Mobile payments: back to the future?

hove90A guest post from a CHYP Friend for many years, Leo van Hove, Professor of Economics at the Solvay Business School of the Vrije Universiteit Brussel, looking at the issue of costs and consumer choice in retail payments.

‘Tis the season to take stock of the past year and look ahead to the next. As far as the payments sector is concerned, picking the Technology of the Year is a no-brainer. Or perhaps 2014 will prove to be Bitcoin’s year. Time will tell.

Whatever the outcome, the Bitcoin hype has had one beneficial effect: heightened interest in the hitherto unsexy topic of payments and, in particular, in the efficiency gains that innovation might bring.

For payments in the off-line world, surely with all the QR, RFID, NFC and Bluetooth experimenting going on, a bright and wonderfully efficient future awaits us. That remains to be seen. Under the hood, many of the new mobile payments initiatives look decidedly un-novel. Worse, in the current setting there is no guarantee that the payment instrument with the lowest social cost will prevail.

Take PayPal’s Check-in. In order to be able to use it, you need to download the app to your smartphone and upload a selfie. Once you have the app ready and fired up, you can check-in to a store that accepts PayPal by selecting it from a list and swiping a button from left to right. As soon as you enter the store, your name and picture then appear on whatever touchscreen the shop uses as a point-of-sale system. When you reach the cash register, you simply say you would like to pay with PayPal and the cashier clicks on your photo. The receipt is sent via e-mail. You also get a notification on your phone but during the payment there is no need to pull it out – or perform any other manual operation.

Fascinating stuff, you say? Indeed. Will I give it a try if and when it reaches my favourite shops? Absolutely. But because my PayPal account is linked to my credit card, as is the case with most PayPal users, my seemingly state-of-the-art payment will, behind the scenes, actually be a run-of-the-mill credit card payment – with all the costs that entails.

Indeed, PayPal basically piggybacks on the existing credit card back-ends and has simply added a new front-end: my phone and picture replace my card as the authentication device. The problem is that a longer payments chain, with an extra intermediary, translates into higher social costs – and higher merchant fees.

On the Internet, PayPal has clearly generated added value. It has made it possible for mom-and-pop businesses to accept electronic payments. But in the off-line world, do we, as a society, really want to displace, say, existing debit card payments with more expensive payments of the kind just described?

The problem is obviously not limited to PayPal. The bank-driven scan-to-pay or tap-to-pay solutions are, for example, not necessarily faster than ordinary cards. Especially not if customers end up typing in a PIN or signing a receipt after all. Hence, in stores that already accept cards increased customer throughput may well be illusory. For tap-to-pay to benefit society it would need to be successful in penetrating as yet untapped sectors, and provide a cost-effective alternative to cash there.

This is not to say that m-payment technology does not hold much promise. My point is simply that one should not fall victim to ‘innovation infatuation’ and think that just because a new initiative uses the latest in technology it is by definition more efficient in all circumstances.

Now, why would a merchant in her right mind accept mobile payments if they are so costly and if the additional benefits are limited? The hip factor is part of the explanation. Also, in a competitive marketplace merchants are afraid of losing custom and will therefore tend to accommodate their customers’ preferences.

And this is where the fundamental problem lies: consumers are insufficiently steered in their payment behaviour. This is because in the payments sector pricing is pretty anomalous. Whereas both merchant and customer derive utility from a payment, in most countries only the merchant faces direct, per-transaction fees. Yes, consumers often pay annual fees, and, yes, in the end consumers as a group always foot the bill.

However, the reality is that at the check-out consumers do not worry about whether a specific payment instrument is costly for the merchant or for society; that is, unless the merchant passes on part of the cost. But most of the time consumers are not confronted with the consequences of their choices and do not realise that collectively they will, somehow, somewhere, end up paying for an inefficient payment system. In short, what is missing on the consumer side are cost-based transaction fees, as signals of underlying costs and set in such a way that the instrument that is most costly for society is also most costly for consumers.

So, will m-payment technology prove to be the game changer many pundits think it will be? Quite possibly. But in order to make sure that the future payments landscape is not only technologically advanced but also lower-cost for society, it would be best to first change the rules of the game and give consumers financial incentives to think about their choice of payment instrument. Only then will we have a fair beauty contest


Chinese checkers

There’s a fun piece by Mark Kitto in this month’s Prospect magazine. It concerns a chap who was visiting a friend in Shanghai. The visitor borrowed some cash from the host and wanted to repay it, so he posted a cheque drawn on a major international bank (which took 34 days to arrive). In order to cash the cheque, the host had to go through a time-consuming and expensive process, which culminated in having to open a bank account that now lays dormant (my good lady wife had to go through a similar process in the US a couple of years ago).
The piece is bylined “Shanghai is the financial capital of the far east. But just try cashing a cheque.”
Surely, I thought, reading this piece that only someone with virtually no understanding of retail payment systems and completely cut-off from modern technology would write a cheque in these circumstances? I then I realised that I’d missed a clue at the start of the article: the visitor was described as a “a banker friend from Britain”.
A cheque? Crackers.
I’m actually writing this article while visiting China, and tonight I’m going to dinner with an English friend who is visiting here from Thailand. (To be fair to British bankers, he did tell me that his HSBC Beijing account and HSBC Bangkok account do play together nicely.) Anyway, if I end up owing him money I will either PayPal it to him, post U.S. dollars in an envelope or leave him a Travelex prepaid Visa card which I’ll load for him via the internet, or if he (like all wise travellers) has a spare pre-paid card in his back pocket, I’ll top his up for him. Or I’ll top up his Thai mobile using my credit card, or I’ll load an Oyster card for him to use next time he comes to London, or…
Anything but a cheque, actually. It’s time we started to get serious about getting rid of them: British bankers who write cheques should be made to feel silly. When the UK Payments Council announced a roadmap for getting rid of cheques, the reaction was predictably, well, reactionary. Here’s some typical stuff, in the case from The Guardian, for example.

I’m a sole trader who runs a window cleaning business, and many of my customers pay me by cheque. What am I going to do?

This group is expected to see the biggest impact when cheques disappear in 2018, not least because many won’t be able to invest in the technology the industry is relying on taking over from cheques.

[From Cheques out, but what does it mean for everyday payments? | Money | The Guardian ]

What? Sole traders don’t have mobile phones? What a load of old rubbish. In a list of “8 Things Your Phone Will (Probably) Replace”, the payment terminal shows up as no. 4 and I can’t say I disagree.

Handsets already connect to the same networks as mobile payment terminals so to think they will be able to mimic the same functionality isn’t too hard to imagine.

[From 8 Things Your Phone Will (Probably) Replace – Consumerologist’s posterous]

We already have the cheque replacement technology in our hands. What many people don’t yet have are cheque replacement systems, but we’re getting there as more non-banks move to open up this sector, as has long been obvious to most non-bankers. Of course, cheques are only one part of the payments business that could be replaced by non-bank alternatives.

Indeed, banks have been extremely slow to meet the evolving customer demands of the digital age. With the rise of these new Web 2.0 business models we are experiencing a complete change in the way money is transacted. In the future, it won’t be the banks that are sending out thousands of cheques or triggering tens of thousands of micro bank transfers to these users.

[From Financial World Online]

This isn’t bad for banks – as we were discussing with reference to M-PESA – provided they have a strategy for using these new payment systems to everyone’s advantage.

Mobile payments are good for mobile banking

Mobile payments and mobile banking are not the same thing at all and, as I have long maintained, there is no reason to think that mobile payments should be provided by banks, nor that mobile operators want to get in to banking. This is why I maintain the much of the comment around these topics is misleading. For example:

Geo-strategic and political consultant at Nova-Comm Strategy Group, Brett Goldman, says: “With M-Pesa… Essentially, what you are doing is eliminating the need for a bank,”

[From Near field comms: How are mobile payments changing traditional banking? – 2/22/2011 – Computer Weekly]

Well, up to a point. They are not eliminating the need for a bank, they are eliminating the need for banks to run payment services. And this is not bad for banks, or customers, because M-PESA don’t need to eliminate banks in order to improve the banking infrastructure as it demonstrates with the example of the M-KESHO service, launched with Equity Bank, that allows M-PESA customers to transfer money to and from savings accounts.

With the M-Kesho Account, customers will be able to get pre-qualified personal accident insurance, access to short-term loan facilities ranging from KES 100, and interest on the mobile account from as little as KES 1. The application is built with the ability to score a customer’s credit rating using a six-month history of his M-Pesa balances.

[From Safaricom, Equity Bank launch M-Pesa bank account – Telecompaper]

How interesting is that? The transaction history built up inside M-PESA provides a straightforward mechanism for financial inclusion, simply not available in a cash economy, and an apparently entirely viable alternative to credit history. The service has been tremendously successful.

