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Where are the mobile macro payments?

Where are the mobile macro payments? I am talking about the payments with a higher amount than the ones that are defined as micropayments.

Where are they? Where are the examples? Have you ever seen a demo online? Or a cards program offering higher value (say: ‘normal value’) mobile payments? Well, I haven’t found it yet, which is strange because I believe the combination of micro- and higher value transactions through one channel is awesome! It means you only need 1 device to replace all kinds of cards in your wallet.

It looks like they only wish to promote micropayments. You know: the small transactions for which cash is currently the most popular payment method. If the infrastructure is available, a ‘tap-and-go’-tool like contactless cards or mobile devices could promise a faster and more convenient payment tool than cash.

Personally I wouldn’t be easily convinced by a mobile solution if it is only used for micropayments, unless there is an automated system to recharge my account (thank your standing orders and direct debits ;) ). What would interest me is a mobile solution by which I can make all kind to purchases, also the €100 ones and higher. But then I also need the guarantee that it is a safe solution and that a personal PIN is needed to authorize the transactions!

I made similar comments already a couple of times on some discussions in Innovation In Payments, and realized I haven’t seen an example of PIN-supported mobile payment solutions yet.

So I started surfing on the net, surfing on YouTube with key words like ‘mobile PIN’, ‘contactless PIN’, ‘mobile payments PIN’ etc. I only looked for about an hour, but it sure proved there is not much around on this niche topic. There are a lot of examples about the ‘tap-and-go’ principle, but the ‘tap-PIN-and-go’… no sign of it!

The only real link I found to movies or an example where a PIN is needed was a PIN code to access a certain application like the Google phone. In other words it was a PIN to access an application, like a key to unlock your wallet. I’m not saying this isn’t an important security measure, but it is not the authorization PIN for a transaction I was looking for. And in all honesty, if Google would only offer micropayments through their mobile wallet solution, than what is the use of linking it to loyalty and coupons, as most of the deals require transaction values higher then let’s say 15 dollar? So I was missing something in the business model…

After an hour I gave up searching and I took the easy way: I called up a colleague of which I was sure he would know the answer. The answer is more or less (for the MasterCard solution): ‘every PayPass-cards portfolio has a combined solution for micro- and macro payments, but it is never promoted’. He proved this with reference to the ‘PayPass M/Chip Acquirer Implementation Requirements’ on page 55. I quote the reference to the PIN (= CVM):

 “PayPass terminals must use ‘No CVM (Cardholder Verification Method) ’ for transactions equal to, or under, the Terminal CVM Required Limit when performing a PayPass—M/Chip transaction. Transactions above this limit must perform CVM processing as specified in EMV 4.1 Book 3.”

 The people who know me better probably can guess my next question already: ‘but why?’ and ‘how? On the demo you only see the reader most often and no option to add a PIN code?’

 Well, in reality it seems that 2 devices are most often combined in this contactless dimension (and not just one like you see in the movies). At least for the open loop system like the ones supported by for example Visa and MasterCard… concretely that means that existing POS terminals often get a software upgrade and an extra device, a sort of reader of contactless cards or phones, that is connected to the POS terminal. The software upgrade can relatively easy be done and is not too expensive. I’m told that the additional reader often require a tougher investment going from €100 for the cheap reader to €300-€500 for the better quality.

 The low value transaction follow a ‘tap-and-go’ principle in which the transaction can be processed EMV-compliant without a PIN code. The higher value transactions will require a PIN code for being EMV compliant. So you tap the mobile against the contactless reader and you type the PIN code on the POS terminal.

 I believe this investment for low value payments only is indeed a tough call for many smaller merchants, however if also the higher value payment can be accepted that way it is already possible to spread the investment over many more transactions (and transactions that support bigger sales).

So why don’t they promote this? A wallet has cards for low value payments, debit cards, prepaid card, credit cards… so why would I only look for micropayments in my mobile wallet? I wouldn’t! Someone like me would be much easier convinced if I knew I could combine several card options in my mobile phone.

And why don’t THEY promote these higher value payments? Well, I am told that the reason is the perception of convenience. Tap-and-go is only more beneficial due to the speed of making the payment, most companies seem to think. And when a PIN must be added the mobile solution would no longer be more convenient then the card solution, at least not faster for processing the payment. Thus, they don’t talk about it.

 I guess it is more a matter of how one defines ‘convenience’. My definition of convenience is at least a different one, in which the combined solution would add more value to me as more solutions could be combined on one mobile device.

