Mobile Payments: Pilot or Progress?

With smartphone sales soaring, usage penetrating both personal and business realms and the number of available mobile apps skyrocketing, the smartphone has undoubtedly changed the way we interact, find the next coffee shop, and much, much more, writes Keith Rowling

With smartphone sales soaring, usage penetrating both personal and business realms and the number of available mobile apps skyrocketing, the smartphone has undoubtedly changed the way we interact, find the next coffee shop, and much, much more, writes Keith Rowling

As the many uses for smartphones become ever apparent, institutions the world over are developing mobile strategies. However this, coupled with the consumer demand for mobile banking and mobile payments increasing, has seen the banking industry put on the spot.

Today, it is not enough to simply offer consumers a mobile banking solution that allows them to view their current account on the go. Consumers increasingly want their banks to facilitate mobile payments in general; they want to transfer money, pay for goods and services, earn loyalty rewards and much more.

With this somewhat daunting prospect in mind, there are several ways for banks to enter the mobile payments space. For example, a lot of banks looking to gain traction in mobile payments are trialling NFC technology. Banks are attracted by the prospect of riding the wave of smartphone popularity and the lure of increased transaction volume, especially with low value payments where customers continue to use cash rather than cards.

At the same time, despite the focus, investment and multiple pilots, mass adoption of mobile contactless payments has yet to be widely realised. There are a number of reasons for this, most importantly the complexity of the ecosystem, lack of clarity around the business case and lack of NFC handsets in the marketplace.

So, in a nutshell, what are the options for banks wishing to enter the emerging mobile payments market?

1. Do nothing – wait to see what happens and react when a more defined business model emerges.

2. Engage with other parties with a view to pilot activity. However, lots of pilots have already been undertaken to the extent that solution providers and other ecosystem players are reluctant to engage further without clear sight of how the opportunity will scale.

3. Work to build an ecosystem with a view to a controlled commercial launch – this strategy, whilst challenging, offers the highest potential return due to the first mover advantage gained by putting a genuinely scalable solution to market.

4. Look for an alternative approach which reduces initial complexity, e.g. Icarte or microSD cards.

With option one carrying a high risk of losing market share and being left behind by competitors, and option two being a relatively well-trodden path already, I want to focus on the remaining two options.

Building an ecosystem, in a way that each party is comfortable to play their part, requires an element of sacrifice from each party, but the potential rewards are arguably the largest. To work, this solution requires a ‘card’ issuer, MNO, wallet developer, card scheme and technology providers to come together. To be successful it should focus on delivering a scalable and open solution for the whole market that provides a convenient and simple consumer experience.

A long term partnership approach, such as this, makes it the most likely solution to scale, where products can be added in real-time, which enhances the consumer experience, and leads to lower operating costs and ultimately allows adaption to changing demands.

However, the complicated commercial model requires an element of risk taking as the bank loses ownership of the payment application storage and management – as the payment application is stored on a device owned by another entity. In addition, the investment and time needed to develop and implement this solution should not be underestimated.

The alternative approach allows the bank to simplify the steps to market and retain overall control. It reflects the existing model of issuers owning the device on which the payment application is loaded and avoids the need for complicated partnerships. The pros to this approach include its speed to market, as devices can be obtained quickly and personalised in advance similar to plastic cards today and the simpler commercial model doesn’t require the involvement of 3rd parties.

However, this approach doesn’t offer a single format solution. Each supported handset requires a different solution, and the abstinence of remote personalisation removes the speed of issuance benefits to the customer. In addition, the cost of hardware is higher than the current cost of plastic, and the solution may not be future-proof as there is no guarantee that the devices will be supported by future handsets.

Ultimately, the challenge for banks wanting to embrace mobile payments is how to ensure a share of an emerging market which is as yet unclear in its design and commercial structure.

When thinking about entering the mobile payments space banks should keep in mind that developing any solution into the market is a good thing, as it helps to develop the overall proposition and raise awareness. At the same time mobile payments shouldn’t be looked at in isolation. Any strategy should also fit within your overall mobile strategy. And finally there is no single clear solution for everyone; the best way forward is arguably dependent on both the market and institution.

What do you think? Are banks better to pilot and progress or hang back and see what happens?