Impact of Mobile Payments on the Financial Services Sector Thibaut Loilier - Market Research

March 2013

Blue Paper

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Table of Contents

1 Executive Summary ............................................................................................................ 4

2 Introduction ......................................................................................................................... 5

3 Mobile Payment Market Overview ..................................................................................... 6

3.1 A brief review of terminology ................................................................................................ 6

3.2 Mobile broadband subscriptions: One of the fastest-growing global markets in history ...... 7

3.3 Smartphone and tablet sales outpace computer sales ......................................................... 8

3.4 NFC is becoming widespread and will likely be a must-have smartphone feature .............. 9

3.5 Mobile banking apps are becoming mainstream ................................................................ 10

3.6 Credit card adoption: focus on the European Market ......................................................... 11

3.7 M-commerce will process more than $800 billion per year by 2016 .................................. 12

3.8 M-payments gaining use among a larger population base ................................................. 13

3.9 M-payment market size: $130 transaction volume per person by 2016 ............................. 14

4 The Mobile Business Ecosystem .................................................................................... 16

4.1 Many new players have entered the mobile payment world............................................... 16

4.2 The German mobile wallet (NFC/contactless) ecosystem .................................................. 17

4.3 Incumbents and new entrants are disputing “ownership” of the customer ......................... 18

5 Mobile Payment Impact on Financial Services .............................................................. 19

5.1 New entrants to the market are large players making bold corporate moves .................... 19

5.2 Disintermediation: Leveraging data through targeted cross-selling ................................... 20

5.3 Data ownership ................................................................................................................... 20

5.4 Regulation ........................................................................................................................... 21

5.5 Interoperability: enabling widespread adoption .................................................................. 22

5.6 New sources of revenue: a macroeconomic approach ...................................................... 23

6 Recommended Strategies for Financial Institutions ..................................................... 26

6.1 Monitor the market .............................................................................................................. 26

6.2 Develop an enhanced mobile presence ............................................................................. 27

6.3 Focus on the user experience ............................................................................................ 32

6.4 Build partnerships through the ecosystem .......................................................................... 37

6.5 Develop and implement mobile payment trials ................................................................... 38

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information germane to their business. The content has been created with the utmost diligence. Therefore, GFT

Technologies is not liable for any possible errors.

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Copyright © 2013 GFT Technologies AG. All rights reserved.

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1 Executive Summary

This paper analyses the potential impact of the mobile payments on the Financial Institution, and is

mainly focused on the developed marketplace. Although we tend to think of mobile payment as those

payments made by the relatively new technique of pointing or waving a smartphone at a point-of-sale

or other payment system terminal, the market is in fact rather broader and more established than the

Near-Field Communication (NFC) technology that currently has the world a-buzz.

The Blue Paper provides a general introduction to the mobile payment marketplace, maps the new

mobile payment ecosystem, describes the players, both financial and non-financial, and examines

the impact this new market will have on traditional financial institutions.

Based on our extensive experience of the financial sector and IT services provisioning, as well as our

knowledge of the mobile payment market, the report provide a series of recommendations for

financial institutions that will help them to move forward with a strategy and action plan to leverage

their strengths and assure their place in the mobile payment ecosystem for many years to come:

Monitor the market to keep up to date with what’s happening in the m-payment ecosystem

Develop an enhanced mobile presence to better engage with current and potential customers

Focus on the user experience to rebuild confidence and trust and also compete in the digital

world

Build partnerships through the ecosystem to create value and new business opportunities

Develop and implement mobile payment trials to drive consumer adoption and awareness

The market is still evolving and there are likely to be some significant shakeouts over the next few

years, but it is clear that mobile payments are here to stay. In the coming years, the number of non-

financial services companies active in the mobile payment ecosystem is likely to grow: Financial

institutions are becoming more proactive participants as the m-payment ecosystem matures. The

majority of the financial institutions have realized that having a mobile banking strategy is now a

business imperative for financial institutions. In the mobile payment space, financial institutions have

an advantage with their established relationship of trust with the consumer.

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2 Introduction

One of the first uses of mobile technology as a payment gateway was

implemented in Helsinki, Finland in 1997, where customers were able to

make a mobile payment to buy products at vending machines owned by

Coca-Cola, a non-financial player… In early 2013, Fast Company named

Square – a US mobile payment start up - as the number three most

innovative company behind Nike and Amazon, and the number one most

innovative company in the financial sector. The mobile payments market is

still in an early stage, so now is the time to pay attention to how financial

institutions will become an integral part of this new marketplace.

The standard definition of mobile payment, originated by the IEEE

Symposium on Trends in Communications at the SympoTIC conference in

Bratislava, Slovakia, in 2004 is as follows: “Mobile payment is any payment where a mobile device is

used in order to initiate, activate, and/or confirm this payment.” Today’s mobile payment industry

spans four distinct approaches, driven by three discrete technologies, as outlined in Figure 1 below.

Figure 1: Today’s mobile payment landscape

These four approaches are:

Direct carrier billing, also sometimes referred to as direct mobile billing or direct to bill, is a

method of paying for merchandise by charging the purchase to a mobile phone account.

Carrier billing uses the telecom company’s billing system; it is completely separate from any

banking infrastructure and does not necessarily involve other financial resources such as

credit cards or bank accounts.

Virtual cards are payment cards that are issued (or can be used) without a corresponding

physical card. Virtual cards are primarily used for online and in-store purchases.

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The number of non-financial services

companies active in the mobile

payment ecosystem is likely to grow

M-Wallets (mobile wallets) are implemented either as a software application or a built-in chip

component embedded in a mobile phone. In the specific case of NFC m-wallets, users can

enact card payments by simply waving their device in front of or over a reader using NFC

technology.

In-app payment technology enables purchases to be made from within a mobile application.

These types of payment are generally used to access special content or features in an app or

on a website, such as power boosts, restricted levels, virtual money, and special characters.

For the traditional financial services industry, probably the most striking aspect of the graphic in

Figure 1 is the number of non-traditional players; most of us do not

think of Zong (acquired by eBay for $240M in 2011) or Google as

financial services companies, but today’s reality is that these and

other forward-looking companies are fast adding financial services

to their corporate portfolios. While relatively few non-financial

services companies are currently active in the mobile payment value chain, their number is likely to

grow, and grow quickly, as the opportunities and the customer base expand.

3 Mobile Payment Market Overview

3.1 A brief review of terminology

It may be helpful for some readers to quickly review some key terminology in the mobile financial

transaction space before we move on to take a closer look at the current state of the mobile banking

and payments market:

Mobile Banking is the use of mobile devices to connect customers to financial institutions and

facilitate access to bank and credit card account information for review and transaction

purposes.

Mobile Payment is the use of mobile devices to make purchases in physical or online stores;

such purchases might include goods, services, digital content, and funds transfers.

NFC (Near Field Communication) is a communication protocol that enables contactless

transactions, data exchange, and wireless connections between two devices, usually a

smartphone and a POS terminal in a retail outlet.

Cloud Payments encompass mobile payment credentials and account information stored in

remote data centres and accessible using a mobile app, a phone number and PIN, or a

physical token of some kind.

The Federal Reserve Bank of Boston defines mobile payments in two specific ways:

Remote mobile payments: when the storefront or retailer is remote to the mobile device user,

for example when making a mobile commerce transaction or buying an app in an appstore.

Proximity mobile payments: when the storefront or retailer is physical and the user is located

at or near to the physical storefront or retailer

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3.2 Mobile broadband subscriptions: One of the fastest-growing global markets in history

The mobile broadband subscription is one of the fastest-growing global markets in history – and one

which is showing no signs of slowing down. It’s also a market that is growing as quickly, though in

slightly different ways, in the developing world as in the developed world; in developing countries,

telecommunication systems are “cellular first”, bypassing the whole landline infrastructure.

According to the International Telecommunications Union (Statistics released in June 2012), at the

end of 2011, the total number of cellular service subscriptions had

reached almost six billion, equivalent to a global penetration of 86%,

or one device for every living human on the planet over the age of

five.

