InnoGraph is an innovation strategy analysis through a series of charts and graphs. Following our article “Of Legacy And Change in the New Banking Ecosystem“, we now look at the payments market.
The Chess Board
Sharon Wajsbrot from Les Echos keeps spreading the news: non cash payments are increasing, players on the value chain are specialising, as mentioned in our latest article, the market is changing. As Jean Lassignardie from Cap Gemini reminds in the article, “banks try to delay complex transformation without losing sight of the crucial changes needed today”. Sharon Wajsbrot concludes: “for banks, the race has begun”. Alberto Jimenez from IBM is also on the race and estimates that “the full replacement of physical cash transactions with electronic payments could unlock over $4.13 Trillion dollars in fresh new revenue. Although it is unlikely that cash will go away entirely, just replacing 25% of today’s cash transactions could translate into over $1 Trillion dollars in new revenue for the payments value chain.” The opportunity is considerable, and mobile operators players have already made their first move: “massive client bases at all socioeconomic levels, dense physical agent networks –required for the conversion of cash to electronic value and vice versa-and the tight control they have over the content and services offered on basic devices (i.e. not smartphones). For banks and other parties interested in Mobile Money, these are pretty high barriers to entry and it would take a long time, and lots of money, to replicate them.” According to him, there is a solution: “Now the needs of the users of these platforms -consumers at one end, and digital ecosystem players at the other- require enterprise-grade platforms: the ones that work every time, all the time, and offer a wide-range set of connections to the rest of the ecosystem to quickly grow the relevance of a Mobile Money service in the life of the consumer. This is the very definition of what Cloud technology can deliver.”
Have we just said Cloud? That opens doors to other players. As Alex Wilhelm remarks for TechCrunch, “Apple CEO Tim Cook said that in its first 72 hours, Apple Pay activated 1 million cards. That figure indicates that Apple Pay is picking up traction outside of the technology, early-adopter set. Apple Pay competes with rival offerings from Google, among others, alongside traditional payment methods”. About traditional payment methods, EMVCo reminds on FinExtra :“Adoption of EMV chip technology promotes a unified international payments framework, which supports an advancing range of secure payment methods, technologies and acceptance environments. As expected, in regions where EMV cards are widely deployed and the acceptance infrastructure is established, EMV transaction activity is much higher. As more and more countries move to secure EMV chip transactions, the payments industry can start to establish a truly global, interoperable payment environment.”.
As expected for this game, a range of chess pieces remains, aligned to defend the fortress.
As Michael Giusti from ISO & Agents mentions, “Just because there is new technology to implement, doesn’t mean we don’t need to finish implementing the old technologies,” said Gil Luria, managing director for Los Angeles-based Wedbush Securities. Fraud prevention ranks among the biggest selling points for the EMV standard, and it’s beginning to outweigh one of the biggest selling points of magnetic stripe cards—compatibility. Mag-stripe advocates cite the system’s ubiquity in the U.S. as an advantage. But this country is hanging onto the legacy technology while the rest of the world has moved on, experts say.” Chris Measures explains in his article for Cabume, “PayPal has grown to be the de facto way of paying for goods on eBay, and has now spread to lots of other sites. Its smartphone app now makes it easy for people to pay for goods on the high street as well. Bitcoin goes further, not just marginalising banks but the entire idea of a national currency. However the real threat to banks is from brands coming into the market and pushing them into the background. The launch of Apple Pay in the US this week is a prime example of what might happen.”
Yet, The Economist warns: “Such technology has been around for years. It has failed to take off, however, in large part because so many firms have fingers in the mobile-payment pie, and often block others from grabbing a big piece of it. Google Wallet, a mobile-payment service that started up in 2011 to great fanfare, for a long time worked on only one of America’s four big wireless networks, Sprint. The other three have their own rival project, now called Softcard (…). A consortium of big American retailers, such as Walmart and Target, also offers a mobile-payment service, called CurrentC, as does PayPal, whose main business is online payments. And then there are dozens of startups, from Stripe to Square, each with its own take on mobile payments.” Josh Ong from Fast Company explains how “Mobile payments haven’t quite taken off yet. I’m sure more than a few of you have taken to using Google Wallet and other similar services for NFC purchases, but these are still the exception, rather than the rule. Apple is taking its entry into payments very seriously, working with hundreds of banks and major brands for the launch.” while Bryan Yurcan remarks that “60% of checking account owners said their debit card is an essential service. An even larger number of millennials (74%) report that they “can’t imagine not having a debit card.” When it comes to online banking, 51% of consumers cite it as their preferred channel to conduct checking account transactions. While mobile payments are gaining popularity, they haven’t “taken on a stronghold like debit cards have.”
