21 October 2017
Brett King
Brett King

Brett King

Brett King - Moven

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Innovation in Financial Services

Innovation in Financial Services

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

The iPhone 5 Debit Card - coming soon

18 October 2010  |  10358 views  |  2

200 individuals were the first to receive credit cards issued by Diners Club in 1950, the brainchild of Frank McNamara. It was the start of a completely new era in personal credit and payments. American Express entered the credit business with its own card in 1958, within five years had issued more than a million cards.

Today there are more than 1.6 Billion credit cards in circulation, and the US credit cards industry generates $2.8 Billion dollars a year in revenue. One in 12 households in London (or 8 per cent) have used credit cards to pay their mortgage or rent in the last 12 months and outstanding credit card balances stood at £63.5 billion in November 2009. By 2013, China's consumer credit market—encompassing credit cards, mortgages, and other personal loans—will account for 14 percent of profits in the banking sector.

Growth in Contactless Technologies
In recent times we’ve seen the move to NFC or Near-Field Contactless credit cards. It is estimated that NFC enabled credit cards will reach the tipping point in 2011, with a total of 30 million British contactless bank cards alone being issued by then. The ease of use of an NFC-enabled card is obvious, no swiping, no inserting. Steve Perry from Visa Europe said that the rising popularity of contactless technology brings the promise of a cashless society where there is no longer any need for people to carry notes and coins around with them.

“Contactless is as revolutionary as the shift to internet payments was five years ago. It will mean having no notes and coins – it will certainly mean having no coins. It will move us almost to a cashless society.” - Steve Perry, Visa Europe

But as the modality shifts toward NFC, the reality is that the physical card itself does not represent a competitive advantage or differentiation for banks or issuers, not that it does today. Once the move to NFC-enabled POS terminals is ubiquitous, it’s probably easier just to carry your phone to make payments than a gaggle of credit and debit cards. That’s not going to happen overnight though right? Cards as a product are still too strong to be replaced by mobile quickly, so we have plenty of time right?

It will happen quick…
WRONG. We know that Apple is working on an NFC-enabled phone, and given their recent hires in the space, it is assumed that the iPhone 5 will be the platform for this change. So how will Apple’s NFC-enabled iPhone 5 work? We know a few things about the likely capability of the phone based on the patents issued by Apple. Firstly, the payment application will be a core app integrated into the phone, there will be a biometric strip (presumably enabling fingerprint authentication) and the phone will ostensibly work just like an EMV-chip credit card.

The question you are probably asking is, how will the payment mechanism work? Here’s where it is largely speculation because Apple is being extremely tight lipped. We know that the primary payment app will work as an interface to your bank or credit card company as you need it to. However, it doesn’t take a rocket scientist to work out that Apple could use its current iTunes store platform to provide stored value for an effective debit card mechanism. If Apple was to use this mechanism as the underlying currency or stored value behind their core ‘debit card’ equivalent payment capability, they would effectively become a bank overnight, and one with perhaps an even stronger differentiation than any other debit card on the market today. Other handset manufacturers and mobile platform providers would be sure to follow as Apple’s payment capability quickly becomes ubiquitous. That is, if the payment networks talk to Apple’s iTunes store…

Competing with Apple, Google and Microsoft Mobile
So how will banks compete in such an environment? Well banks can’t issue their own mobile phones like Apple or Google’s partners can, and plastic cards and checks look downright archaic in comparison to such a payment paradigm. The only choice of Card issuers and banks would be to embrace the new technology and scramble to partner with the handset manufacturers and mobile OS owners. Visa has already deployed their Visa Paywave solution on the iPhone, but currently you need a cradle or sleeve that the iPhone sits in to do the sexy NFC bit, that simply won’t be necessary on the new device.

So the question for banks in this new environment would be how do we now issue cards to customers? Do they have to come into the branch for us to configure their phone? Given how easy it is to upload iTunes credit, this would be a huge competitive disadvantage, so the compliance procedures applied to the current physical process of card issuance become a millstone around the bank’s neck and result in rapid disintermediation. Within the space of 3-5 years, banks no longer have a credit card business. Sure, they might eek out a small business settling payments between Apple’s iTunes store and the bank, but compared with the size of the card business today this would be miniscule.

Challenges Ahead for Banks
What about if a customer could download a new “credit card” from the iTunes’ App store, or from Google’s Marketplace? Well how would you qualify for the card as a customer, are there different card apps for each bank, what is the onboarding and risk assessment process?

Don’t be tempted to think that the protection of existing payments networks or a bank license will protect your existing business from such innovation. If Apple does launch their NFC phone and announces collaboration through Visa and Mastercard’s payment network, do you honestly think with millions of iPhone 5’s going out the door that the regulator is going to call a halt to payments from a phone?

