24 September 2014

Brett King

Brett King - Moven

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Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

Why the iPhone 5 means the end of the swipe and cards

26 September 2012  |  9248 views  |  18

It took almost two decades for credit card payments (followed by debit cards) to become globally ubiquitous, so it might be reasonable to think that a paradigm shift at the POS will take years to become mainstream. Why would you spend money deploying expensive NFC-enabled (Near Field Communication) POS terminals unless consumers were going to use them, right? Is this why Apple chose to snub NFC technology in its latest iPhone?

In normal circumstances, if there were no competition, this would make good business sense. The problem for the banks and networks is that they think the "card" is defensible -- that this product has enough inertia for consumers to not be bothered by the fact that they can't yet pay with their phone at every POS terminal. In the U.S., this inertia has not only meant a slow roll out for NFC, but has also seen U.S. merchants slip seven to eight years behind their EU counterparts. In the EU, already 75 percent of cards support the EMV standard, and more than 90 percent of terminals, whereas in the U.S. only 30 percent of merchants support EMV. So we hear frequent stories of U.S. travelers in Europe unable to pay for the simplest of purchases or transactions with long-outdated card tech. Worse for the U.S. card industry is that the industry is paying 3c of every transaction in preventable fraud right now due to outdated signature and mag-stripe tech.

Maybe Apple is simply waiting for NFC to become mainstream before it jumps in. That's undoubtedly part of the reason, but I think there are other explanations that present real problems for the incumbent card networks and banks.

Not-for-consumers?

NFC is sometimes referred to by skeptical industry pundits as Not-For-Consumers. But the technology is sound, has been around for more than a decade, and is a logical transition when you are trying to move consumers from a plastic "swipe" to a phone-based "tap."

Let me tell you why I think Apple baulked this time around with NFC. I think there are three main reasons, but they have little to do with the consumer-adoption angle:


  • Firstly, the most obvious. Apple wants maximum utilization of its device and technology, and it's likely true that it's waiting for better U.S.-based infrastructure (its home market and one of its largest) to support phone payments at the POS. Apple is not known generally at leading consumers with new technologies, they weren't the first with an "MP3" player, neither were they the first tablet manufacturer. Apple is known for their impeccable timing with new technologies, along with creating disruptive ecosystems to support those technologies (like iTunes).
  • Secondly, it doesn't control the ecosystem and they're not keen on providing tech that banks and card networks make money on, but they don't. While it is true Apple has such phenomenal market and brand power that it could move the market on this, why move the market so that banks and card networks continue to make interchange fee, and Apple makes nothing beyond the handset sale?
  • Lastly, it has figured out that it just doesn't need to support the existing POS technology to enable payments at all -- so the longer banks and networks wait to deploy NFC ready merchant capability, the less likely it is that Apple will go for NFC all together. In fact, the lack of NFC industry adoption means Apple is choosing to pursue support for digital wallet solutions, taking the card and swipe out of payments all together.

Was it a good decision for Apple? That's highly debatable, although it isn't going to hurt iPhone 5 sales. Apple could have re-released the iPhone 3G and called it the iPhone 5 and it probably would have sold 20 million units without blinking.

So does this mean there's life left in cards?

Not a chance. In fact, the lack of NFC roll out is actually creating significant momentum behind a much more serious and disruptive trend. The trend to go cardless and POS-less completely.

While banks and networks have been debating the merits of NFC, and while US merchant acquirers and card issuers have been debating the roll-out of EMV and new POS technologies, there has been a quiet but steadily growing shift towards payment experiences that don't require a swipe or tap paradigm at all. Pay with Square, PayPal merchant payments, Amazon checkout, closed-loop mobile apps like Starbucks' app, or clever applications of back-end payments like Uber, Apple Store (app) and iTunes are rapidly growing in credibility, both at the POS and online through e-Commerce.