These are not the only barriers to payment markets. TechVibes reports on a survey from technology research company Software Advice which states that “25 percent of consumers were likely to use digital currency if it becomes widely accepted, with 9 percent saying they currently use it, but among SMBs, half said they were ill-prepared for digital payments, and half were “not at all prepared” for digital currency.” Talking Payments concludes with the usage point: “Security will always be an issue to new customers, particularly when it comes to sensitive information like their payments data, and the providers of wearable technology will have to convince them of its safety before people will really trust it. (…) Wearable technology will have to be introduced as a completely unique means of making a payment before it’s really considered as the main way to pay.”
Objective: The centre of the board
Merchants and retailers are key partners in the payment sector. One objective the game is to create a network effect through their points of sales. As Jim Marous sets the scene for The Financial Brand: “Merchant Customer Exchange (MCX) has built a consortium of over 70 of the largest retailers in the US including Target and Wal-Mart and announced an alternative mobile wallet solution, CurrentC. The participating merchants control one in five retail dollars spent in US stores, and have said they won’t accept Apple Pay”. Timeframe is also important as Harry McCraven reminds in his article for Fast Company: “with an October 2015 deadline looming which will require many retailers to install new terminals, the odds are good that many more will be Apple Pay-ready before too long.”
Daisuke Wakabayashi reminds in The Wall Street Journal that “only Apple’s newest phones, the iPhone 6 and iPhone 6 Plus, include the technology. Apple has signed up the six biggest card issuers, accounting for roughly 83% of credit-card transactions, with 500 financial institutions coming by early next year. It also has the three major credit-card networks: Visa Inc., MasterCard Inc. and American Express Co. Still, corporate credit cards or prepaid cards aren’t accepted yet. Neither are retailers’ proprietary credit cards, so shoppers can’t use their Macy’s or Bloomingdale’s cards.” To win the merchants trust, Current C has developed a different approach, according to Mike Isaac from The New York Times. In his view, “CurrentC is an effort by merchants to build their ideal mobile wallet. CurrentC is designed to link directly to a customer’s bank account instead of a credit card. This is a strategic move, analysts say; in bypassing the credit card companies, merchants can avoid the high fees that they are required to pay on each credit transaction they process. CurrentC would also give retailers the ability to track shopping habits across the dozens of stores that belong to MCX, a data set that has traditionally been held by credit card companies, not merchants.” This video from Bridget Carey will give you an overview of where we stand on the board.
Security is key for payments. This drives companies to develop new solutions, and Aurus is presented by PYMNTS as being an innovative partner to work with. They “developed AurusShield®, a patented secure payment application that is solving the challenges being faced by retailers to protect their payment data against the threat of malware attacks. A data breach can result in substantial loss of revenue, drive customers to competitors and sometimes even result in bankruptcy. AurusShield is an innovative approach in the marketplace, and keeps our customers ahead of the cybercriminals while preparing them for EMV, mobile commerce and other innovative payment solutions.” Alex Scroxton from Computer Weekly mentions Boku in the UK, and explains “The advantage for consumers is mainly convenience – rather than enter your credit card number, security code and address, you can just enter your phone number – but also security, to make a charge the buyer must be holding their phone in their hand or send a text message to confirm. The scheme could therefore help protect consumers guard against card-not-present (CNP) fraud, a perennial concern among e-commerce merchants, Prideaux suggested.”
The Economist comes up with an estimated amount of debit card fraud in the US and wonders “Why has it taken America so long to adopt the anti-fraud measures that continental consumers have used for years? America is the only rich country that still relies on magnetic strips and signatures for most credit-card transactions. It is also the only one in which the market in counterfeit credit cards is still consistently growing. Retailers, banks and card issuers lost $5.3 billion to credit-card fraud in America in 2012—about half the global total.” As Josh Ong outlines for The Next Web, “CurrentC, a retailer-backed payment system billed as one of the chief competitors to Apple Pay, has notified customers that hackers may have acquired their email addresses, as first reported by Business Insider. (…) Even so, the hacking does raise questions about the security of CurrentC’s system, which stores financial data in the cloud and uses QR codes and passcode to approve payments.” Finally, Kelsey Campbell-Dollaghan concludes by reminding “it’s far more likely that criminals will use the flaw to set up hundreds or thousands of fraudulent transactions in smaller amounts to evade notice. A good reminder to keep an eye on your account, no matter how small the charge.”
