Introduction
At the latest iPad launch event, Apple CEO Tim Cook announced that we have now entered the post-PC era. Apple sold 172 million "post-PC" devices last year (including iPods, iPads, and iPhones), which represented 76% of Apple's revenue.1 When you consider how much longer Apple has been selling PCs, the rapid growth of post-PC devices is undeniable. Largely due to this growth spurt, post-PC devices have disrupted the music, book, personal-handheld gaming, and indeed the high-tech industry itself— and we expect it to disrupt other industries as we know them today.
When post-PC era and payments collide
The escalation of mobile has begun to impact financial services (FS) companies, and is changing the way we think about payments. In PwC's October 2011 FS Viewpoint entitled, "Dialing Up a Storm," we discussed the mPayments industry in its infancy. Since then, the dynamics of the industry have continued to evolve. While a dominant player has not yet emerged, and consumers have still not widely adopted mobile payments, new developments have occurred, providing a glimpse of the future:
- Cloud-based processing is becoming a popular alternative to Near-Field Communications (NFC).
- To better compete, we see top retailers forming their own payment networks.
- Increasingly, traditional FS players are acquiring or forming partnerships with emerging market firms.
Each of these developments has its own significance; collectively, they convey that traditional players are at risk of losing out on new growth opportunities if they don't take action now. Today, we identified four themes—technology, adoption, competition, and non-traditional opportunities—that impact the evolution of mobile payments and shape how players should respond.
Inactivity carries a high price tag
"There are risks and costs to action. But they are far less than the long range risks of comfortable inaction." –John F. Kennedy
Given the immaturity of the space and its inherent risks, FS players have been cautious entrants. While they currently have tangible advantages—and, as we see it, the battle is theirs to lose—it is imperative that they adapt to the changing environment, remain open to collaboration, and be receptive to different technologies. The 20 billion-dollar prize is still up for grabs, but the question remains: who will win it?
Trend 01: Technology
Keep an open mind
Location! Location! Location!
The critical distinction among NFC, cloud- processing and 2D code technologies lies in where payments information is stored, in that the storage location determines the number of players involved in making a transaction possible.
Mobile network operators (MNOs) that heavily subsidize mobile phones prescribe what hardware goes in or doesn't. Recently, a leading US telecommunications provider declined to partner with Google Wallet, which leverages NFC technology, preventing Google from installing a "hardware element into the Telco's phones." 2In contrast, cloud processing, which does not require local storage of payments information, can bypass MNOs. In contrast, by leveraging 2D codes, Starbucks was able to launch a successful mobile offering without involving other players.
Cloud processing—increasingly popular
While this technology is young and some share doubts about its security and scalability3, we have seen innovators deploying solutions via cloud processing, sans NFC. Google, for instance, has adopted cloud processing to allow users to use cards issued by any of the major payment networks.4
ISIS, a joint venture among several MNOs, has said that, because NFC does not permit multiple apps to communicate with NFC adoption by both consumers and merchants, it too is considering cloud-based storage of card data.5
On the other hand, the adoption of NFC by consumers and merchants has been slow. Less than 3% of smartphones are NFC enabled today.6 Payment networks are mandating EMV rules and providing incentives for merchants to upgrade their POS devices, thereby laying the groundwork for NFC.7 But given the hardware technology hurdles, both from a terminal and device enablement standpoint—we expect lower adoption of NFC than market experts predict.
One size does not fit all
Previously, it was the financial institution that determined which technology to use. These days, no one player has enough power to determine what the technology should be. That makes investing solely in one technology or another a risk. As we see it, the comingling of multiple technologies is a more likely path to mPayments adoption. Successful players are not only open to partnership options, but they also receptive to different technologies.
Trend 02: Adoption
Success lies in the value proposition
According to our internal research, only ~5% of smartphone owners used their phones to pay for goods or services at the POS. Yet over 50% of consumers show interest in using their mobile phone as a debit/ credit card.8 In comparison, the market has not been able to deliver tangible merchant interest to complement that of consumers.
In services we trust, so where's the value?
According to our internal research, consumer value-added services will be more important than payment transactions in driving adoption. The success of iPhone is a great example. While every mobile phone predating iPhone could make calls, iPhone's success stems from its applications, value-added offerings, and intuitive user experience. Likewise, the success of mPayments will be less about payment processing and more about added value.
The easier the experience of your digital wallet, the more your service offering will stand out in a sea of competing mPayment options.
Looking beyond value-added services, customers want a simple experience that brings a wealth of offerings in a unified and cohesive manner. Two examples:
- American Express pioneered a seamless integration of offers and loyalty from the online world, offering it at the physical point of sale.