It is likely that, by the time you read this, global mobile device

penetration will be close to 100%. Almost 20% of those six billion

subscriptions are using mobile broadband connections, enabling them to securely use complex data-

based transactions; these broadband subscriptions have grown consistently at a rate of 45% per

annum for the past four years.

Figure 2: Mobile broadband subscriptions represent an increasing percentage of the global mobile device market

As can be seen from Figure 2 above, mobile cellular growth has been driven by developing

countries, which accounted for more than 80% of the 660 million new mobile cellular subscriptions

added in 2011. Although developing countries are catching up in terms of 3G coverage, huge

disparities remain between mobile broadband penetration in the developing (8%) and the developed

(51%) worlds. In 2011, 144 million mobile broadband subscriptions were added in the BRICS (Brazil,

the Russian Federation, India, China and South Africa), market accounting for 45% of the world’s

total subscriptions added in 2011. In Africa there are still fewer than five mobile broadband

subscriptions for every 100 inhabitants, whereas all other regions have penetration levels above

10%.

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According to Gartner, tablet

purchases by businesses will triple by

2016

3.3 Smartphone and tablet sales outpace computer sales

The growth of the mobile device market is rapidly overshadowing the

personal computer market as users discover that a device the size of a

pocket notebook delivers as much computing power as an A4-sized

laptop and is for many purposes as convenient, if not more so.

Smartphones and tablets are the new PCs – and they’re selling in far

larger numbers than PCs, far faster than PCs have ever sold.

According to a report from Business Intelligence, tablet sales will reach

nearly 500 million units a year by 2015, and global tablet sales will

exceed the number of PCs currently sold per year (~360 million).

The vast majority of these tablets will be using the cellular network, further increasing the number of

mobile data users. Industry analyst firm Gartner expects 1.2 billion smartphones and tablets to be

purchased in 2013, up from 821 million in 2012; this latter number represents 70% of the total

number of end-user computing devices sold that year.

While tablets and smartphones are unlikely to completely replace

traditional desktop and laptop computers in the business world,

mobile devices are expected to significantly increase their

penetration in the corporate sector. Gartner is predicting that

tablet purchases by businesses will triple by 2016 to 53 million

units, supporting a far more mobile workforce; the firm expects 40% of all workers to be mobile within

the next three years. According to analyst Zeus Kerravala with ZK Research, we are witnessing a

generational change: "This isn't a temporary phenomenon. PCs are great for information creation,

whereas tablets and smartphones are better for information consumption, and we're mainly

consumers, not creators."

Figure 3: By 2016, smartphones will outsell PCs by a factor of three

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Price cuts, driven by manufacturing economies of scale and increasingly intense competition as well

as convenience, are driving the exponential growth of smartphone usage; in both Europe and North

America, smartphones have reached commodity status in a very short space of time.

Figure 4: The average retail price of a smartphone is expected to drop 60% between 2010 and 2016

3.4 NFC is becoming widespread and will likely be a must-have smartphone feature

One influential factor in the future of mobile devices as

transactional facilitators may be the widespread

implementation of Near Field Communications (NFC),

particularly if contactless payment becomes the dominant

vehicle for mobile payments. ABI Research has raised its

estimate for NFC handsets shipped in 2012 from 80 million to

102 million units (November 2012). The same firm also

estimates that 90% of manufacturers now offer at least one

NFC-enabled handset at retail. Forrester Research reports similar numbers of NFC-enabled mobile

devices shipped worldwide at close to 100 million. Google is currently shipping a million NFC Android

phones every week, i.e. 52 million "new" NFC Android devices in the next 12 months.

Visa Europe has forecast that, across Europe in 2013, 40 card issuers will be offering mobile

contactless payment services to consumers and that, by the end of

2013, around 80 smartphone models will be certified by Visa to carry

out contactless payments (Source: NFC Times – January 2013).

Deloitte, meanwhile, points out that NFC is also being applied to

areas beyond mobile payments, such as gaming and next-generation

social networking. The company predicts that by the end of 2013

there may be as many as 300 million NFC-enabled smartphones,

tablets and eReaders in use.

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Compliance issues, along with

interoperability and standardization,

will play increasingly important roles

in determining which technologies

eventually dominate the mobile

payment space

As with all emerging technologies, however, it is wise to proceed with caution; while contactless

payment is an attractive option, it’s not the only option, as was shown in Figure 1. When innovative

technologies such as NFC are adopted rapidly, security can be overlooked, and security is clearly a

vital attribute of any payment technology. Vulnerabilities are

already emerging, which should not surprise anyone who

remembers war-driving (picking up wireless transmissions and/or

hooking into wireless connections illegally while cruising the

streets). Both card numbers and CVVs (Card Verification Value

codes) may be transmitted when contactless payments are made

and, while some security practices are in place, primarily using

cryptography, the PCI-DSS has not yet issued any guidelines on

the protection of payment card information in NFC-based transactions. Compliance issues, along

with interoperability and standardization, will play increasingly important roles in determining which

technologies eventually dominate the mobile payment space.

3.5 Mobile banking apps are becoming mainstream

We can’t talk about mobile payments without considering mobile banking,

given the rapid growth of mobile devices substituting for debit/ATM cards

as well as other payment cards. Almost all major banks, and many

smaller banks, now offer some form of mobile banking application to

support customers’ demands to be able to interact with their financial

accounts anytime, anywhere. (Forrester Research, The State of Mobile

Banking 2012).

Figure 5: Juniper Research expects mobile banking use to double by 2017, reaching 15% of the world’s population

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If the mobile payment market takes off

as expected, the current pattern of

non-cash payment methods looks

unlikely to change a great deal

Both retail and corporate banking customers today expect to be able to interact with their financial

institutions via their mobile devices, whether over the Internet or via SMS and email, and that thinking

naturally extends to mobile transactions of other types, including mobile payments. Existing mobile

banking platforms are well-positioned to support a move by banks into the mobile payment arena; the

trust relationship already exists between customers and institutions, and trust is at the heart of all

effective financial relationships. By adding mobile payments to their existing portfolio of mobile

services, or indeed by establishing a completely new portfolio of service offerings, banks can

establish themselves as the hub for all things financial for their customers. Mobile banking has been

one of the most important strategic changes in retail banking in years, and continuing to evolve down

the mobile path is critical for future success – one might even say relevance. We’ll explore this

concept further explored in Section 4: The Mobile Payment Business Ecosystem.

3.6 Credit card adoption: focus on the European Market

It’s interesting to compare the evolution of the mobile payment

market with the evolution of the credit card market, which differs

markedly between North America and Europe. US credit card usage

reached a peak in the early 2000s and sharply declined along with

the rest of the financial markets in 2008, but is now making a slow

recovery as confidence returns to the marketplace; according to

TransUnion, the average US consumer credit card debt stood at $4,996 in the third quarter of 2012,

up 4.9% from a year earlier. American Express also reported an increase in credit card use of 5%,

with the growth coming primarily from older people. This increase in credit card use also parallels the

growth in online bill payments for everyday household expenses and may indicate that for these

older users, credit cards represent a more secure form of online payment than the direct online

banking links and other newer payment methods being adopted by younger consumers.

Europe appears to be charting a steadier course than the US; in the EU, all non-cash payment

methods seem to be developing along more or less the same trajectory.

Figure 6: Relative importance of different payment methods in the largest EU economies

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Mobile payments currently represent

the largest element in global mobile

commerce transaction volume

The total number of non-cash payments in the EU, using all types of payment methods, increased by

4.6% to 90.6 billion in 2011 as compared with the previous year (Source: European Central Bank -

2012). In the same period, the number of card transactions rose by 8.7% to 37.2 billion, with a total

value of $2.56 trillion – an average of $70 per card transaction.

Credit transfer, direct debit and card transactions represent more than 80% of all m-payment

transactions in Europe. This leads us to believe that, if the mobile payment market takes off as

expected, the current pattern of non-cash payment methods looks unlikely to change a great deal.

3.7 M-commerce will process more than $800 billion per year by 2016

While mobile payment technologies continue to proliferate, mobile commerce marches on, and is

expected to process more than $800 billion in transactions globally by 2016 (Ericsson Review,

October 2012). Interestingly, we are seeing different priorities for mobile commerce emerge in

different markets as a reflection of the underlying economic infrastructure.

In developed markets, the emphasis is on cash and credit card replacement for small, frequent

transactions both on- and offline, with an emphasis on

convenience over need. In October 2012, Masaki Yoshikawa,

Executive Vice President and Managing Director of DOCOMO’s

Credit Card Business Division, announced that 17 million

Japanese (about 7% of the population) are using mobile phones

with wallet functions. In developing markets, however, the dominant services are rather more basic,

such as person-to-person money transfers, micro loans, and bill payments.

As can be seen in Figure 7 below, abstracted from the 2012 Ericsson Review, mobile payments

currently represent the largest element in global mobile commerce transaction volume, followed by

person-to-person transfers. These numbers reflect strongly the development of mobile payment

systems in developing markets; 2.5 billion people have no access to banking services, whereas twice

that number have a mobile phone subscription. Providing financial services via the mobile phone can

bridge this gap, bank the unbanked and the under-banked, and bring all mobile commerce (m-

commerce) stakeholders together.

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Figure 7: One vendor’s perspective on the developing mobile commerce marketplace

In both the developed and undeveloped worlds, driven by on-going high penetration rates for

smartphones, remote digital purchases (downloads and virtual products such as travel and event

tickets) represent a significant proportion of mobile commerce transactions. Remote purchase of

physical goods (traditional e-tail) represents a rather smaller part, and in-store mobile payments are

really still in the exploratory phase. Person-to-person payment transactions are set to expand

significantly but, as noted earlier, we have yet to see which technology will dominate in this segment.

While Figure 7 illustrates one vendor’s market perspective, many other reports are available online

which offer differing perspectives, reflective of the current exploratory phase of the market. The

independent Shopify site, for example, offers a broad third-party perspective on mobile commerce

trends which readers may find of value.

3.8 M-payments gaining use among a larger population base

According to OurMobilePlanet.com (Google), almost 30% of the world’s

smartphone users made payments using this device during 2012, up

from 27.6% in 2011. But usage is extremely variable between countries –

in 2012, mobile payment usage in Ireland reached a high of 36%,

whereas the figure for Belgium was only 14%. Clearly, the market still

has much “settling down” to do.

Statistics and predictions are also hampered by the current lack of an

agreed industry-wide definition as to what constitutes a mobile payment;

some reports consider mobile app purchases, for example via iTunes, as

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mobile payments. If we accept this premise, every Apple, Android, BlackBerry, and Microsoft

smartphone user who has made a purchase in an appstore automatically becomes a potential mobile

payment user.

Further, all of those appstore purchasers have credit card or other payment information stored in

their appstore accounts (Apple, for example, has more than 400 million active iTunes accounts with

associated credit card numbers). Consider that each of those credit cards is linked to all the iOS

devices owned by the credit card account holder, and it’s easy to see just how far and how fast the

reach of this market can grow.

Figure 8: Smartphones are already a significant purchasing vehicle for advanced economies

3.9 M-payment market size: $130 transaction volume per person by 2016

Of course, none of this market development hyperactivity means anything if

it’s not stimulating economic activity; fortunately, that’s not the case.

Consumers are not only making purchases in the virtual purchasing world of

iTunes and appstores. Mobile payment start-up Square, a company that has

only existed since May 2010, is now processing $10 billion in payments

annually – and that’s just two months after it hit $8 billion in annualized

transactions, and seven months after reaching $5 billion.

Gartner and other leading industry analysts are anticipating an economic

activity level of $130 for every man, woman, and child on the planet in 2016, reflecting a CAGR of

44% from 2012 to 2016 and valuing the mobile commerce market at one trillion dollars.

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Consulting firm KPMG anticipates

that, by 2015, mobile payments will

top $1 trillion

Gartner has also stated that it expects global mobile transaction

volume and value to average 42% annual growth between 2011

and 2016, and forecasts a market worth $617 billion with 448

million users by 2016. Consulting firm KPMG anticipates that, by

2015, mobile payments will top $1 trillion, and the volume of

mobile payments will jump around 100% per year. IDC Financial Insights’ "Technology Selection:

Worldwide Mobile Payments 2012–2017 Forecast" (November 2012) predicts the worldwide

purchase volume of mobile devices will exceed $1 trillion by the year 2017. There is clearly no doubt

among the analyst community that mobile commerce will be an extremely valuable market in just a

few years.

Gartner also estimates that the number of mobile payment users will reach more than 448 million by

2016, and that the highest penetration will be in Asia Pacific, followed by Africa – further emphasizing

the important role mobile technology plays in the developing as well as the developed world (see

Figure 9 below).

Figure 9: Rapid growth is projected in many regions, most notably Asia Pacific and Africa

Now that we have a solid picture of the current and immediate future market development, what’s

next? With a rapidly evolving market like mobile payments, opportunities abound – the trick is to

understand where the optimum opportunities lie. So let’s move on to examine the new mobile

payment ecosystem for some insight into those opportunities and how financial institutions can take

advantage of them.

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Financial institutions are becoming

more proactive participants as the m-

payment ecosystem matures

4 The Mobile Business Ecosystem

We define the mobile business ecosystem as the entire spectrum of entities involved in the mobile

payment business, both as core players and as providers of value-added services. As we have seen

in the preceding pages, the mobile payment market is both complex and fluid. It is therefore not our

intention in this section to describe every participant in detail but to focus on the key aspects of the

ecosystem relevant to financial institutions today.

4.1 Many new players have entered the mobile payment world

As we noted at the beginning of this paper, many non-traditional businesses are becoming integral

elements of the mobile business ecosystem. This ecosystem comprises many different types of

business, each occupying a particular niche and exploiting this expanding world to its own advantage

- mobile carriers, phone manufacturers, chipmakers, and e-commerce platforms. As a result, the

mobile payment business ecosystem has become increasingly complex and challenging to work with.

The graphic below charts the flow of transactions through the mobile business ecosystem, showing

that the banking system underpins and links every step in the chain. But those same banks are

notably missing from the visible cast of characters. Why is this?

Figure 10: One vision of the mobile payment business ecosystem

The technological and business challenges posed by the mobile payment ecosystem have been

greeted with open arms by technology providers – they feel at

home with these challenges and are learning the ways of the

financial system as they go. Banks and other financial institutions

are becoming more proactive participants as the ecosystem

moves from early-stage to mature, a process which is expected to

develop rapidly over the next several years.

Banks are also well-positioned to leverage their position of trust by increasing the perceived value

they bring to consumers and other participants in the ecosystem. These new players still need the

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banking system as the underpinning, a situation that banks can use to their advantage through

strategic partnering and data management.

4.2 The German mobile wallet (NFC/contactless) ecosystem

The graphic below illustrates the possibilities inherent in just one mobile payment ecosystem in one

market. Ten different industries and more than 40 players have come together around a single

system, and any number of partnerships is possible between any players in any of these “cells”. It’s

easy to see from this one illustration the enormous complexity of this exploding marketplace.

Note that these companies were all active participants in the ecosystem at the time this paper was

written, but with a market as fluid as mobile payments, there’s no guarantee that the ecosystem will

still look like this by the time you read it.

Figure 11: Just some of the players in the German mobile wallet (NFC/contactless payment) ecosystem

As shown in Figure 11, the mobile payment business ecosystem includes a wide spectrum of actors,

from chip manufacturers to service providers and from mobile network operators to card issuers.

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Telecommunications companies and

financial institutions have the longest-

established and deepest customer

relationships

4.3 Incumbents and new entrants are disputing “ownership” of the customer

Competing players in the mobile payments ecosystem are all able

to leverage different capabilities and customer/partner benefits in

their quest for leadership in a particular mobile payments niche

that’s critical for delivering value. However, as can be seen from

the table below, marketing and customer relationship

management services – the drivers of customer ownership – are

able to compete at every point in the chain.

Of all the players, however, telecommunications companies and financial institutions have the

longest-established and deepest customer relationships. This, together with their exclusive control of

assets critical for mobile payments (financial accounts and device connectivity) will be key elements

for these businesses to maintain and improve their position in the mobile payment ecosystem.