The beauty of NFC, for the banking industry, is that the industry could simply have migrated customers from card to phone and all the existing value chain stayed in place. You still needed a bank relationship, they issued you a card number (or Primary Account Number -- PAN, as it is known in industry speak) and you still went along to a merchant and used your bank generated account (now theoretically on a mobile phone with an NFC chip) to pay a merchant through their POS terminal. It is a simple way to keep the card and swipe paradigm going and it meant that both the issuing banks and the card networks kept getting interchange fee because there was no alternative to their incumbent rails.

The problem for the industry is that right now we're doing away with the swipe paradigm altogether, primarily because there wasn't a rapid enough adoption of NFC-enabled payments. We've simply circumvented the poor user experience of the swipe card, for a richer user experience on the mobile device.

The driver for reinventing payments is not putting the card into the phone to get rid of the plastic in our wallet -- it is about reinventing and leveraging a payment instance married with data. The trouble for the incumbents is that you just don't need a card, a swipe or even a POS terminal when it gets down to it. A rapid transition to NFC would have saved the swipe-at-a-POS paradigm by allowing for a rich data support envelope around the payment.

With the poor industry adoption of next-gen POS payment tech, consumers and innovators are seeking that user experience without the swipe at all.

Maybe no card is better anyway

If you've tried Uber, for example, you would have pre-registered your account online or through an app and then the time comes for your first trip in an Uber car around town. You book a car through the app, and it shows you the driver coming your way via GPS and how far away he is. Then you're in the car and off to your destination. When you arrive you exit the car and you receive a receipt for the trip on your phone via the app. No card, no swipe, a seamless payment and ride experience. It's the new paradigm of payment -- seamless, frictionless, and information rich.

Alternately you may have recently walked into Starbucks to order a no-whip, skim soy mocha Frappuccino and a bagel (toasted), but at the point of sale you simply pull out your phone scan the app-generated bar code and you're off. Soon you'll be able to just say your name via Pay with Square at the register and the payment will be processed.

Whether it is Square, PayPal, Uber, Dwolla, Venmo, iTunes, Apple Store, Starbucks, or any other app-enabled digital wallet, we're finding that we don't need to swipe to pay.

Now I know what you're thinking -- that we still need a card number, we still need an issuing bank, and we still need the merchant rails, right?

For now, yes.

But not for long...

The problem, however, for banks is that value stores such as Dwolla, Venmo, PayPal, iTunes only require you to pay a fee to the bank every time you top-up your value store account. Then, if you're using a digital wallet to pay, you avoid interchange at the transaction level.

For solutions like Pay with Square, Apple Store, and Uber, there is obviously ongoing interchange fee for the network, but because the swipe paradigm has been removed, the back-end rails could be replaced with another P2P (peer-to-peer) payment network solution that avoids the Visa and Mastercard rails all together, perhaps through use of the cloud.

In fact, the fastest growing payment class today would simply be classified as peer-to-peer electronic payments. Increasingly merchants and consumers are going to be seeking simply to make a payment and the incentives to pay in real-time directly from one bank account to another. This is fast becoming the holy-grail in payments. The problem is that ultimately a P2P real-time payment could entirely circumvent the card networks.

So whether you are a bank or a card network, the decision of Apple to avoid NFC probably just killed your chances of keeping the status quo of interchange via the card/swipe paradigm.

The likelihood is that the digital wallet, whether via a smartphone-initiated payment or simply built contextually into shopping experiences, has got too much momentum now to save the swipe paradigm. The next step is simply to avoid interchange, the networks and traditional value stores all together. That's where merchants and start-ups want to take this, and they're all leading with a better user experience than the existing incumbents. It's all up for grabs now...

