Mobile challenges to the financial sector

What’s big in payments right now? I don’t think we have to guess. Our good friends at PaymentsNews have already pointed out that

Two payment-related themes are emerging from NRF conference being held this week in New York: POS encryption/tokenization and mobile payments acceptance.

[From Payments News from National Retail Federation BIG Show 2011]

One of these themes is all about reducing costs (the costs of PCI-DSS compliance are very high, but I don’t want to talk about them in this post), the other about creating new opportunities. It’s hard to argue with this prioritisation: mobile has to be the no.1 strategic issue. But new opportunities for who? The mobile operators? The international payment schemes? The banks? Chetan Sharma’s survey says that it will be the schemes. I’m not so sure, because it would mean that current value networks will be substantially unchanged through the transition, which doesn’t seem right to me.

Can the current payments landscape of banks issuing cards being accepted at merchants being acquired by other banks translate into the mobile environment? We (the industry) used to think that banks and mobile operators would eventually get around to being pals and would sort things out to set the new value network in motion. Will they? Who knows: but the barbarians are at the gate. Eric Schmidt, the Google CEO, writing in the Harvard Business Review, set out Google’s strategic priorities for the coming year:

Second, we must attend to the development of mobile money.

[From Preparing for the Big Mobile Revolution – HBR Agenda 2011 – Harvard Business Review]

Wow. Mobile money is Google’s second-highest priority. In fact, as Eric notes, Google top three strategic priorities are all about mobile. They are going to be a big part of the mobile marketspace from now on.

In last year’s survey, Google/Android narrowly missed out to be the biggest story of the year but this year, the verdict was clear that Google will continue to dominate the headlines with Android devices and new updates and apps.

[From Always On Real-Time Access » 2011 Mobile Predictions Survey Results]

There’s a particular interest there for those of us who have long thought that NFC is going to be a gamechanger because customers find the convenience of contactless so attractive: it energises all sorts of applications, not only payments (actually, payments are rather dull – probably not the application that drives people into the stores to get NFC handsets).

Google is building a mobile wallet nicknamed “Cream,” which it plans to integrate with Android NFC phones that consumers could tap to pay in stores

[From Google Building an NFC Mobile Wallet; U.S. Banks Are Interested | NFC Times – Near Field Communication and all contactless technology.]

You can see where this is going. Banks will be offered a choice of loading their payment applications to the operator-controlled UICC or to the embedded secure element in Android phone, iPhones (rumoured to have NFC soon) and Blackberries (the first Blackberry devices with NFC are about to launch). Not only will these not be controlled by the bank, they won’t be controlled by the operator either. If the infrastructure for accepting NFC payments is simply more mobile phones, even mobile phones with knobs on, there’s no barrier to new types of payments sitting in those secure elements.

Anyway, back to the competitive landscape. If you were being negative about mobile operators, you might conclude that they’ve blown it: a couple of years ago they had the chance to get NFC moving on their terms, but they wouldn’t order the handsets. Now they’re going to have to work hard to get back into the value network. And a particular issue will be the basis of competition: what are they going to offer on their NFC platforms? I’ve mentioned before that I think identity is an area where innovation might generate something new for them, so perhaps the operators are developing new propositions around digital identity (the mobile passport or whatever), or couponing and loyalty, or sports, or event ticketing and management.

And so it is that accountants, banks and mobile phone companies see themselves as engaged in intense competition while customers think they are all the same. Competition as businesses perceive it is not at all the same as competition as consumers perceive it.

[From John Kay – Radical innovation rarely comes from within]

John is typically thought provoking, and surely correct. In the specific case of mobile, though, there’s another aspect: the operators ability to innovate, even if they wanted to, is being constrained.

The Verizon iPhone is exactly the same as the AT&T iPhone, just on a different network — and not even on Verizon’s fastest, latest network, which could have showcased Verizon’s strengths.

[From Why Verizon’s iPhone spells the end of the golden age for carriers | VentureBeat]

There’s a difficult line to tread when blogging: after all, we provide consultancy services to the industry and I have to try to balance the display of corporate expertise and depth of understanding with sensitivity to clients plans. I hope I won’t get in to trouble for saying that I think it is a real problem for some of our clients that their strategy people think about competition in conventional terms: operators, banks, schemes. These aren’t the people who will put them out of business — or, more likely, reduce them to pipes (for bits, money, data), which could still be a good business if they are operationally efficient — if they do nothing to respond to the challenge coming from the outsiders. Its going to be a fun year in mobile.

If you’re interested in learning more about this kind of thing, Consult Hyperion’s Head of Mobile Money, Paul Makin, will be presenting on the challenges that mobile presents to the financial services sector at Mobile Financial Services in London on March 15th-16th 2011. Do come along and join in the discussion.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]