Figure 12: Different participants contribute different elements to the mobile payment ecosystem

As we can see from Figure 12, different categories of participant in the mobile payment ecosystem

perform different functions within the ecosystem. While most players are participating in two or three

areas, it’s clear that the most competitive segment is that concerned with customers’ data –

marketing and customer relationship management (CRM). As the realization of the importance of

data across all elements of the ecosystem grows, the battle for data management superiority will

increase, with new intermediaries seeking to compete across all service areas.

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5 Mobile Payment Impact on Financial Services

While the business models to achieve an adequate return on investment are still emerging,

particularly in light of the wide variability of fees as well as commissions to agents, merchants, and

contractors, what is clear is that this entire new system will have a major impact on the future

direction of financial services around the world.

Under the surface of the mobile payment system lurk many implications for the value chain that

directly impact all the different stakeholders, but perhaps none so fundamentally as financial

institutions. Financial institutions have “owned” the commercial payment space for centuries, and the

threat to that incumbency posed by these new players should not be underestimated.

5.1 New entrants to the market are large players making bold corporate moves

As noted earlier, many leading technology companies are showing a great deal of interest in the

mobile payment space, due in no small part to the challenges posed by the introduction of an entirely

new ecosystem based in technology as much as in institutions. However, it’s also evident that these

technology companies are more than willing to partner with financial institutions to resolve those

challenges:

Google partnered with Citi Group to develop the Google Wallet NFC-based mobile payment

system

PayPal, which is now a de-facto member of the financial institution club, has announced the

development of proprietary NFC-based peer-to-peer mobile payment system built on a Nexus

S Android device

Apple, which, as we have seen, is becoming a major player through its 400 million iTunes

account holders, has hired Benjamin Vigier, a leading NFC expert, as the company’s new

mobile commerce product manager

Nokia is enabling NFC on all its new smartphones

Many telecommunications companies are showing an increasing interest in developing mobile

solutions for financial services

AT&T, T-Mobile, and Verizon Wireless have created a joint venture in the US under the

umbrella name Isis to develop an NFC ecosystem built around point-of-sale systems

In the UK, O2 has partnered with Barclay’s Bank to launch the O2 Money initiative

The fourth major player in the US cellular network arena, Sprint, has launched its proprietary

Sprint Mobile Wallet service in partnership with Cardinal Commerce payment processors

Many of these newer players are nimble competitors that can and will foster disruptive innovation in

the mobile payment ecosystem; some are already doing so. These innovators are transforming the

purchase journey and payments experience, altering the entire customer experience as it pertains to

transaction processing.

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The battle to control and monetize

mobile payments, digital offers, and

virtual coupons is underway

Credit card companies can predict

with 98% accuracy, two years in

advance, when a couple is going to

divorce, based on spending patterns

alone (Marissa Mayer, Yahoo CEO and

former Google VP)

The battle to control and monetize mobile payments, digital offers,

and virtual coupons is underway, and participants need to move

swiftly and decisively to claim their place on the playing field.

Internet giants have already started to acquire or partner with

niche start-up players in the mobile payment space. In December

2010, PayPal owner eBay acquired local shopping engine Milo, and in April 2011, shortly after it

concluded a lucrative deal to sell its credit card readers through Apple’s retail outlets, Square

received a strategic investment from Visa.

The monetization journey is already under way. These new-style strategic partnerships are now

generating significant volumes of mobile payment, primarily card-not-present transactions where the

user’s phone is the means of acquisition, either through in-app payment or via the browser. PayPal

alone recorded a 173% increase in global mobile payment volume transacted during the 2012

Thanksgiving holiday when compared with 2011 (Source: PayPal, November 2012).

5.2 Disintermediation: Leveraging data through targeted cross-selling

In the world of mobile payments, customer data is king, hence the

importance of the marketing and CRM players in the mix. A

mobile payment transaction involves not just the collection of

money but also the collection of behavioural data – and

companies like Google are far more interested in data that

enables them to target advertising more effectively than in the

actual payment process. This in turn provides an ongoing role for

financial institutions as an essential underpinning to the mix.

eBay’s ownership of PayPal, as well as other more recent acquisitions such as Zong, Milo, and

Where give the company access to a truly enormous pool of behavioural data, enabling them to add

a multiplicity of services and options around the transaction itself. In effect, eBay is creating its own

mobile payment ecosystem by offering a multi-channel payment experience.

Consumers, at least in the developed world, value convenience over almost any other aspect of life.

The reality is that, regardless of provider, mobile payments are extremely convenient. Financial

institutions that can offer the convenience of mobile payment, wrapped in a relationship of trust and

security, will be well-positioned to win the hearts and minds of today’s mobile consumer.

5.3 Data ownership

In most countries, banks and other financial institutions are not permitted to use payment data

outside of their own corporate domains; this restriction also covers mobile wallets and online

payments, at least while traditional financial instruments continue to be used. What is far less clear,

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A mobile payment transaction

involves not just the collection of

money but also the collection of

behavioural data

at this point in the game, is who actually owns the data as it flows through the mobile payment

transaction process.

This data ownership issue is playing out in a number of digital

arenas – the situation is not dissimilar to ownership issues

around information and digital assets posted on social

networks. Customers believe they own the data they produce.

Retailers believe that, once customers have purchased a

product or service, they own the data produced as a result of that transaction. Meanwhile, financial

institutions are legally responsible for the security and privacy of payment and transaction

information, so it could be argued that primary ownership lies with those organizations.

Clearly, this is yet another aspect of the mobile payment ecosystem that remains in flux – and it’s

one that customers, as well as the other participants in the chain, would do well to keep an eye on.

5.4 Regulation

Financial institutions are well-acquainted with the regulatory environment and understand the

fundamentals, but there is as yet no specific guidance or legal framework for the mobile payment

ecosystem. Some new regulations are beginning to appear that address the security and privacy of

mobile payment transactions – consumer protection issues, allowable fees, money laundering, and

the like - but holes in the financial security blanket remain, where coverage, responsibility and liability

are unclear, leaving all the players in a state of vulnerability. New market entrants and non-banks

offering mobile services are trying to address the consumer protection issues, but for now financial

institutions remain liable under existing laws.

The European Union is making significant strides towards a more comprehensive regulatory

environment for mobile payments. The European Commission recently published a Green Paper

entitled “Towards an integrated European market for card, internet and mobile payments”, the

general objective of which is to create an efficient and competitive single market for consumers,

retailers and payment service providers. More regulation in the mobile payment environment is as

much of a certainty as death and taxes.

The European Payments Council (EPC), working together with all stakeholders active in the mobile

payments ecosystem, is willing to contribute to the development of a reliable and secure ecosystem

for the initiation and receipt of Single Euro Payments Area (SEPA) payments by the mobile phone.

The intention is to help in establishing an ecosystem which could enable all payers and payees to

make and receive mobile payments (m-payments) across SEPA, and creating a secure environment

for the multiple stakeholders active in the field.

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5.5 Interoperability: enabling widespread adoption

A major concern when multiple companies from very different backgrounds come together in a new

ecosystem is interoperability. As we’ve already noted, the key to widespread customer adoption is

convenience, and convenience doesn’t happen if the different parts of the ecosystem don’t work

together seamlessly. From a customer ‘s perspective, the experience must be the same, regardless

of whether that customer enters the ecosystem through his bank, his credit card issuer, his device

manufacturer, or his cellular network operator.

Figure 13: One example of actors involved in the m-payment space

Cross-border interoperability is also key. Today, most mobile payment services are closed-loop

systems, in which a customer participating in one network cannot send payment to a customer in a

different network, even within the same country. Implementation of cross border interoperable mobile

payment solutions will go a long way towards preventing market fragmentation, which would in turn

hinder the emergence of open, non-proprietary technology standards for mobile payment services,

as recommended by the European Payment Council.

Figure 14: For now, ISIS mobile wallet is only available to a limited audience

Not all mobile payment schemes use a Secure Element (SE) – the chip that houses the

cryptographic keys and payment credentials, and secures mobile payment transactions - even in an

open environment like a mobile device packed with many different apps. An advantage of NFC is that

those payments do use an SE, one that can be stored in a SIM card, an SD card, or in the internal

circuitry of the device itself. None of these distribution models has yet emerged as the dominant

approach. In Europe, the chip on chip-and-PIN bank cards is an SE, as are the SIMs in GSM

phones; however, neither of these technologies is widely used in the United States.