One thing we should expect from a service is that it simply works. Meaning that is works simply. Anick Jesdanun explains why on INC: “It’s easier just to pull out my plastic credit card than to figure out which card works with which app and which app works with which store. In practice, the process isn’t so smooth. I have several payment apps taking up space on my phone. I open them only when I need a reminder of why they are so frustrating. After all, whipping out a credit or debit card isn’t so time-consuming, though it is a pain when I lose a card or leave it at home. It would be nice not to have to carry them around. Dewindra Hardawar from Venture Beat says “What we really need is a faster and more secure payment method than plastic cards with magnetic stripes.” The fact is, there are issues. As Ben Lovejoy explains for 9to5 Mac, “In two instances, multiple payments were taken for a single transaction. Apple later confirmed that the glitch was indeed a formatting problem in the data, and fixed it the same day. Some of the issues appear to result from using apps without signing-in – something Apple Pay in principle makes possible, but which many apps don’t yet appear to properly support.”
Evan Nemerof from American Banker reminds that this also is a market opportunity. In his article, he mentions “Digital Disbursements reduces end-to-end disbursement costs by as much as 75%, Bank of America said in a Tuesday press release, when compared to a physical check. Also, merchants could potentially save more than $1 billion annually by eliminating disbursement checks, the release said, citing data from an Aite group survey. “We are very proud to offer an alias-based business-to-consumer payments solution. Digital Disbursements is an important step in the evolution of the payments industry in the United States,” Dub Newman, head of global transaction services in North America for Bank of America, said in the release.” Faaiz Tameem from WIRED concludes: “Digital technology is about making life easier, and Apple Pay is just the start. And for now, that my wallet has been digitally transformed, it can go back to being a style accessory.”
Central pawns first
This is how John Heggestuen from Business Insider introduces Apple Pay: “Apple Pay boasts a number of security features that speak directly to consumers’ top mobile payments concerns. (…) Hoping to steal the show, MCX, a consortium of over 70 of the largest retailers in the US, announced its own mobile wallet, “CurrentC,” days before Apple. These merchants control one in five retail dollars spent in US stores, and won’t be accepting Apple Pay, according to sources familiar with the matter.” Sarah Perez from TechCrunch presents another device based strategy. In her article, she relates the story of “The former head of Google Wallet and longtime PayPal exec, Osama Bedier, is this morning revealing his new company Poynt, a “future-proofed” payment terminal that combines an Android-based tablet with a hardware docking station, and includes support for all modern payment technologies, including traditional magstripe cards, EMV (chip and pin), NFC (Google Wallet and Apple Play), Bluetooth, QR codes, and beacon technology, in an all-in-one device sold at cost.”
Making good developing moves
They already know how to do it on the web. Should they be successful on mobile as well? Ben Thomson says he’s not so sure. In his article for Stratechery, he explains “The problem for PayPal is that, as noted, peer-to-peer payments is a “square”-shaped problem; all of PayPal’s internal incentives are designed to solve this problem first-and-foremost. That’s why when it comes to a new problem, like easily enabling an individual or small business to be a merchant, PayPal is markedly inferior to what is on offer from startups like Stripe (for e-commerce) and Square (for offline purchases)”. Josh Ong from The Next Web explains “Previously, PayPal had tested Pay After Delivery with a small pilot in the UK and Europe. The service is now generally available in the US. Pay After Delivery is free, but you’ll need to have a verified account, since it’s basically a short-term line of credit (…) PayPal also announced a partnership with Tillster, which will see it provide mobile payments in an upcoming Burger King app, and an integration with GoDaddy for its online store.” Napier Lopez from The Next Web remarks that “Google has been quickly expanding the capabilities of Wallet recently. What first started as a simple mobile payment tool is now approximating established rivals like PayPal in functionality. The company also made it a point to note that your Wallet transactions are 100 percent covered by the company’s fraud protection system, surely in reaction to claims that Apple Pay is safer, as well as general concerns over vulnerabilities in mobile payment systems.”
