We are pleased to introduce a Guest Post by Michael Koploy, an analyst who has been looking at mobile payment from the retailers' perspective. We hope you find Michael's work useful and interesting and we thank him for his contribution.
Back in July 2011, US technology research company Gartner predicted that mobile users would jump to over 141 million in 2011, a nearly 40 percent jump from a year prior. And near field communication (NFC), the RF technology to facilitate payments from these devices, has been popular in the news. For example, Visa recently approved select handsets to use its payWave scheme, a big step in expanding the reach of mobile payments.
At the same time, Gartner and other advisories predict that the mass adoption of payments could take a number of years - some even saying it could be a decade. The entire ecosystem isn’t there yet - manufacturers need to produce the phone, banks need to figure out how important mobile payments will be and market accordingly, and retailers need to figure out if they need to upgrade their hardware and the impact of increased interchange rates.
Software Advice, a site that helps software buyers research enterprise solutions, has been hearing from a lot of merchants that are unsure what this technology even is. “How much will processing these payments cost?”, “What are the security implications to be aware of?” and “What the heck are mobile payments?” are just a few of the queries they’ve heard from retailers.
To help address this gap in knowledge, I have put together a guide and FAQ to help retailers understand the technology and ecosystem around mobile payments. Check it out at Mobile Payments: FAQs for Retailers.
The Card Payments industry is at a crossroads. However, depending on which path the industry follows it may soon be facing a precipice.
The technology collaborations that smartphones, social media and NFC allow are, without doubt, potential gamechangers. The likes of Visa and Mastercard know this and, depending on your point of view, they continue and will continue to back many horses or muddy the waters.
Of course, nothing is inevitable as there are large hurdles to be overcome in growing new payment networks which bypass established card schemes. Credibility, security of funds and exception processing are but some examples but, in time, alternative models and processes can and will be developed to overcome them.
2012 will see further progress and additional approaches to harnessing these game-changing technologies but it will be another year of jostling for position as some clarity emerges on the way forward.
Strategically it will be an important year in the background but, on the ground, the future is a little easier to see. We'll come back to some of these in the coming weeks but, for now and in no particular order of significance, here are some headlines:
1. EMV will gain sufficient traction in the USA to force the hand of those who doubt its value.
2. Contactless payment infrastructure in the UK will advance considerably, although take up in terms of number of transactions will remain behind target. The London Olympics will be seen to be a missed opportunity in promoting the concept.
3. At least one, but probably two, PED vendors from Asia will make a significant impact in the Western Europe market.
4. Verifone and Ingenico will continue to increase their capabilities but in so doing will concede vital high value market niches to more innovative and consumer focussed vendors. They won't care as their businesses will continue to grow in the mainstream sectors in the short term.
5. Despite the growth of Verifone and Ingenico, independent PSPs will continue to prosper as the new devices entering the market (implied by 3 and 4 above) will require to be serviced.
None of the above is earth-shattering but the shoots which emerge from these seeds will be small enough and reactive enough to take advantage of the post-2012 landscape in terms of supporting social media, smartphone and NFC based solutions.
Should the mainstream payments sector become dominated by two schemes (Visa and Mastercard) and two service providers (Verifone and Ingenico) then industry growth will depend upon emerging solutions from everyone else. 2012 may therefore turn out to be the year in which the fate of card payment as we know it today was sealed in a competitive inevitability.
Having discussed some of the global trends in card payments here, we turn our attention to developments that have impacted at a more regional level.
The US has been assessing the impact of EMV and now seems set to introduce Chip & PIN over the next few years. There is still much discussion around the cost/benefit analysis of this move but it seems that the lack of a clear way forward in the mobility sector is providing enough inertia for even the most pessimistic business case to look good. EMV USA is on its way and let's hope that much of the pain experienced in implementation elsewhere can be avoided.
On a sexier level (everything is relative!!!), the US has also seen the emergence of tablets in the retail sector. The trend is starting to gain traction elsewhere too and, with the prospect of using tablets for both typical EPOS applications alongside customer facing applications this trend could have a big impact on the future shape of payment systems.
In Europe, and in the UK in particular, the rollout of contactless card acceptance devices finally seems to have hit the tipping point with many major retailers committing or even rolling out. Uptake from a cardholder perspective is still relatively low so there is still much work to be done on the issuing and education of cardholders side.
Also in Europe, work around streamlining security approvals and payment systems in general continue. National approvals and processes in Europe has historically been a huge barrier to entry to new vendors. Although they are never as quick to deliver as originally hoped for, any initiatives which encourage more competition has to be a good thing for the wider market. The continued growth of card payment in central and eastern Europe, markets unhindered by historic security and debit scheme programmes, has provided some lower hanging fruit in the meantime.