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Mobile payments represent an

opportunity to reduce the social costs

of payments by increasing the volume

of cashless transactions

Financial institutions need to be aware that ownership of the SE to all intents and purposes means

ownership of the payment process, and therefore ownership of the transaction fees. The NFC

models currently being trialled do not put financial institutions in control, so this is clearly another

area in which banks should be looking to partner strategically – and quickly.

5.6 New sources of revenue: a macroeconomic approach

Mobile payments represent an opportunity to reduce the social

costs of payments by increasing the volume of cashless

transactions. In this context, social costs are the costs to society,

the overhead derived from the resources used in the production

of payment services excluding fees and tariffs levied between

participants in the payment chain. The lower the social costs of a

payment method, the greater its efficiency for society at large, according to the European Central

Bank.

Even though cash carries the highest social cost among all payment methods (0.5% of GDP), it

remains by far the most popular means of payment in Europe, especially for small amounts.

However, cash payments have on average the lowest costs per transaction – which appeals to

consumers a lot more than it does to financial institutions. Mobile payments and the general move

towards a cashless society therefore represent an opportunity for banks to increase their revenue

stream without decreasing their consumer customer base or inconveniencing the customer in any

way.

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Looking at the evolution towards a mobile-payment-driven society, we can chart a natural

progression:

1. Mobile banking is now a mainstream expectation by consumers at large. It is no longer being

perceived as an alternative system but as an essential business imperative

2. Building from this foundation, banks have the opportunity to move relatively seamlessly into

the mobile payment ecosystem and associated mobile commerce offerings in the near future

Given the rapid adoption of mobile banking, banks are indeed well positioned and possessed of a

significant competitive advantage in the mobile payment race. As noted earlier, Gartner is forecasting

worldwide mobile banking adoption to reach close to 50% by 2016 compared with the 15% market

penetration today.

Figure 15: Progression of mobile payment adoption by consumers (Javelin Strategy & Research, 2012)

The above illustration, drawn from a 2012 Javelin Strategy & Research study, illustrates the

progression of mobile payment adoption by consumers. Clearly, adopting a service-based approach

for financial institutions makes a great deal of sense.

Mobile payment processes represent growth opportunities for all market sectors if financial

institutions can capitalize on mobile services to tap into emerging revenue streams.

In the B2C world, opportunities include:

Service and subscription fees

In-app marketing and advertising

Cross-selling

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In the B2B & B2B2C world, the opportunities are even greater:

Add-on revenues from macro-transactions and micro-transactions

New services, such as transportation and ticketing

New retail-focused services, such as smartphones repurposed as point-of-sale devices for

merchants (remember how Square gained its first major market exposure by providing POS

capabilities to Apple stores)

Service subscription fees

As we’ve seen, financial institutions are in many ways well-positioned to take advantage of the

position of trust they already occupy in the consumer’s vision of the financial ecosystem. But it will

take strategic thinking and strategic action to ensure a long-term grasp on the mobile payment

ecosystem and be more than the background glue that holds the system together.

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6 Recommended Strategies for Financial Institutions

6.1 Monitor the market

6.1.1 Keep up to date with what’s happening in the m-payment ecosystem

First and foremost, it is vital that financial institutions keep abreast of developments within and

around the mobile payment ecosystem. As we’ve seen repeatedly throughout this document, the

number of players entering the market continues to grow exponentially, and those players are

increasingly operating in multiple sectors of the ecosystem.

It’s important, too, to monitor the global market. Innovative start-ups are appearing not only in Silicon

Valley (Square, Google Wallet, Zong, and others) but across Europe and beyond. Sweden, for

example, is the home of two new players: Accumulate has introduced

WyWallet, a joint venture mobile wallet program with PayEx and the four

leading mobile network operators in Sweden, and iZettle from TechCrunch is

positioning itself as “The Square of Europe”, with chip-card readers deployed

across Scandinavia, Germany, Spain, and the UK.

Readers interested in gaining a deeper understanding of the evolution of the

mobile device market are invited to check out the March 2012 “GFT

TechReport“ Mobiles – do all good things come in three?”

6.1.2 Participate in conversations about the mobile payment market

One way to ensure your business has a voice in the global mobile payment conversation is to clearly

define where you see the potential new sources of revenue that might be generated by mobile

payment services, understand what existing vendors are doing in those spaces, and identify where

your business could fit in the mobile payment arena. As you consider these scenarios, remember

that data is in many ways more important than money in this brave new world.

You can also build your mobile payment strategy by participating in focused events such as the

Mobile World Congress 2013 in Barcelona (that took place in February 2013 in Barcelona) or the

Mobile Payments & NFC World Summit 2013 in Hong Kong. Also pay attention to – and participate in

– targeted discussion groups on LinkedIn like Mobile Payment Strategy

and NFC Mobile Payment & Commerce Professionals, and follow

opinion formers in mobile payment on Twitter, including Pymnts.com,

Bank Innovation, Brett King, and GFT Group.

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It’s fundamental to define key metrics

to monitor m-payment initiatives

6.1.3 Track and understand mobile payment initiatives

Once you’ve defined where you see the potential new sources of

revenue for your organization from mobile payments, stay current

with developments by setting up a tracking system for mobile

payment initiatives. You’ll need to define the key metrics to

monitor – the players, the segments, changes in the volume of banked vs. unbanked populations,

device and other technology developments, geographic areas, as well as the initiatives themselves.

Figure 16: Example of a mobile payment market monitoring matrix

Note: We have used the following definitions for the development stages of each of these initiatives

in the above example:

Beta Stage: The company has a product or service in testing or pilot production.

Expansion: The product or service is in production, commercially available, and being actively

marketed.

Established: The product or service is widely available and accepted by the target market.

Also bear in mind that any of these initiatives may be taking place in a physical or virtual (remote)

environment.

6.2 Develop an enhanced mobile presence

The mobile payment ecosystem infrastructure is more complex and demanding than that of mobile

banking – many more stakeholders are involved, and many more skillsets are required. Financial

institutions can, however, leverage the work they have already accomplished in the mobile banking

space to jump-start the building and deployment of mobile payment infrastructures that will meet the

needs of the multiplicity of participants. This advantage, coupled with the deep-seated trust

relationships with customers, offer yet more reasons why a clear mobile strategy is a prerequisite for

success in the evolving mobile payments arena.

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Having a mobile banking strategy is

now a business imperative for

financial institutions

6.2.1 Design or build a mobile banking infrastructure

As we saw in section 2, mobile device usage is exploding, and in

particular the usage of web-enabled mobile phones to manage

many aspects of everyday life. As an example, a study from Intuit

Financial Services reveals that fully 50% of Generation Y banking

customers (those born after 1980) routinely use their smartphones

to check bank balances and make payments. Having a mobile banking strategy is now a business

imperative for financial institutions, and is another sign that the move to mobile has become one of

the most important paradigm shifts in business over the last couple of decades. Customers live in a

mobile world, and to be successful in this market, businesses must be a part of that world. Mobile

delivers convenience, and it delivers lower costs – the two primary drivers of consumer behaviour.

Mobile customers are interacting with their financial institutions in three distinct ways:

Text banking: This is the simplest method, which works with any cell phone using SMS

messaging, but its capabilities are limited. SMS banking

services use both push and pull messages. Push messages

are those that the bank chooses to send out to a customer's

mobile phone, without the customer initiating a request for

the information. Typically, push messages are either mobile

marketing messages or alerts notifying the customer that an

unexpected event has taken place, such as a large

withdrawal of funds from an ATM or a large payment using

the customer's credit card. Pull messages are specific

requests from the customer to the bank to deliver specific

information such as a balance enquiry or payment request.

Mobile web banking: Can be used on any web-enabled mobile

device. Mobile web banking offers more functionality than text

banking, including the ability to transfer funds between accounts and

pay bills. The main constraint is that this method must follow the

lowest common denominator in terms of user experience; it cannot

deliver a personalized experience based on the capabilities of each

user’s particular device. For users, this may introduce an unwelcome

lack of convenience which, as we’ve noted earlier, is a primary

requirement for banking, and online, customers.

