Mobile phones are expected to play a significant role in the future of cashless payments in remote and on-premise purchases.
Payment companies are ramping up their mobile offerings in the scramble for this lucrative market.
MasterCard is one provider boosting its offering in the mobile sector. The company is responsible for authorising payment transactions, clearing and moving data and settlement between parties.
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It handled $3.3tn last year with its network processing 12 billion transactions per second. MasterCard has been operating in the payments market for more than 40 years.
But CIO Rob Reeg says the smartphone explosion is making a substantial impact on the market.
Vodafone launches global NFC services
Mobile phone operator Vodafone is the latest company to position itself in the NFC market, having signed a deal with digital security firm Gemalto to deploy global NFC services to its subsidiaries, as well as banks and retailers. Vodafone claims the partnership could see hundreds of millions of subscribers use its NFC services.
The multi-year global contract will provide the foundation for “wave and pay” contactless transactions via mobile phone, as well as for new services that demand the highest levels of security and integrity, says Vodafone. Key elements of the end-to-end platform will include end-to- end security encryption between financial institutions and mobile operators and the company’s UpTeq NFC high-end card product, it says.
“The amount of computing power in consumers’ pockets now is probably greater than the rocket science we had 30 years ago. So the question for us is how we leverage that for consumers to get what they want,” he told Computer Weekly at the company’s MasterCard Innovations Showcase event.
Reeg currently spends half his time on the day-to-day operational side of the business and the rest on innovation. The company’s innovation division has around 20 people, having recently opened its labs in Dublin. But Reeg has plans to grow that figure to 200 by the end of 2013, which will include the innovation, marketing and product development teams. He says the move was part of a long-term strategy over the next five years rather than something expected to yield money in the short term.
“When we look to the future it is to a world beyond card not just cash,” he says. Garry Lyons, newly appointed chief innovation officer and head of MasterCard Labs, says the company has already created over 100 prototypes of new innovative payments methods, many of which have a mobile flavour. “Mobile payments work when you can provide a compelling context-specific experience to the consumer,” he says.
His aim is to create an innovative start-up culture where teams were not afraid to try out ideas that might fail. “We can then invest in the innovative projects we are looking to promote and kill the ones that fail.”
Providers are already beginning to offer both contactless mobile and mobile apps, with Orange Quick Tap Wallet for Barclaycard and the US-based ISIS Wallet, which work like chip-and-PIN credit cards, while Google and Square manage payments and pass them on to consumers’ cards over the web.
The world of financial payments has a long history of partnerships but the market is still becoming familiar with the mobile operator entrants. “Nobody knows how the market will pan out,” says Charles Weir, founder of mobile apps developer company Penrillian. “The mobile operators are betting on near-field communication (NFC) because it plays to their strengths supporting security through SIMs; others like Square believe that other technologies will win.
“Even a tiny fraction of every payment done through a mobile phone adds up to a fortune, so there’s plenty of profit to go round. And for players like Google there’s exciting advertising opportunities from knowing where you shop and what you buy.” But it will be some time before the market matures, he says. “Fewer than a dozen phone models currently support NFC payments. And it will take years for phones and terminals to become mass-market. A typical solution requires coordination with more than a dozen stakeholder companies, so there are commercial challenges.”
Chicken and egg
There are also issues around mobile providers not wanting to roll out NFC-enabled devices until there is a market for them. Retailers are understandably reluctant to overhaul payment systems until the consumer demand is there. For example, Apple has yet to release an iPhone with contactless payment.
But Weir says: “It’s not a case of Apple pulling the market back. It’s more a case of the market not yet being big enough for Apple.” Angel Dobardziev, analyst at Ovum, says the issue of cost in replacing infrastructure would prevent retailers from rushing to embrace the technology in the short-term. “The point-of-sale system is a tiny fraction of the cost, then you have integration into the infrastructure, with CRM systems and that is the really expensive bit,” he says.
However, he says roll-outs will happen as part of the refresh cycle, as NFC is undoubtedly the way retail payments systems are going. Dobardziev believes such m-commerce applications as remote payments will be a key driver in the uptake of the mobile wallet and eventually on-premise payments, as consumers and retailers warm up to contactless.
Payment providers such as MasterCard and Visa are strongly pushing in this direction. “They are wise to get into this space and are making significant investment to be relevant in this fledgling market,” Dobardziev says. “It’s both an aggressive and defensive move as they are seeking to defend their existing position against the new providers, but also see this as an area of expansion. “For example you can have all your loyalty cards and coupons in one place. The organisation that provides that platform will have huge insight into your consumer behaviour,” he says.
“Many companies are positioning themselves to be that provider, whether that’s a cloudbased wallet you access via broadband or an NFC chip based in the SIM or on the device. At this early stage we don’t yet know which way it will prevail. “It’s a gold rush and a lot of players are trying to position themselves in the space.” Dave Birch, director of IT consultancy Consult Hyperion, is confident NFC will be a successful technology, but agrees the form it will take is yet to be decided.
The move to put NFC in SIM cards may not be the direction the market eventually takes. The NFC element could be embedded elsewhere in the hardware of the phone, a move which would see the mobile network operators have less control in the market, he says. But despite new entrants to the market, Birch is confident the banks do not having anything to worry about yet. “The story is about ID rather than payments, the phone is just acting as a remote control for your ID, you are selecting who you want to be,” he says.
MasterCard’s Reeg agrees that a lot of different stakeholders need to come together before NFC becomes a reality. “A lot of shake has to occur between manufactures, operator, payment infrastructure, banks are still doing their own thing. It’s an evolving landscape and it will take time to work through and get parties to come together,” he says. Different countries are working at different paces, with certain markets moving at a faster pace toward mobile payments. “We’d roughly bucket countries into categories of three, five and seven years,” says Reeg.
In emerging markets the telcos have already firmly established themselves in the mobile payments sector, where citizens don’t have existing bank accounts, adds Ovum’s Dobardziev. The mobile payment market is already expected to undergo exponential growth by the end of next year.
According to the Global Payments Report, the number of customers making payments with their mobile phones is estimated to grow to 17 billion transactions in 2013. This compares with 141 million in 2011, according to research from Capgemini, RBS and retail association Efma. Volumes are expected to surge once NFC e-wallets are launched. But figures from MasterCard show around 85% of world transaction payments are still made in cash and cheque, with the rest electronic.
Even in more mature markets such as the US, the split between cash and electronic is 50-50. This division represents a huge opportunity for electronic payments companies, but it also puts the mobile payments market into perspective as a growing market in a growing market. The battle to establish dominance in mobile payments is likely to rage on for some time before a clear winner emerges.
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