He noted that some 21 percent of M-PESA users in Kenya now use the service simply to store money and earn interest. The savings service – branded as M-KESHO and in partnership with Kenya’s Equity Bank – has effectively set-up 750,000 new bank accounts in Kenya since launching in May with deposits totalling KES900 million (US$10.7 million).

[From Vodafone, Telenor To Expand Their Financial Services | Telecom Recorder]

Scatchamagowza! They’re on their way to creating a million new bank accounts. Far from taking customers away from banks, M-PESA is bringing customers to them! As far as I can see, this is pretty conclusive proof that banks are wrong to lobby regulators to insist that mobile payments can only be provided by banks and that regulators are wrong to listen to them. (In Europe, fortunately, this is not true because of the Payment Services Directive: O2 have applied for a payments licence in the UK, for example). So, an efficient and effective mobile payments platform adds value to mobile financial services by making those financial services more accessible at lower cost. And while stimulating this, operators can make money too.

Aite says mobile payments will account for $214 billion in gross dollar volume by 2015, up from only $16 billion in 2010

[From The Smartphone Payments Train’s Leaving the Station – Bank Technology News]

That means lots of transaction fees. It’s interesting to note how M-PESA’s transaction fee income has held up.

As the use of M-Pesa spread, Kenyans started using it for smaller and smaller transactions. The average amount sent through M-Pesa declined from the equivalent of about $50 in March 2007 to less than $30 by March 2009.

[From Fascinating Stat and Lesson for the US About Mobile Payments in Africa]

So Kenyans are sending smaller amounts and are paying transaction fees that amount to larger fraction of the transaction (around 7%) because they still find it more convenient to do this than to use any of the alternatives. Once again, we see the mobility premium in action and a new value network that enables mobile operators to provide profitable payment services (because of that mobility premium) while simultaneously enabling bank, insurance companies and others to provide profitable financial services using mobile payments as a conduit.
More important than the mobile payments business itself will be the businesses that it enables. Just like M-KESHO, there will be new financial services businesses that only make sense on the mobile payments platform. In the UK, initiatives such as O2 Mobile Money and Orange Cash should provide some useful early indications as to how the market might evolve: if third-party financial services offer new products using these payments (eg, SME payments, media subscriptions, that kind of thing), then I think that will show that the pie will get bigger instead of getting sliced.

P.S. By way of an experiment in the service of readers, I have instructed no.1 son to go mystery shopping for an Orange Cash card and will report here in a couple of weeks.

Will they or won’t they pay?

The outsourcing company Accenture conducted a survey to find out if consumers want to use their mobile phones for payments. Unsurprisingly, there is a strong correlation between countries where people have already used their mobile phones for payments (eg, China) and where people wanted to use their mobile phone for payments (eg, China).

Overall, 69 percent of survey respondents in Asia indicated they favored using mobile phones for most payments, led by Chinese consumers (76 percent) and India (75 percent), followed by Korea (56 percent) and Japan (47 percent). Outside of Asia, the next highest positive response was in Brazil, where 70 percent of consumers favored using mobile phones for most payments… asked if they had used a mobile phone to make purchases in the past six months, nearly half (47 percent) of tech forward consumers in China indicated they had, followed by Korea (42 percent) and Japan (33 percent).

[From Interest in Mobile Phone Payments Strong Among Most Active Mobile Users Despite Security and Privacy Concerns | Business Wire]

Now, the figures cannot represent a desire for mobile out of a lack of alternatives. I’m in China right now, where China UnionPay already has gazillions of cards out there and I’ve been using my splendid Travelex prepaid Visa card all day without a problem (some shops just wanted signature, some wanted online PIN and signature, I don’t know why). Meanwhile, back home, the situation looks rather different.

In the U.S. and Europe, combined, however, only 26 percent of respondents favored using mobile phones for most payments.

[From Interest in Mobile Phone Payments Strong Among Most Active Mobile Users Despite Security and Privacy Concerns | Business Wire]

Oh well, I guess there’s no need to spend much money on m-payment solutions in Europe or the US then, when only a 100 million or so people will want to use them, especially so in the US where another survey shows that few consumers are prepared to pay for m-payments.