The Knights before the Bishops
Banks also want to play the game. Sarah Clark from NFC World quotes RBC and writes: “With the addition of new mobile devices we are making the RBC Wallet more accessible to our clients through an additional platform and devices, ensuring that our users will continue to have the choice and flexibility that they have experienced in our traditional and online banking channels,” says Linda Mantia, executive vice-president for cards and payment solutions at RBC. “Our mobile capabilities are growing and will continue to evolve to offer our clients with value added services, more payment options, on more devices, across more networks.” Nick Summers mentions a French example for The Next Web, “French bank is gearing up to launch an online payment service for Twitter users. Unveiled last month by S-Money – a subsidiary of the banking group BPCE – it’ll give users the ability to “simply Tweet money to one another.” As Leila Abboud from Reuters explains to TechMeme: “The move by Groupe BPCE, France’s second largest bank by customers, coincides with Twitter’s own push into the world of online payments as the social network seeks new sources of revenue beyond advertising. Twitter is racing other tech giants Apple and Facebook to get a foothold in new payment services for mobile phones or apps. They are collaborating and, in some cases, competing with banks and credit card issuers that have run the business for decades.” In France as well, Sharon Wajsbrot relates the launch of a new service from Visa in an article for Les Echos. According to him, “To remain at the forefront of the market, the credit card specialist Visa is launching a new solution for contactless payments, in partnership with Atos subsidiary Worldline. Based on the Host Card Emulation technology, which utilizes a cloud-based storage system, will be on trial as of March with around 1,000 users of four partnering banks”. Banks want to play the game, but at calculated risks, and that may be an issue according Jim Marous. In his article for The Financial Brand, he explains: “A reluctance to “accept failure” is a cultural weakness which impacts innovation. There is plenty of anecdotal evidence that banks are not good at supporting employees who take calculated risks and fail, and the survey confirms that banks are weak in this area. With regard to where investment is being made, channel innovation still is receiving the greatest emphasis, 89 percent of banks worldwide saying they were increasing their investment in this category. “
Never move the same piece twice in opening
That’s the law of change: it can even stumble the foundation, and affect currencies themselves. May that be with limited impact. Hacking Finance presents BitCoin status with key figures.
Evan Faggart has studied the potential impact of a massive usage of BitCoin in current economic situation, and while accepting that things can differ in the real world, he concludes: “the general process of boom and bust holds true for each specific event. Thus, we have seen two possible scenarios in which a Bitcoin credit bubble could occur. Although both scenarios have distinct features, the end results are the same: a huge spike in the Bitcoin price would occur, and a massive price drop would follow. While it is uncertain if these scenarios will actually play out in the real world—given that several Bitcoin exchanges have passed proof of reserves tests, and that it is uncertain whether or not Bitcoin will become mainstream—it is important to consider the definite possibility of these scenarios.” In following article, Fondapol explains for Trop Libre that BitCoin is “an open network that no one ones, free of rights, a transmission channel that holds no interest in what it conveys. Thus, as the Internet is a platform facilitating digital communication, Bitcoin seeks to enable transactions and creates that last link that was missing to digital exchanges, a monetary tool”. Jonathan Shiebel from TechCrunch mentions Circle, “the mobile app focuses on core tasks in digital money like sending and requesting money using a phone’s contact address and a bitcoin address; performing in-person transactions using QR codes, and instantly converting between dollars and bitcoin using linked bank accounts and cards.” Jeremy Allaire, Circle’s owner, explains in the article that “Focusing on person-to-person payments is a straightforward thing to do right now. Payment products have been limited to domestic use and tied to one banking system out of thousands around the world.”
Castle early if you can
This complex chess board has witnessed a great variety of partnerships, burdens shared with relevant players. Global Payments announced on Finextra “that its Integrated Solutions division, OpenEdge, fully supports Apple Pay, and will deliver the service to more than 2,000 integrated software application developers. (…) OpenEdge will add Apple Pay to its software development kit, allowing developers the ability to embed the payment service into their offerings.” Finextra mentions the partnership between Samsung and UnionPay in China: “People using Samsung’s latest Galaxy Note 4 phablet as well as the older Note 3 and Galaxy S4 smartphones will be able to use the system across a network of some 3.6 million NFC-ready terminals at shops throughout the country. Samsung’s entry into China mimics Apple’s approach to the US launch of the Apple Pay service, by forging links with card schemes and issuers to gain a foothold in the nascent non-cash payments market.” Usine Digitale explains how Apple and Alipay could enter in partnership in the same country: “I hope we can do business together” said Jack Ma, Alibaba CEO, about potential talks with Apple.