UBER works just fine without a swipe - Credit: Uber TagsMobile & onlinePayments

Comments: (26)

Alexander Peschkoff - TEDIPAY - London | 26 September, 2012, 03:26 Good vision. That's the direction many players (especially "outsiders") are looking in. What about such boring stuff as settlement, clearing, reconciliation, disputes, chargebacks, transaction audit, etc - who is going to fulfil that function with a/c-to-a/c payments?.. Do issuing/acquiring banks have the capacity - and, more importantly, the desire (without any "interchange fee" incentive) - to do that? Also, critically, do consumers care about the interchange fee (especially with Amex rewards)?
Brett King - Moven - New York | 26 September, 2012, 03:32

Alex P,

Consumers care about being able to pay and to get money from A-to-B in real-time. They don't care about who does it, as long as it works. 

The system right now is too complex for basic P2P and the disruption opportunities at the Merchant end of the payment system are obvious. The industry won't move forward by hanging on to complexity around clearing, settlements, etc - why? Because it adds zero value to the end user experience.

This is perhaps one of the biggest reason why the rails themselves are under threat. Not interchange - experience.

The trick is to get rid of the friciton. That adds HUGE value. So the industry needs to stop fighting to protect the value chain that adds no ongoing value to the consumer experience.

BK

Alexander Peschkoff - TEDIPAY - London | 26 September, 2012, 04:01

"Because it adds zero value to the end user experience."

That's where I disagree. There is nothing wrong - for the consumer - with the existing status quo. When I pay with my Amex card at POS, I don't care about the high interchange fee which the merchant is hit with - it doesn't cost ME anything. In fact, I love that high interchange fee charged by Amex as I get a kickback. Did consumers see any of the Durbin savings?..

Also, does even iPhone look as cool as Centurion?.. (just kidding)

 

Brett King - Moven - New York | 26 September, 2012, 04:08

Alex P,

Here's my counter.

The two most successful payments experiences from a consumer experience side in the last decade are PayPal and Square. Both put any card based initiative to shame. Both charge clients directly at a premium, both have improved on the customer experience. Thus, consumers will adopt in droves and pay for the privilege of simpler payments experience.

Name any other merchant acquisition program that has grown 2 million merchants in 2 years. Name any other bank or network driven payment initiative that has grown as fast as PayPal since 2000.

Then throw into the mix the Starbucks App. 

Nothing the banking industry as a whole or the card networks have done in the last decade has had anywhere close to the consumer adoption of the three examples I've just given. The current system success is down to inertia - it's not enough to sustain consumer experience long-term.

BK

Alexander Peschkoff - TEDIPAY - London | 26 September, 2012, 12:42

Consumer adoption is not always an indication of business model viability/scaleability/sustainability.

Amazon has great registered user base, with hundred of millions of card details - they are a (much) better platform for any retail disruption than iPhone/Google (funny enough, even though Amazon competes with retail), yet few people talk about that as it's not as sexy as iPhone 5.

iPhone 5 adds little to the equation. Passbook does, to a degree - but then it works on iPhone 4 too.

User-to-POS interface is just one of the elements of the architecture that is needed to develop the next-gen payment solution. How user is IDed (barcode, NFC, BT, Wi-fi, sticker, manual entry, bio, "I know that face") is not that criticial.

Talking of the latter in respect of Pay with Square user experience, try lining up 50 people of ethnic origin different from yours (e.g. Chinese) and see if you can match a face to a photo with adequate accuracy. On a consistent basis... In a busy shop... Compare that to an electronic ID. Do you see "world class" and "ubiquity" from a different angle now?

Brett King - Moven - New York | 26 September, 2012, 13:15

AP,

I agree systemically there is some challenges to a seamless payments world, my point is that it is not the incumbents rushing to that new world. The problem with incumbent systems and inertia is that the imperative to change is often slowed by hubris over the embedded nature and success of the existing system (see Bookstores, Record Stores, Kodak, US Postal Service, Blackberry, etc).

In this case, the problem is that the organizations who are experimenting and succeeding in payment alternatives is not the incumbents. Thus, the likelihood of incumbents in the market spontaneously responding to user experience opportunities when they think the existing system "works just fine" is very slim. Whereas, the likelihood of some new start-up or a new collective group trying unseat the incumbent with a better user experience is ever more likely.