However, the [Yankee Group] consumer survey results also indicate that less than 10% of respondents would be willing to pay extra for mobile transaction services such as mobile banking, mobile coupons and mobile payments

[From Less than 10% of US consumers willing to pay for mobile payments • NFC World]

But hold on, I thought. If you asked consumers in the US if they were prepared to pay for debit cards then only 10% would have said yes. Yet everyone has (and uses) a debit card. Hhmmm…

So who does pay for debit cards then? In the US, where the merchant fees are much higher than in Europe, transaction fees are the major source of income. But the economics of debit are different in Europe where the already lower debit interchange and fees mean that in some countries (eg, the Netherlands) the banks lose money on every debit transaction, whereas in some countries (eg, the UK) they make a small but vanishing margin. Yet debit is profitable for banks. Why? It’s because the major component of income from debit schemes is not the transaction fee but

  • The interest foregone on current accounts. Consumers who use their debit cards keep money in their current accounts to fund and the bank earns interest on that money.
  • The fees earned from unauthorised overdrafts and such like. If you are out spending on your debit card and you see something that you want, you might go into the red to get it. Or you might make a mistake.

This led to an interesting twitter conversation with Forum friend Scott Loftesness. As Scott pointed out, people do, of course, pay for debit cards, but they just don’t see explicit pricing. But they might, if the “Durbin debate” ends with issuers being forced to reduce interchange. The National Retail Federation (NRF) in the US has told Congress that delay to debit card swipe fee reform will save banks and their customers more than a billion dollars for every month of delay. Actually, that’s not quite what they said…

A postponement of the debit card swipe fee reform could cost US retailers and their customers more than $1bn per month, the National Retail Federation (NRF) warned Congress.

[From Debit fees regs delay could cost $1bn]

I wrote before that if retailers think that they are being so grotesquely overcharged for debit schemes then they should start their own, and I do have to say that I am puzzled that more of them haven’t already gone down the decoupled debit route, especially those with strong loyalty databases (eg, Tesco).

My wife’s visit to Target this week prompted a revisit to the decoupled debit space. Target’s value proposition: hand me your check and sign a release form, you will then receive a RedCard linked to your checking account and good for 5% off all future purchases

[From Decoupled Debit « FinVentures]

Retailers in the US, it seems, prefer a different kind of competition. A little while ago I read a piece in the Financial Times, which I couldn’t find given five minutes googling, that said that the regulatory capture of $1 billion a month, most of it going to America’s biggest retailers, wouldn’t make any difference to the prices that consumers pay. I’m sure that’s true, and I don’t suppose banks pass on all of that billion to customers any more than retailers would, but let’s face it: someone has to pay.

Banks have never lost out because of their gracious generosity in allowing customers to use cheque books, debit cards or cash machines for free.

[From The end of free banking would be another slap in the face | Chris Leslie | Comment is free |]

This is what people in the UK genuinely believe. As Scott says, they see debit cards as free. There’s no way you can now charge them for them. So why wouldn’t mobile payment cost be bundled into the bank account fee just as the debit card cost is? Actually, I suspect that it won’t be, for the simple reason that I don’t believe that consumers won’t pay. Mobility has value. If you had asked me whether I would be happy to pay an 8% transaction fee for using mobile payments a few months ago then I would have told you no way. But that’s exactly what I did last week when I went and parked at Woking station, cheerfully paying a 40p extra charge for using RingGo (a mobile payment for parking scheme) rather than use cash for a £5 parking charge.

Scott asks how mobile payments can deliver additional value to the merchants. I would say that in my recent dealings with issuer/acquirer/merchants, three general themes have emerged (I stress that these are general: they don’t relate to any specific project we are involved in).

  • The first is that retailers like mobile wallets. anticipate lower online abandonment rates with mobile wallets and I suspect they may also anticipate a higher average sale than with cash in physical environments.
  • The second is that retailers expect to be able to use these mobile wallets to interact directly with consumers through loyalty products, coupons, special offers and so on.
  • The third is that mobile should mean fewer disputes and chargebacks, which cost retailers time and money.

All of which means that the retailers will incentivise customers to use mobile, so customers will use it even if it costs them an explicit fee versus the implicit fee associated with debit. Ultimately, I’m pretty sure, that the fact that only 10% of consumers say they will pay doesn’t mean anything.


[Dave Birch] The German Savings Bank Association are to launch a contactless e-purse for low-value payments in 2011. The project takes the highly unsuccessful Geldkarte, which is on every debit card but rarely used, and adds a contactless interface to give it a convenience boost. They are targeting transactions under €20 (which will be without a PIN) although in the future they will extend the scheme to larger transactions (which will be PIN verified) and expect the scheme to be more popular with German retailers than Visa or MasterCard contactless payments because it is cheaper and simpler (they say). Germany has, historically, been seen as being a rather conservative retail payment market but in addition to the savings banks’ son-of-Geldkarte, the German telcos are also launching their own new contactless payments scheme, but using stickers.

