There is tremendous activity at the moment in the payments sector driven by advances in communications and associated technology. Financial services companies, payments companies and new entrants alike are making major investments, launching innovative new initiatives and jostling for leadership in what is a rapidly changing market. However, it is far from clear that anyone has identified a winning proposition that will be able to dominate the market. Providing real benefit to the consumer will be key to widespread adoption of new platforms.
Payment services have historically been a relatively stable sector of the financial services industry; at best, they are an after thought. Significant developments and progressive changes in the background and in back-office systems have been implemented in recent years; yet, there have been few really great leaps forward with a major impact on the consumer experience since payment cards (charge cards, credit cards, payment cards) began to supplant checks and become an alternative to cash 50 years ago. However, all that looks set to change.
The last 2 years have seen a growing number of initiatives in the payments sector, especially in mobile payments technology. The range and variety of current developments is extensive and potentially quite confusing. What is less certain is which, if any, of this multitude of initiatives will have the potential to penetrate mass markets and truly transform consumer behavior.
There are drivers of change from many directions:
One of the major enablers is technology. Two areas have proved especially significant. The first is near field communication (NFC). Earlier radio frequency identification (RFID) allowed enabled devices to operate as contactless payment methods.
Contactless smart cards have been in use in many parts of the world for over a decade. However, in some markets, adoption was initially limited by unreliability and by the need for significant capital investment by retailers. NFC extends the technology by allowing higher capacity two-way communication between devices. These can function as contactless payment systems as before, but can also form the basis for more advanced and reliable systems.
The second key enabler is the platform of advanced technologies now available in smartphones, tablets, other portable devices and mobile communications. Apart from enabling remote communication with banks, card companies, supplier bases, etc. global positioning (GPS) technologies can locate consumers accurately and push much more relevant data and information to them. Together, NFC and mobile technologies provide the foundation for significant further advances in payments systems, which are attracting attention and investment from many directions. Hardly a month passes without a new product or platform announcement, a new industry partnership or a new entrant promising a radically new approach.
Some key recent developments include.
However, the very range of current developments testifies to an immature and uncertain market. It is clear that only a very small number of these innovations will prove to have the winning combination of customer benefits, ease of use and economic advantages to survive. Markets simply cannot support a large number of inconsistent and conflicting payments systems. Regulators, too, should increasingly drive consistency and standards to protect consumers, such as under the Payments Services Directive in the European Union.
Advanced payments systems are having to break into a market which is inherently low margin. The transaction fees which can be earned directly from providing payment services are, however, not the primary attraction.
The potential value lies in control of the consumer interface and the access it provides: to customer and market data and the ability to target added value services, advertising and promotions directly to the customer at the right time in the right place. In effect, payment data is more valuable than payment fees: payment transaction data can generate value for all of the participants in the payments value chain. This potential is why the payments battlefield is particularly fiercely contested at the moment. As we have seen, banks, card companies, new entrants, mobile telecommunications companies, hardware suppliers are all in effect fighting to take control of consumers’ day-to-day spending and payment operations and exploit that control as the basis of higher value, higher profitability services.
Technology and applications that can exploit payments data, for example, in delivering assessments of payment information quality or customer and marketing analytics, can help develop marketing strategies and inform audience segmentation. Many of the competing technologies have different, very powerful backers, that are all jockeying for position. But they will not necessarily be able to impose a solution on the public. It may be that telecom carriers, hardware providers or card networks will determine the future of payments technology rather than banks themselves. However, for new payment technologies to be seen as more than a gimmick and for consumers willingly to adopt them, more needs to be done to identify systems that will add value for the user as well as for the provider.
To attract consumer take-up, alternative systems will have to compete effectively with the simple or virtually costless alternatives of using plastic or carrying cash. While each of these carries some theoretical risk (loss, robbery, fraud), in practice the risk is small. And, by definition, the acceptable economic cost of a payments system is limited to a small proportion of the value of the underlying transaction. Will consumers switch in droves to new technologies? Despite the hype and the major investments now being made, new systems may face an uphill challenge.
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