Financial institutions, established technology firms and start-ups are racing each other to create the mobile payments ecosystem of the future. However, these payments players should be working together and thinking in more ambitious terms than one-off novelties and limited disruption. Even Apple’s high-profile ‘alternative’ payments facilities, while using desirable hardware to create superior consumer experience, do not represent an advance in the underlying infrastructure of the payments ecosystem.
Banks need to reassert their role in mobile payments
Our vision for this ecosystem is a clear, robust, bank-driven model. It consists of only four parties – banks themselves, merchants, consumers and financial technology (FinTech) providers (as financial enablers). The prize is a scenario where banks and FinTech companies collaborate effectively and extend their businesses to create value for all participants.
Today, however, banks aren’t leading growth in the mobile payments space. They are in fourth place, behind ‘alternative’ payments providers such as PayPal, card networks and online brands including Amazon. Not only are banks not driving or shaping the mobile payments ecosystem, but their fundamental relevance in that ecosystem is threatened by the transformative capabilities of mobile commerce. Typically it’s the high-profile ‘alternative’ payments facilities that are rapidly transforming into major brands, eroding the established players’ market share and revenues along the way.
At present, payments channel models (including mobile) typically rely on a capability to solve unique, isolated problems and specific needs. They build their market profile through providing ‘single product-centric’ solutions – see the diagram below:
All the payments industry initiatives that have come to market rely on limited technology solutions. Once they have made their choice of channel infrastructure models (e.g. Near Field Communication/Bluetooth Beacons/Quick Response codes) they tend to stick with it. What they all have in common is obligatory interaction with financial institution-owned bank accounts. As the system functions today, this interaction cannot be replaced.
Enabled by banks, used by merchants, controlled by consumers and powered by FinTech
In our four-player mobile payments ecosystems, banks will remain the entity that own the customer’s current and checking accounts – as the primary accumulation point of funds from salary payments. Merchants will enable the mobile purchase and payment experience with their POS solution. Consumers will have direct control over the information they provide to merchants. FinTech partners will deliver the software and architecture required to run the payments environments, connecting the other three parties in the most efficient and effective way possible. A smart, cloud based payments network will be provided (as-a-service) and will add network based business functionalities. Pre-existing infrastructure elements will be put in place to build and implement a concept that is thoroughly tested and stable.
Merchants will also benefit from extended capabilities to reach their customers through analytics-driven, highly personalised loyalty schemes and incentives. These personal-touch points will be supported by immediate, mass-oriented in-store offerings. Tailored consumer use-cases, specific to the merchant business, can be enabled (examples include pay at the pump in petrol stations, pay at the table in restaurants and window shopping (buying goods displayed in a window space)). The use of mobile applications will support advanced analytics helping merchants to develop very highly detailed insights into their customers’ behaviour, in order to improve the consumer retail experience.
Consumers, at their discretion and always under their control, can earn incentives for granting access to their data. Importantly, payment information is no longer stored on a card or saved on the device. Instead, it is available in a secure, tokenised cloud environment - only the actual authentication process will be carried out on the device. At this point, the consumer can choose any convenient authentication mode from PIN, password, fingerprints or face recognition, enabled by their smart device. Even more secure methods will evolve over time and become available through a next generation of smart devices – ‘agnostic’ in relation to the underlying mobile payments ecosystems.
In the long-term, banks will evolve beyond their current role as sole infrastructure providers and payments collectors. The use of new approaches and increased IT capabilities will enable bank account-derived information to play a full role. Banks will share the benefits of increased information and richer customer data with network participants, enabling them to offer data services that will drive increased ROI. This model will be integrated into other lean and popular mobile services, acting as part of the larger payments ecosystem.
The starting point
Banks’ immediate priorities must focus on building an IT architecture to prepare today’s infrastructure for tomorrow’s challenges. This can be seen as a core banking ‘casing’ that will enable state-of-the-art connectivity and interoperability. It will introduce functionalities to support a real-time-based mobile payments environment. To support operations during change, it will keep the current core intact, handling core/system replacement or decommissioning at a later stage.
The renewed payments infrastructure, propelled by the key actors operating in unison, will see a single, holistic environment for consumer convenience and enhanced retail benefits begin to emerge. Fragmented solutions will evolve into a cohesive, digitised, value-adding customer experience. Outmoded high-cost payments processing will be replaced by ultra-low-cost industrialised handling. Banks will take on a new role as ‘insight aggregators’ and innovation facilitators.
The bottom line
Convenient mobile payments with real consumer appeal, along with other innovations, can be directly enabled using new technology - these will be adopted at speed by the market. Mobile payments, and the wider payments market, can now ‘think big’ in terms of payments potential and innovation. We are talking about complete and positive transformation, through system-wide interoperability. It’s a bold vision, but we believe it can be a reality. And we have the technology to make it happen.
By Bernd Richter, Partner, Capco