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Do banks even need to innovate and offer mobile payments?

Since contactless credit cards are not taking off as fast as expected, and neither customers nor merchants are excited about tapping a card instead of swiping it, some analysts have started looking at contactless as a bridge to mobile payments, which is now seen as the next great revolution. I'm having trouble buying this.

How can contactless create the reader infrastructure that is required for NFC payments if merchants are not interested in upgrading their terminals for contactless cards to start with? If the readers are built into new generation payment terminals and cost nothing extra for merchants, then yes, the readers will be deployed over the next ten years, during the normal replacement cycle for payment terminals. If all terminal vendors build the readers into all of their new generation terminals at no extra cost, then a large portion of merchants will automatically be contactless ready within the next five years or so. Don’t hold your breath.

According to some people, there is however a much more realistic bridge to mobile payments. Contactless transit cards.

In Hong Kong and London, contactless transit cards can be used outside the transit system to purchase things at traditional shops like 7-Eleven. According to Cassis International, a supplier of mobile payment systems to banks in Asia, this creates a far better environment for banks to launch mobile trials. In fact, in response to a question from a banker attending a recent conference in Hong Kong, Cassis CEO Thian Yee Chua said that if there is no contactless transit infrastructure in the bank’s market, where the cards are commonly used both for transit as well as to pay at high frequency merchant locations, then “don’t even try to get involved in mobile payments”.

Mobile payment feels like something that is definitely going to happen someday, but it is still very difficult to see how banks can benefit and how they might even play a part. Banks may be forced to play a secondary role, if any at all. Speaking at the same conference on innovation, Chris Skinner of Balatro pointed out how all of the successful examples of recent innovations in payments come from new players, not banks. Paypal of course, but also Hong Kong's Octopus, London's Oyster, China's Alipay and others. Chris described how Wells Fargo was originally the payment institution behind Paypal but apparently didn’t see the opportunity to buy Paypal before the company was too big.

Here is a hard one for me to get my head around: should banks innovate more and lead all of these new payment initiatives, or should they follow others and try to play a supporting role?

In chairing the conference, after almost all the presentations had been made, I asked the audience for a show of hands. How many people agree that banks need to be more innovative? I was surprised to see that almost everyone agreed. And there were many more bankers in the room than technology suppliers.

While bankers themselves feel, somewhat intuitively perhaps, that they need to be more innovative, their organizations are not usually structured to promote the type of innovation we are seeing today. For example, most banks have pretty much abandoned their acquiring activities, so they are seriously limited in their capacity to impact the moment of payment, something that is needed for things like contactless and mobile. This is especially true for the major global and regional organizations that dominate the credit and debit card market. In a sense, this creates a new opportunity for national players that still have a holistic view of payment, with integrated issuing and acquiring activities. But I am digressing into another blog post. So I’ll stop right now.


Comments: (9)

A Finextra member
A Finextra member 25 July, 2008, 04:02Be the first to give this comment the thumbs up 0 likes

I agree ...  the  card market is a solution looking for a problem right now. 

A Finextra member
A Finextra member 25 July, 2008, 07:13Be the first to give this comment the thumbs up 0 likes

Your question is so relevant in today’s changing global financial services markets, Aneace. Here are some of my thoughts…

Bank drivers for change are not much different now to what they were a few years ago, namely:

  1. Retain existing customer base (defensive strategy)
  2. Grow market share of profitable product lines (aggressive strategy)
  3. Reduce costs (any fool can reduce costs, sustaining the cost base without wrecking the business is the challenge)
  4. Grow revenue by:
    1. introducing new products to new markets
    2. introducing new products to existing markets (without cannibalising existing revenue streams)
    3. increasing margins (whilst remaining competitive)

except that now, market pressures are forcing margins down through increased competition and product commoditisation.  Additionally, there is a lesser brand loyalty amongst customers making it much easier to switch brands. New markets have become more accessible.  It is these pressures that are intensifying the need for change.

Banks compete in these conditions through the introduction of change and the ability to change swiftly.  I mention this only as the backdrop for the answer to your question Aneace, because innovation is a major component of the change process.  Without innovation, banks adopt a “me too” approach, which was an acceptable approach even five years ago but no longer acceptable if the growth strategy is aimed at delivering new products to new markets (refer 4a above).

It’s worth mentioning here that banks have a couple of handbrakes that inhibit their ability to accept change.  The first is the risk profile of the bank and the second is organisation complacency and inertia towards change, consequential of protected banking regimes.

Certainly in Australia, banks are generally lauded for their risk management expertise. Market analysts report favourably on their ability to withstand adverse market conditions, however the cost of a ‘no-risk’  or over-conservative strategy is a longer term issue of lagging behind the global competition in gaining access to new markets.

The key is to balance risk and innovation so let’s now move on  to the aspect of new markets and mobile payments.

China, India and other Asian countries will lead the way in the use of technology in financial services due to a number of reasons.  The take-up rate of mobile telephones in these countries is astonishing.  Their use is prolific…you see it on public transport, in hotel lobbies, at events, in the street…everyone has a phone.  Social networking is rife and phones are becoming an essential personal device…personal security is considered to be one of the benefits of possessing a mobile phone.

China and India especially are leapfrogging technologies.  Their communications infrastructure is being established to support high bandwidth from the start, there is no lead-in phase.  These countries embrace technology in both manufacturing and consumption aspects, which drives internal competition  for technology leadership.  They want the future now.

Now to address the mobile payments part of your question.

I mentioned personal security before.  Another aspect of security is the security of the device.  All phones today are a financial device…you make a call and you get a bill from the carrier.  Moving your credit card onto a mobile phone chip will not increase the risk. It may even lessen the risk when you consider that the phone doesn’t have to leave your hand to make a purchase.

