Innovation Without Glamour


Deceptively stagnant progress in contactless payments

In an effort to encourage cashless payments, banks and Telco’s have become increasingly inventive about the offerings they can provide to their customers. Companies like M-Shwari M-Kopa are now offering loans and leases, a host of apps now offer pre-payment for goods, and taxi’s and transport can be purchased from the map view of your destination. However the creativity of app designers is running far ahead of Business’s ability to deliver on these ambitious promises and it must be the less glamorous back end of these ideas that drives real progress.

One of the most long standing desires of many banks has been to foster completely cashless payments across the retail industry. In many countries the driving force behind this has been the implementation of contactless payments through Near Field Communications (NFC) on both mobile devices and cards. However, it is easy to forget that the level of acquiring proliferation required to make this a reality has only just reached the watershed point of customer acceptance in the UK, a full decade since the launch of the first NFC Barclaycard in 2002. South Africa, for example, has only now started to roll out their first ‘tap-and-go’ terminals despite a landscape where approximately a third of cards in circulation has the capability enabled.

The main obstacles

There are numerous reasons for the delay. Firstly no bank wants to spend a fortune developing an acquiring network that will benefit their competitors as much, if not more, than themselves. Secondly there are inherent risks of fraud when the need to enter a client PIN is removed. These risks can be mitigated by imposing a low floor limit, say £15, on transactions but doing narrows the usage to micropayments. This in turn makes the proposition less attractive, especially in societies that place a cultural status on holding large quantities of cash. However, the most critical hurdle to cashless implementation is the problem of integration. Contactless payments require a significant amount of investment from the merchant. Although larger retailers may be able to commit significant capital investment to development they also tend to have customers that transact more than £15. It is therefore first the smaller and mid-range retailers, who cannot afford the integration investment, that banks must target.

Overcoming obstacles

Too many banks and telcos have been focused on their customer value proposition in an attempt to draw potential customers from competitors. The focus has been to provide the award winning app, or the most multi-functional card. As an ‘innovative customer proposition’ mobile payments has therefore sat squarely in on side of most bank’s card issuing businesses rather than their acquiring wings, limiting their ability to develop contactless as a Business to Business rather than Business to Consumer offering. The real customers in this story must be merchants, not individuals, and banks in developing countries are missing a significant opportunity by targeting the ‘unbanked’ population rather than the ‘un-acquired’ retailers.

Example of success

Ironically, a paradigm of success has not been achieved through the innovation of new technology but rather by leveraging developments that have been left behind by mobile progress; QR codes. One of the most interesting ideas to come out of Africa has been SnapScan, launched early this year. The system runs on QR codes and only requires a customer to log a card with the app and ‘snap’ a relevant QR code to complete a transaction. Although this may seem a step back from more glamorous NFC payments it has many redeeming features. The most significant of these is that the app requires no special integration from either customer or merchant. The merchant need only hold an account with the relevant bank (currently Standard Bank) to receive payments with no need to integrate into their own payment systems. And if this is too much integration then the app can print a code that can be redeemed for the accumulated payments in branch. By circumnavigating the need to engage in costly IT integration the service has significantly expanded its target market for mobile payments, much like Square did in 2012 for cards.

Expanding the B2B offering

Too many banks have focussed on the issuing section of their card businesses. Historically this makes sense as acquiring networks have rarely delivered profit margins equal to issuing businesses, nor can one make the argument that acquirers promote cross-sell to more profitable areas of personal banking like loans and mortgages. Acquiring wings are often lumped with the rising costs of regulation as many governments have started to place limits on interchange and merchant acquiring fees leaving some acquirers consistently failing to generate profits.  It might be expected that banks increasingly follow RBS in outsourcing their acquiring businesses to concentrate all efforts on issuing. This may not be the correct decision and the P&L view does not show the full picture. By organising card businesses with a strong focus on issuing it becomes too easy to lose sight of the beneficial impact, on both issuing and acquiring, of developing robust acquiring propositions. It is only in this way that Banks can really hope to overcome many of the obstacles on the path to abandoning cash once and for all.

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