What we've learned from the disruptors in other industries is that an exisitng system never protects you from disruption when it comes to innovation and improvements in CX. 

The momentum in these alternatives has got to that tipping point where the 'swipe' can no longer win outright. It all adds up to more choice for consumers, more fragmentation in the market.

BK

Alexander Peschkoff - TEDIPAY - London | 26 September, 2012, 13:21

I wholeheartedly agree - I am the founder and CEO of a disruptive mobile payments startup, after all.

It is indeed easier to kick butt that is big and moves slowly.

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 26 September, 2012, 17:46

In all this CX / UX Kool-Aid, we seem to have forgotten a couple of strong benefits that credit cards have always offered to consumers viz. deferred payment, repudiation / fraud protection and rewards? I don't see why any sensible consumer would opt for a realtime person-to-person payment method that lacks one or more of these benefits, especially in an in-store situation where the consumer doesn't necessarily have prior relationship with the merchant. Compared to these benefits, CX / UX is very peripheral - not that I personally find anything inferior about the CX / UX of handing over my credit card to be swiped.

A Finextra member | 26 September, 2012, 21:34

Very insightful  - seems to mirror the evolution of the mobile device industry over the last 10 yrs... while FIs seek to protect their investments in current state technology and process, the non-FIs are crafting solutions that leap-frog the current state of payments...ultimately one of these new approaches will catch on, grow to critical mass and be the ultimate game-changer.... until the cycle repeats itself

 

 

 

 

Brett King - Moven - New York | 27 September, 2012, 02:40

Ketharaman,

You better start telling the 110 million PayPal customers, and the 2 million Square merchants they've got it all completely wrong...

This whole pay in real-time thing is obviously just a conspiracy to create massive risk in the system and displace honest banks trying to make an honest living.

BK

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 27 September, 2012, 08:50

@BrettK:

PayPal allows credit cardholders to pay even without PayPal accounts. SQUARE only supports credit cards. Banks make interchange on all those transactions. Both PayPal and SQUARE use credit cards and existing banking rails. That only supports my point. Superior CX / UX is only an add-on in their case. Examples, if any, of MOPs that have superior CX / UX and bypass credit cards and / or banking rails would be more relevant counterpoints.

A Finextra member | 27 September, 2012, 09:30

Of course the iPhone isn't the only new phone without NFC - and the fear of a patent infringement might be another reason that it does not carry the feature.

As far as payments go, NFC may be a dead duck for the retail world - even for low cost items. The main reason is that for most retail transactions, the customer hands something over to make the payment, be it money or a card or voucher. In NFC, the retailer takes money from the customer by scanning them wirelessly. The power to give/take the money has passed from the customer to the retailer. Add in the fear of unscrupulous employees scanning customer's pockets to pay for their purchases and you've got a difficult proposition to sell.

On the other hand, apps where the customer scans the item themselves and then authorises the transaction themselves - with confirmation sent to the retailer - are much more attractive. These put the power back with the customer, and are also attractive to the likes of apple, since apps are firmly in their control.

Alexander Peschkoff - TEDIPAY - London | 27 September, 2012, 10:05

@KS

"Examples, if any, of MOPs that have superior CX / UX and bypass credit cards and / or banking rails would be more relevant counterpoints."

Good point. But bypassing could mean replacing one set of rails with another (not less costly). What is the objective? If it's to make money, payments vs marketing (on the SAME platform) is an easy question to answer.

@BK

"This whole pay in real-time thing is obviously just a conspiracy to create massive risk in the system and displace honest banks trying to make an honest living."

One needs to consider several factors: ubiquity and global reach (e.g. V/MC vs Pay With Square), scale of operations (fraudsters are commercially-minded people, they will not waste their resources on low volume opportunities), and many other factors. Are we comparing UX or transaction cost, for example? If the latter, shall payment startups care at all - merchants are OBLIGED to accept V/MC payments (which is not the case of alternatives).

