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Visa gets its wallet sorted, or does it?

The announcement today of Visa’s acquisition of Fundamo signals the drawing of the battle lines in the face off between Mastercard and Visa in the mobile payments stakes. While I understand that a wallet is much more than just an NFC enabler, the announcement of Google’s NFC trial around their ‘wallet’ last month put some pressure on Visa to make a strong competitive statement against the Android positioning. But what does this mean for the mobile payments landscape?

There’s only room for a few wallet standards

While everyone would like to ‘own’ mobile payments and the mythical m-wallet, the fact is that the recent failure of ISIS to successfully launch a competing payments backbone means that in all likelihood the current card issuer networks will remain at the core of the mobile payments infrastructure for the time being.  This gives Visa and Mastercard a fairly significant advantage in owning the plug-in or API that enables access to the backbone. The wallet effectively acts as that plug-in functionality.

The challenge that Visa and Mastercard have at this point is not technology, but getting partner banks enthused enough to start aggressively rolling out solutions around mobile payments with their proprietary “wallets” plugged-in. The problem is that today you can count on just two hands the total number of banks globally who’ve enabled broader P2P payments as part of their mobile App strategy – such as Chase, Hana, ING Direct and ANZ – and that is an appalling legacy mindset hurdle to get over.

The fact that banks have been so slow to embrace mobile P2P enablement does not bode well for broader bank-led adoption of the mobile wallet. It means that Fundamo and Visa will have to rely on consumer take-up, or integration at the handset level for broader adoption. In this respect, the Google Wallet still probably has an advantage here, but if Visa gets a deal with MSFT/NOKIA or with APPL then all bets are off.

The other opportunity and challenge here is the pre-paid debit card market. With some 50 million+ underbanked in the US alone, with the increasingly strong debit card market in the EU and with China and India ramping up rapidly in respect to smartphone adoption, perhaps the greatest opportunity to be tapped will be integrating pre-paid mobile accounts and pre-paid debit cards in the same handset. It makes sense doesn’t it? What’s the difference between a pre-paid debit card enabled via a mobile wallet, and a pre-paid phone account? They are both value stores…

In that environment, Visa could do with some independence from the issuing banks – perhaps issuing their own pre-paid debit cards as part of the wallet proposition. Given their relationship with the banking community, however, I don’t expect a rapid independent solution to this problem.

The good news is, that Fundamo already has a strong financial inclusion play, so my view is that overall this move is going to be very positive, especially in emerging markets.

Circumventing the backbone might still be possible

The dark horse here could still be Apple, leading with a P2P solution that circumvents the traditional networks. Apple has just taken a shot across the bow at Telcos with their iMessage component of iOS 5, which circumvents traditional short-message-system networks, so they’ve shown their willingness to use their broadly adopted platform to challenge services that are redundant in the cloud world. In the world of payments, you only need large-scale adoption of IP-enabled handsets to start challenging this space and creating a new service framework. ISIS couldn’t do this because they didn’t have a way to get their service ubiquitous. Apple already has 250 million cardholders plugged-in to iTunes, so they have massive momentum already.  Could they turn that into a P2P backbone?

Sure. Apple will still need to plug in at the back-end in someway, but a cloud-based competitive backbone to the traditional payment networks would be even more pressure on the current interchange environment.

Long-shot? Maybe, but it won’t be long before the pressure on interchange fees, modality of payments around mobile wallets and the changing role of the POS (mobile becomes the POS ala Square and NFC) makes cloud-based alternatives viable. Certainly within the next 5 years this is likely to happen.

It’s still about context

While owning a wallet that has a rapid path to NFC and P2P enablement is a great start, I still believe the real trick with mobile payments is around the context of a payment. The big difference between mag-stripe/Chip and PIN interaction and that of a mobile NFC payment is that I can contextualize the interaction before, during and after the payment. That might be as simple as updating your account balance in real-time, or it might be about integrating offers and loyalty into the payment experience. Square is obviously counting on that as a driver for cardcase.

The challenge Visa faces right now is building context. The wallet is just a plug-in for payments. Where Google (Offers), Apple (iAd), Groupon, Foursquare and others are threatening is the context of those payments.

That’s where I can influence a payment based on location or a trigger.

That’s where I can steal you away using a competitor’s wallet.

That’s where I can circumvent a traditional payment interaction and avoid using the traditional POS all together.

That’s where I OWN the customer.

Visa has made a great start with their acquisition of some very solid tech in the form of Fundamo, but they’re not there yet. My greatest concern is they'll wait for banks to add the context, and banks are even slower at doing this stuff than visa is...