Mobile Banking apps: Mobile apps designed specifically for the user’s individual device

model will deliver the optimum user experience in terms of experience and functionality.

Javelin Strategy and Research reports that most banks have responded well to this market,

offering separate apps tailored for the iPhone, iPad, Blackberry, and Android operating

systems.

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Banks’ customers expect in the near future to be able to use their mobile device to execute any kind

of banking interaction, financial transaction, or payment process in the near future. Ideally, this

functionality should be delivered through a single interface that provides a familiar, intuitive,

comfortable experience that reflects both the device and the way the user expects to interact with

that device.

To assist financial institutions in defining and developing the mobile banking services of the future,

GFT has created a Mobile Finance Competence Centre. The Competence Centre combines GFT’s

longstanding experience in developing IT solutions for financial services companies with the

company’s deep expertise in designing applications for mobile devices.

Following a three-step approach, GFT builds multi-platform rich mobile applications. By tapping into

its extensive technological expertise, GFT offers added value services to mobilise business with a

short time-to-market.

Mobility Consulting: Assessing the impact of mobile technologies on products, services and

processes. This assessment leads to recommendations regarding process or product innova-

tions or organisational improvements.

Mobility Development: Developing multi-platform rich mobile applications to mobilise busi-

ness for new or existing processes with a short time-to-market.

Mobility Integration: Integrating these applications into existing back end processes.

6.2.2 Create a mobile presence across the buying lifecycle

Mobile devices are more personal than PCs: they register location, identity and distance, they can

listen, see and read – they can even guide you. They are connected to the world through multiple

channels and will likely change the way we do many everyday activities in the not-too-distant future.

Mobile devices, both phones and tablets, are increasingly an integral part of everyday life that more

and more people have come to rely on, and that reliance is becoming ever more deeply embedded

into the product recommendation and purchase cycle. For example, in 2012, 3.7 million French

smartphone users sent pictures of a product to family or friends while shopping, an increase of 35

percent over the previous year. Shopping in France has become a collaborative experience,

regardless of who is physically present during the evaluation process, with 31% more people texting

or calling friends/family about a product. (Source: ComScore).

This is just the beginning of the SOLOMO (short for social-local-mobile) market, which brings

together social networking and local searching on a mobile device. Adding financial and payment

services to the mix will deliver the final piece in the purchasing lifecycle.

An example of how this can work can be seen in the CoinKeeper mobile app. The goal of

CoinKeeper is to make the process of tracking one’s finances fun and incorporates some aspects of

gamification, a technique that is increasingly being used in the development and marketing of

products. Users are invited to set financial goals for things they want to save towards (like a vacation,

a car or a new iPad) and can use the app to track their progress towards their goal.

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Available in different versions for smartphones

and tablets, CoinKeeper lets users record

transactions by simply dragging coins from

accounts into expenses and showing them

where they are overspending by the fill level

and colour of each expense category/coin. The

app supports multiple currencies and enables

users to customize the categories to match

their earning patterns and spending

behaviours. Motivational elements keep users

engaged with the process.

For financial institutions, this type of service is a potential opportunity to, for example, cross-sell a

loan to help the user reach his or her financial goal.

6.2.3 Offer new services based on smartphone functionality (camera, GPS, etc)

Location-based services are already well embedded into the mobile shopping experience, so

customers are conditioned to accept additional conveniences that will offer new services and add

value within an existing process. Two examples of location leverage are described below:

Square‘s Card Case is a mobile app

for iOS and Android in which users can

store virtual cards for the merchants

they visit and buy from who accept

Square. These mobile cards in turn

store locations, merchant contact

information, coupons, photos, menus,

comments and reviews from other

customers, order and purchase history,

and more. The app also lets users set

up a tab at a restaurant under their

name without having to produce cash or a physical payment card, because the app already

has the user’s payment card information saved. Square Card Case also offers a merchant

discovery function that displays a directory of merchants in the area as well as a list of the

most popular spots that Square customers are frequenting.

Picture Money Transfer for Deutsche Bank:

Developed by GFT as a prototype for Deutsche Bank

to demonstrate at CeBIT 2012, this innovative mobile

banking app enables smartphone cameras to digitise

and intelligently process bank transfer slips. It was

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Today’s mobile consumer expects to

be able to use the same app across

multiple devices seamlessly and in

synchronicity

conceived as an extension to Deutsche Bank’s award-winning “Meine Bank” app and offers a

high level of user-friendliness as well as practicality. The customer simply photographs the

transfer form with the iPhone 4S’s high-resolution camera, and the details on the form –

payee, account number, bank sort code, currency, and payment information – are captured by

the OCR software. All information is then transmitted to the mobile online banking system,

which automatically processes the payment, checks the data and completes the transaction.

More information on the Picture Money Transfer app can be found here.

6.2.4 Offer a multi-devices experience

Today’s mobile consumer uses more than one device type, and

expects to be able to use the same app across multiple devices

seamlessly and in synchronicity. Apps must work natively on

many different screen sizes and resolutions, and shift smoothly

from one to another, across laptops, tablets, eReaders, and

smartphones.

In “The New Multi-screen World: Understanding Cross-Platform Consumer Behavior,” Google

revealed that 90% of users surveyed move between devices to accomplish a goal, and those devices

might include smartphones, PCs, tablets, eReaders, and web-enabled TVs. Customers expect to

have the same mobile app and, by extension, mobile payment experience whatever device they are

using. It is therefore vital that financial institutions’ strategies for participation in the mobile payment

ecosystem include multiple-platform developments that deliver custom, synchronised user

experiences.

Figure 17: Bank of America’s multi-platform mobile banking offer

GFT develops multi-platform mobile applications using a tried and tested approach based not on

technological expertise alone but also on a wealth of customer understanding with one objective in

mind: customer satisfaction. Appverse Mobile is an open-source mobile development platform

developed by GFT Appverse which allows developers to use HTML5, JavaScript, CSS3 and

leverage the native functionality of a mobile device to build apps. The platform provides a broad set

of APIs to access the native functionalities of a mobile device via a consistent JavaScript interface for

the supported operating systems.

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4G could facilitate the migration of

existing payment and banking apps to

mobile

Customer education is key to

consumer acceptance for mobile

payment

6.2.5 Take advantage of 4G (fourth generation networks)

4G LTE (long-term evolution) is a standard for the wireless

transmission of high-speed data to and from mobile phones and

data terminals. The 4G network is capable of transferring voice

and data in the form of Internet Protocol (IP) data packets,

whereas 3G networks handle voice and data separately. A

completely data-based network will allow for more bandwidth which means more data can be passed

through the network, increasing the efficiency and effectiveness of mobile data transmissions. 4G

networks are already widely deployed in the UK, the US and Germany, and should be available

across Europe by the end of 2014.

The higher bandwidth and speeds associated with 4G networks will enable the delivery of more

robust and data-heavy applications such as financial transactions. 4G can therefore be seen as

another enabling technology for the mobile payment ecosystem, facilitating the migration of existing

payment and banking apps to mobile.

Figure 18: Worldwide subscribers to the 4G wireless standard known as Long Term Evolution (LTE) are projected to pass the 1000 million mark in 2016

6.3 Focus on the user experience

6.3.1 Educate your customers about the benefits of mobile payments

Thanks to the long-standing trust relationship and existing rapid

growth of mobile banking adoption, financial institutions are well-

positioned to educate their customers about the benefits of mobile

payments. Financial institutions also have an enormous amount of

behavioural data about their customers, which can be leveraged

to great advantage through marketing communications programs that appeal to what customers have

said are important to them – flexibility, convenience, availability, responsiveness, service. Education

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A good user experience can make the

difference between a smash hit and a

resounding failure, between customer

loyalty and customer loss

is also the way to overcome the potential roadblock of data privacy concerns around mobile

payments, which is helped considerably by that pre-existing relationship of trust.

A good example of the effective use of

marketing communications to promote the use

of mobile payments came in the form of

Google’s first Google Wallet advertisement in

the US in September 2011, featuring Seinfeld’s

George Constanza. You can watch the ad

here.