Security solutions exist in the market today that can ensure user authentication. As for lost/stolen replacement, mobile phones will not replace cards until the merchant reader population reaches critical mass.  By that time measures will be in place to replace a mobile phone and chip too under lost or stolen circumstances.

In support of the new market growth strategy mentioned previously, it is significant that both Citi and ANZ have introduced mobile payment and mobile banking pilots in South East Asia as reported last week in this forum.  Each has had reportedly favourable outcomes.

You can extend the question of mobile payments to mobile banking where a few more financial transactional capabilities will fuel the fire.

Naturally, predicting the future is a ‘risky’ exercise but with these drivers and your eyes wide open there is not only a ‘risk’ in not innovating but it could be much greater than the cost of developing a mobile payment strategy.


A Finextra member
A Finextra member 25 July, 2008, 07:54Be the first to give this comment the thumbs up 0 likes

You know, I have a home in Singapore and spend lots of time in Asia, and just don't get the "Asians are quickly adopting mobile payments" thing. You still see lots of places that don't accept credit or debit cards because of the cost to the merchant.

I would hope to see some energy put into innovations that help encourage merchant acceptance, something that is needed in any case if mobile payments are going to take off.

It feels like something is definitely trying to take off, but I'm not sure that the right things are being done to make sure mobile payments happen in a decently near future.

Mobile marketing is exploding across Asia and Europe, driven in large part by merchants, why aren't mobile payments also taking off?

David Birch
David Birch - Tomorrow's Transactions - London 25 July, 2008, 11:22Be the first to give this comment the thumbs up 0 likes

Surely the problem is that banking and payments need to become more separate, so that innovation in payments in not linked to innovation in bankign.

A Finextra member
A Finextra member 25 July, 2008, 15:51Be the first to give this comment the thumbs up 0 likes

I agree. That's a good point, Dave. Payments is a huge market, and if banks separate it out from the rest of the business, it would probably be easier to develop new products that help grow the market. Right now, lumping it in with the rest of the business is not very helpful. You can see that especially with debit cards.

A Finextra member
A Finextra member 26 July, 2008, 11:08Be the first to give this comment the thumbs up 0 likes

Payments not only consumer expences but also B2B transactions are huge market. I may point that through technology whole economy is going towards cashless community. Online payment services are limite with credit cards, electronic funds transfers or remitances and e-commerce payments but we may see that more pervasive systems are on the way through mobile services.

Mobile payments has a huge potential so that as you mentioned above payments business should be seperated...

A Finextra member
A Finextra member 28 July, 2008, 03:59Be the first to give this comment the thumbs up 0 likes

I think it's fair to predict that some customers will be using mobile payments whether banks offer the service or not. Not all customers, but eventually most of them.

Banks need not offer mobile payments, but that would leave their customers no choice but to use a third party.  Is it more risky than not moving on mobile payments?

While banks may not need to offer mobile payments directly I believe that banks must embrace mobile payments eventually or risk alienating their customers. There are more than payments, transit tickets, and internet banking to consider, mobiles will also be used for internet transactions in preference to credit cards or debit payments. Mobiles also open up a whole new range of commerce and financial interactions which are not even be happening yet and which cards will not provide.

Not all mobile payments systems require a reader and could one overtake NFC type mobile payments, and even card and EFTPOS?

Would banks prefer participating in a generic, ubiquitous and open-to-all mobile transaction system which enabled them to compete with credit card branded debit cards and even credit cards? For instance if your customer could choose debit (straight from their bank savings account) or credit (from their bank's credit facility) and it was accepted everywhere by everyone?

What difference might it make if mobile transactions cost less than both Eftpos and the credit card networks with better security and lower costs for merchants?

My feeling is that all other approaches will go the way of the passbook and that all transactions will be 'mobile' eventually and probably not NFC - but when? Likely sooner than predicted.

A Finextra member
A Finextra member 28 July, 2008, 04:59Be the first to give this comment the thumbs up 0 likes


My two cents worth - we should also be coherent in our definition of mobile payments!

Mobile payment activity is very clearly divided into two worlds :

1. Physical world - NFC style/phones acting as cards

2. Virtual world - Mobile based transactions catering for Internet, Banking, Request, Information etc..

Aneace is focussing on the physical world payments when you move card payment capabilities into a mobile phone & the merits of doing so when you do not have the physical infrastructure to support such activities!

I am a firm believer the real activity & commercialisation (read - monitisation) of mobile payments today is firmly in the other world - the world of virtual payments, mobile banking , marketing activities (Or in Singapore's case - SMS Spam!) and social activity that does not translate directly to physical payment utilising a mobile phone!


A Finextra member
A Finextra member 06 August, 2008, 15:32Be the first to give this comment the thumbs up 0 likes

Technology Convergence

The physical and virtual payment worlds will converge over the next 5-10 years. We already A5 PCs (Asus), roll-up keyboards and roll-up screens (Philips reader) or glasses that act like screens, and mobile phones that can access the internet (Nokia, Blackberry et al) convergence has already started. With Microsoft developing a "new operating system for the web age", how long is it before we have truly personal PCs and virtual payments take over from physical ones?

Implementation Difficulties

Roll-out of new POS technology can take up to 5 years for a natural replacement cycle. So unless the banks stump up the cash for saving them money by customers using contactless the time frames and costs are not advantageous.

Security Issues

Having done extensive work on PCI compliance, the model of the retailer, rather than the bank and customer, holding the key to access someone's account is flawed. With the growth in fraud, security is a higher priority than innovation. The principle of dual-identification "something you have" and "something you know" (or better still, triple, with "something you are") is flawed with payment cards as "have" is based around the almost-permanent card number. Mobile phones would enable one-off, time-based payment certificates to be issued instead of a re-usable card number. Virtual payments the same.

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