Allan Swann looks at the rise, and potential fall, of mobile payment platforms.
For what seems like an eternity, the mobile industry has waxed lyrical about the potential of mobile devices to change banking and payments, pulling each individual's financial world out of their wallets and integrating it seamlessly with their mobile devices. So why does everywhere else in the world appear to be ahead of the UK, a supposed world financial centre?
It's enough to make you want to smash your iPhone 4S. Or not.
Alongside problems with security and standardisation, the initial 'dog eat dog' mentality has given way to a more collaborative approach, driven as much by fear as innovation as the 21st century's technological titans, Google, Amazon and Apple all bring their weight to bear on the incumbent financial services providers, banks and mobile network operators.
The debate is coming down to two main solutions: physical near-field communications (NFC) payments, such as tapping your phone against the till to pay from your digital wallet (such as Google Wallet), and cloud-based options, such as an iPhone or PayPal app that simply debits money from your account.
But is it all really necessary? Surely in a recession there are bigger problems to tackle than developing costly, untested new payment methods?
Well, half of UK phone owners own smartphones, and ComScore research shows that 4.8 million of them used their device to access their bank accounts in 2011. IMRG/CapGemini's data shows that £940m, or 4% of last Christmas's sales, were via mobile, and Visa believes that mobile payments in Europe will reach £650bn by 2020 while the UK Centre for Retail Research has said that shopping via mobile phone is expected to grow by 584% in 2012 to £4.5bn. This is seriously big business.
James Richards, director of mobile at digital banking software company Intelligent Environments (IE), believes there is a huge pent-up demand from consumers that is not being matched by the service providers.
"A lot of them see the incredible things an iPhone or Android device can do, and wonder why it can't do their banking too. And why can't it? The technology is here," he says.
Much like most emerging technical standards, a muddled mix of industry protectionism and a lack of clear standardisation has stifled many attempts thus far to provide a clear technological channel for money to flow through.
On the app side, early adopters in the UK, such as Barclays' Pingit (which allows for financial transactions) and UBS's more in-depth mobile banking app are a rarity in this country, yet US and Australian counterparts have had these capabilities for years. Even the third world, such as Cambodia's Acleda and Thailand's Bangkok Bank, have superior app-based offerings.
Serge Van Dam from Fiserv says that the delay has been due to banks attempting to do the job in-house, a task not made easy by the continually evolving development cycle. While banks traditionally work to six-month software development cycles, Apple releases new iPhones nearly that regularly, and updates its OS every month or two. The banks need to work together, or approach third parties to develop their mobile banking options to match that kind of speed.
"We do it cheaper, faster and provide a decent return on investment. We have 70 dedicated developers working on our product," says Van Dam.
Andrew Tobin, chief technology officer at O2 Money, believes that once the options become available, mobile banking and payment will be something customers will adapt to quickly. Android and Apple have shown how commerce can be performed on mobiles quite easily.
"In the next one to three years the public will become familiar with using phones to transact as a matter of course, and further capabilities, such as money-saving coupons and vouchers, will become popular, as they will be automatically integrated with the purchase transaction," Tobin says.
Alongside its development of O2's virtual wallet app, IE recently released research suggesting that the investment going into the mobile banking and mobile payments infrastructure for the 2012 London Olympics will provide a pivotal moment for the adoption of mobile financial services in the UK.
IE's research found that a quarter of the respondents to its survey believe that mobile financial services will hit the mainstream in 2013, while a further third believe it will in 2015.
Richards believes one of the key problems with adoption has been the UK's hyper-conservative banking culture. Many banks have used security as an excuse to put off development, as they struggle to balance functionality against their security requirements.
"It's not so different from ten years ago with internet banking - we had problems then, but for the most part it worked. Security became more of an educational exercise once the systems were in place," he says.
The problem with the mobile channel that wasn't there ten years ago for online banking is that there is now a huge user expectation for a seamless and hassle-free user interface. Users accustomed to clean Android and Apple interfaces won't put up with bulky, messy mobile apps. As Richards puts it, replicating the online banking experience is not good enough.
"If users can't access their account details in less than ten seconds, they will look elsewhere for solutions," he says.
Indeed, the banks appear to be heading in the opposite direction. Their latest online banking initiatives have forced greater burdens on the user in the name of security. Just this year HSBC has introduced its laborious SecureKey PIN system, and Barclays has gone a step further with its Pinsentry Card Reader, to name a few examples.
These kinds of onerous and time-consuming procedures will not wash with mobile consumers. Indeed, technological innovations in the UK banking sector seem to be more focused on protecting the banks' interests than providing any kind of decent customer service.
The banks blame complex regulation and the financial crisis for a lack of capex, which would allow them to approach the problem more aggressively.
