Jul 24, 2008

When should a bank launch a mobile payment service? Do banks even need to innovate?

Since contactless credit cards are not taking off as fast as expected, and neither customers nor merchants are excited about tapping a card instead of swiping it, some analysts have started looking at contactless as a bridge to mobile payments, which is now seen as the next great revolution. I'm having trouble buying this.

How can contactless create the reader infrastructure that is required for NFC payments if merchants are not interested in upgrading their terminals for contactless cards to start with? If the readers are built into new generation payment terminals and cost nothing extra for merchants, then yes, the readers will be deployed over the next ten years, during the normal replacement cycle for payment terminals. If all terminal vendors build the readers into all of their new generation terminals at no extra cost, then a large portion of merchants will automatically be contactless ready within the next five years or so. Don’t hold your breath.

According to some people, there is however a much more realistic bridge to mobile payments. Contactless transit cards.

In Hong Kong and London, contactless transit cards can be used outside the transit system to purchase things at traditional shops like 7-Eleven. According to Cassis International, a supplier of mobile payment systems to banks in Asia, this creates a far better environment for banks to launch mobile trials. In fact, in response to a question from a banker attending a recent conference in Hong Kong, Cassis CEO Thian Yee Chua said that if there is no contactless transit infrastructure in the bank’s market, where the cards are commonly used both for transit as well as to pay at high frequency merchant locations, then “don’t even try to get involved in mobile payments”.

Mobile payment feels like something that is definitely going to happen someday, but it is still very difficult to see how banks can benefit and how they might even play a part. Banks may be forced to play a secondary role, if any at all. Speaking at the same conference on innovation, Chris Skinner of Balatro pointed out how all of the successful examples of recent innovations in payments come from new players, not banks. Paypal of course, but also Hong Kong's Octopus, London's Oyster, China's Alipay and others. Chris described how Wells Fargo was originally the payment institution behind Paypal but apparently didn’t see the opportunity to buy Paypal before the company was too big.

Here is a hard one for me to get my head around: should banks innovate more and lead all of these new payment initiatives, or should they follow others and try to play a supporting role?

In chairing the conference, after almost all the presentations had been made, I asked the audience for a show of hands. How many people agree that banks need to be more innovative? I was surprised to see that almost everyone agreed. And there were many more bankers in the room than technology suppliers.

While bankers themselves feel, somewhat intuitively perhaps, that they need to be more innovative, their organizations are not usually structured to promote the type of innovation we are seeing today. For example, most banks have pretty much abandoned their acquiring activities, so they are seriously limited in their capacity to impact the moment of payment, something that is needed for things like contactless and mobile. This is especially true for the major global and regional organizations that dominate the credit and debit card market. In a sense, this creates a new opportunity for national players that still have a holistic view of payment, with integrated issuing and acquiring activities. But I am digressing into another blog post. So I’ll stop right now.

1 comment:

Doug Yeager said...

this is a great post. it seems like banks could be more active in mobile payments in the area of mobile provisioning of credentials onto mobile phones (once these phones exist). right now, it seems there are organizations called TSM that believe they should manage the Secure Element. while it is true that a 3rd party should probably oversee management of this device, i still think that the bank has a part to do active provisioning of the phone once the space on the secure element has been allocated for it's payment card. right now the 3rd party i.e. (Venyon) demands they control the entire process. if i'm a bank, i think i would want manage the security of my customers credentials all the way to the card instead of trusting someone else to do it. this is the Global Platform concept and it is designed to do this, but i'm not sure banks have begun to research and implement their "GP ports" for these contactless mobile payment cards that are coming.