By George Peabody

The mobile handset and the lifestyles it enables are now deeply embedded into the world’s social DNA — particularly for those under 30, the future customers of financial institutions and service providers. As a result, the industry is accelerating the mobilization of financial services. In a decade, there is every likelihood the mobile channel will become a routine — if not predominant, channel for financial services.

Recently, mobile banking has been a hot item for the marketing leadership and channel managers of nearly every financial institution. Now, the discussion is beginning to shift toward the future phases of mobile payments, including the role of near-field communication-based handsets. However, this hard focus on a hardware-based technology overlooks significant activity during the last year and the future it suggests.

Possible Challenges to the NFC Future

It is timely to re-evaluate the mobile roadmap because the same trends that made mobile banking possible have vastly expanded what’s possible for mobile financial services.

The operating assumption of those discussing mobile payments has been that near-field communication (NFC) is the inevitable endgame, an approach combining the smarts and ubiquity of a mobile handset with the speed and convenience of a contactless payment. The logic goes that the benefits of richer interactions with the merchant environment — smart posters, couponing, etc. — will naturally drive consumers to use and demand NFC-enabled handsets.

While this assumption may well hold true in the long run, there are several real barriers to completing the conventional NFC picture. NFC deployment as envisioned requires mobile operators, mobile handset manufacturers, payment processors and financial institutions to craft a workable business model that satis­fies all parties, which has not yet emerged. Secondly, NFC deployment costs are not trivial. Compared to today’s 20 cents worth of plastic and iron oxide, never mind a contactless card at $1.25, NFC will be comparatively expensive even after chipset costs drop to nickels and dimes.

An Arc of Innovation

On the other hand, software-only approaches have the potential to address real consumer needs at a relatively low deployment cost without needing to satisfy the growing roster of players in this multi-sided market. (See “Imagine Mobile Convenience Driving Sales” below.)

Trends enabling this alternate payments path include:

• Open mobile networks. While both their true level of openness and their impact are yet to be determined, open wireless networks make it possible for users to purchase mobile devices from any source and use them on the mobile network of their choosing. Verizon has declared it will support third-party devices that comply with a minimal set of standards. This new openness should make for a far more vibrant mobile device marketplace and give the mobile carriers a marketing boost.
• New smart phones. While none would accuse the standard clamshell mobile handset of delivering PC-like usability, everyone recognizes that capability in the iPhone. Building on the design strengths of its predecessors including the Blackberry, Palm Treo and Windows Mobile platforms, the iPhone’s launch was a watershed moment in mobile usability. Upcoming handsets like those based on Google’s Android operating system and design specifications (never mind improved devices from the incumbents) will continue the rise in mobile innovation.
• New software, new payment systems. New systems are being announced or are waiting in the wings. Obopay and MasterCard have linked to provide person-to-person (P2P) funds transfers to MasterCard credit, debit and prepaid cardhold­ers. Google’s Gpay patent is coming as well — perhaps for the Android launch. Couponing and new customer experience management applications like Apple’s patent hardly require the presence of NFC hardware. Consumer smart phones equipped with cameras and scanning software will read barcodes to instantly find extended product information, reviews and pricing. The physical Web connecting consumers at brick-and-mortar retailers will not be the exclusive domain of NFC-tagged smart posters.

Exploring the Effects

Innovation tends to be disruptive at least for a subset of existing market participants and for a period of time. Here’s a look at what could happen.

