Zapp! Ping! Wang! UK payments get even more interesting

[Dave Birch] After the article in the FT about Vocalink’s proposed “Zapp” service, I had quite a few e-mails from people asking for clarification because they couldn’t quite understand what was being proposed. They e-mailed me because I was quoted in the piece, not because I know anything about Zapp, and they probably should have e-mailed Vocalink’s PR folk instead, but anyway I thought I would pick out a few key points from the article and, using my skills and judgement with respect to the e-mails that I got, point out a few interesting aspects of what has been publicly stated.

Vocalink, which runs the UK’s payment infrastructure, said on Monday that customers would be able to pay at the till without a credit or debit card, by loading a mobile app and then scanning a barcode, or tapping a reader, with their phones. The service, called Zapp, is scheduled to launch in mid-2014 at a development cost of £100m.

[From Vocalink to launch Zapp mobile payments scheme – FT.com]

At first glance, readers might think this uninteresting, since it sounds exactly like LevelUp. But there’s a crucial difference here, which is that (much as MCX wants to do), the underlying payment mechanism will be direct bank account to bank account transfer. In the UK, unlike the US, there is a suitable credit push mechanism for this, the Faster Payment Service (FPS). So, the experience is likely to be that you do your shopping, you use your Zapp app to pay and there is an immediate FPS push from your bank account to the retailer’s bank account or (more likely in my opinion) an FPS push is issued and the “confirmation” given to the retailer immediately so that the goods can be released. If it takes a bit of time for the FPS push to reach the retailer bank account, it doesn’t matter (I stress that I know nothing about Zapp at all, this is merely informed speculation by an interested member of the general public).

“The zeitgeist is that the world is exploring ways of going straight to the bank account,” said Dave Birch, a consultant at Consult Hyperion. “In the US, the drive is by the retailers, whereas here it’s Vocalink . . . The most important thing is that payments are interesting again.”

[From Vocalink to launch Zapp mobile payments scheme – FT.com]

I did indeed say both of these things, and great many more beside. In particular, I said that while the retailers (and others) are trying to bypass the international card schemes and go straight to the bank account, the international card schemes are not stupid and can read the newspapers just as well as I can. Hence they are developing a spectrum of value-added propositions to make the retailers want to use them when they no longer have to use them. This is going to drive a lot of innovation, which is why payments are getting so interesting. Hence Zapp will have to develop similar value-added propositions and simply undercutting existing credit and debit card fees may not be enough to “win”.

Lloyds Banking Group and HSBC told the Financial Times that they were considering joining the scheme. But Barclays, HSBC, Lloyds, RBS and Santander have all signed up to a separate initiative, also to be powered by Vocalink, whereby individuals will be able to make payments to other people using their phone numbers.

[From Vocalink to launch Zapp mobile payments scheme – FT.com]

This is a misunderstanding which I saw in several reports. The journalists are getting confused between the mobile front-end to the FPS system, which is essentially the same as Barclays existing PingIt service, and the retail proposition that will run on the same FPS rails. There is a logic to this: with the banks having invested so much in creating the FPS service, it makes sense to use it for as many new services as they can. And for a variety of reasons too boring to go into, there are non-technical reasons for the stakeholders to prefer a credit push solution over a debit pull solution.

Unlike some mobile payment services, Zapp is not seeking to cut out acquirers such as Visa and MasterCard.

[From Vocalink to launch Zapp mobile payments scheme – FT.com]

Visa and MasterCard are not, of course, acquirers. I think what the journalist may have been told is that Zapp hopes to work with acquirers to persuade them to handle Zapp payments alongside their existing payment schemes such as Visa and MasterCard. Now, none of their existing infrastructure supports Zapp so they will have to spend money on adapting it (which they may well be persuaded to do) but it’s not a simple add-on.

The way that the app works is likely to vary according to the way retailers choose to use it. Marks and Spencer, for example, uses contactless terminals, based on near-field communication.

[From Vocalink to launch Zapp mobile payments scheme – FT.com]

This is, I imagine, true. However, it’s also complicated. I’m sure that what the Zapp guys are thinking is that NFC is much easier and more appealing for customers than QR codes, so the Zapp app will be indifferent: if the POS has an NFC interface then the customer can tap, if not they can scan (or use Bluetooth or whatever). The Samsung owners can smugly tap and go, the Apple owners can pfaff about scanning. Again, though, not that simple. The NFC interfaces on the existing terminals are used for EMV (ie, NFC card emulation mode), which is why they will need upgrading to do cool stuff with Zapp (hence the appeal to acquirers).

As I mentioned when I was talking about PayPal Here recently, adding NFC would make it rock. To make Zapp rock, it could exploit the NFC interface in the phone connecting with an NFC interface in the terminal for high-speed data exchange (so they could dispense with paper receipt printing, for example). I’m sure they are working on the roadmap for this right now. This could be an excellent customer experience: terminal displays total just as it does now and the customer can tap with card and wait for a paper receipt to print out or they can tap with a phone and have the coupons, vouchers and ID go to the terminal, the payment request come back and get authorised by a PIN (or a fingerprint or whatever) and then have the receipt plus other “small data” (who knows: pictures of the goods , warranties) loaded to the handset instantly. With a bit of jiggery-pokery around digital signatures to make it all secure, could work rather well. I wouldn’t use it, naturally, because I get frequent-flyer miles with my BA Amex card, but I’m sure the predominantly debit card-using public probably would. Why would they care if the money is debited from their account by a Visa/MC debit transaction or a Zapp FPS transaction?

However, that technology has not always worked smoothly, with customers complaining they have been charged twice when more than one of their cards has entered the terminal’s range.

[From Vocalink to launch Zapp mobile payments scheme – FT.com]

This has got nothing to do with Zapp and, as I bored everyone to tears with before, is to do with ergonomics rather than than the specific configuration of the short-range proximity technology used. It doesn’t matter whether the contactless interface is being used for EMV, a future version of PingIt or Zapp, there will still be a story in the newspapers about fraudsters accessing your card / phone / chip implant from outer space.

When it comes down to it, I’m a competition-over-regulation kind of guy, so I’m really looking forward to seeing what the Vocalink boffins will unleash next year. I hope it will be a new round of innovation in the retail payments space.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers