Of the three models that I described in my last blog – credits by invoice extension, virtual credit cards by application, and virtual credit cards by NFC – which would benefit banks most? As I alluded to previously, mobile payments will involve more participants including the telco operators, technology companies, and software vendors. So, what should banks do to ensure that these new participants don’t cut too much into their profits? This is the question that GFT and IESE set out to answer.

According to our study, of the three models, only virtual credit cards by NFC will allow the banks to maintain their strong position. Credits by invoice extension allow others to create a way for users to make mobile payments without credit cards, for example by adding payments to the user’s phone bill. Virtual credit cards by application give capacity to a whole sort of businesses, like Starbucks, to offer small mobile payments. Both these models cut out the banks.

On the other hand, the NFC option looks to be the only one to offer a wide rollout and economies of scale which will allow financial services companies to continue profiting, albeit sharing some of the profit with the other participants.

There is a risk that a telco company takes on a role of payment aggregator if they are able to control the access of the NFC hardware inside the handset. (There is an on-going debate about where is the best place for the “secure element”, which holds the digital ID of the user, and who is the “Trusted Service Manager”, who controls access to it – inside the hardware, controlled by the technology company, or inside the SIM, controlled by the telco operator.) This is what has occurred in Japan with NTT-DoCoMo whose control of the infrastructure, software and hardware, allows them to charge a “toll” for access.

So what should banks do? Above all, banks need to embrace NFC and make alliances with technology companies and businesses – those with large numbers of customers that pay them regularly.

In the optimal scenario, banks should drive the distribution of chip-enabled credit cards; later, through its partnerships with technology companies this model can be easily extended to mobile devices. The bank can therefore take the early lead and follow a land-grabbing strategy that should discourage others from deploying competing technologies.

This is precisely what Citibank has done in the U.S. by partnering with Google, MasterCard, First Data, and Sprint. In this way, Citibank has ensured that it will get a nice cut of the mobile payment pie!

Karl Rieder, Delivery Manager, GFT