realms, it is becoming increasingly clear that this is a genuinely disruptive technology.
Indeed, as the many uses for smartphones become ever apparent, institutions the world over are being forced to adopt mobile strategies – and nowhere is this truer than in the banking industry where mobile payments are swiftly coming to the fore. Just last month the Payments Council announced a scheme, currently backed by eight major financial institutions, that will allow UK mobile users to make payments via text messages to launch in spring 2014. However, this is only one possible way of market entry, banks looking to gain traction in the mobile payments space are also considering and trialling NFC technology.
NFC technology has been around for a number of years and is seen by many as the obvious way to migrate electronic point of sale payments onto a mobile device. Banks are attracted by the prospect of not only riding the wave of smartphone popularity, but also the lure of increased transaction volume, especially in the low value payment space where customers continue to use cash rather than cards. However, banks are having to navigate how to enter the NFC payments space without getting into potentially complex agreements with Mobile Network Operators (MNOs). Just as banks see the benefits of NFC, MNOs and alternative payment providers are also keen to make sure that they are not excluded from this potential mobile payments revenue stream.
Despite this context, mobile contactless payments remain broadly untapped globally – mass adoption has yet to be realised. There are a number of reasons for this, including the complexity of the ecosystem, lack of clarity around the business case, and lack of NFC handsets in the marketplace.
So, what are the options for financial institutions wishing to enter the emerging mobile payments market?
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By GlobalData1. Do nothing – wait to see what happens and react when a more defined business model emerges. The danger here is that with new entrants into the marketplace and other FIs taking steps, banks who sit on the fence could face loss of market share in the medium term.
2. Engage with other parties with a view to pilot activity. However, lots of pilots have already been undertaken, to the extent that solution providers and other ecosystem players are reluctant to engage further without clear sight of how the opportunity will scale.
3. Work to build an ecosystem with a view to a controlled commercial launch – this strategy is challenging but offers the highest potential return due to the advantage gained by putting a genuinely scalable solution to market.
4. Look for an alternative approach which reduces initial complexity, e.g. Icarte or microSD cards – this presents a logical route to market for those wishing to quickly gain some market insight whilst keeping control of their brand.
With option one carrying a high risk of losing market share and being left behind by competitors, and option two being a relatively well-trodden path already, let’s focus on the remaining options and discuss their relative benefits.
Building an Ecosystem
This option requires the building of a complex ecosystem in a way that each party is comfortable with the role they play. This necessitates an element of sacrifice from each party, but the potential rewards are large. This type of solution will likely require a card issuer, MNO, wallet developer, card scheme and technology providers. To be successful it should focus on delivering a scalable and open solution for the whole market that provides a convenient and simple consumer experience. It should primarily focus on early delivery, but without complicating evolution and expansion.
The long term partnership approach makes this the most likely scale solution, and it allows the handset compatibility issues to be overcome leading to a single solution for all. Furthermore, products can be added/removed in real-time, which enhances the consumer experience, leads to lower operating costs, and ultimately allows flexibility to adapt to changing demands.
However, the complicated commercial model requires a partnership approach and an element of risk taking as the financial institution loses ownership of the payment application storage and management – the payment application is stored on a device or SIM owned by another entity. In addition, the investment and time needed to develop and implement this solution should not be underestimated.
Alternative Approach
This option allows the financial institution to simplify the steps to market and retain overall control. It reflects the existing model of issuers owning the device on which the payment application is loaded and avoids the need for complicated partnerships.
The pros to this approach include its speed to market, as devices can be obtained quickly and personalised in advance – similar to plastic cards today. Furthermore, other uses of the device, e.g. music storage, can provide additional benefits, and the simpler commercial model doesn’t require the involvement of third parties.
However, this approach doesn’t offer a single format solution. Each supported handset requires a different solution, and while the abstinence of remote personalisation keeps the initial barriers to entry lower, it removes the speed of issuance benefits to the customer. In addition, the cost of hardware is higher than the current cost of plastic, and the solution may not be future-proof as there is no guarantee that the devices will be supported by future handsets.
Moving forward
The challenge financial institutions face with mobile payments is how to ensure a share of an emerging market which is as yet unclear in its design and commercial structure. However, this should not dissuade participation. When thinking about entering the mobile payments space, FIs should keep in mind that developing any solution into the market is a good thing, as it helps to develop the overall proposition and raise awareness. In addition, proximity payments shouldn’t be looked at in isolation and need to be incorporated into the overall mobile strategy. Flexibility is key as there is no single clear solution for everyone – the best way forward is dependent on market and institution.
Ultimately success will depend on availability, benefits to the customer and merchant, revenue model and demand. This doesn’t mean that solutions which don’t satisfy all of these needs should be discarded, but this should be understood at the outset. While the approach of building a partner ecosystem remains the most likely long term success, alternative solutions may well gain scale in the short term and that momentum could have an important part to play in the growth of mobile payments.
