Tag: Mobile Payments

An almost 50 year old concept is now all the rage in the payments space; disintermediation, which according to Wikipedia is; “…the removal of intermediaries in a supply chain, or “cutting out the middlemen.”

It might be a cliché, and I hate any buzz-phrase not invented by me, but in the payments space this one makes perfect sense.

For example, to make a branded card payment you have not one, but several middlemen, all of whom add cost to the overall price of the goods you buy;

1. Terminal Manufacturers – those devices you slide / swipe your card into are a cost, If they are PTS and SRED compliant, a significant cost. Target, for example, spent $100 MILLION to replace theirs after their well publicised breach.

2. Acquiring Banks – The bank who authorises the payment charges roughly 0.02% of the total value of each transaction.

3. Issuing Banks – The institution who issued the card itself charges the lion’s share at a very rough average of 1.7% of the transaction value.

4. Card Schemes – The brands (Visa, MasterCard etc.) vary in the slice they take, but for the sake of argument, let’s say it’s around 0.1% of the transaction value.

5. Your Bank (in general) – May or may not charge you for the ‘privilege’ of having a card, mine does, but let’s ignore this for now.

According to statista.com the volume of credit card transactions in  2012 was around $6,000,000,000,000 (or 6 TRILLION USD), so let’s put that into perspective:

Terminal Manufactures – I cannot even begin to guess how many payment terminals there are worldwide. But I’m going to put my reputation on the line and say it’s a lot. Manufacturers have also received a very significant boost in the last year or so with the enforcement of EMV on our US brethren. For the sake of this blog, we’ll just assume many millions are spent by retail merchants on these devices.

Acquiring Banks – 0.2% of $6 trillion is $12 billion.

Issuing Banks – 1.7% of $6 trillion is $105 billion.

Card Schemes – 0.1% of $6 trillion is $6 billion.

In other words, the cost associated of using credit cards exceeds 120 billion USD!

This is actually not meant as a criticism. They provide a service, many services in fact (including paying for the inevitable fraud), and we are all very likely utilising the benefits of the non-cash services on a daily basis. My point is that we ALREADY have the ability to remove the majority of these middlemen sitting in our pockets; our mobile phones.

Your bank wants to be paid for storing, protecting, and providing access to your worth. The phone company wants to be paid for providing the bandwidth to get to your worth. That’s fair, but why should anyone else be paid? It certainly isn’t the retail merchant who’s absorbing the middleman costs, it’s us, the end consumer. And it’s about time we start demanding more options.

The disintermediation of the non-cash payments systems will be a slow process of disruptive innovation. One side will try desperately to hold on to what they have, and the other side is trying to move too fast to change everything. BOTH sides need to understand that things WILL change, but can only do so when the replacement mechanisms are truly fit for purpose. We simply aren’t there yet.

Card Schemes need time to turn their enormous ships onto a new course; banks need to take over the fraud loss liabilities; and biometrics companies need to shut the hell up about the death of password and the ridiculousness of their single factor solutions. Most of all, the consumers need to ask for something they don’t even know they need yet.

So yes, disintermediation in payments is coming, but likely not any time soon. Even with PSD2.

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This blog was written by  and the original article is here; http://www.acuityid.com/?p=336;

“Today’s payment behemoths are trying to desperately hold on to control of the payment processing infrastructure because they intuitively – if not consciously  – understand that the true  inevitable disruption of mobile payments is radical disintermediation i.e. total or near total annihilation existing, seemingly haphazard and completely archaic business models.

This is apparent in their schizophrenic attempts to simulatneiously fight new security standards for e and m-commerce while clinging to very regulations they love to rail against to limit new market entrants. It is apparent in the reports generated by highly paid consultants to strategize about how banks can hold onto, i.e. arm twist their customers, while generating new revenue streams, i.e. fees, to compensate for  archaic service models and lost payment opportunities. It is apparent in their acquisitions and attempts to present them selves as “market innovators” and “consumer service organizations”.

If mobile payments play out the way similarly disruptive technologies have in the past, the payments landscape of 2020 and beyond will look radially different then it does today. Some, if not all of today’s industry stalwarts, in spite of their best attempts to survive, will be greatly diminished, shadows of their former selves, if not simply ghosts. Meanwhile, a host of new players with radically different visions of how payments systems ought to work will rapidly grow into expansive financial legends with global footprints.