Segmentation is Key: Also for Payment Institutions

Yesterday Chris Skinner shared a very interesting document published by Adkit, called “Retail Customer Segmentation in Worldwide Banking”. The idea behind the study is that since 2008 banks started to focus on the customers again for their growth (whereas before the crisis growth was generated through M&A).

So Adkit investigated how banks tend to ‘divide their customer base into groups with similar characteristics in order to provide value offers and sales offers which are effective and unique’. As you might guess some groups will be offered more effective and unique products and services than others. Segmentation is one thing, after the segmentations you get the profitability and the investigation of how much more costs could potentially generate more revenues. And that is where is becomes interesting for Payment Institutions (PIs).

In this paper I will not be talking about the underdeveloped countries where a huge percentage of the population is still unbanked, because that again needs a complete other ‘segmentation story’ than for the ‘bank-developed’ countries of course.

For a better analysis I would even narrow down the PIs, since you have, I think, in terms of products, 2 types of PIs:

-          New Products: the ones with brand new products focusing on customers with very specific needs

-          Substitute Products: the ones with substitute products of regular payment products like credit transfers, credit and debit cards or others… by far the biggest group I would say.

That being said, we can continue with this analysis. Of course the segmentation lessons in general are relevant for PIs as well, just like for any other sector/company. I assume this is always part of a go-to-market strategy. What can be argued is whether this strategy for PIs is often focused enough.

It is the latter group (of the Substitute Products) where it often goes wrong in my understanding. PIs often think that because they have a new product in the market, they will definitely attract enough customers from the mass market who will then again spread the word to their friends, etc, etc… and thus reach a critical mass. Many times this is proven to be wrong. Take for example prepaid cards in Belgium. Companies had a lot of arguments to get a prepaid card, but beside the high prices, they never targeted a specific segment. They tried to get any mass market consumer to become their customer. They see the advantages and they think that an online marketing campaign will make the difference. Of course they have segmented the market, but they didn’t go any further. They didn’t investigate well enough how these segment need to be approached, and if they need to be approached at all. I say it’s wrong, wrong, wrong…

So you need segmentation and you need to see which segments are already satisfied with a similar service and who is servicing them, and that brings us back to the presentation of Adkit! When you think of financial services, you think of banks. Banks offers most payments services. So now you see why segmentation in banking is so important in determining what segments to approach as a PI of the second category.

One of the conclusions of Adkit is that ‘service levels differentiate between segments:

-          Low profitability: no relationship manager, up to 2 contact per year

-          Mid profitability: relationship manager, 3-4 contacts per year

-          High profitability: expert relationship manager, 6 contacts a year along with a concierge service, available to customers at all times’

Now how do you think this ‘segmentation-service’ relationship would look like for the ‘Substitute Product’ PIs’? They would indeed be inversely to the one of a retail bank: the best serviced clients of a bank will likely go to the bank for payment services as well, and they will get the service they wish for. The ones who don’t hear a relationship manager are more easily convinced of substitute products and can often not get the payment services they wish. For example credit cards are a privilege for the ones with a higher income, that means that it low-income consumers do need a Visa or MasterCard (for let’s say international online transactions) they would need to chase a prepaid card, which has more or less the same payment service, except that the fund management is different (pre versus post funded).

Of course the fact that this ‘low profitability bank segment’ is less ‘drilled’ by bank relationship managers makes it easier for PI relationship managers to convert them to switch to their payment services. Customers unconsciously like to be approached for products that might be interesting for them, especially if it is new for them. If this doesn’t happen at the bank, then this should be the job of a PI and its sales network!

Segmentation is of course only the small first part of the exercise. After the segmentation, PIs will need to start investigating how to approach these segments, through which channels, with what kind of products, with what kind of arguments etc etc etc…

Chris Skinner talked in his introduction to the presentation about the names UK banks tend to give their segments:

-          Apples: mainstream customers

-          Lemons: students and underbanked

-          Pears: high net worth and mass affluent

-          Oranges: the die-hard oldies, retired and other with wealth but little income

For most banks the lemons are way too sour to do business with, however I strongly believe that it might exactly be that segment where many PIs should get their vitamin C to grow stronger! Oranges might also be very healthy and since the business in a PI is not based on loans or other low-term revenue streams they might also get under the radar of PIs that offer substitute payment products.