Major German telcos plan to hold a trial next year using contactless stickers that would enable subscribers to tap their phones to pay in stores with the telcos’ mpass payment service that is now available only for purchasing on the Internet.

[From German Telcos To Launch Trial of Their Own Payment Scheme in 2011 | NFC Times – Near Field Communication and all contactless technology.]

The trend to stickers, incidentally, isn’t confined to Germany.

U.S.-based mobile-payment start-up RFinity is adopting passive-contactless stickers for its payment project in and around a university campus in Idaho, changing an earlier plan to expand its pilot using contactless microSD cards… RFinity and Bling are among a host of start-ups hoping to take businesss from Visa Inc. and MasterCard Worldwide and major banks in the budding mobile-payment market.

[From M-Payment Start-Up Trades MicroSDs for Passive Stickers | NFC Times – Near Field Communication and all contactless technology.]

Never mind contactless, some German retailers have already been looking beyond it to the next technology revolution in retail e-payments, biometrics. Specifically fingerprints.

“This is an interesting system for the future with a high security standard. There will never be a system that is 100 per cent secure,” Binneboessel said, adding that using a fingerprint payment method is as secure as using a PIN… “On average paying using a fingerprint takes only seven seconds, paying with a bank card that requires a PIN takes 12 seconds and paying with cash takes 20”.

[From German grocery stores experiment with payment by fingerprint : Technology]

See how the report talks about security but then cites speed as the main benefit of switching to the technology. Talking about security, some customers have security concerns about contactless technology. When Discover did a trial with contactless payment stickers, they found that users were quite security concsious. They wanted to put their stickers inside the cover over their mobile phones and…

Few said they would want their name or account number printed on the sticker.

[From U.S.: Discover Pursues Contactless-Mobile Strategy With Sticker Trial | NFC Times – Near Field Communication and all contactless technology.]

I don’t want my name or account number printed on my bank card either, but there you go. Anyway, the point is that stickers were seen as being an interim technology, just there to fill in until mobile proximity handsets arrived. Which, by the way, they now have, although in very, very limited numbers. Why the delay? Because the mobile operators insisted on a standard called Single Wire Protocol (SWP) that keeps the proximity interface under their control, and it’s taken a while for the handset manufacturers to get going on this. Samsung have already introduced an SWP phone into their line up (and, indeed, we’ve been using these at Consult Hyperion on a couple of major projects).

The phone for the Telefónica trials, the Samsung S5230, known as the Star or Player One, is an EDGE handset–not a 3G phone. But Samsung said it is one of the handset maker’s top sellers.

[From New Samsung NFC Phone Gets First Trial in Spain | NFC Times – Near Field Communication and all contactless technology.]

These phones, however, need a contactless infrastructure in place at POS to make them desirable for payments. How is that going? Some up-to-date figures on US consumers payments

Adoption of contactless technology also shows promise. Some 21.7% of consumers have adopted contactless debit cards, while just over a quarter hold a contactless credit card. Some 9.5% report having adopted a contactless toll-payment instrument. Overall, those who have adopted any kind of contactless payment device stands at 44.3%, a figure that may seem more robust than critics of contactless payment have supposed. The report, though, does not look at actual usage of contactless devices.

[From News]

This reminds us that contactless payments aren’t only about open-loop payments. Even in the US, consumers are familiar with the technology primarily because of transport and transit applications. The report goes on…

While the report does not touch on contactless payments via mobile phones, it reports that 8.2% of consumers are now using mobile banking to access their accounts, compared to 70.7% for online banking and nearly 85% for ATM or debit cards.

In summary, then, there are lots of people who know what contactless is, quite a few people with contactless cards, but not so many actual transactions. And yet…

that the only real threat to cash on the horizon is contactless payments.

[From Mobile Transfers – Will They Live Up to the Hype? — Counting On Currency]

This is wrong, of course, because the threat to cash will come from mobile phones, but in developed markets they need the contactless rails to run on. So where are those contactless rails? Personally, I think that Forum friend James Van Dyke of Javelin is right, as he generally is, to say that the problem lies not with the market but with the industry. Customers like fast, “touch and go” payments. But they don’t seem to find them as an option in any of the places where replacing cash with the tap makes sense: their parking meter, their coffee shop, their PC: the industry has driven contactless down the path of existing business, existing terminals, existing POS. That’s not good enough.

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