 

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Comments: (14)

John Dring
John Dring - Intel Network Services - Swindon 10 June, 2011, 17:04Be the first to give this comment the thumbs up 0 likes

Brett,

Absolutely. Replace the traditional POS with Mobile based alternatives.  Create an alternative to traditional card links payments. Create a new trusted wallet for payment. 

But there's a reason why 'Visa' and Banks (and Operators) move slowly, and its because they don't need to move fast.  There is no compelling event, or rise in serious competition and so they continue in their cartels, and long may the gravy train last (they say).  Spread a little FUD and you can add another 10 years on.  As you point out - tech is not the problem.

The announced Google wallet leverages the current payment system, rather than competing with it, for now.  Perhaps Apple will make a more aggressive play, but even with 250m devices they are not ubiquitous by a long shot and Android grows stonger too.  PayPal is another option, but they seem dormant too.

Brett King
Brett King - Moven - New York 10 June, 2011, 23:31Be the first to give this comment the thumbs up 0 likes

John,

Thanks. The challenges to go outside of the ecosystem are significant. That's why Google didn't bother, and went instead to augment the existing payment system I guess...

BK

Ward Hagenaar
Ward Hagenaar - PaymentGenes - Amsterdam 13 June, 2011, 09:59Be the first to give this comment the thumbs up 0 likes

The reason for banks to be slowly is they have few to win and hardly any influence when acting solely. In the NL banks took a good step in cooperating with the telco´s and establishing an NFC infrastructure that will be jointly exploited, open to others as well...

Google, Apple and others are smart enough to wait for others to invest in the non competitive infrastructure, experts as the are in reusing and remoddeling these in new service offerings. As they know the customer far better than any bank, it fits their business models and also have a totally different size compared to banks, they can make a difference and bring a new service to work.

I fully agree with Brett on the context of payments, these giants have no problem in offering a context in a profitable way to customers.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 13 June, 2011, 12:56Be the first to give this comment the thumbs up 0 likes

The context of mobile payments is indeed critical.

Right now, the usage scenarios for accepting mobile payments (a la SQUARE) seem lot more compelling than those for making them (a la Obopay, Google Wallet and other m-wallets). Besides not having much of a play with Square, banks might have recognized that a bulk of Square's appeal lies in its disruptive business model - no setup fees, no monthly fees, no need for merchant account - rather than mobile. Furthermore, banks need not fear that their traditional POS+gateway+acquirer+processor model will get supplanted by Square, whose 2.75% flat rate renders it too expensive for medium and high-volume merchants (cf. third party calculators from FeeFighters for cutoff levels above which the traditional model proves cheaper for merchants).

This might explain why banks face no clear and present danger from mobile payments and can afford to take a wait-and-watch approach.

Brett King
Brett King - Moven - New York 13 June, 2011, 13:19Be the first to give this comment the thumbs up 0 likes

Ward,

I think that this is a pretty strong argument for a open, partnership-based approach for banks. They most commonly see that they should 'own' the domain, but the reality is no one can, so the only option will be to partner. This takes both a shift in psychology of the bank, and a shift in platform capability.

BK

Ketharaman,

I could not disagree more. The clear and present danger is absolutely massive.

Think of it this way. Right now today if you are a bank, you need to ask Google and Apple for permission to use their platform to provide mobile banking. Given the rapid failure of traditional advertising mechanisms, contextual engagement of customers around mobile payments is going to be the lifeline of banks in the future, but today there is almost no capability internally within banks for real-time engagement of customers. This is needed right now regardless of future platforms, otherwise there will be a bunch of organizations that own the customer and banks will either be disintermediated, or need to pay for the privilege of using someone else's platform to engage.

There is no argument in any scenario for sitting back and waiting.

BK

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 13 June, 2011, 14:27Be the first to give this comment the thumbs up 0 likes

@Brett K:

If I were a bank, with due respect to Apple / Google, I'd hate to have to take their permission to offer mobile banking on their platforms. Perhaps, that's the real reason why I won't take mobile banking too seriously.

But banks might see this differently. After all, just because Apple / Google will have to write a check on, say, Wells Fargo, to meet their payroll and supplier payments, it doesn't mean that they've to take Wells' permission to provide technology solutions. Likewise, just because their core banking software runs on a datacenter that is powered by electricity from, say, EDF, it doesn't mean that banks need EDF's permission to provide banking solutions.   

