During the last decades we have seen several technology revolutions. The 1980's introduced the personal computer, the 1990's the internet and the 2000's the iPod. Chris Skinner ponders the next wave of technological innovation and its likely impact on the banking community.
The speed at which revolutions take place is collapsing. The television took three decades to become accessible whilst the iPod took about three months. The digital generation is rapidly and radically re-landscaping markets from music to travel to fashion to entertainment to banking. All of which is made viable by the Internet and mobile connections.
These days, in our constantly connected global society, new ideas and innovations can spark new ways of doing business within months. The result is that we are living in a state of flux which is leading to a cashless, cardless society.
Now, many of you will stop reading at this point because you think a cashless, let alone cardless, society is a fallacy. A cashless society is like a clothless suit – it is the Emperor’s new clothes. Everyone can talk about the idea of a cashless society but, in reality, there’s nothing there. However, we were living in a cardless society only fifty years ago.
It was not until 1958 that the credit card revolution occurred with the immortal “Fresno Drop”. The Fresno Drop was conceived by a middle manager at the Bank of America named Joe Williams. Mr. Williams mailed out 60,000 credit cards to nearly every household in Fresno in 1958. The result was that the BankAmericard became a success and the credit card became a routine part of our daily lives.
So it took about three decades for the credit card to become accepted and another two for it to become the major retail payment mechanism in most countries. How long for it to disappear? Maybe a decade? And the same goes for cash too.
What are the signs that this may happen? There are many. Here’s the logical progression.
To begin with, cash usage in America has halved in the last eight years, from 60% of all payments to 31%. The same is true with cheque usage, halving from 30% of all payments to just 15%. The reason for the big drop is the fast rise of debit and credit card payments, rising from 10% to 51% of payments. This points to a cashless society being made possible by substituting cash with cards.
The rest of this article will focus upon the signs of change that point to the ultimate replacement of cards.
The first of those signs is the increasing use of mobile telephones for small value payments. Mobiles are paying for lots of things from car parking meters to taxi fares to drinks and snacks from vending machines. You only have to visit Finland, Japan or Australia to see folks text messaging machines with payments.
In particular, Japan’s NTT DoCoMo has made a business out of mobile payments with the i-mode mobile entertainment system, which gives access to Internet, 3G and other services. The result of increasing functionality on the phone has been a massive upsurge in spending on games, ringtones and other services through the phone. i-mode is now available in Japan, Germany, the Netherlands, Taiwan, Belgium, France, Spain, Italy, Greece, Australia, the UK, Israel and Russia and services are being continually enhanced in terms of range and functionality. The result is that mobile payments are becoming a standard for not just ringtones and games, but music, Internet orders and a variety of other payments.
That leads to the second sign of change – the fact that payments are now sliced and diced. It used to be that we would only pay for things if they were 1.99, 11.99, 99.99 or any other amount with a .99. The fact is that the amount today is just the .99. Everything from i-tunes to i-mode prices access at a fraction of a cent and can support that micropayment transaction level because the amounts are being treated like airtime on the mobile. Just as you pay a fraction of cent for a fraction of a phone call, so you can now pay a fraction of a cent for a fraction of a tune.
As a result, TowerGroup expects the total market for micropayments in the USA to reach $11.5 billion by 2009, with almost $5 billion being made by mobile phones. The mobile, internet and micropayment world of the future will not be fuelled by cards and cash but by clicks and texts.
That leads to the third revolution in payments – waves. Rather than signing, clicking or texting, just wave your card at a payment station using Radio Frequency Identification and Near Field Communication. Both are chip-based contactless payments systems that allow a card or other payments device, such as a mobile phone, to be uniquely recognised by a reader. Currently, such chips are used primarily for tagging your dog or cat at the vet but they are being introduced extensively by the card infrastructure providers of Visa, MasterCard and American Express, as well as by other card providers and issuers such as JP Morgan who launched the Blink card as a contactless device to their 94 million American cardholders this year. All of these contactless payment systems are based on a credit, debit or prepaid card being loaded with value such that when you reach the purchase station you just wave the card over the station and you have paid.