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 27 September, 2012, 10:06

@FinextraM:

You raise a very valid point when you say, "Add in the fear of unscrupulous employees scanning customer's pockets to pay for their purchases and you've got a difficult proposition to sell." This is one of my fears with NFC payments when I pointed out, "But, having credit and debit card details broadcasted to people and card readers in the close proximity is so not okay" in my recent Finextra post

I agree with you that self-service mobile checkout solutions of the type you've mentioned are attractive for consumers. But, I've always wondered if retailers will find them equally attractive. I haven't really understood what prevented consumers from picking up an item, "forgetting" to scan it and walking out of the store without paying for it. Surely these apps can't deactivate EAS tags attached to items the way regular checkout equipment can.

Nick Collin - Collin Consulting Ltd - London | 27 September, 2012, 10:07

Sorry Brett, but I for one remain convinced that mobile NFC is massively overhyped and that plastic cards will be with us for many years to come.  I've set out my reasons in the following blog:  http://www.linkedin.com/groups/Mobile-NFC-RIP-BAB-Opinion-130718.S.132491969?qid=a2bfc49f-28fc-40d6-80d9-a271b736b713&trk=group_search_item_list-0-b-ttl&goback=%2Egmp_130718

Alexander Peschkoff - TEDIPAY - London | 27 September, 2012, 10:12

"On the other hand, apps where the customer scans the item themselves and then authorises the transaction themselves [...] put the power back with the customer"

Excellent point! It's not how, it's what. You can do very interesting things with NFC too. E.g. there will soon be hundreds of millions of contactless bank cards out there, but little infrastructure to make good use of them. We are working on a solution to accept EMV contactless cards via non-EMV compliant reader... (better keep my mouth shut for now)

A Finextra member | 27 September, 2012, 10:39

In my pocket, I've a little bit of plastic that allows me to buy goods and services in pretty much every shop in the world.

Using that 16 digit number allows me to shop online with pretty much every online store on the Internet or contactable by phone.

The problem with "Square, PayPal, Uber, Dwolla, Venmo, iTunes, Apple Store, Starbucks, or any other app-enabled digital wallet" is that none of these payment methods are compatible. Should I choose to set one up and deposit my hard earned cash (using my plastic card) you can bet that the number of places I could use it is very limited. 

While each may be the method de jour, I don't think any are going to have the global presence.

Until the time that there is a Global alternative, I'll keep my (NFC enabled) plastic.

Dave

(Disclosure: I work for a subsiduary of MasterCard)

Brett King - Moven - New York | 28 September, 2012, 03:22

Nick,

I did read your LinkedIn post and I read the thread. If you re-read my article I'm actually saying that the card networks have opened the doors to competition because they didn't make an orderly transition to NFC, but that by no means indicates the card will survive. 

While cards are the incumbent and dominant, if you look at transactions globally using card networks, the majority of those transactions are already 'cardless' through e-commerce and direct debit. So even if you factor out NFC your argument still doesn't stack up in the real-world as it stands today.

BK

Nick Collin - Collin Consulting Ltd - London | 28 September, 2012, 18:02

I'm with Dave on this Brett.  It's all about infrastructure.  Even with "cardless" transactions, you're still talking about billions of PANs, millions of acceptance locations, issuers, acquirers, massive networks, business rules and standards, and the ingrained habits of merchants and consumers built up over decades.  That's not all going to go away overnight and it's going to take a long time for any potential competitor to build anything similar.

(Disclosure: I do a lot of consulting work for MasterCard!)

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 28 September, 2012, 20:42

@BrettK:

I'm not sure if I understand this part too clearly: "if you look at transactions globally using card networks, the majority of those transactions are already 'cardless' through e-commerce and direct debit". If, as you say, they use card networks, how can they be 'cardless'?