PYMNTS reminds Apple is actually in talks with a wide range of partners, “Apple is talking with HID Global and Cubic, which both specialize in making secure keycard building access and transit fare systems. Developers today are not permitted to tap into NFC used in both the iPhone 6 and 6 Plus, as it remains exclusive to Apple Pay. The feature could, however, be open to select partners and give developers the option to use the feature within their applications.” As Lance Ulanoff reminds, a lot of players cannot partner with Apple for payments, though. In his article for Mashable, he quotes “Denée Carrington, a Forrester analyst who closely tracks the mobile payments industry, explained that the members of MCX are also part owners in the LLC (Limited Liability Company) and, as such, all signed off on an agreement (…) “Part of the agreement,” Carrington told me in an email, “is a non-compete: No other mobile payment solution other than MCX’s CurrentC can be accepted in-store.” Carl Franzen from The Verge mentions latest bank partnerships with Apple and concludes: “Barclaycard has also reportedly turned on Apple Pay for its US customers today, but we have yet to see any official notice from the company. Several other smaller credit unions are also said to have turned on Apple Pay as well.”
Develop on both sides of the board
There is room for improvement, and only “offensive” developments will enable a chessmate. As Tony Levy from IBM reminds, “With analytics delivered on cloud through software as a service (SaaS), finance organizations and users can take advantage of the full breadth of reporting, analysis, planning, budgeting, forecasting, scorecarding and what-if profitability analysis capabilities—but with the speed and agility of a cloud-based solution.” About the Chinese market opportunity, Zennon Kapron from INSEAD outlines “With over 1 billion consumers, mobile payments for Chinese vendors are a huge opportunity. (…) But if Apple does choose to proceed in China and obtains all licenses required, it could be too late to bring any innovation to the mobile internet payments industry. Local players like Alibaba’s Alipay and Tencent’s Tenpay have infiltrated the mobile payments market offering extremely convenient money transfer; utilities payments; booking; and even fund investment technology. While mobile payments are huge here, NFC is not.”
Companies choices have wider repercussions on the economy, as PYMNTS reminds: “The argument goes like this: Apple is the world’s largest company, when measured by market capitalization and it accounts for about 3.5 percent of the weighting of the Standard & Poor’s 500-stock index. Apple accounted for 18 percent of the entire rise of the S.&P. 500 index this year. That is how it drives—or at least strongly influences—the U.S. economy directly.” This is why William Lazonick has written an open letter to Apple to express his will to see a better shared ROI from Apple to its “real investors”. In his article for HBR, he explains “However, there are two other important groups of people who invest in the corporation without a guaranteed return: Taxpayers, through a wide variety of government agencies charged with spending on physical infrastructure and the nation’s knowledge base, regularly provide productive resources to companies without a guaranteed return.” Arnab Sengupta from Finextra is confident about the launch of Apple Pay and raises a key question: “within the next one year, we are expecting around 180 million iPhone 6 customers (some upgraded from iPhone 5) equipped with Apple Pay facility and iOS 8.1 Operating system ready for Apple Pay usage. Does anyone believe that the projected 180 million iPhone 6 customers with Apple Pay ready features within a year will not be using this feature for payments in the existing or newly deployed NFC terminals as well as with the online merchants with Apple Pay supported cards?”
Victor Luckerson sums up the situation for TIME Magazine: “But consumers are still reluctant to give up their credit cards. Mobile payments generated $4.9 billion in sales in 2014, a paltry figure compared to the year’s $4.8 trillion in card transactions, according to Euromonitor. Google’s own mobile payments service, Google Wallet, offers much of Apple Pay’s functionality but hasn’t seen widespread adoption. Startup Square abandoned its much-hyped mobile wallet platform earlier this year, instead pivoting to an order-ahead service like Seamless. PayPal, which is spinning off from eBay in 2015, has also struggled find a mobile formula that works in stores. The transition to mobile payments is a challenging one because it requires buy-in from so many different players.”
This article was inspired by Chess Central and Greg Satell from Innovation Excellence. It is dedicated to the chess game lovers of my family, my husband and my father.