The way I see it, a given customer has different needs. No single company can own the customer relationship for everything. Apple undoubtedly owns the iPhone apps and handset relationship with the customer, and no matter what banks do to enhance their internal mobile banking / payments capabilities, they'd still have to go via Apple to make their mobile apps available on an iPhone. But that doesn't mean that Apple owns the banking relationship - that's still within the preserve of the bank. Similarly, Google Wallet has made it clear that it isn't a payment service or a network but an m-wallet that stores credit / debit / prepaid cards. If there were no banks to issue these cards, Google Wallet will lose its basic purpose. So, while I see tremendous scope for partnership between banks, MNOs, PSPs and handset manufacturers, I strongly doubt if banks need to fear getting disintermediated as the provider of banking solutions.

Of course, I agree that banks might want to engage with iPhone / Android users increasingly via mobile advertising. However, I don't see how that's related to their mobile banking / payments offerings. They can achieve their engagement goals by allocating their advertising budget towards iAds / AdWords. I'm sure Apple / Google won't decline those dollars.

A Finextra member
A Finextra member 13 June, 2011, 14:36Be the first to give this comment the thumbs up 0 likes

Dear Sirs,

Payments is infra structure heavy. Payers have their monies on bank accounts or have credit accounts in credit institutions. Same thing for payees. They also have their monies in bank accounts. Also payees/merchants want to serve all customers/payers. In payees need to transfer money from bank account to "wallet" or other token in order to pay much of the convenience is lost and uptake is going to be slow. Same thing with merchants - they like to get their sales payments into their main bank account since they also have to pay suppliers and partners and staff! Imagine Ford accepting "airtime" as payment for a new Mustang! So the infrastructure of open four party model connected to bank accounts in 200 countries is difficult to beat and therefore MasterCard and Visa have the upper hand. Most customers are focused on the consumption on what they buy and do not care about the payment more than it has to be convenient, selfinstructing, secure and available. Therefore no other payment system has been able to challenge Visa and MasterCard. Visa and MasterCard do not need to be best to win, but avoid being worst in order not to lose.

Brett King
Brett King - Moven - New York 13 June, 2011, 15:05Be the first to give this comment the thumbs up 0 likes

Ketharaman,

I think you've missed my point. It's not about advertising, but a complete shift in the way you engage customers moving forward.

Today we send out thousands (or hundreds of thousands) of messages across a few channels that are the same (we call them campaigns). We then wait for customers to respond to those when they need a product. That mode of acquisition is rapidly failing.

The new approach will be real-time messages based on triggers or context to individual customers, that result in a journey or path for customers to follow to the bank - for want of a better term we call this engagement banking for now. This requires a completely new layer of capability from a messaging architecture and from a offer management capability. This has nothing to do with mobile banking or mobile payments more broadly, except that the mobile device is a perfect platform for engagement moving forward.

Regardless of your view on Mobile, you will need to 'engage' customers when and where they need banking instead of waiting for them to come to you in the future. This is not advertising, but an entire engagement strategy that starts with a message and encapsulates a 'user experience' that makes it very easy to engage or have a sales/service dialog with your bank as a service provider. Right now today, I can't think of one bank globally that is really ready for this level of engagement, but in 5 years this will be the norm.

In this environment the organisation structure, platform, messaging architecture, analytics enviornment, and whole end-to-end user experience process will be very different from today. Banks need to be thinking about this seriously for the future.

Let me put it another way. By 2015 the #1 channel will be mobile, #2 internet, #3 ATM, #4 Call Centre and #5 Branch for retail, wealth management and SME banking. What does the organization structure look like for that reality?

Step back from the argument about the wires or networks and think about what you need to maintain your RELEVANCE to customers in this space and you'll realize banks are woefully prepared to make this jump. Which leaves a massive gap that is being attacked by those much better at engagement.

This is the burning platform issue banks face today. Engaging the customer relevantly.

Brett

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 13 June, 2011, 15:10Be the first to give this comment the thumbs up 0 likes

@Finextra M: 

Railroads got disintermediated by automobiles in the USA; the FORTUNE magazine recently reported that Google Search is getting disintermediated by vertical search engines, name brand etailers and group buying sites. History is replete with examples of incumbents getting blindsided by young upstarts in other infrastructure-heavy industries. At the time it happened, no one would have charged the incumbents of being the worst. To that extent, I don't believe that the present 4-corner card network model is permanently unassailable.

At the same time, history has shown that disintermediation can happen only when the newcomer renders the incumbent's offering irrelevant. Like someone said, the only way to beat Google is by making search less relevant and not with a better search engine.