Thinking of Mobile: My Opinion on an Academic Paper on Mobile Payments

Last week Mike Wilkinson sent me a link to an article of the Review of Network Economics. The article ‘Mobile Payments at the Retail Point of Sale in the United States: Prospects for Adoption’ is a study by some researchers from Boston on the chances for success of mobile payments in the US. Must say I really enjoyed reading this 29-page academic article. And I am happy to share my point of view on it in italic.

Summary of Document (and my view on the summary)

For the researchers mobile payments are defined as ‘the use of a mobile phone to make a payment at a physical retail location, whether or not the phone actually accesses the mobile network to make the payment’. This means the person-to-person (P2P) payments are more of less out of scope in the study.

I personally think this a rather narrow scope, since for me P2P would be a true added value of mobile compared to cards. So for me having a feature to make P2P payments in a bar, for example, could convince me to use it at a POS as well.

Their conclusion is that there is no evidence that in the near term these kinds of payments will be successful. They see many more pilots testing the model in the market, but they don’t expect mobile payments will become true competitors to cards in the next 1-3 years.

Note that this article was written in 2010. We are already one year further and I still don’t expect this to happen in the next 1-3 years. They may start rolling it out by then but the widespread success… I don’t think so honestly.

Their insight in the market makes them believe NFC will be the winner in the mobile payments technology area. They also noted that using contactless technology in a mobile device does not require the device to use the mobile network. In that case a connection with a computer could make the synchronization in order to make payments. The benefit according to the researchers is that this implies that payments can also be made where no mobile signal exists and when battery power is exhausted.

Although I doubt synchronization can be done when the mobile’s battery is down, I see a very different interesting opportunity here: thanks to this the bargaining power of the telcos in the traditional mobile payments business model gets eroded. If an alternative for the secured element in a SIM card can be found through f.e. a micro SD chip there will be a shift of bargaining power in the existing classic mobile business model. This was new for me as I thought SD cards could only store data (although Ainsley Ward had already been blogging about this). This offers 2 main benefits for payments:

-          SIM cards no longer need to be modified to add an additional secured element

-          The payment app can easily be transferred from mobile to mobile and is independent of the subscription

The challenge for telcos in the mobile payments game will be to focus on added value through innovations and linking several services into one service offering and I think there are real opportunities. A link with a subscription for easier uploading of a mobile account will, for example, still be more easily by telcos then other companies that try to enter the market. Telcos have an infrastructure of transferring low values from one account to the other and so they could even be better positioned for this than true financial institutions. A next step to a prepaid cards program could then easily be made for a more integrated model for the consumer for small and higher value payments through a mobile phone.

Benefits of Mobile Payments (and my view on the benefits)

The next part elaborates on the benefits of mobile, it will not be a surprise they come up with following elements:

-          They are fast (not much faster than contactless card payments I assume)

-          For micropayments, where no authorization is required, there is a real potential to digitalize these transactions

-          Mobile payments an be made more secure (I assume this is more a US point of view and it can be argued that with the recent push of Visa to move cards to EMV mobile would really still be more secure than cards in the future)

-          The mobile device has the possibility to carry many card accounts. The researchers believe this could increase the competitiveness since the switching costs lower, as no new card needs to be purchased to access the new card account

-          Evans and Schmalensee (2009) believe the real gains will come from what they call the ‘technological mash-up’ of telephony and payments, and they speculate about a market for advertisements delivered to a mobile phone based on a consumers location and buying habits

-          Mobile could also be used to store personal information such as the driver’s license, making it a ‘fully enabled digital wallet’.

I believe that the only sustainable technology launch in the coming 3 years will be the payments related stuff. The initial focus will indeed be micropayments, although I think a mobile today is smart enough to ask for a PIN when needed, and in that case the use of the mobile payments technology could be extended to become a perfect substitute for a card.

The technology mash-up sure sounds awesome, and it will definitely come, but I don’t expect a big rollout of this in the coming years already. Some pilots here and there will show the opportunities of this technology, but privacy legislation might become an issue in linking personalized consumer profiling with location-based advertisements on a mobile phone.

For storing personal information on a mobile phone there is a very strict security policy and technology needed. I suppose at this moment it is still unclear what the standard will be for these kind of implementations. At first sight the SIM card could bring this solution. But the problem is that if the customer changes its telco relationship he also gets another SIM card, so how will these data be transferred then? Also note that if a government would like to support this method as the only solution for driver’s licenses or ID card, this would mean EVERY telco must support this on its cell phones.