Hoping to take advantage of all these developments is a new breed of hardware vendor emerging from Asia. We have seen similar attempts in the past, of course, but this time, and with lessons from these previous attempts learned, the market conditions are far more favourable both in terms of opportunity and competition.
As 2011 draws to a close, let's reflect on the year gone by in the world of card payments. In this first part, we will look at some of the global developments before focussing on more regional trends in part two.
At the Point of Sale itself, there have been no rabbits pulled from the hat to upset the established order but that disguises what has been an extremely busy year as vendors, banks, schemes and service providers position themselves for the future.
The most high profile industry activity has undoubtedly been the continued consolidation of hardware vendors and service providers and, indeed, the growing blur between these two previously distinct types of organisation. Verifone has undoubtedly stolen most of the acquisition headlines in 2011 with their big competitor, Ingenico, focussing a bit more on stretching their core business organically.
There has been a host of activity around mobile payment / m-commerce. In particular, there has been a lot of debate how NFC could drive mobile payments forward but, possibly more interestingly, about the threat it poses to the established card payments order.
As discussed previously, Visa and MasterCard are investing in many sytems and technologies, almost as if to cover all the possible scenarios, while new entrants try to harness the emergence of social networks and growing telco networks to circumvent the big two altogether.
In contrast to the consolidation in the more traditional card payment sector, mobility is driving all kinds of alliances and partnerships as hardware and service providers attempt to find the killer bundle that will give them a crucial leadership position in this highly fractuous space.
All of this takes place against the backdrop of a stagnant recovery from a largely Western recession and, although there is an ever growing number of gloomy predictions about the future health of the US and European economies in particular, our feeling is that 2011 has seen the Card Payments market pick up a bit of bouyancy and optimism which has no doubt been driven by the opportunities some the developments above offer.
In previous articles we’ve talked about a virtual arms race amongst industry participants. Their aim is to ensure they’re not left out of the next generation of payments innovation like they were with the successful M-Pesa.
At a scheme level, Visa invested in Cybersource and MasterCard bought Datacash. Visa continues to invest in Square while MasterCard seems to be backing iZettle. And with over 5 billion mobile phones globally, it isn’t any wonder that these global players are trying to align themselves with future growth in mobile commerce and NFC.
Do we even need Visa or MasterCard? M-Pesa doesn’t seem to think so. And Google Wallet may try to remove them from the equation too.
Will the telcos, such as Orange, be the new payment schemes, directly debiting payments from customer’s bank accounts? We saw Pay By Touch try this route (and fail) as well as early adopters work in the mobile payments space such as SimPay (failed in 2005).
Will Visa and MasterCard take a small piece of every pie to ensure that they cover the future?
Or, is Apple showing an example of where a retailer can potentially get around Visa and MasterCard as well as placing traditional payment solutions into their stores? Their recent rollout of their EPOS-like EasyPay system to iPhone users shows where the future may be heading; a customer buys an item online or in the store (using the camera on their iPhone) and then uses their iTunes account to pay and walk out with the goods. No card, no payment terminal and (potentially) no need for Visa or MasterCard. Disintermediation of all of the traditional players by a forward-thinking retailer prepared to do things differently.
The Orange route is one approach, while Apple demonstrates another way forward. But the future is likely to be a hybrid of a lot of technologies ultimately providing what customers want (a great experience) rather than what technology providers think they need (another technology).
Of all places, it seems that London is the latest authority to heap negativity on the potential rollout of contacless payment systems.
Despite being the host city of a self-proclaimed 'Cashless Olympics' next year, the London Assembly's Transport Committee has criticized Transport for London (TfL) plans to replace their Oyster contactless ticketing system with universal standard debit/credit contactless payment system.
Instead of welcoming the bold initiative that will make the transport system of London more accessible to the millions of visitors it enjoys every year and the attempt to drive cost out of the administration of the system (to benefit users and taxpayers alike) the committee chooses to focus on the old scare stories of data security and exclusion.
Such negativity not only betrays a complete lack of understanding of the practicalities of using proximity technology for payment and the widespread availability of pre-paid debit cards for the non-banked population, it displays the worrying lack of vision which seems prevalent throughout much of public sector bureaucracy in the UK.
If London is able, in full view of the world, to host the Olympic Games with all the logistical and organisational challenges that that represents, surely it is capable of migrating its transport ticketing system from what is essentially a closed loop to an open platform and provide continuity and better value for money for its current users as a result?
