Smartphone sales are continuing to grow across the globe, with the population increasingly relying on this technology not only as a means of communication, but also to play games, read the news, or surf the internet on the move. Consequently, institutions the world over are looking to tap into this market and make the most of their increasingly mobile customer base.
Indeed, with every week that passes comes more news in relation to mobile payments. Be it the founding of new partnerships, the signing of commercial agreements or the launching of various mobile money apps – writes Jon Rutter, Director Product Development at First Data.
Today eight of the UK’s largest banks have now pledged to launch money transfer services via text message before 2014, but with increasingly sophisticated banking and payments apps available, are SMS payments really the best approach for banks looking for success in the mobile arena? What other options are available? And how can financial institutions ultimately determine the best approach to bank initiated mobile payment solutions?
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Near-Field Communication (NFC) technology is seen by many as the obvious way to migrate in-store debit card payments onto a mobile device. The recent success of the Oyster card, as demonstrated by Transport for London, is standing banks to attention. Banks are attracted to the lure of increased transaction volumes in the low value payment space, where customers continue to use cash rather than cards. However, banks are keen to navigate the NFC market without getting into potentially complex agreements with Mobile Network Operators (MNOs). Just as banks see the benefits of NFC, MNOs and alternative payments providers are also keen to make sure that they are not excluded from this new and lucrative 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.
When addressing the challenges related to entering the emerging mobile payments market, financial institutions are faced with four potential options:
- Building an ecosystem this strategy is challenging but offers the highest potential return due to the advantage gained by putting a genuinely scalable solution to market
- Exploring alternatives choose an option which reduces initial complexity, e.g. Icarte or microSD cards, presenting a logical route to market for those wishing to quickly gain some market insight while keeping control of their brand
- Engaging in 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
- Nothing observe the market and define a strategy when a more defined business model emerges. The problem with this is that with the likes of Square, iZettle and Barclays Pingit already on the market, banks which sit on the fence will face loss of market share
While all options will be considered by the major players in the British banking industry, some carry more risk than others. The risk of doing nothing is arguably higher than the risk of doing something, with the final option carrying a high possibility of losing market share and being left behind by both traditional banking competitors and challenger brands. Pilot activity has also been explored by most of the major players, so its vital that banks take the next step and turn this initial explorative approach into genuine progress.
A partner ecosystem
Building an industry ecosystem necessitates an element of sacrifice and cooperation from each party, making it a tricky option but with the greatest potential for success in the long-term. A mobile payments solution would require participation from 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.
A partnership approach provides scalability for the solution, and allows handset compatibility issues to be overcome, leading to a single solution for all. Input from a group of independent parties enhances the consumer experience, can lead to lower operating costs, and ultimately allows flexibility to adapt to changing demands.
However, the investment and time needed to develop and implement a partner ecosystem should not be underestimated. In many cases the financial institution loses ownership of the payment application storage and management, as it will be stored on a device or SIM owned by another entity, with the result that agreeing the necessary terms can prove a lengthy process.
The alternative option allows the bank a quicker route to market while retaining control of the overall solution. It reflects the existing model of issuers owning the device on which the payment application is loaded and avoids the need for complicated partnerships.
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 does not require the involvement of third parties.
However, this approach can be limited by the narrow set of technologies it is likely to support. 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.
Making the leap
In a fragmented mobile payments marketplace, banks are under pressure to make their leap into the sector count. With the added challenge of competition from an increasing number of new market entrants, financial institutions need to ensure a share of an emerging market which is unclear in its design and commercial structure.
However, this difficult backdrop only makes the potential rewards greater for banks. With no clear market leader to contend with, financial institutions have a number of routes to market open to them, and should keep in mind that developing any solution into the market is a good thing as it helps to develop the overall ecosystem and raise awareness.
The industry winners will be those who offer strong handset availability, added benefits to the customer and merchant, and a realistic revenue model. There is no single guaranteed route to this success, and the approach will differ according to each individual institution and the needs of their customer base. However, for those banking on mobile payments success in an increasingly crowded marketplace, one thing is clear its imperative to do something.