There are several things that concern me when it comes to contactless, mobile and micro payments however. In particular, the fact that most banks do not appear to take these developments seriously. Banks view mobile and micropayments as ‘wait and see’ pilots and trials, whilst many of the mobile and micropayment leaders are telco’s such as NTT DoCoMo or innovators like PayPal. The same is true with the innovations in contactless payments.
For example, the Oyster card was introduced to London as a rechargeable contactless prepaid card in 2003. It originally targeted London’s rail and subway users with lower cost fares and, as a result, has been a runaway success with over 2 million users today. The use of the card is now extending to pay for traffic meters, newspapers, burgers and chewing gum. In fact, it will soon become a real substitute for cash and therefore the use of cash will decline further whilst the use of the card will increase.
But the vision for this type of contactless card does not stop there. The Oyster card is likely in fact to follow the example of the Octopus card in Hong Kong. The Octopus card was launched back in 1997 and has over 12.5 million users today. Not only can the card be used for payments across a broad spectrum of retailers, but it is even usable in Bossini as from August 2005. Bossini is the equivalent of a Marks & Spencer or LL Bean agreeing to accept the card. Now, you have a real alternative to both cash and credit and debit cards – the contactless rechargeable payments card from the local transport system.
Mobile, micro and contactless payments are in fact disruptive technologies in the payments world. Disruptive technologies were identified by Clayton Christensen in his book, The Innovator’s Dilemma. Mr. Christensen talks about disruptive technologies as often being a cheap alternative to an existing product. The alternative is often a no-frills, stripped-down, basic option to the incumbent product which, as a result, is dismissed as cheap rubbish by the existing providers. However, as the cheaper alternative gains market traction, it also gains investment dollars and uses those investment dollars to upscale and ultimately challenge the incumbent providers.
One of the examples Mr. Christensen uses to illustrate this is the Japanese car manufacturers. When Japan entered the US car market in the 1950’s, the cars were dismissed as irrelevant by Chrysler and Ford as they were cheap, rusty, poor quality and unfashionable. However, for people with a limited budget who just wanted a car to go from A to B, these new cars were ideal; affordable, comfortable and nowhere near as hard to acquire as an American car. Over the years, Honda and Toyota garnered more demand and upscaled until they became the most popular cars in the USA.
That is a disruption and we are seeing these disruptions in the payments world. There are many simple methods of making low value payments, each of which could, over time, upscale to higher value payments. For example, telecommunications firms focusing on mobile payments; online organisations such as PayPal taking a large slice of Internet micropayments; payment providers from the transport systems, such as Octopus and Oyster, offering electronic cash systems that are slowly upscaling from paying a fare to buying a burger to purchasing clothing. All of these mobile, micro and contactless payments are convenient and easy for consumers and have the potential, over time, to upscale. But upscale to what?
This leads me to the second concern with mobile and contactless payments, which is that banks believe this is just for low value payments.
Currently, most mobile payments are for items under $10 and contactless payments for items under $100. What prevents these systems offering payments for higher value items is that there is no authentication of the payment. Unlike, card-based payments where you need to carry something you have – the card – you also need to present something you know – the PIN or signature. It is the second piece that allows higher value retail payments today. Without a second authentication mechanism, mobile and contactless payments will be restricted, but adding these verification mechanisms – PIN or signature – would defeat the reason for introducing these payment processes which is speed. The fact that contactless payments take 20 seconds off traditional payment times is the reason for its success in fast food restaurants, cinemas and subway stations. Add extra time onto the transaction and that defeats the purpose.
However, you would expect to take longer over a $1000 transaction than you would over a $1 transaction. Therefore, if you could bring in a second level authentication to the payment instrument then it could easily replace existing Chip and PIN and signature systems. That is where the importance of biometrics comes into focus.
Biometric payments will maintain the speed of transaction whilst allowing high value payments based upon something you are, which is more secure than something you have or something you know. At present, biometric payment systems are few and far between but that could all be about to change.
