An earlier blog, The Runaway Mobile Payments Train, likened mobile payments to a train leaving the station and gaining momentum. US banks and other financial services institutions (FI) must be asking themselves if they are on the train or being left behind. This is the first of several follow-up blogs considering key elements of the equation regarding whether FIs will be winners or losers as mobile payments gains critical mass and becomes a huge revenue producer. These blogs will explore opportunities available to FIs, advantages FIs have over other players in the market, disadvantages faced by the FIs, and risks and challenges FIs must overcome to become winners in this space.
At this time, only the largest banks are significantly investing in mobile payment capabilities. Most are entering broad partnerships, spreading risk and testing merchant and consumer preferences and tolerance. A few smaller institutions are piloting solutions with existing technology partners. Considering the quick pace of technology advancement and industry uncertainty, these are the right plays for banks and credit unions. Major decisions and investments should be withheld until consumers, retailers, and regulators make the critical decisions that will determine where the industry and technology go.
While major investments can be postponed, it is imperative financial institutions of all types and sizes learn about mobile payments and begin considering future strategy.
The first topic to be explored in this series is technology. Financial institutions are at a disadvantage because they do not control the technology and are not as technically savvy as other players. Early entrants – PayPal, Google, and Amazon – are superior technologists and the cellular carriers, along with the credit card associations, control the communications and processing networks. Financial institutions must be conscious of this disadvantage and apply resources to take advantage of other strengths.
It is likely that mobile payments will utilize multiple technologies, each offering benefits to stakeholders. Point-of-Sale technologies will include SMS (text), WAP (wireless), and NFC (Near Field Communication). QR Codes are, and will continue to be, an element of WAP, and possibly other, solutions. Financial institutions must understand the features, benefits, and limitations of each of these. Below is a synopsis of each.
Premium SMS (text) based transactional payments
- Prevalent in Europe & Asia but is being replaced by Mobile Web Payments & Direct Mobile Billing
- Not reliant on co-location
- Used by PayPal, currently largest US Mobile Payments processor
Mobile web payments (WAP)
- Dedicated web page or application, possibly leveraging QR Codes
- Merchant investment is small; popular with micro-businesses
- Used by Starbucks, Square, and other countless other solutions
NFC (Near Field Communication)
- Smartphones or similar devices communicate by touching or close proximity
- Based on RFID standards
- Requires new hardware for most merchants
- Starting to be used in Japan; Europe using to pay for parking
- Appears to be preferred technology for evolving leaders
- Used by ISIS, Google Payments, and card association solutions
- User-specific QR code, probably used in conjunction with two-factor identification
- Used by Starbucks, with huge success
Transaction facilitation solutions will prominently leverage existing cellular networks. The existing card association and ATM networks will also be utilized. It is possible that NACHA, or a new and improved version of NACHA, will provide a low-cost transaction enabler. Digital cash, such as Bitcoin, is a threat to the financial services industry's significance in the mobile payments marketplace. But, regulatory modifications will likely weaken digital cash's future.
In the next few years, all these technologies will play some role in the mobile payments market because each provides unique benefits. In the long-term, innovation may produce a POS technology and network that provides the best of all alternatives, and a common solution will emerge, much like credit card and ATM technology in previous generations.
Smart phone and tablet technology advancements are moving at the speed of a bullet-train. Some solution providers are offering break-through technology solutions (if interested in an example, learn more about Dwolla). Factors to be discussed in subsequent blogs, including the regulatory environment, will greatly influence technology decisions.
Return to the CapTech Blogs site next week for a discussion about mobile payment partnerships.