• Financial Institutions: There will be multiple impacts felt by financial institutions as mobile programs affect both the issuing and acceptance sides of their business. One potential threat FIs face is an apparent lack of coordination as the individual silos within each organization make decisions on how their products “go mobile.” For example, MasterCard will sell the mobile person-to-person service from Obopay to its credit, debit and prepaid card-issuing members. However, one could argue that P2P payments is the rightful province of those responsible for the online and mobile banking channels. Outsourcing mobile payments to a third-party processor is an avenue to consider, as an outside partnership can aid the coordination and enterprise alignment of mobile endeavors.
• Payment Processors: Mobile customer experience and payment platform innovations may give a boost to closed-loop merchant programs as well as alternative payments systems that leverage automated clearing house and electronic funds transfer networks. While such efforts do not necessarily leave out payment processors, they can shift control of the payment process toward merchants, giving them options to process in-house if not circumvent today’s payment networks. For processor-backed mobile initiatives, there will be increased costs as the new technology is applied to programs that will offer lower transaction volumes, looking more like prepaid card programs than debit-or credit-based efforts. However, this investment by a third-party processor can reduce financial institutions’ capital outlays that will eventually be required to keep pace with new market trends such as mobile.
• Mobile Network Operators: While mobile network operators (MNOs) continue to evaluate their role in payments, it is true that the same technical innovations that benefit payments program managers could be leveraged by the mobile operators themselves. Programs that combine mobile with prepaid payment cards are emerging. The decoupled debit model is another option, available either through a financial institution’s partner or an alternative network, to further circumvent the traditional payment ecosystem. Given strong MNO interest in payment participation — their core service business is under strong margin pressure — the decoupled debit platform offers an avenue to both co-exist or go around payment industry incumbents.
• Point-of-Sale Manufacturers: Should software-only mobile proximity payments take off, the implications for the major point-of-sale (POS) manufacturers are myriad. Catching the ATM syndrome, transaction volume through traditional card readers would drop because, when the payment method is pre-arranged and credentials predetermined, there is no need for a card swipe.
  

While these methods will only nibble at the margins, consumer-facing software innovation will put pressure on traditional POS terminal manufacturers to become more innovative themselves. VeriFone’s taxi system, combining card acceptance and entertainment, is one example of such an innovative platform and business model. TableTop Media’s platform for casual dining establishments raises the bar further, combining pay-at-table, promotions and infotainment as it shifts the economic model of POS devices from product sales to monthly service revenue.

An objection to this line of argument is speed at the point of sale. While an issue, software on a handset using a broadband wireless connection can be quick indeed. While not a solution for a fast-food restaurant or transit application, it may perform well enough for a clothing retailer, a gift shop or that coffee shop on the corner.

The Arc of Innovation

The introduction of many niche-oriented mobile-enabled payment programs is something every player in the payments ecosystem should anticipate. History shows that betting against the power of smart devices at the edge of a competent communications network is not a winning strategy. With mobile, we are again redefining that network edge, this time from the merchant’s countertop to the mobile device in the patron’s pocket.

In the long run, consolidation will absorb many of these niche-oriented programs into a single wallet and that wallet may be based on NFC. In the meantime, the good news hinges on how much both consumers and the payments industry will learn as we ride the arc of innovation to come.

About the Author

George Peabody is the director of Mercator Advisory Group’s Emerging Technology Advisory Service, where he provides strategic and tactical consulting to Mercator’s members and clients. During his almost 25-year career in the IT industry, Mr. Peabody has held senior leadership positions in software development, marketing, project management, market research and operations.

About Mercator Advisory Group

Mercator Advisory Group is a leading, independent research and advisory services firm exclusively focused on the payments industry. Their clients range from the world’s largest payment issuers, acquirers, processors and associations to leading technology providers.

Imagine Mobile Convenience Driving Sales:

At the end of 2007, Apple filed a patent to speed ordering of frequent purchases like your morning coffee. The design allows the consumer to place an order using any WiFi-enabled portable device — an iPod, a PDA or a mobile phone — when it comes into range of a merchant’s WiFi and in-store server systems.

Here’s how it works:

• The patron approaches the merchant location and comes within range of the merchant’s wireless network. (There’s no reason this couldn’t work in a drive-through line.)
• The consumer’s wireless device, running software from the merchant in the background, wakes up when it receives the signal from the merchant’s system.
• The consumer checks the device and is presented with a list of previous orders at the establishment. After selecting the food or drink items, instant discounts, coupons for future purchases or advertising may also be presented.
• The patron’s order is passed to the coffee shop’s order-handling system.
• An acknowledgement is sent to the patron that includes the time to complete the order, price and payment information.
• A payment request is passed to the consumer’s in-store prepaid account or to the designated card account for authorization and payment.
• The consumer picks up the order and the transaction is complete — all without a payment card in sight.
• Similar implementations are easy to imagine. Replace the WiFi connection with a cellular network. Leverage GPS to provide the location awareness. Use text messaging or an application-based PIN service to approve transactions and monitor activity. Software developers and payments industry innovators are going to be very busy.