Demand Side Barriers (and my view on these barriers)

They then continue with the demand –side barriers:

-          Costs: high cost to consumers and merchants to upgrade to new technology. Mobile phones as well as POS terminals might need an upgrade or replacement and that is of course expensive

-          Substitutes: low benefits because of the existing payment system. Cards offer the same functionalities in fact than a mobile phone for making payments

-          Network effects and two sided markets. The success of a payment solution is entirely dependent of the scale on which it is used. This is where most discussion starts: who must be convinced: merchant or consumer? Consumers don’t use it when merchants don’t accept it and merchants don’t accept it when consumers don’t use it! The so called ‘killer app’ could overcome this, where they give the example of Japan rail system.

The believers in the mobile technology can play with the first element I would say. By subsidizing the upgrades for merchants and/or consumers the investment cost could definitely be reduced. The authors also mention the SD card with NFC antenna as an alternative for an NFC enabled handset. This way consumers can buy a cheaper phone and only need this SD card to make payments.

The network effect in this business is another critical factor. The authors give the example of rail road system to show a good acceptance network can more easily convince consumer of joining the club. I agree with this, however it is important to note that this is in a closed loop system and that is totally different then the open loop, where the scale is much harder to achieve.

Supply-Side Barriers (and my view on these barriers)

The main supply-side barriers according to the authors are:

-          Negotiation costs: there are many stakeholders with all their interest and opinions. In those circumstances a consensus takes time.

-          Appropriability or public good nature of industry standards: the problem is mobile payments needs standardization but no company is willing to work on it, since it requires more effort than internal benefits. From the moment a standard is set new competitors would be ready to enter the market.

-          Lack of clear regulatory oversight and regulations: this is probably especially the case in the US where several governmental organizations have some kind of responsibility in the financial services sector, at Federal AND on state level.

-          Business model: the key elements here are according to the article customer ownership and price setting

I believe indeed all these arguments are very relevant. In the article they refer to the card-based system that offers more or less the same speed, convenience and acceptable security. This means for mobile in the short run they will need to find other arguments to convince consumers. That is currently the hard part. Most parties are convinces of the long term advantages, however they do not seem to find the true added value to shake consumers’ minds.

Concluding Recommendations (and my concluding remarks)

They listed following policy recommendation to make mobile payments work in the future:

-          Conduct quantitative research, including survey and market research, to estimate the potential value of mobile payments in the United States

-          Help to establish regulatory guidelines for security and privacy and to clarify oversight responsibilities

-          Facilitate coordination of industry-wide standards that ensure the continued safety, soundness and efficiency of the payments system by establishing a neutral setting where all the stakeholders can exchange ideas without concerns about collusion

Do I see a need of a performing American Payment Council here, such as the EU has been setting up? I think this will definitely help to get some standards established; however I think this will only be successful over the medium to long term (could be a prejudice based on the European example as well).

I assume the market surveys have been made already in the past by many different organizations, and they probably all have interesting insights in what the market is like. A better coordination between all these impacted organizations could definitely help to scale the market better. I also agree that a better insight in the different technical and organizational possibilities will facilitate a ‘best fit for all’. Just like in the cards game I assume at the end a couple of big players will remain and they will become the standard. Smaller players will try to break through via new solutions, or cheaper unit costs for customers (merchants and/or consumers), maybe even a new back solution (like direct debit instead of a card scheme for example.

For more information, again I recommend you to read the document, via this link.

Redefinition of cash

CEOs from Wincor Nixdorf and Giesecke & Devrient recently confessed that the annual spent on a global level reaches $300 billion for processing of cash. That is not a small cost of course… it is big business! Or let’s say a burden on business. In the LinkedIn group Innovation in Payments we have spent a lot of energy on this topic, about 130 comments! The discussion was ‘how to get rid of cash’. I guess the conclusion was more of less that we cannot get rid of cash. Via this new series of blog posts, I am going to try to give a summarizing view on this topic, with here and there a personal touch of course.

Key questions will be:

  • What is cash actually about? In my opinion is it not just coins and notes, in this post I will try to explain why.
  • Are there reasonable alternatives that might work? To replace cash? Or to disfavor cash maybe?
  • What can be done to decrease the cost of cash?