Sound far fetched? History tells us otherwise.  Have a read through a post from 2011  A Kodak Moment. Between 2000 and 2009, Kodak imploded.  The decade started well enough for Eastman Kodak. In 2000 it clocked film revenues of $11 billion, had 70,000 employees and 14 factories around the world. Then things started going pear shaped. Come 2009, revenues from the sale of film had fallen to $1.3 billion, the workforce had dropped to 20,000 and the number of factories had gone down to one.

Or consider Digital Equipment Corporate, AOL, Kmart, or sen your local travel agency — those of you under 35, may not even know what they are.  Technology-based innovation is both the bane and savior of market evolution indifferent to the fate of those impacted by rapid, sometimes catastrophic transformation. The notion that the today’s seemingly untouchable payment legends will remain intact after the coming decade of market transformation is quite simply naive. In 1989, I consulted for a company that employed 500 people to facilitate highly-targeted,  database managed, email marketing. By 2001, I purchased a software program online that had far greater functionality for $195.

The beauty of this type of imminent and inevitable market transformation is that no one really knows how it will play out. Not the pundits or the prognosticators. Certainly not the CEO’s of major financial institutions.  So while American Express touts their “transformative move to tokenization” (quotes mine for sarcastic emphasis)  or VISA digs their heels in against the European Commissions payment card reforms,  brave entrepreneurs will continue to introduce new payment means and mechanisms, and the rest of us will continue to dance and jockey for position until the initial fallout subsides and the re-visioned marketplace emerges.

Hold on to your hats, this is going to be a wild and crazy ride!”

So Apple have finally adopted NFC, huh?  Big deal, Samsung have partnered with Visa and MasterCard to promote NFC for over a year, and included NFC chips in their devices long before that.

Apple’s wallet provides you options to choose which credit card you want to use. CREDIT CARD?! REALLY?! How is that innovation in payments?! The whole point of mobile payments is that you don’t need a branded card to make a payment, at least it should be the point!

Payments has been, and will always be, just an exchange of stored value for a service or product whose value is, in turn, entirely arbitrary. e.g. I work for an entire week for a value I have agreed with my employer, and I am now going to buy a designer suit for the same ‘price’. The fact that the suit was made for a fraction of the ‘cost’ I paid for it is why its value is arbitrary; because regardless of the price, I agreed to it.

So what have Apple done differently? You can now authenticate the payment with your fingerprint. Seriously? People barely trust the fingerprint to log into their phones, let alone authenticate a payment. And seeing as the value of the contactless transaction is set below £20 (for the UK) and authentication is not required at ALL, why would you add an extra step?

I can tell you now that the credit card brands will not accept biometrics any time soon to replace EMV for higher transaction values when even software PIN (as opposed to hardware) is still rejected. Couple the fact that Apple’s global market share for phones is less than 12%, with the US being their only viable new market (who love their credit cards), and you have a completely empty offering.

But, you may say, Apple has 800 million iTunes users! Irrelevant, because there are nowhere near 800 million iPhones in use. From their initial inception way back in 2007, Apple sold their 500 millionth iPhones in June 2014. That’s total sales, all models, in seven years. Estimates suggest that there are less than 300 million in use globally, compared to a total of 1.75 billion smartphones.

On top of Apple’s minimal – and shrinking – market share, the transition of credit card payments to direct bank account payments through a mobile device has, through necessity, started small. Security is absolutely an issue, which is why the back-end wallets generally consist of credit cards, which handle the fraud / loss liability. With your bank account, it’s YOUR money, and the banks have yet to accept the liability for loss though mobile apps. When they do, the card brands will have no benefit and the transition to mobile will accelerate.

So why DON’T the banks provide this function themselves? Because they make money from credit cards, plain and simple, and it will be a tough sell to charge the fees they do now when accessing your own funds, even if they do provide a ‘fraud resistant’ service. Besides, the money from credit cards is not from the cards themselves, it’s on the interest you pay for your LINE of credit, so the poor banks can still make their squillions. That’s a relief.

Besides, people take their phones for granted, just as they do water coming out of the tap (I know, 1st world problems), and people simply do not see the issue with continuing to use plastic, so how will the mass adoption of mobile payments really take off? Simple; value-add services and guaranteed security.