6.3.2 Focus on customer retention

Banking and mobile payment apps are competing for the customer’s attention with every other app

on the market. So it’s important to offer the best experience to your customers, in terms of usability,

functionality and, of course, convenience. A mobile payment app that’s both useful and attractively

designed with usability in mind can go a long way towards positive reactions and user adoption. A

key element in the development of any app is the user experience. No matter whether you’re

designing a new Apple product or a mobile application, it is essential to test any new app interface

and functionality extensively with real users to ensure the highest likelihood of user acceptance in

production. A good user experience can make the difference between a smash hit and a resounding

failure, between customer loyalty and customer loss.

A great user experience will enhance the reputation of your

organization with the customer through greater trust, and ensures

the customer will be more open to adopting other offerings from you

in the future. These external validations will also make it easier in

the longer term to gain internal buy-in to additional mobile payment

and other innovative customer-facing projects. It will help to

enhance a brand personality and further differentiate an organization from the competition. A great

user experience is a key milestone on the road to successful participation into the mobile payment

ecosystem.

On the other hand, a negative customer experience with a mobile payment or banking app will do

nothing for your organisation’s prospects. The effect is the same as a negative experience at a

restaurant or hotel: if the experience is bad, the user will likely take their business elsewhere.

6.3.3 Be on the front line of biometric authorization

Security and a sense of trust are, as we have seen, vital to customer retention and a great customer

experience. The traditional approaches to access control and authorization, based around knowledge

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and the possession of certain information, have been proven vulnerable too many times, so it’s vital

that a more trustworthy authentication method be adopted.

One technology that’s showing promise in making bank transactions and mobile payments more

secure is biometrics. Widely adopted in industrial control systems, biometrics is an excellent fit for the

financial services industry, as the technology complements conventional PINs and TANs. A number

of options for biometric authorization are currently being tested in the field – fingerprints, iris, face

recognition, hand vein recognition, and voice analysis are all showing promise.

GFT developed a biometric voice authorization system,

VoiceTAN, as a proof-of-concept for a biometric transaction

authentication protocol. It demonstrates secure

communication between non-secure end user devices and

secure back ends with biometric voice authentication for

money transfers. Find more information here about this

innovative project.

You will also find more information about the acceptance and

potential of biometric recognition processes in ‘Homo

biometricus – Biometric recognition systems and mobile internet services’, written by GFT expert

Bernd-Josef Kohl.

6.3.4 Stop thinking like a bank

As we’ve seen, the mobile payment ecosystem is populated by a large number of players who are

neither banks nor financial institutions – and don’t think that way. We are witnessing the emergency

of a new category of financial institution customers – the de-banked, who have voluntarily opted out

of the traditional banking system because the banks don’t offer what they need.

By participating in the mobile payment ecosystem, banks have the opportunity to bring these users

back into the banking universe. Mobile payment functionality will be attractive in particular to

Generation Y customers (those born after 1980), and could serve as an enticing introductory or re-

engagement offer.

Let’s look at how Starbucks, an active participant in the mobile payment ecosystem, approaches the

market. Starbucks offers a mobile app that lets users buy coffee and other items with a Starbucks

card by scanning a barcode via the screen of their phone.

This app came about because Starbucks took the time to understand the needs of their customers

and develop a simple, convenient mobile payment solution that uses QR codes, something their

customers are already familiar with. In its first month of operation, more than a million mobile

purchases a week were being processed through the app in the US; the total number of sales

processed has now topped 60 million.

Starbucks has partnered with Square for the programme, giving customers the option to pay with

Square, which takes convenience to a whole new level by eliminating even the need to take the

35

Gartner expects more than 70% of

Global 2000 organizations will have at

least one gamified application by 2015

phone out or sign a receipt for payment.

Initially, Starbucks customers will need

to show a barcode on their phones, but

when Square’s full GPS technology is

integrated into the process, the

customer’s phone will automatically

notify the store that the customer has

entered, and the customer’s name and

photo will pop up on the cashier’s

screen. The customer will give the

merchant his or her name, Starbucks will

match the photo and the payment will be

completed automatically – all the user

has to do is choose their coffee blend. In recognition of the planned long-term nature of the

relationship, Starbucks has also invested $25 million in Square. You can read more about the

investment here.

Rival San Francisco-based coffee shop chain Peet’s, which consumers generally agree offers better

coffee, is losing business to Starbucks simply because of this convenience.

In another, more business-focused, project, GFT has developed the InnovationHouse blueprint in

collaboration with Bax & Willems (B&W), a leading provider of IT solutions and innovation

management consultancy based in Barcelona, Spain. The company’s goal is to help clients turn their

dreams and goals into new business ideas through innovative IT solutions that integrate seamlessly

into the day-to-day business.

6.3.5 Gamification as driver for users' adoption and action

As noted in our examination of the CoinKeeper app, gamification

is being increasingly adopted as a component in development and

marketing to engage customers. The term describes the use of

game mechanics concepts and techniques to non-game activities

to drive engagement and solve problems. By 2014, it will be as

important for any consumer-facing business to have a gamified service for product marketing and

customer retention as it is to have a presence on Facebook, eBay or Amazon today. Gartner expects

more than 70% of Global 2000 organizations will have at least one gamified application, and by

2015, more than 50% of organizations managing innovation processes will gamify those processes.

However, gamification is a complex process and requires specialized expertise to implement

correctly. So while gamification is currently being driven by novelty and hype, Gartner predicts that by

2014, 80 percent of the current gamified applications will have failed to meet business objectives

primarily because of poor design. More details of this analysis can be found on the Gartner website.

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Financial institutions have an

advantage with their established

relationship of trust with the

consumer

Gamification techniques are beginning to be applied to mobile

payments and the future looks promising. For example, LevelUp

is a mobile payments platform created by Boston-based start-up

SCVNGR. The LevelUp mobile application uses QR code

technology to enable mobile transactions to be made at local

businesses using iPhones or Android phones; more information

on their innovative approach to business, and how they’re

addressing the intense competition in this space, can be found

here.

In August 2012, the company launched Causes, a way for users

to give part of their LevelUp rewards to a non-profit of their choice

and automatically receive the necessary receipts to claim

charitable donation exemptions on their tax returns.

6.3.6 Secure apps an essential part of the mix

Convenience and security are always a trade-off to a greater or

lesser extent, but security will always be a part of the „comfort

factor“ that is so essential to the widespread adoption of any new

process or technology. Mobile consumers frequently cite

concerns about data privacy as a gating factor in moving to

mobile payments, particularly since data

breaches continue to appear on the front

pages of the world’s newspapers, despite

the plethora of laws in place to protect the

confidentiality of consumer data.

More than two-thirds of over 1,200 people

surveyed by CreditDonkey said they

weren't ready to replace their cash with a

smartphone, and a similar number said they'd rather hang on to their credit cards than use mobile

payment technology. According to Avivah Litan, a senior analyst at Gartner, those fears may be

justified. "It is possible that fraud may account for 1.5 percent of all mobile transactions within five

years”. So we can expect 15,000 fraudulent transactions for every one million transactions.

Consumers also continue to be in some cases their own worst enemy by using easy-to-guess

passwords. Research conducted by O+K Research for Kaspersky Lab in 25 countries found that

17% of respondents used their date of birth as a password, 10% used a name, and 9% used a pet’s

name. Customers must answer a security question that they have previously set up in association

with their mobile banking account.

Here, again, financial institutions have an advantage with their established relationship of trust with

the consumer. However, they will need to convince consumers that mobile payments are secure –

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The convergence of mobile payment

and the “big data” challenge

represents a huge opportunity for

financial institutions

and in fact can be seen to be more secure than using a physical credit card. That's because most

mobile payments are enacted using phones that have GPS, installed, so the payment provider can

use location data to determine if the transaction is legitimate.

6.3.7 Turning data into knowledge

According to experts, there is likely to be a tenfold increase in

data volumes around the globe every five years. Internet access

through mobile devices is outnumbering access through stationary

access points as early as 2013, especially in the mobile payment

space. This will be the next big data management challenge.

Note: The term “big data” is used to describe large datasets (over

one petabyte) and the technologies used to store and manipulate them.

