If you've followed my bullish ramblings on mobile payments here at Finextra, you'll know that talk of the coming ubiquitousness of mobile payments is nothing new for me:
In my first book Bank 2.0 I predicted that Mobile Payments at the POS would overtake card payments by 2016-2017. I'm still bullish on that estimate, but would be the first to admit my biggest surprise in respect to Apple's announcement was that it has taken
them until the iPhone 6 to do payments.
What it means for the industry
We can safely say now that the debate over NFC is over - NFC combined with the use of Tokens is the industry standard moving forward. For those suggesting BLE/iBeacon or other cloud based tech might leap frog, I think it's been fairly obvious all along that
NFC was the chosen standard by the card networks, the only issue has been around implementation and timing. Apple's adoption of NFC signals that interoperability is a key component of the ecosystem moving forward, but it also probably means we're going to
see signficant morphing of the existing networks around the shift to mobile. Those shifts will be:
- Move away from Card numbers to Tokenized Identity as the customer identifier (no more "cardholder" folks)
- Card networks become data networks - the data passing before, during and after a transaction becomes just as important as the authorization itself
- When we move to cardless ubiquity do card networks just become payment networks with payment and identity protocols?
Technologies like BLE and iBeacon have a role to play here. What we didn't see in the Apple announcement this time around is how they plan to stimulate in-store activity - how they will encourage use of Apple Pay over other payment modalities or other mobile
wallets. This is where iBeacon is part of the long-term play.
As Ian Kar pointed out on Bank Innovation, Apple definitely
is making subtle moves into the merchant space, with one key intent. They want to ensure you interact with your iPhone in-store, ensuring you use their wallet when you pay. Most likely that will be through combining loyalty and merchant rewards/offers
That is the other exciting thing. Mobile payments are not like card or cash payments, and that is what most pundits who are skeptical constantly miss or discount. The use of mobile allows you to contextualize payments with information, content, location
data, behavioral data, deals, etc before and after a payment that you could never do with plastic or cash.
Apple has resolved the modality of payments with this move, but we're still just getting started on the value ecosystem.
Why did it take Apple this long?
Apple was waiting for the right ingredients to ensure success of their Apple Pay initiative. Apple didn't want another Maps fiasco, and they wanted to ensure people used the feature. However, the United States being Apple's primary territory and being the
card payments backwater it was, has hindered that adoption because the propogation of contactless POS was poor. Enter Target...
The Target, and Home Depot breaches, just to name a couple are part of a broader systemic issue in the US around an aging mag-stripe infrastructure. There are still some, like Clint Boulton at the Wall Street Journal/CIO Journal who argue that cost of replacement
of the POS infrastructure can not be justified on the basis of fraud costs alone (Card Security Costs Outweigh Benefits for Many). The varying
estimates of POS replacement US-wide range between $9Bn and $35Bn, and estiamted fraud costs this year range between $6.9Bn and $15Bn. On this basis, the business case actually seems pretty strong, but let's just look at US card fraud as a whole. While some
might debate this, the facts are the US is in serious trouble because of their slow EMV adoption.
As reported in
Business Intelligence, the US does 25% of the world's credit card and debit card transactions, but carries 51% of the world's card fraud. Regardless of what you think of POS replacement costs, this is an incredible statistic that shows how far behind signature
and mag-stripe put the US card business.
Apple now knows that the major merchant acquirers and the card networks are all fully committed to rolling out new EMV capable terminals, that will also support mobile contactless payments. This is key - without this guaranteed momentum, Apple was faced
with uncertainity over the horse before the cart problem of a mobile payments capability. For merchants, issuers and acquirers, this makes the decision to invest in retooling the POS networks much easier.
The additional sweetners here are three fold. Firstly, tokenization will avoid much of the type of breaches we've seen at Target and Home Depot because the token is only a one-time use thing. Secondly, the move to tokens and the combination of biometrics,
etc allow for the emergence of a 'cardholder present' approach to interchange rates that will potentially give mobile payments a competitive merchant rate. Lastly, the US might effectively jump straight from magstripe to mobile, especially if issuers can figure
out how to reduce the cost of card replacement by moving straight to mobile SE and tokens.
Ubiquity is inevitable
For those skeptical of mobile payments adoption, POS retooling and Apple's entry into payments signals the final hurdle to mainstream adoption. For the last 200 years we've seen a gradual speeding up of technology adoption in society, meaning that today
the difference between early adopters and late adopters is often measured in just months. Payments behavior is more embedded than most, but that doesn't mean it is immune to change. A likely model for adoption rate for mobile payments in developed markets
is 2-3 years, based on what we've seen around Kindle, iTunes, App and Smartphone adoption over the last 7-8 years.
If you are skeptical about this I think it is important to point out that while debit card use has been increasingly signficantly over the last decade, physical payment methods around cash and particularly cheques (checks) have been in constant decline.
If we are to examine customer behavior around payments it is very clear. Physical payments are on the decline, real-time electronic payments are the future of demand and interaction.
Now this doesn't mean that Apple's move will bring an end to cash or plastic anytime soon. It does mean that mobile payments will dominate within just a few short years as the instinct for a payment changes.
This is not an instinct just being driven by Apple either. On average, 4,361 out of 100,000 people globally were using mobile-payments services as of June 2013, according to Groupe Speciale Mobile Association, an international mobile-telecommunications group,
and the World Bank. In sub-Saharan African, the figure was six times that—with nearly a quarter of the population banking on mobile phones. In more than 9 countries across Africa,
mobile money accounts already outnumber physical bank accounts, and in markets like Kenya, mobile payments have long outstripped use of physical cash.
Mobile payments and mobile P2P are the coming ubiquitous form of payment. Apple's entry into this space simply speeds up this shift, and guarantees a common standard across Visa, Mastercard and Amex networks around NFC and the use of Tokenization. By 2020,
it won't just be the USA that considereds mobile payments the primary modality, but indeed, Africa might get there before the US.
For markets like the MINT (Mexico, Indonesia, Nigeria, Turkey) countries the likelihood that the majority of the newly banked will move straight to mobile is extremely high - they won't be given a plastic card. Distribution costs won't support that model.
It won't matter whether you are a farmer in Kenya, or an Apple Fanboy in New York City - mobile payments ubiquity is inevitable. Apple has just cemented that future into place sooner, rather than later.