- Apple released an app called Passbook that aims to store items such as boarding passes, movie tickets, and gift cards in a simple manner. By focusing on value-added services and finding merchants to come on board first, Apple will not only be in a great position to drive customer adoption, but also to negotiate with payment providers.
The classic question—chicken or egg?
So, what comes first? How do we increase consumer adoption when there is no merchant adoption—and vice versa? First and foremost, merchants are looking for a simple and affordable way to process card payments. Ultimately, they want to improve customer intimacy—likely through targeted ads, analytics, and loyalty. But, due to high costs, uncertain control over customer data, and shifting standards— merchants lack clarity on where and when to invest.9,10 And consumers won't value mPayments capability if it cannot be used daily and if it does not offer incremental value over plastics.
Players need to design the right bi-directional value proposition with a focus on creating a cohesive experience instead of forcing solutions that do not meet merchant and consumer needs.
Trend 03: Competition
Mobile–dialing up intense competition
Competition over data, margins, interchange and customers—heating up!
Mobile allows innovators interested in growing other revenue sources, such as advertising revenue, by capturing users' offline transaction data and pushing ads even when customers are shopping offline. Merchants now have a means of connecting to customers without first building a 16-digit, plastic-based payments network or having to relinquish customer ownership. This puts traditional FS players in a tough position. With their customers no longer dependent upon credit cards as a payment option, they fear losing the control that they have until now.
Traditional players beware—merchants are entering the fray
In "Dialing Up a Storm," we said that the likelihood of a retailer-led model was high and that a retailer model would soon emerge. Recent WSJ articles confirmed our hypothesis, reporting that Wal-Mart, Target and a dozen other retailers are cooperating to create their own payments platform called the Merchant Customer Exchange (MCX).
Merchants need only focus on selling their solution to their consumers, and need not be concerned about both sides of the market. If an mPayments network were to result from these collaboration of retailers with their combined annual revenue of $1.38 trillion dollars—we anticipate that it would adversely affect interchange revenue for traditional players.11, 12 Not only could retailers use cost savings from interchange to make their offering more attractive to consumers (via discounts and coupons), but they could also steer consumers' payment choices. But, first they will need to resolve the inherent complexities of starting a payments network.
The market-entry door swings wider
Once available only online, alternative technologies are now available for offline use.
Cloud. On one hand, cloud processing enables institutions to devise their own digital wallets; on the other, it lowers the barrier to market entry for non-traditional players, thereby raising the competition to a higher level. A focus on creating a positive customer experience and offering innovative value-added services is now required.
Account-to-Account (A2A). Real-time A2A settlement creates an alternative network where money can change hands. With the advent of products such as Dwolla's FiSync, A2A is now becoming a reality.13 While such products are untested, they pose a threat to the traditional ecosystem. Clearly, given their existing interchange revenue, banks will be resistant to the use of alternatives. But sufficient pressure or attrition from customers could force a change. For instance, merchants are bound to leap at the prospect of lower transaction fees.
Despite these threats, we believe that traditional players still hold the incumbent advantage. But inactivity is not an option. First-mover advantage is waiting to be seized.
Trend 04: Non-traditional opportunities
Untapped potential in emerging markets and the "left-hand side of the wallet"
We see three new value streams yet to be tapped—small-ticket cash conversion, mobile commerce fees, and existing revenue streams at risk, such as interchange and interest income. Taken together, these add up to $20B of potential revenue at stake for FS players. In addition to these "organic" growth opportunities, we also see two "inorganic" or non-traditional growth areas for those seeking to extract the most value from this space.
A number of factors are working to create the perfect storm for mPayments adoption. 1) 85% of all retail transactions today are still funded via cash or check14 and 2) according to our internal research, ~2.5 billion people will have mobile phones by 2015 and have limited or no access to banking services or payments offerings.
Emerging markets = untapped potential
In some developing markets, mPayments are commonplace thanks to person-to-person products such as m-PESA that facilitate money movement without the use of financial institutions. Over the past five years, m-PESA has rapidly grown in Kenya to 15 million customers and 37,000 banking agents –a sign of times to come.15
Emerging markets FS needs are basic: money transfer and secure storage—representing significant opportunities for US issuers and networks looking for growth to extend their prepaid expertise. For example, payment networks have made significant investments in emerging markets.16 According to the World Bank, 68% of Kenyan adults used mobile payments services in the last 12 months.17 Traditional FS players should view mPayments as a low-cost, high-efficiency entry point to acquire and partner with companies throughout the value chain.
Look to "the left-hand side of the wallet"
That's the term we use to we refer to value-added services. Take a moment to visualize your physical wallet. Your credit cards and cash are in one compartment, while other compartments (the left-hand side of your wallet) hold driver's licenses, health-insurance cards, and loyalty cards.