Big data technologies emerged to resolve these issues, when it became clear that relational

databases could no longer cope. These technologies provide not only a scalable and easy way to

store large volumes of data; they also provide the algorithms needed to manipulate it.

When it comes to finance, this new approach to improved decision-making simply cannot be ignored.

As an example, in GFT’s Blue Paper Impact of Social Media on the Financial Services Sector, we

concluded that the convergence of social media and the “big data” challenge represents a huge

opportunity for financial institutions. We are seeing the same trend in the mobile payment space. As

an example, the team behind the start-up SCNVGR’s mobile payment app, LevelUp, tracked sales

among its clients based on weather conditions using big data technologies. The team found fewer

customers ventured out when it rained; however, customers who were already in a coffee shop spent

an additional 20 percent while waiting out the storm.

Solutions that offer targeted analysis of ever-growing amounts of data are in high demand –

wherever possible, with real-time processing. Especially in risk management, it’s crucial to be able to

analyse data quickly. To do this, it’s particularly important to be able to carry out complex

aggregations online. In-memory databases like SAP HANA – which were previously mainly used in

specialist fields such as telecommunications – now make this possible. And these databases are

becoming particularly attractive for financial service providers - an area where GFT can help. Sound

decisions are most important in critical situations, when the course of action must be determined

quickly. For example, credit card companies can use the new databases to recognise relationships

more quickly and react much faster to credit card fraud or money laundering, even for mobile users.

With real-time analysis, big data can be mined in close to real time and credit approvals can be

conducted quickly, easily and more accurately in the form of on-demand credits.

6.4 Build partnerships through the ecosystem

When considering where and how to partner to best advantage within the mobile payment

ecosystem, financial institutions would be well advised to run the results of international market

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monitoring and research through a more local filter, The future for mobile payment is not clear in

Europe, and it won’t necessarily replicate the US mobile payment ecosystem. Both Square in the US

and iZettle in Sweden enable customers to accept credit card payments through mobile phones,

either by swiping the card on an add-on device or by manually entering the details on the phone

itself. However, US-based entrants into the global mobile payment market have the potential to

change the game in Europe.

As the mobile payment ecosystem evolves, it will develop core strengths and dominant

methodologies through the creation of close co-operation between the players, primarily the banks,

telecommunications companies, and merchants. These partnerships can become more innovative by

bringing cloud-based players into the mix; for example, Google and V.me are trying to create new

businesses. This can produce a very different outcome than direct innovation by traditional players

that are focused on margin-driven approaches. As we’ve already noted, disintermediation is

potentially a significant threat for financial institutions, but entering into creative strategic partnerships

with new technology-driven market entrants can defray or remove that threat altogether.

Financial institutions are advised to focus their partnering efforts on technology leverage and revenue

sharing with mobile network operators, mobile device manufacturers and technology vendors, based

on their agreed vision of the global mobile payment business ecosystem.

For once, speed is not the key driver in developing these partnerships.

For example, Bling Nation, the company behind the first commercial

NFC payment system in the US and backed by PayPal, suspended its

service in 2011 in order to revamp its business model. The company had

originally launched its payments service with community banks in 2009,

but the jury is still out on the future of this particular partnership, clearly

indicating that the vision must be fully developed before putting the

strategy in place. However, the sooner the complementary players are

able to co-operate on developing mobile payment standards, the faster the market will take off.

While there remains a lack of consensus in both US and in Europe about the structure and

composition of the mobile payment business, it is looking increasingly as if, in Europe at least, non-

financial institutions will start focusing on small payments that would otherwise be made using cash

rather than credit cards. Such a development would open up an opportunity for banks to partner and

explore new sources of revenues and services. It is conceivable, but by all accounts unlikely, that

new players will successfully bypass the traditional underlying financial infrastructure.

6.5 Develop and implement mobile payment trials

6.5.1 Prototype and test different approaches with employees or a select subset of clients

The mobile payment environment remains extremely fluid, so testing for customer acceptance is an

absolutely key prerequisite for deploying new solutions on a wider scale. Here’s how Bank of

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America (BofA) introduced a QR code-based mobile payment app in their home state of North

Carolina.

The system, developed by Paydiant for BofA, enables iOS and Android smartphone users to scan

QR codes to pay for their purchase. The system uses QR codes rather than near-field

communication technology, so users do not need special chips or equipment beyond their regular

smartphones. Five merchants agreed to pilot the system with the bank, and bank employees tested

the solution for three months in a series of “real-world” trials. The trial period ended at the end of

2012, so it will be interesting to see the results when they become available. More background on

this particular trial can be found here.

6.5.2 Develop insights into the user experience

One of the key take-aways for Bank of America as they review the results of their Paydiant trial will

be how users interacted with the system. User behaviour, as we’ve seen, is a key predictor of

adoptability, and if both customers and merchants can seamlessly blend the use of this solution into

their daily lives and use it more-or-less without thinking, the experiment can likely be deemed

successful.

In August 2012, McDonald's began testing a mobile payments service using

PayPal at 30 of its restaurants in France. This test lets McDonald's customers

order food on smart phones through a McDonald's mobile app, or online, and

pay with PayPal. There is a separate queue in the test locations for users

participating in the trial to pick up their meals. This trial is part of McDonald’s

strategy to engage customers in new ways and optimise the customer

experience.

In the mobile payment space, retailers are looking for a payment solution which

will fully address their needs and expectations, including high customer

acceptance and value, as well as a cheap, convenient, fast and secure service.

The 2012 London Olympics is another example of a trial designed to gain greater

insight into the user experience. Samsung and Visa showcased mobile payments

at the 2012 London Olympic and Paralympic Games. In November 2012, Visa

Europe released an infographic highlighting the key results of the trial:

In the 10 weeks leading up to and including the Games, the number of

contactless transactions in the UK doubled.

There was six times the number of contactless transactions during

Games time as there were during the same period in 2011.

During the Games, the Olympic venues accounted for 15% of contactless

transactions in the UK.

Contactless Visa cards can be used at 122,000 contactless terminals in the UK and more

than 390,000 around Europe.

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This trial is part of Visa’s strategy to spread the use of this technology throughout the industry and

around the world, but also to get more feedback from the public.

6.5.3 Start a deploying a “card-based” contactless payment ecosystem

Some banks have begun to deploy a “card-based” contactless payment ecosystem as a “toe in the

water” experiment with mobile payment systems. There are two main type of card-based payment

system:

Contactless credit card: Contactless cards are used most often for financial transactions as

a replacement for the physical process of swiping a magnetic strip card or inserting a card with

an exposed "smart chip" into a reader. This enables the card to function as a credit card, debit

card, transit pass, or any other type of stored-value card.

NFC Sticker: Rather than using near-field communication chips built into handsets, the NFC

sticker is attached to the back of mobile device (or anything for that matter). The sticker

incorporates an NFC chip containing the data required to complete payments. This approach

enables customers to use any phone that supports texting capabilities and does not require a

smartphone.

Spain’s La Caixa bank recently rolled out a contactless sticker-

based mobile payment system using NFC “TAP Visa” stickers.

Each passive sticker carries a Visa payWave EMV application and

customers can attach the sticker to the back of their phones and

tap them wherever payWave is accepted. For purchases of more

than €20 (US$26.11), customers are asked to enter their PIN code

into the merchant’s payment terminal. Since January, the bank

has issued more than 1.1 million contactless cards to its base of

more than 2.8 million mobile banking customers. 5,000 customers are taking part in the first stage of

the project.

Barclaycard in the UK has also launched a passive contactless

sticker programme called PayTag in partnership with Orange.

Most consumers with contactless cards, stickers or related

applications on NFC phones are able to pay for purchases of up

to £20 without entering a PIN, up from the previous £15 limit.

Visa Europe estimates there are almost 105,000 contactless

point-of-sale terminals in the UK, including in public transport

systems, supermarkets, and restaurants, and predicted that

number will grow to up to 150,000 by the end of 2012.

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Contact:

Thibaut Loilier | Business Marketing | GFT Group

T +34 93 565 9100 | info@gft.com

Copyright © 2013 GFT Technologies AG. All rights reserved.