If we look at mobile banking / payments, they continue to use banks and card networks. It's open to debate whether they're more or less convenient, secure, etc., than other forms of banking. But, one thing is undeniable: They're a form of banking and, by definition, they're not making banking less relevant. The only way banks and card networks can get sidelined is by something that makes banking and payments irrelevant. I don't know if that *something* will ever happen, but I'm sure that mobile banking / payments are far from that *something*.  

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 13 June, 2011, 16:38Be the first to give this comment the thumbs up 0 likes

@Brett K:

Thanks, I now understand that "Mobile Engagement Banking" is the crux of your argument for the future of banking. The shift from traditional outbound to modern inbound marketing is already happening in many other industries, so I can easily forsee that it would happen in banking in the manner you've described. I agree that catering to that will call for different organization structure, messaging platform, analytics and UX as compared to today's. Even granting that banks are woefully unprepared for all this, they can always partner with third-party companies who are better in these things. Let's assume they fail to enter into such partnerships. Does it mean that Apple / Google and others who are better at fostering such engagement will disintermediate banks? No - not in the next five or even 10 years, and for the following reasons:

  1. In principle, to me, banking per se holds primacy over mobile engagement banking. To put it plainly, banking is banking, engagement is only engagement. 
  2. I've come across several cases of accounts being frozen unjustifiedly by PSPs like PayPal versus none by banks. Therefore, in actual practice, I'd feel safer putting my money in a bank - even an old fogey one that insists that I visit its branch for every transaction - than keep it in a PayPal account. This might change if regulators force PayPal and other PSPs to play by the same rules that are applicable to banks.
  3. Notwithstanding the above, the whole point could be somewhat moot: As tech companies, Apple / Google / Facebook / eBay-PayPal enjoy a seat at the top of the valuation totem pole whereas banks have to stay content at the bottom half. It isn't reasonable to expect shareholders and Wall Street to permit the tech prima donnas to dilute their tech positioning and get into banking in any significant way, knowing that any such move would likely lead to their market caps taking a nosedive.  

In short, when it comes to banking solutions, to twist the popular saying, banks are not damned if they do, and not damned if they don't!

A Finextra member
A Finextra member 13 June, 2011, 16:47Be the first to give this comment the thumbs up 0 likes

For some reason Mobile, to me, draws strange parallels to the Betamax versus VHS battle.  The big players are all throwing their hats in the ring but there are a few key organisations standing back and waiting for one of them to assert their dominance and become the de facto standard.  Hopefully when this occurs we will see a big push to implement and enable consumers to transact with ease.

A Finextra member
A Finextra member 14 June, 2011, 08:35Be the first to give this comment the thumbs up 0 likes

Dear All,

This debate on what launched mobile payment solution will prevail resembles the late 1970ies and 1980ies issuance of proprietary payment cards. Every major organisation with a customer base issued a payment card. Most of these have disappeared as the Visas and MasterCards have taken over the card payment space due to universal acceptance. Can the tech industry replicate these payment networks? Probably not since the built in experience of 50 years of operations and access to bank customers in 200 countries is difficult to copy. Payment is not only about forwarding a transaction message. It is also about risk management, dispute/exception handling and a business model that benefits all the stakeholders. Most of today´s offered mobile solutions are based on closed loop logic - as the proprietary payment card was in 1980. They need to emerge into open loop to be successful. Imagine that all the people in the world would be in only one bank - it would be easy to resolve any payment service including mobile - everything is intrabank!  This is the customer offer for many of these new payment services.

John Dring
John Dring - Intel Network Services - Swindon 14 June, 2011, 13:58Be the first to give this comment the thumbs up 0 likes

...Imagine that all the people in the world would be in only one bank - it would be easy to resolve any payment service including mobile - everything is intrabank! ....

Right! And that would do away with serious fraud too, because it would be impossible to squirrel ill gotten gains overseas into anonymous accounts!  But of course this will never happen.

Another analogy would be telephones.  Decades of investment in infrastructure, incumbent monopolies (mainly state ones) but they all worked together.  Nevertheless, new technology such as fibre, satellite, and mobile are rapidly eroding the fixed line concept.  So it will be with cards.  we will still do 'payments' (like we still make voice calls) but they will be supplemented with added value stuff like e-invoicing, m-banking, P2P, payment policy control, aggregated wallets.   So the same payment networks will exist, but have different 'customer engagement' channels.  Its just a question of getting the banks and payment processors to work with the experts in those new channels, such as they just did with the Google Wallet.

Brett King
Brett King - Moven - New York 14 June, 2011, 14:20Be the first to give this comment the thumbs up 0 likes

Right on John D!

I'm working up a post to further explore this given the entrenched views expressed in the comments here...

BK

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