The very fact that governments have focused upon tightening border security through biometric programmes is the key to unlocking this potential authentication tool. As you pass through US customs today, you give your fingerprints and face for biometric authentication. Soon, in the UK, all citizens will be issued with biometric identification cards if the government achieves its aims. In the Netherlands, people are proactively signing up to the Schiphol airport iris recognition Privium service. The reason is that it allows you to queue jump customs and walk straight through to your flight.
As governments force biometric programs into their countries, so will banking and payments piggy-back on this change. The reason, if for no other, will be to address the fraudulent activities in banking today.
For example, the major inhibitor to online transactions is the fact that many consumers feel threatened by identity theft and online fraud. In particular, the media has done a good job of getting people concerned about these activities with reports of over 100,000 victims of identify theft in the UK in 2004 costing a total of £1.3 billion in losses. It takes up to six months for an identity theft victim to sort out the issues and nine out of ten victims think the fear the theft created for them will never end. On the other hand, one in five people throw out their bank statements and utility bills without giving a second thought to the potential dangers.
In particular, many of us know that usernames and passwords do not work. Many of us write passwords down on post-it notes that are left on the desk or in drawers, and one in five of us use the same password for everything. So how secure is online banking when your customers use the same password to access their account as they do to order a book from Amazon?
The result is that almost half of the customers of banks would think about switching to an alternative financial services provider if they offered stronger authentication. Usernames and passwords, signatures and Chip and PIN will never be completely fraud-proof because they rely upon something you have and something you know, both of which can easily be usurped or stolen.
That is why many see the future of authentication being based upon something you are – your face, iris, finger or palm. That is why governments are introducing biometric border controls and, as a result, banks will do the same.
This means that you now have a variety of developments that physically displace cash – mobile, micro and contactless payments – which can also be used for higher value payments when they are combined with biometric authentication.
If you agree with the hypothesis presented so far, then you have agreed that we could move to a cashless society, with most cash payments being replaced by cards and mobile. So what about becoming cardless? It will be a decade or so before cards disappear due to convenience and lifestyle.
Imagine that your payment mechanism is built into a watch that your bank gave you. The watch includes an RFID or NFC capability, biometric recognition and is supported by existing infrastructures at the merchant front-end and money transmissions process back-end. The retail consumer can therefore go into any store, wave their watch at the contactless terminal, press their finger to the pay point and they have purchased the goods. No card or cash involved.
That is the vision of the future of retail payments and we are almost there today. We already have contactless payment terminals, fingerprint recognition payments, micro and mobile payments. The only logical step is to introduce non-card based payment systems.
Some of these already exist, like the Exxon SpeedPass keyfob – an RFID chip based contactless payment system in the USA for gas. Or the JCB Credit Card Casio Watch – yes, you can already pay for goods with a wave of your watch if you are a JCB credit card holder in Japan. It will not be long before the card evolves to the clothing or jewellery of your customer base.
Therefore the near-term world of retail payments will be one of a cashless and cardless society. A society based upon micro and macro contactless payments with biometric secure authentication through bank provided mobile and wearable devices.
All of this may be a long stretch from where we are today, but the concept of a non-card based cashless society is already being trialled in Scandinavian countries, Asia and other innovative towns and cities across the world. It is only a matter of time before we see such capabilities delivered across Europe and America.
The focus will be convenience and cool. Give your customers trend-setting payments devices rather than coloured cards. Deliver cashless solutions and infrastructures rather than notes and coins. Dump the gold or platinum card for the gold or platinum ring. Develop the mobile wallet with free phone, iPod, 8 megapixel camera and 3G.
All sound a bit too visionary? A bit too quirky? Well just watch out. As Clayton Christensen can testify, the winners will be the ones who disrupt payments because they have a vision of the long-term. The losers will be those who think these innovations are meaningless.Chris Skinner is a director of TowerGroup and founder of ShapingTomorrow.com.
Web links: www.towergroup.com
Author's email: Chris Skinner