Value-Add Services: Retailers are the only ones who can make this happen, not phone companies, not card brands, and certainly not the banks. For retailers to make the enormous investment required to change from a credit card infrastructure to mobile / hybrid there needs to be a clear positive effect on the bottom line. Unfortunately, with the ridiculous number of choices related to loyalty schemes, instant coupons, e-wallets and so on, no retailer knows which to back.

Guaranteed Security: The reason credit cards still eclipse mobile payments is because if you use a credit card you are not liable for fraud, the issuer is. The so-called liability shift. If you take out this middle-man, who accepts the risk? The retailers? The bank? The mobile app service providers? Someone has to, because you can be damned sure it won’t be the consumer.

Which brings us to only relevant thing to come out of Apple’s announcement; NFC is now the technology of choice. All we need now is the consolidation of every other service, someone to accept the inevitable losses, and mobile payments can come into its own.

Yeah. Right.

First, any discussion on ‘mobile payments’ needs to start with a explanation of what I mean by it. There are many definitions and types of mobile payment; anything from SMS, to direct mobile, to mobile web, and from NFC to QR can all be labeled a ‘mobile payment’.

However, from my perspective, there are really only two main categories of mobile payment:

1. A mobile device is used in authenticating the individual making the payment, the transaction happens in the background (e.g. e-wallets), and;

2. An application on the mobile device passes the sensitive payment details (e.g. paying with credit card through a web browser)

Clearly 1. is better than 2., as mobile phones will probably never be as secure as we’d like them to be.

Second, I think it must be understood that ‘payments’ in general is NOT about the payment itself, that’s just detail, it’s about the authentication of the individual making the payment. Whether you have a checking account, a line of credit, an e-wallet, etc. as your source of funds, you don’t care how you get to it as long as doing so is safe, convenient, widely available, and value for money.

However, safety and convenience have always been, and will always be, a balance of mutual exclusivity. In other words, the more you have of one, the less you have of the other.

The reasons mobile payments are nowhere near as ubiquitous as credit cards […yet], are myriad and include;

1. Credit cards are familiar to, and used by, a large chunk of the planet. There are approximately 7bn of them out there and they have been around for over 60 years

2. They are very widespread, and the use of them is a well establish process

3. Smartphone use is not as great in some regions as it is in the US / Europe, significantly limiting the available payments functionally

4. Large retail have not adopted them significantly, and the card brands are making things difficult

5. People just don’t trust them yet, and they are more complicated for the ageing portions of our population

However, this will not stop the trend, and these two ‘statistics’ pretty much say it all;

1. The average time it takes to realise you’ve lost a credit card is 11 days, the average time it takes to realise you’ve lost you mobile phone is 4.5 MINUTES.

2. By the end of 2014, there will be more mobile phones in use than there are people on the planet (>7bn).

Unfortunately  the transition of the non-cash payments ecosystem to mobile will be from credit cards, which requires the support of the card brands, who, for obvious reasons, are loathe to provide it. Both the PCI DSS and the PA DSS standards stifle innovation by making any form of compliance for mobile payments on Cat 3 mobile devices (phones, tablets etc.) exceedingly difficult, and in some cases, impossible.

I have to assume that once the card brands are ready to roll-out their OWN mobile payment infrastructures, the transition will happen much faster. This must involve alternatives to EMV, and any solution must be scalable, and future-proofed, so they’ll need a couple more years to get themselves sorted.

The card brands employ a lot of VERY smart people, and I have to further assume that there are entire departments dedicated to digging them out of the hole they have spent decades creating. From the physical infrastructure (PEDs, back-end servers, credit cards etc.) to sector dependencies (PSPs, acquirers, service providers etc.)  the credit card payment ecosystem is enormous, and enormously complicated. The transition of plastic to mobile will take a long time, but I think the brands have a lot to offer in the space if they decide to play fair.

In the end, mobile applications will rule the day, at least until the next thing comes along. It most certainly won’t take 60 years like the cards-to-mobile transition – and I suspect will involve some sort of implant – but entire fortunes are there for the taking in this space. The functionality, convenience, and yes, even the safety of mobile applications mean that they will be the next big thing. Competition will be massive, which can only benefit the most important factor; the consumer.