Michael Nuciforo, mobile and digital banking consultant at Keatan Consulting, believes part of the failure by the banks in this area has been in their business models.
"Banks have a phenomenal amount of data on their consumers available, and they never thought to use it until companies like Apple and Google showed just how effective targeted advertising and services could be," he says.
The mobile space provides huge opportunities specific to the medium, such as push messaging, location-based advertising and even augmented reality (AR) to provide real value-added services to customers, and boost the banks' bottom lines.
"One of the key changes has been banking frequency. One-hundred years ago people went to the bank once a week; internet banking may have reduced that to once every few weeks. Our research shows that mobile banking customers check their banking details 20 times a month - that's five times a week and a huge opportunity for banks to advertise and sell products to their customers," he says.
Painless as possible
Internet banking got users used to the idea of not visiting the branch; smartphone banking can go a step further and make those bank visits as painless as possible. Imagine opening your banking app, selecting a branch, and organising an appointment for later in the day, instead of having to call in or ring the branch to make an appointment.
Mobile banking also allows for potential tools such payment calculators. Users could look at their loan repayments for the new plasma TV, their home and car insurance or any of the current products banks offer.
Going a step further, Australia's Commonwealth Bank has developed an augmented reality mortgage app. Firstly, it allows consumers to be notified when they are near a house for sale. They then hold up the device, which scans the house, provides all the relevant information, and calculates the user's income and mortgage repayment rates. They can then book an appointment to inspect the house, or to see the mortgage advisor in branch to sign the paperwork.
Ed Adshead-Grant, head of Hewlett Packard's enterprise services card and payments services for Europe Middle East and Africa, believes there is a very real risk the banks may find themselves cut out by market disruptors and new entrants.
"That is a real fear that [the banks] have, but it's also an opportunity for them to step up their innovations. The banks find it difficult to innovate; they can do it, but retailers and telcos have a different track record in innovation - they work to faster product cycles. They will come and eat the banks' lunch, so to speak, if the banks don't get proactive immediately."
However, the telcos are also having their lunch eaten by over-the-top (OTT) service providers that coast on their infrastructure. Mobile operators no longer control phone content, which is now provided by these app stores, and, in Apple's case, don't even get a decent cut of the handset's sale price. The telcos have been watching mobile banking with great interest to ensure they aren't cut out of the loop. Google, Amazon and Apple, after all, are making the real money here from their networks.
The iPhone pushed the world into the internet smartphone era and opened up the potential for mobile payments almost singlehandedly with its vertically integrated iTunes store model, which allowed users to purchase and download apps on the go. The news that Apple finally decided to take this model a step further has kicked speculation into high gear - it recently applied for patents for an e-wallet type device, and NFC capability has long been rumoured to be included in its next generation iPhone.
Realising the importance of controlling the payment system end-to-end, Google has courted some controversy by pressuring its app developers in its Google Play store (formerly the Android App Store) to use Google Wallet rather than rival payment systems - a nod to Apple's vertically integrated store.
While Android smartphones are already coming out with NFC chips built in, any move by Apple would almost certainly drive mass adoption of the standard.
Both the telcos and the banks want a piece of the pie, and the industry response appears to be collaboration, the likes of which has not been seen in the banking and tech sectors in the 21st century. And they may well have to.
Project Oscar, that is, Everything Everywhere (owners of T-Mobile and Orange), Vodafone and Telefonica's (O2) joint submission to the EC for its new payment mechanism, is one such move. The joint venture received shareholder approval, a president has been selected and it's now going through an approvals process. Just three years ago, the idea of these three fierce mobile rivals working together in such a fashion would have been considered unthinkable.
Beyond Project Oscar, each of these companies has its own alliances with other companies - Vodafone, for example, has also announced a joint venture with Visa. Adshead-Grant believes MasterCard will be making a similar announcement shortly. The simple fact is that everyone's hedging their bets.
That is not to say that NFC is a foregone conclusion. Unlike cloud-based payment systems, it requires a substantial hardware investment, such as installing the chips in devices and in point-of-sale terminals.
PayPal is one company that has backtracked on its support for NFC, dropping the development of its NFC mobile point-of-sale transaction plans, which looked set to move the company away from its predominantly online purchase-based roots into mainstream payment systems. Noises from its execs suggest that they now believe NFC to be dead-on-arrival - that is, by the time it has mainstream acceptance users will already have all their information in the cloud and find the idea of physical commerce silly.
Privacy advocates are concerned about both systems. Both cloud and NFC-based systems leave no room for anonymity in cash transactions. Every purchase is logged somewhere, with the banks, the telcos or the middle-men. This could lead to a rash of lawsuits similar to those that Facebook and Google have been facing over the past few years, as well as issues with law enforcement subpoenas and requests for information. Just how far will people trade their personal data for convenience?
Hopefully by year-end we'll have some idea.
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