The chicken and egg of payments

From age-old bartering to plastic cards, merchants and financial institutions have continually evolved how consumers pay for goods. Today, speed and convenience are king, which may account for our heavy reliance on plastic payment cards – according the UK Card Association, UK consumers spent £3.3 billion more using plastic in December 2012 than in December 2011. It is perhaps no surprise then that mobile payments and contactless are the latest wave in this evolution, with both promising greater efficiency to the consumer, writes Bernhard Lachenmeier

From age-old bartering to plastic cards, merchants and financial institutions have continually evolved how consumers pay for goods. Today, speed and convenience are king, which may account for our heavy reliance on plastic payment cards – according the UK Card Association, UK consumers spent £3.3 billion more using plastic in December 2012 than in December 2011. It is perhaps no surprise then that mobile payments and contactless are the latest wave in this evolution, with both promising greater efficiency to the consumer, writes Bernhard Lachenmeier

These have already achieved some tangible success, most notably with contactless payments on the Transport for London bus network, on which 700,000 bus fares were taken via contactless card in the first three months of 2013. However, uptake of contactless remains low in other cases and some forms of mobile payments are still in their infancy. Yet the technology supporting these payment innovations are not new – consider, for example, that the iPhone was introduced in the same year as contactless payments. So the question is – which comes first, consumer appetite or technology innovation?

In the case of mobile payments, the technology itself has been around for some time. As far back as 1997, Coca Cola set up vending machines to take payments via text. Yet it is only relatively recently that banks brought this to the mainstream, with mobile wallets, mobile as point-of-sale and P2P carving out new ways for consumers to make payments on the go. Encouragingly, consumers are also showing they want to use alternative payment methods – they sent almost £10 million in PSP payments with Barclay’s Pingit service in the first 100 days of its launch in February 2012. So in this area, arguably, both the technology and consumer appetite already existed. The last link in the chain was the actual innovation from banks and vendors to catch up to the demand.

Contactless and NFC paint a slightly different picture. The success of Transport for London’s Oyster cards shows that when it comes to changing behaviours, consumers are onboard if they see a clear advantage and a smooth transition. However, the failure of the London 2012 Olympics to live up to its hype as the first contactless games suggests it’s not all plain sailing. Visa’s figures showed that just 15% of those with contactless cards chose to actually use them at the games. So while consumers are happy to embrace NFC in some areas, they are perhaps more cautious when it comes to transactions involving personal financial data.

Consumer demand, it seems, is there. In January 2013, PwC research highlighted that there is demand for innovative digital offerings "such as social media notifications, an electronic wallet for loyalty cards and financial tools provided by banks and that these are the products consumers are most willing to pay for". The question remains, can banks deliver?

The technology may be tried and tested in multiple industries but banking innovation is complex. Technology investment, regulations and interoperability all play a role. Ultimately, success will depend on educating consumers and appeasing concerns around security. Banks that can do this and successfully embrace and deliver innovations will stand the best chance of success – both through customer retention and attracting the next generation.