Where has all that can-do spirit gone?
Now that several high profile retailers have rolled out payment terminals and PEDs capable of supporting Contactless Payment, vendors of these technologies are changing their emphasis from EMV and card acceptance to NFC and mobility.
Although Contactless remained a headline theme at Cartes 2011, this was largely as a constituent part of the migration to mobile payment and was reflected in the growing number of NFC devices, wallet apps and technology integrations that were on show.
Now that contactless payment technology is a business as usual requirement, it will open payment systems like never before by providing an interface to devices that are not controlled by the traditional players in the card payments sector.
This is possibly the biggest challenge ever to face the card payments 'club'. Every player today is at some risk of having their interests diluted or even wiped out as the mobile payments revolution progresses.
Acquirers, PSPs and even Card Schemes are at risk of being replaced by collaborations between networks, application providers and service providers who can generate a critical mass for their own payment systems.
Possibly the most secure group of the current players are the equipment vendors as it is going to take a radical culture change before consumers allow merchants to process their payments with anything other than 'trusted' devices. And, although they might not look much, the familiarity and relative comfort that consumers have built up over several decades of using payment terminals will not be easily overcome.
However, new approaches might be possible which remove the need for merchants to have a payment device at all. Who knows where this development might lead, for example?
It's no wonder that all and sundry are involved in developing payment apps for smartphones, PEDs that can interface to smartphones or payment gateways that can accept transactions from mobile devices. Their future involvement in the industry could depend on finding a completely new part to play. Consequently, there is a lot of hedging going on and precious little leadership.
Who is going to emerge from the crowded playing field of mobile payments and lead the industry into a brave new world? Don't expect the answer at Cartes 2012.
Photo Credit: http://www.grasscutsgardenservices.co.uk
So Cartes has come and gone for another year.
In general terms, the show seemed more upbeat than in recent years (hopefully a portent of an improving economy in general) but the themes were less than innovative, which is not to downplay some advances in the underlying technology.
We will pick up on some of these themes in the coming days but, amongst the card payments fraternity at least, the major talking point was the continued expansion by acquisition of Verifone and Ingenico.
Ingenico must surely have thought it had stolen the show with its announcement that it intended to acquire Xiring just days before the doors opened. Although it appears, to this observer at least, more of a tactical than strategic acquisition, Xiring has made a big impact with card reading devices for non-payment applications and are considered a big name.
However, just hours later, Verifone (who once again chose not exhibit directly at the show) announced an $800million deal to acquire Point, the dominant provider of card payment solutions in the Nordic region and, through Point's earlier acquistion of Commidea and TS3, a significant player in the UK. This deal will have profound implications across the industry, broadening as it does Verifone's service portfolio while simultaneously narrowing the choice of hardware available to retailers in Northern Europe.
This may not hurt Ingenico in the short term but it does make Verifone's intention to compete as a complete service provider pretty clear. It is difficult not to see Banksys, Point's major supplier of payment hardware up to now, as the major short term loser.
As we have discussed before the continued consolidation in this sector is opening the door for new suppliers to enter and several - XAC, Castles and Spectra for example - were trying to make a big splash.
We have explored at a high level how a mobile payments system is a significantly more complex proposition than a standard card payments system. Why is this so?
In simple terms it is because the token which drives the payment (smart phone vs smart card) is substantially more intelligent and flexible. The whole point of mobile payments is to make the process more convenient for the user. This should lead to more purchases and further drive the migration to cashless payment.
Therefore mobile payment systems will potentially have to offer the following characteristics; the ability to enter account details by NFC, the ability to input vouchers via 2D bar codes, the ability to send receipts via SMS, the ability to input account details or verify PIN by an app either over the network or via Bluetooth and many variations on these themes.
Numerous questions arise from these possibilities; how do we ensure interoperability between NFC devices and these systems?; how do we accomodate the huge number of networks providing mobile telecomm services?; how do we authenticate apps as trusted?; won't bar codes have to be self-scanned?; and many, many more.
In truth, some of these questions could be addressed by simply integrating a new piece of technology to the system. But others are far-reaching and have potentially huge implications for interoperability.
Further, in the early stages at least, mobile payments will be niche and may not offer the return on investment to drive the necessary systems development for general deployment.
It is more likely that retailer specific or closed-loop systems will be developed where the application and system can be more easily scoped and the business case quantified. Such a landscape will potentially lead to a number of retailer owned mobile payment apps, any of which could evolve into a defacto system for other retailers who wish to join the revolution.
And one doesn't have to look too far to find retailers already making inroads into the financial services sector.
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