So what is cash? According to Wikipedia cash is, when referring to money, “the money in the physical form of currency, such as banknotes and coins”. No surprise I guess ;) . However it was not always cash and notes people used to pay with, although it also fits under the term ‘cash’. Wikipedia tends to elaborate on the history or a search item as well, and there we find that after the collapse of the Western Roman Empire the only form of money were coins, silver jewelry and hack silver.  The example of Asia and Africa shows that shells were for a very long time the common payment product. They were not only used for regular transactions within the African community but also in the international slavery business, making shell more or less an international currency ;) .

These examples offer valuable information on how to interpret cash. After all, history shows that from a certain level of development and standardization of society coins were produced, depending of the value and the culture it could be iron, silver, gold or another commodity. Later also notes were printed for making transfers easier.

The point that I want to make here is: which of these examples is cash? Should we only consider the coins and notes as cash? I tend to disagree. All these examples have a common ground, which makes me believe the definition of cash from Wikipedia should be narrowed down. They should stick to “money in the physical form of currency [dot]”, after all by completing it with “such as banknotes and coins” Wikipedia makes readers think cash would only be banknotes and coins.

However, if you ask me, cash is any form of value exchange between two parties that is generally accepted within a population and that can be exchanged anywhere, and anytime within the community where the payment method is used and acknowledged. In that sense cash transfers can be any transfers of values that fulfill the upper definition. That means also shells and other tools can be put under the denominator of cash.

I see two critical differentiators of cash compared to other payment methods: the first one is the time-and-place aspect, and the second one is the idea that it is a transfer between two parties.

The most important element is that it is a transfer between two parties! The payer offers a value to the payee without intervention of another player. To that extend it cannot be compared with a bank transfer, where the bank is the intermediary in the transaction. For a card payment it gets even worse: not only the payer, payee and bank are involved but also the scheme that owns the card brand intervenes in the transaction. Why this is so important is foremost the anonymity aspect: if no other parties are involved in the transaction there is no trace of the reason of transaction. That to be more concrete: the means a cash transaction can be made for any exchange, legal or illegal, black or white market, secret of non-secret. A card or bank transfer can always be traced back and the account statements will more often mention where the transaction is made and also why it is made (in a form of reference, free text for example).

Funny though the government keeps printing cash (at on average 8% in the euro-zone), but demands more and more transparency and traceability for non-cash transactions…

A transfer, a direct debit and cards can only be initiated under certain circumstances and often only at specific timeframes: when the payee has a POS terminal, of where a card reader and internet access is available, or simply in a bank branch of course. On top of that it is common use that it takes a couple of days before the money arrived on the payee account. The transfer is not a real time event, unlike an exchange of coins or shells for example.

The use of a card is dependent of the opening hours of a merchant for example and the credit transfer can only be initiated when the user has (a) access a laptop/PC with internet connection; or (b) when the bank branch is open. There is no anywhere/anytime principle for these payment products, while this is the case for cash.

Again this is nothing new in fact. However what this does prove is that by making card transactions more popular, the use of cash will not be eliminated! What probably might come closest to a ‘new are cash transaction’ is the peer-to-peer mobile transfer. It is indeed a new form of value exchange: the virtual currency. I am convinced that are likely to be (one of the) new forms of cash in the future, after the shells, hack silver, coins and notes. Unfortunately at this moment that is not yet the case, as not everyone has the technology to participate in this new way of making transactions. As long as that is not the case for me it is not yet a cash transaction. On top of that the scheme or brand behind the peer-to-peer transaction still acts like a third party. That is the second burden in this new way of making transactions… Unless the legal framework would offer the opportunity of keeping the transaction (to a certain extend) anonymous.

Examples like M-Pesa probably come closest to the new cash, where mobile is used for transferring cash. Shepherds can  easily pay with their mobile phone for a new goat for example, other will buy a new bike with their mobile, or food… Indeed, the mobile players act like the distributor of the value. However, the transactions are still quite anonymous. That is possible because the majority of payments are about low value payments. The anywhere/anytime principle still stands, as the money is ‘real-time’ transferred for the one mobile account to the other (it’s a real-time closed-loop systel). And because the network of mobile phone is more or less everywhere available, and 24/7, you can say also this argument holds ground.

The ones that acknowledge this as a new form of cash will often call the value exchange in the example above ‘e-cash’, or ‘m-cash’. However I do think that in the future these value exchanges will sometimes become a perfect substitute, and then e-cash and m-cash might simply be called ‘cash as well!