IMHO, NFC and QR code based mobile wallets might have a chance of replacing the plastic form factor of cards in the medium term, but they're a long, long way from replacing card accounts and card rails, let alone banking rails. I say this because even Internet based payments, which have been around for almost 15 years, haven't managed to totally / substantially replace card accounts, card or banking rails, barring MNO/Carrier-based billing services like Boku and Zong. Even the poster boys of Internet and mobile payment, PayPal and SQUARE respectively, use banking rails.

Brett King - Moven - New York | 28 September, 2012, 21:05

All,

I've said that behavior is rapidly building around cardless payments whether online or in a retail setting. This leads to the inevitable conclusion that consumers who are coming into the workforce today are very comfortable with mobile wallet solutions that exclude plastic, and that this will drive improvements in in-store and merchant solutions that don't require plastic.

For now we still require the PANs and networks that enable the payment value chain, but once you remove plastic, the 'value' of the network and card issuer is challenged. 

NFC would have retained the psychology of the 'swipe' and reinforced the traditional rails, but removing the swipe as a paradigm by creating non-plastic, non-card wallet solutions has increased the likelihood of disruption to the networks in the value chain.

You guys, while passionate about your own use of cards, are not representative of the customer of 2020. Your behavior is not a driver of innovation in the industry - it reinforces existing rails. All well and good if you are a consultant to Mastercard, or you prefer the current paradigm. Customers opening accounts now have no loyalty or perception of cards as better - they don't understand why they can't pay with their mobile everywhere already.

That gap between customer behavior and the capabilities of the rails/system is growing. Keeping that status quo guarantees you are disrupted when the opportunity arises.

Watch this space - by 2016 you guys will be converts...

BK

Brett King - Moven - New York | 30 September, 2012, 05:22

Finextra Readers,

A very detailed article in Payments News I saw today which comes to very, very similar conclusions, but with much more detailed analysis:

http://paymentsviews.com/2012/09/24/the-state-of-payments-us-market-2012/

 

BK

Pierre Galeon - allpay - London | 30 September, 2012, 21:00

A very good report which has lots of merits. Visionary.

A Finextra member | 01 October, 2012, 14:57

Acquirers are aware of the paradigm shift and are intensely chasing PayPal or Square as clients just as much as they may want a Tesco or WalMart as a customer. The PayPal's or Square's of this world act as "master merchant" for all customers using the service - eg. taking the chargeback risk on behalf of their clients.

Companies such as PayPal and Square are liley to use the fewest number of acquirers possible in order to increase their buying power therefore acquirers must move quickly to build relationships with these organisations, however, ultimately the acquirers know the the ultimate goal of PayPal and other companies would be to bypass the existing VI/MC networks and go directly to the clients bank accounts with some other kind of username/identifier to bypass all interchange costs.

The above will take time as the networks will need to grow to be on par with VI/MC to build this kind of system hence PayPal and Square's move into physical POS space - they just need to increase awareness and overall market share before they can consider bypassing the traditional networks... Interesting times but for now the premise of the above article is certainly incorrect and the bank networks will take a long time to break down as it's not just VI/MC who have skin in the game, it's every single issuing bank worldwide who receives the interchange income and until the power of the new players gets much much greater they will not have the market power to truly change things. Thoughts?

Brett King - Moven - New York | 01 October, 2012, 18:12

Finextra Member:

You don't think 2 million merchants in 2 years (Square) or 110 million account holders/members in 12 years (PayPal) is evidence of building network?

BK

Alexander Peschkoff - TEDIPAY - London | 01 October, 2012, 21:57

@BK

The anonymous member (would be nice to know the identity...) does not contradict that. The message is exactly that: mobile payment companies are fast becoming POS - hence THEY are in control, to a degree, of routing options etc. That's a fundamental shift! Think of Google Wallet who requires zero collaboration from both the merchants and the issuers...

The key element is risk management: a mobile company that also controls "secure element" (and is POS) is a force to be reconed with. Neither Square nor PayPal have that... Yet?..

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