Seriously, if you are a bank, it’s likely that in just 8-9 months you’ll be faced with competition from non-banks who can do the whole NFC-enabled phone payments thing much faster, easier and more compelling than you ever could by issuing a plastic debit or credit card. And guess what?

If you’re the CEO of a bank, you probably don’t even have someone appointed to work on mobile credit card onboarding yet, so what’s the likelihood you’ll be ready to compete?

Let’s try plan B – let’s go to the regulators and see if we can stop mobile phone payments as a mechanism shall we?

 

Apple's NFC iPhone patent TagsPaymentsRetail banking

Comments: (3)

Stephen Wilson
Stephen Wilson - Lockstep Group - Sydney | 19 October, 2010, 16:43

[The] compliance procedures applied to the current physical process of card issuance become a millstone around the bank’s neck...

I don't disagree, especially as I am one of those who complain that the world has gone compliance mad!  However, a good deal of payment card compliance relates to security, and this creates a significant barrier to entry for phone based payments.

If Apple becomes a bank, and the handset becomes a special private wallet, it creates a whole new jungle track along which money changes hands and criminals will find weaknesses.  Security challenges and resulting tensions include:

Handset certification: as merchant terminals need to be Visa/MasterCard/EMVco certified, then so will handsets.  Certification creates significant bottlenecks in product release cycles.  Yes, handsets are subject to telecommunications testing too, and we might expect the vendors to be comfortable being highly regulated, but their traditional compliance burden applies more to hardware than software, and certified RF modules can remain stable across multiple products.  In contrast, payments functionality is software-based and evolving very rapidly.  Every new handset model and software upgrade may need fresh certification.

Platform security: need I say more?  Smart phone malware is emerging rapidly, and nobody is sure how inherently secure mobile phone operating systems really are.  The nice thing about smartrcards is that their computers are very compact, dedicated to a small set of tasks, much more testable, much less configurable, and their architectures mostly hark back to security applications, so they're better pedigreed.

Social Engineering: as the Droid09 scare showed, there are limitless new opportunities for criminals to dupe smartphone owners into loading malicious applications.  As ever so sexy payment apps flood the markets (especially less regulated ones like Android's), how will customers sort the sheep from the goats?  It's likely to become completely bewildering, with enormous opportunities for good, in joining up payments, loyalty, money-management, e-commerce and bartering.  During the development rush, the quality of well intended third party apps will be very suspect.  And criminals will be able to slip in utterly bogus software. 

This is going to be a wild ride!

Security will give the banks several years breathing space.  A smart strategy to protect their turf would be to hybridise the handset with bank-issued chips is some manner.  They could shift the UX from card to phone while preserving the card's intrinsic security benefits.

Cheers,

Stephen Wilson, Lockstep.

 

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Brett King
Brett King - Moven - New York | 19 October, 2010, 18:44

Stephen,

Great points, and I think that issues like security and certification are valid concerns.

However, I think what ultimately will drive the marginalization of plastic is that it is certainly no more secure than your phone at the end of the day, and that behaviour will force the hand of banks. Ultimately it's easier to carry all my 'cards' on my phone and swipe with my phone, than carry physical plastic or use an outmoded method of payment like cheques. Ease of use, technology adoption diffusion, usability and accessibility will ultimately be the drivers behind the mobile payments revolution.

Case in point - mobile NFC payments have already been in use in Japan and Korea for many years, use there is rapidly increasing due to ease of use, and fraud is significantly lower than on traditional physical modality around cards.

Brett King, Author - BANK 2.0

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Stephen Wilson
Stephen Wilson - Lockstep Group - Sydney | 19 October, 2010, 20:02

"Plastic is ... certainly no more secure than your phone at the end of the day". 

We're talking about a very long day here!  The compact, de-featured computing model of the smartcard or SIM will for the forseeable future be intrinsically more secure than any handset. 

Yes, convenience and novelty often trump security ... but it's not sustainable.  There was a scandal in Australia a few years ago when an expedient suburban bank manager took to transporting cash in the back of his car (hundreds of thousands of dollars) because of a shortage of armoured vans.  His short cut didn't last long. 

Yes there will be competition pressure and disruption from non-banks exploiting new technologies, but real banks will copy the innovators, broaden their payment products, maintain superior security, and retain market share.  Afterall, security, in all its dimensions, is what banks are really for. 

 

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Brett King is an Amazon bestselling author, a global commentator on the financial services space, a keynote speaker, the host of the BREAKING BANKS Radio Show on Voice America Radio, and the founder o...

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