The content of the wallet's left-hand side will soon be digitized. And when that happens, we anticipate rapid proliferation. We believe that these value-added services will drive the adoption of mPayments—paving the way for services that manage accounts, offers, credentials and identities via trusted mobile-security players.
Since we estimate that left-hand-side opportunities will rise as high as $3 billion over the next three years, it will pay to integrate them so as to provide a simple and cohesive customer experience.
Trend 05: Security
Major concern for consumers, major opportunity for players
Over 63% of consumers surveyed indicate mobile payments security as their greatest area of concern.18 As mobile payments become more popular, mobile payments providers will need to reduce identity theft and mobile application security breaches. However, mobile payments security is complex due to the number of players (and systems) involved. A network is as strong as its weakest link. Fraudsters will seek the path of least resistance. We anticipate that regulators will intensify their focus on data protection in years to come.
On March 22, 2012, the Congressional subcommittee on Financial Institutions and Consumer Credit hosted a hearing titled "The Future of Money: How Mobile Payments Could Change Financial Services." This was one of the first meetings hosted by Congress on the topic, and expert panelists ranging from the Federal Reserve to industry participants (MasterCard, PCI Security Standards Council (PCI SSC), Smart Card Alliance) were brought in to explain the basics of mobile payments and address concerns.19 Chief among the concerns of many congressmen were questions surrounding security. Today, according to PCI SSC, mobile payments security can be differentiated into two categories. 20
- Merchant acceptance applications where phones, tablets, and other mobile devices are used by merchants as POS terminals in place of traditional hardware terminals
- Consumer facing applications where the phone is used in place of a traditional payment card by a consumer to initiate payments
Notably, the PCI SSC has only been concentrated with providing requirements and guidance to the first category – securing the use of mobile devices as a point of sale acceptance tool. However, as for the second category of applications, there are no regulators, forums, roadmaps, or industry standards that wallet providers can refer or adhere to. 21,22 We believe this will change in the coming years, and as mentioned earlier, represent a potential area of growth for trusted mobile security players.
How to protect your valuables
When it comes to mobile payments security, the focus needs to be on holistic solutions and not regional ones – meaning an assessment requires an end-to-end partnership and incorporates all the hardware and software involved in conducting mobile payments.
Mobile payments providers should focus their priority on protecting their most valuable assets and data and creating scenarios to defend this information. They will also need to invest in periodic independent security assessments and have the ability to make instant updates when needed.
Too often, companies do not make sufficient investments in security until it is too late. Investments in ongoing security infrastructure assessment, consumer education, and a zero-liability policy with fraudulent charges, will need to be ongoing to ensure that mobile payments is safe and perceived as such.
Implication for players
The question FS players should ask is not whether they should play. Given the rapidly changing technological environment, their increasing risk of obsolescence, and the growing mismatch between the FS world and its surrounding environment, the answer is clearly "Yes." The question that FS players should be asking themselves is "How should we play?"
Disruptive products such as m-PESA are dis-intermediating credit cards, attracting both unbanked and under-banked customers, and beginning to match the capabilities that credit-card networks offer. And, while consumers and governments tend to trust traditional players the most with money movement, institutions should not take their status for granted. In today's post-PC era, both traditional and non traditional players must continue to innovate and invest, or risk getting left behind.
Investment alternatives for consideration
In planning for an uncertain future, consider these three investment bets: 1) All-in bets: High risk, high reward investments, 2) Hedging bets: Bets meant to create multiple options, and 3) No-regret investments. At a minimum, we recommend adopting the last two strategies.
So, what else should you do right now? Here are recommended actions for...
Issuers. Place multiple bets in the market and partner with viable mPayments ventures as early as possible. Focus on critical drivers of differentiation, e.g., customer experience, value-proposition design, and analytics. Differentiation and positive customer experience will become increasingly important as mobile reduces customers' switching costs and simplifies the process.
With a suite of offerings such as debit, credit, prepaid, line of credit, home equity, full service banks have an advantage over other players who cannot yet offer comprehensive banking services.
Smaller banks should consider forming inter-bank coalitions to match the scale and network effect that national players bring. Smaller players also have the advantage of local reach, allowing for collaboration with local merchants and customers.
In addition, issuers should invest in scalable and nimble technology infrastructure to facilitate the range of required partnerships.
Networks and associations. Networks are in an advantageous position to replicate their current role in the payments ecosystem as platform providers, but they need to make high-risk bets. Invest in small firms to develop and test disruptive innovations with the aim of defining the future ecosystem while becoming consumer- and merchant-centric.
