Near field comms: How are mobile payments changing traditional banking?

The e-money wallet is on the brink of becoming a viable technology in the UK. Mobile network operator Everything Everywhere and Barclaycard will roll out the UK's first mobile phone payment systems later this year.

As Barclaycard and Orange prepare to launch the UK's first mobile payment system, Jenny Williams investigates how mobile payments will change traditional banking.

The e-money wallet is on the brink of becoming a viable technology in the UK. Mobile network operator Everything Everywhere and Barclaycard will roll out the UK's first mobile phone payment systems later this year.

But as mobile network operators dabble with handling consumer transactions without a retail bank partner, how will banks need to adapt to the emergence of mobile payments in the UK?

Shift in traditional banking

Retail banks will need to adapt, according to Thomas Gregory, head of digital payments at Barclaycard. "Longer term it will no doubt cause a shift in the traditional model of banking - but that is for retail banks to adapt to."

"A core aspect of Barclaycard's strategy is to drive innovation in payments across the regions in which we operate to stay ahead," he says.

But mobile operators are looking at creating systems for mobile payments using near field communication (NFC) technology. O2 is applying for an e-money licence for NFC payments this year from the Financial Services Authority (FSA) so it can hold money from customers and facilitate transactions.

The licence will provide capability to launch and run financial services in the company's own right without a retail banking partner. However, mobile operators will not be able to charge interest on the electronically-stored money.

Only 32 organisations currently hold an e-money licence in the UK. These include institutions such as banks, retail outlets and online payment networks.

Cutting banks out of the picture

The biggest breakthrough in the mobile payment market has been in developing countries, providing bank services via mobile phones for people who have traditionally not held bank accounts.

Unlike O2, Vodafone is not applying for an e-money licence. Its main focus is on M-Pesa, a mobile transfer system launched in six developing countries, such as South Africa.

Geo-strategic and political consultant at Nova-Comm Strategy Group, Brett Goldman, says: "With M-Pesa, an individual would go to a kiosk, buy a pre-loaded card, enter a code into their mobile device and make transactions via SMS. Also, people are able to save money in a mobile wallet-type programme and send that way."

"Essentially, what you are doing is eliminating the need for a bank," he adds.

Steve Prentice, vice-president and research fellow at Gartner, believes mobile peer-to-peer (P2P) payments in developing countries have cut banks out of the picture.

This could have repercussions on the UK banking market. The recession has dented consumer trust in banks, making mobile operators' promises of an electronic purse and e-money services even more appealing. "In the current economic climate, people will go round banks if they can," added Prentice.

Trust in banks

"When you look at the UK customers, you could argue that it's the right time for new payment services, as there's less trust in banks due to the financial crisis," says Christophe Uzureau, research director at Gartner.

However, citing recent research, Uzureau points out that the level of trust is still high for credit card issuers and banks, with less trust for mobile operators.

"Mobile operators don't realise how hard it is to develop trust in a payment brand. They have no experience."

Lisa Mitnick, senior executive in mobility services at Accenture, believes banks will maintain a crucial role but must adapt to provide new mobile banking services.

A recent study by Accenture suggests banks that enable customers to use mobile devices to check bank balances, transfer money and pay bills can achieve returns on investment (ROI) as high as 300%.

"Banks will lose customers and revenue streams if they don't do that," she adds.

And banks have a central part to play. "Even in P2P payments, there is collaboration between banks, mobile operators and device makers," said Lisa Mitnick.

Mobile operators go it alone

But, according to Dave Birch, chair of the digital money forum and director at Consult Hyperion, the mobile payment systems created by telecommunication companies in Japan and Kenya are more successful than some joint ventures between telecos and banks.

There are also issues surrounding device makers handling customer visa card details as the availability of NFC handsets drive new NFC-capable applications.

"The chips put into the phones are secure. But that's not enough. They need to be part of a secure value network. Loading your visa card into an iPhone is interesting in terms of that," he explains.

GlobalPlatform is an organisation trying to standardise the management of applications on secure chip technology to ensure interoperability.

Android and iPhone leap ahead

Several NFC-enabled handsets were announced at the Mobile World Congress in Barcelona in February, including devices from Google, Nokia and Samsung.

Rachel Hunt, EMEA banking research director at IDC financial insights, also believes the availability of NFC handsets will cause disruption.

"As Apple and Google are considering NFC as part of their offering, they might get a score of applications that leverage that. This is an area where the bank cannot compete as it cannot act quick enough. Start-ups will be quicker to create apps," said Hunt.

Hunt regards the biggest issue for banks is knowing what value mobile payments provide for customers. "If they don't think about how this is going to be used and how it will benefit customers, then they're doomed to failure."

She believes mobile payment systems need to leverage existing payment schemes and infrastructure rather than build new ones.

"But I'm betting it's neither a bank or a mobile operator but an organisation similar to Paypal that will be the type of disruptive entrant needed to get it right," she concludes.

Banks are extending its services with mobile banking, manufacturers are launching NFC handsets and mobile operators are readying to facilitate customer transactions without retail bank partners. Mobile phone technology has, and will continue to, change banking in the UK. How the different parties will work together to provide mobile payment systems is yet to be fully realised.


How will mobile network operators (MNOs) manage mobile payments?
 By Dave McKay
O2’s decision to go with an e-money licence overcomes many of the concerns faced by mobile network operators (MNOs) in hosting and managing a third-party application on their networks.
Mobile phones contain a universal integrated circuit card (UICC) chip, where a payment application is loaded. This chip is very similar to a chip and pin card and the technology implemented adheres to almost identical standards.
The security mechanisms implemented for mobile contactless payments are equivalent to the proven smart card technology standards dictated by technical industry bodies that govern card issuers and payment application providers, such as EMVCo.
The UICC chip in the mobile handset has a cryptographic capability and an encryption key owned by the MNO. This ensures that no data can be written to, deleted from or edited on the chip without the express authority of the MNO, as the issuer and chip owner.
One key benefit for MNOs managing the payment application in a mobile handset is their ability to use over-the-air technology to load, update or block an application at anytime while a mobile phone is switched on.
In comparison, for the same updates to be made on a chip and pin payment card, it would have to be physically connected to a terminal, and in the case of a contactless payment card, it would need to be left in a contactless reader or writer for an inconveniently long time.
A vital element of contactless mobile payments infrastructure is the wallet technology, which also provides the user interface. Although no details have been communicated, it will be important for O2 to ensure that this is as straightforward and user-friendly as possible to increase end-user acceptance of the payment application.

Decisions will need to be made, however, between security and ease of use. For example, should a pin number be entered to authenticate all transactions, or only for transactions over a certain value?


Dave McKay is a technical specialist at mobile payment management firm, Bell ID.


The role of NFC in smartphone apps
Near-field communication (NFC) allows data to be exchanged between devices via short-range, high-frequency wireless communication technology by combining the interface of a smartcard and reader into a single device.
Google Android smartphones, Nokia smartphones and Apple iPhones will have the ability to exchange information such as web links and directions as well as make payments for products using NFC technology.
NFC chips are used, for example, in posters. NFC chips can be embedded into maps and, when you touch your phone to the chip, it will open the map with directions on your phone.
NFC will also be used to connect different devices. For example, if you have a stereo and buy new speakers, then placing them next to each other will allow them to transfer information to change the stereo’s settings for optimal audio output.



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