Or why Banks are REALLY scared of mobile payments
For me, mobile payments began back in 2000 in the innovation area of MasterCard. Using an Ericsson R380 mobile, and a server-based wallet in conjunction with the SET protocol and possibly the most expensive data connection known to man, we tapped our stylus and paid for an item a little under three minutes (yes, minutes). This was the future, this was the next big thing.
Here we are now, almost 13 years to the day and mobile payments are still the ‘next’ big thing. There’s been a lot of issues getting mobile payments into the mainstream – some of which are to do with a lack of a strong consumer offer. Some recent initiatives looked promising – the Six Pack in the Netherlands, a similar Belgian initiative, Oscar in the UK, ISIS in the US – but none make it past commercial pilots or more often the initial talks. Part of the reason is that there are a number of misconceptions about the payments world, which mobile players trying to enter the market naively accepted as truth – not in the least helped along by regulators claiming that the payments world was awash with transaction revenues.
Take for example a 100 EUR transaction made with a credit card in Belgium. It will cost the merchant around 2,20 EUR to accept. This fee is the Merchant Service Charge which is composed from the Acquirer’s 3-4% margin plus fees to cover all other aspects of the transaction, which are passed through to other players through the transactional model. The most visible of these is interchange – which is a balancing fee sent to the Issuer of the card to compensate them for providing the card and account to the cardholder. In our example this results in a net revenue for the Issuer of around 90 cents. From the money that they receive, they will fund transaction processing – either on internal systems or more usually today with a third party processor such as SIX card, ATOS or First Data. The cost for this would be around 6,5 cents per transaction. This leaves the Acquirer with around 60 cents revenue to pay their costs and provide margin.
However, all three of these entities will then pay a substantial fee towards the payment scheme – typically MasterCard or Visa – which amounts to around 65 cents in our model. Proposed European legislation on interchange will reduce the Issuer’s revenue to 0,2% of the transaction value – a cut of around 70 cents in this model. However, it is unlikely that the Merchant Service Charge will reduce by this amount.
Recent years have also highlighted the continuing issues that Banks have with customer intimacy, lost during years of increasing automation of Bank process rather than customer engagement (here) yet they retain a reluctance to allow others to provide that intimacy. A word that is used often in the industry is ‘disintermediation’ – which means someone else getting in between them and their customers. It created such a fear in the industry that rather than co-operate, they do other silly things. MasterCard was so terrified of new wallet players that they imposed a fee on funding transactions for deported wallets that isolate the banking world from the actual commercial transaction (and the data that goes with it). This includes people such as Google, ISIS and PayPal.
In reality though, PayPal gross transaction value accounts for only 60bn USD of the estimated 30 trillion USD made in credit and debit card transactions each year, equal to roughly the transaction value in Belgium. The banking world is in reality more fearful of the public perception of PayPal than the reality of it.
Alongside the interchange regulation and a raft of other changes, Europe’s legislators are creating an entirely difficult environment for payment innovation. As well as investigating conglomerates such as the Dutch six pack, the law makers and regulators are also making it particularly difficult for new entrants to obtain the licensing that they need. This puts the brakes on new payment providers once they reach critical mass. Payments is profitable, but it’s hard to enter new markets and harder to get REALLY big. Even players like Google, who have a banking license, have found this a difficult playground.
The key seems to be to stand the current model on its head and forget transaction revenues altogether. In the transaction acceptance world there has been a successful and silent mobile revolution. Although it’s been driven by technology of plugging a device into a mobile phone to create a mobile POS, the revolution was actually in the business model for cards acceptance. Non traditional players such as Twitter’s Jack Dorsey (as Square) and iZettle’s Jacob de Geer and Magnus Nilsson have redefined the market by creating services designed for previously unserved merchants.
In Europe today, 20 million companies do not accept card payments. “These companies are small in terms of turnover, typically they have between 1-3 employees,” stated de Geer in a recent speech. “Accumulated they account for 20 percent to 30 percent of GDP in any European market”.
The reason for this lack of card payments is simple: it’s too complicated. The barriers to becoming an acceptance point are too high. Merchants face complicated applications, fixed fees, long-term contracts and high monthly fees.
But these companies approach the business differently – viewing the transaction as a commodity and seeing the importance in customer experience and the value that can be derived from the data generated by the system. Square is able to know what flavour of pizza is most popular at 3am in the New York Village and can sell that information to a Domino’s franchise looking to open a new store. This is the new reality, payments are now a means of gathering information on transactional behaviour and the costs typically attributed to payments need to be reallocated based on value.
PayPal recently launched PayPal Beacon, a device that works with the PayPal mobile app as a user enters a store and pre-authenticates them at the cash register – giving the merchant a photo if wanted and supplying details on past purchases. This means that there is not even a need to implement NFC to get mobile moving.
Banks are ill-equipped to do what PayPal does. If the future of payments is profit from data, then this suggests that Banks are not currently the future of payments. A Clear2Pay survey in conjunction with Finextra earlier this year showed that over 75% Banks do not currently have the resources, staff or knowledge to deal with the big data that they realise is incredibly important. In short, they are not able to change at the pace the market demands.
This is a space where they need help – and are potentially willing to share revenues to support it – yet after a number of headline failures in banking-telecommunications initiatives, third party appetite may be waning.
Ultimately, the winners in mobile payments will be those that bring real value to Consumers, solve the Banking issue with Big Data, lower costs for Merchant Acceptance while pleasing the Regulators and becoming profitable.
It’s that simple…
- PayPal most trusted and private, Apple most innovative in new mobile wallet study (venturebeat.com)
- Is a Smartphone Credit Card Reader Right for Your Small Business? (staples.com)
- Mobile Payments – Two Major Systems Set To Go In The US (business2community.com)