Acquirers/processors. With card processing at risk of becoming a commodity due to non-traditional players and new technologies, processors should consider options for reinventing their offerings and offering more value-added services. Moreover, they should leverage their background as neutral enablers to facilitate the evolution of the ecosystem by playing such roles as trusted service managers or platform development managers.
Alternative payments providers. In the near term, alternative players will continue to depend on traditional players for payments processing. But they can, and have, been successful in filling gaps or simplifying processes.
Surveys have shown that alternative providers are usually not trusted with money. Thus, they need to deliver "above and beyond" differentiators such as value and convenience. By leveraging their agility and culture of innovation, start-ups only have room to gain by delivering rich, bi-directional value propositions.
Footnotes
1 Liz Gannes, Post-PC Apple, By the Numbers, http://allthingsd.com/20120307/post-pc-apple-by-the-numbers/, March 7, 2012
2 Chris Foresman, Verizon filching Google Wallet from US-bound Galaxy Nexus, http://arstechnica.com/gadgets/news/2011/12/verizon-filching-google-wallet-fromus-bound-galaxy-nexus, Dec 6, 2011
3 Andrew Johnson, Visa executive slams PayPal in-store service http://www.marketwatch.com/story/visa-executive-slamspaypal-in-store-service-2012-02-15 , Feb 15, 2012
4 Tricia Duryee, Google Wallet Now Supporting Multiple Cards, Like, Um, a Real Wallet, http://allthingsd.com/20120801/google-wallet-now-supporting-multiple-cards-like-um-a-real-wallet/, August 1, 2012
5 Ryan Kim, GigaOm, Isis takes the slow road to mobile payment success, http://gigaom.com/2012/04/06/isis-takes-the-slowroad-to-mobile-payment-success/, Apr 6, 2012
6 PwC Internal Research
7 Visa. Visa Sets U.S. Acquirer Process Mandate for Chip Transaction Processing, http://usa.visa.com/download/merchants/bulletin-us-acquirer-mandate080911.pdf, Aug 9, 2011
8 PwC Internal Research
9 Robin Sidel, WSJ, Retailers Join Payments Chase,
http://online.wsj.com/article_email/SB10001424052970204571404577255261085314318-lMyQjAxMTAyMDAwMTEwNDEyWj.html, March 2 2012
10 NFC Times, Best Buy Fears High Costs and Shared Data in Move to NFC Wallets, http://nfctimes.com/news/best-buy-fearshigh-costs-and-compromised-data-move-nfc-wallets , Nov 10, 2011
11 Robin Sidel, WSJ, Retailers Join Payments Chase,
http://online.wsj.com/article_email/SB10001424052970204571404577255261085314318-lMyQjAxMTAyMDAwMTEwNDEyWj.html, March, 2012
12 Robin Sidel, Payments Network Takes On Google,
http://online.wsj.com/article/SB1000087239639044404270457758952309433682.html , August 2012
13 Dwolla FiSync – Financial Institutions See A Future Beyond Plastic and it is Dwolla., http://blog.dwolla.com/dwollafisync/, March 26, 2012
14 Ed McLaughlin, Prepared Remarks for ―The Future of Money: How Mobile Payments Could Change Financial Services, http://financialservices.house.gov/UploadedFiles/HHRG-112-BA-WState-EMcLaughlin-20120322.pdf, March 22, 2012
15 Business Daily, M-Pesa drives innovation five years after launch,
16 Visa, Visa Acquires Fundamo, Signs New Agreement with Monitise, http://corporate.visa.com/media-center/pressreleases/press1128.jsp, June 9, 2011
17 World Bank, Measuring Financial Inclusion, http://wwwwds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2012/04/19/000158349_20120419083611/Rendered/PDF/WPS6025.pdf, April 2012
18 PwC Internal Research
19 United States Congress Committee on Financial Services, Hearing entitled ―The Future of Money: How Mobile Payments
Could Change Financial Services, http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=284912, March 22, 2012
20 Troy Leach, PCI Security Standards Council, Prepared Remarks for ―The Future of Money: How Mobile Payments Could Change Financial Services, http://financialservices.house.gov/UploadedFiles/HHRG-112-BA-WState-TLeach-20120322.pdf, March 22, 2012
21 Darin Contini, Marianne Crowe, Cynthia Merritt, and Richard Oliver, Federal Reserve, Mobile Payments in the United States: Mapping Out the Road Ahead, http://www.bostonfed.org/bankinfo/firo/publications/bankingpaypers/2011/mobilepayments-mapping.htm , March 25, 2011
22 Richard Oliver, Prepared Remarks for ―The Future of Money: How Mobile Payments Could Change Financial Services,
http://financialservices.house.gov/UploadedFiles/HHRG-112-BA-WState-ROliver-20120322.pdf, March 22, 2012
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