SIX Card Solutions - Mobile and contactless: the reality behind the headlines

By: Emil Büchler Managing Director, Head of Cards SIX Card Solutions The way consumers and businesses want to make payments has evolved considerably over the past five years. Convenience, speed and security have become the defining features of payments in the modern world. As a result, these drivers are leading to new and innovative payment …

April 7, 2011 | SIX Financial Information

By: Emil Büchler
Managing Director, Head of Cards
SIX Card Solutions

The way consumers and businesses want to make payments has evolved considerably over the past five years. Convenience, speed and security have become the defining features of payments in the modern world. As a result, these drivers are leading to new and innovative payment channels becoming available to us today. In this article, Emil Büchler, Managing Director & Head of Cards, SIX Card Solutions, looks at the issues surrounding innovation in the payments landscape.

Making the distinction

There is much hype at present over new and innovative payment methods, specifically around mobile and contactless. However, before examining the issues surrounding them, the two channels need to be differentiated. Mobile technology is developing at a rapid pace, evident by the growth of handsets like the iPhone and devices with Android interfaces. With new mobile phones coming equipped with chips that enable cashless payments, these convenient and user-friendly devices have the potential to take a significant share of the payments market. Forecasts by Juniper Research estimate that the market for mobile payments is expected to quadruple by 2014, reaching £390 billion in value, which equates to 5% of the total e-commerce sales worldwide.

Moving on to contactless, also known as Near Field Communication (NFC), this is the technology that enables your mobile phone to become your wallet. Having been around for several years as a proven solution that has been rolled-out in some parts of the world, it is not a new technology and so it can be argued that it is no longer an innovation. What is ground breaking though is the development of NFC to make payments possible via mobile phones. This advancement has led many to believe that this will be the year NFC breaks through into the mainstream.

Obstacles preventing adoption

However, there are certain issues that remain around these emerging payment channels which could hinder their growth. When it comes to contactless, the security issue is one of the most pressing concerns. With banks claiming they are not liable for the identity theft that RFID (Radio Frequency Identification) cards can encourage, certain customers are avoiding this type of payment, as they are unsure as to when the payment is complete. Furthermore, you still have some consumers who prefer to use cards with a PIN code or even to pay with cash, as they do not trust cards altogether so contactless is clearly not for them.

However, for those who embrace usability and convenience, this is a suitable product, as they can use it to pay for everything. This segment is typically the younger generation. It has been argued that demand has been poor due to the system’s security issues.

However, I disagree. The general target group and overall demand is segmented in different customer types. These are split between the younger generation, in most cases the early adopters, and others, the more security-conscious types. Another issue around NFC is that the further enhancement of the contactless technology has been delayed and it is taking companies copious amounts of time to push through this development. The technology is available and usable, but not to a wider audience yet. The issue here is the basic function, as in the infrastructure for various partners. It is not only merchants that need to make the investment into accepting contactless payments, but also banks with issuing the NFC enabled cards. The encouragement for implementation and promotion of contactless is essential if it this technology it to make its mark.

The problem with payments is that innovation takes time because nobody is willing to invest millions in the hope that there will be a demand – especially when there is a successful, working business model such as cards payments. For example, it took 15 years for cards in Switzerland to make the break-through as a general payment method that could be used anywhere. With contactless, the demand is in progress and investments are being made step by step. There are card schemes and a minority of issuers that are making combined efforts to raise the benefits of contactless solutions in order to stimulate awareness and uptake among consumers. But overall the business model and processes around contactless, as say with a credit card, are not there yet as it is still an emerging field. Many companies in the cards and payments business have tried NFC pilots, but there has been a lack of further development. As a result, it has been claimed that contactless has had limited success so far. However, the talk that this field is of interest to Google and Apple is not just speculation. I believe that it will be included in their sales processes and selling services and technology as this is a young innovation that is technology driven, so it is companies like Apple and Google that will drive this technology.

Success going forward

The mobile space is where contactless can enter a new generation. In order for mobile payments to win recognition, credit card companies need to embrace this technology and provide solutions for mobile phones. Another requirement is the support of the merchant by restocking their registers with contactless terminals. For example, over 65,000 merchants in Switzerland will need to make that investment. This has partially been implemented already, as the NFC-chip has already been applied to some credit cards. Other countries, such as the US, Japan, Turkey and the UK, have also begun establishing the infrastructure.

While the technology has matured, the business model and processes around these advancements have not been able to keep up, as various mobile contactless pilots have shown so far. For example, if a customer loses their payments-enabled phone, their point of contact is still not clear; is it their network provider or bank? Questions about who owns the customer still remain. There are also technical hurdles to overcome when looking at mobile payments, with the industry still awaiting one common standardised SIM card that can perform both telephony and payment functions and be accepted by all handsets. Furthermore, who will issue this SIM? Striking an agreement between the key parties in the value chain such as card networks, issuing banks, merchant service providers and retailers over the issue of commercial fee structures is no small feat. All in all, there is still a lot of clarification and progress needed in the mobile payments area, with regulation from the various European payment bodies much needed but yet to be thrashed out.

The payments industry has invested heavily in security improvements over the last few years but with mobile and contactless, convenience has become the main focus. So the question is now, is it security or convenience that counts? I believe it is a combination of both. Once we can address the security concerns around contactless and mobile payments, then demand for this convenience will grow and transactions will become faster going forward. Whether these payment methods become widely adopted is debatable but there certainly will be a market for them. When that market will come to fruition is only a matter of time.

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