I would like to carry one mobile device for virtually everything – I’m a member of the smaller the purse the better club – so the idea of a cashless, maybe even credit cardless world is very appealing to me. I recently rather cautiously dipped my toe into some fresh mobile payment waters on my Blackberry using a new app. The transaction went perfectly smoothly, nothing blew up security-wise and I got a great deal, on the road, at 9:30pm at night. It got me thinking though, if mobile payments really take off in a big way, as I think they will, there are global implications and huge challenges and opportunities ahead for financial institutions and mobile providers. This is really exciting territory.
One of the very best things about working for a huge corporation like HP is that there is such a wealth of expertise here. We have incredibly strong heritage within our HP Integrity NonStop team when it comes to financial services IT and it was my privilege to get some time with two of our experts in the area of payments, Bob Kossler and Arun Guar.
CD: What’s the growth rate of mobile payments? What do the current statistics tell us about where the world is headed?
BK: There are roughly 6.8 billion people on the planet today and the vast majority use mobile phones. Sometime in 2010 the 5 billion mark was crossed in cell phone subscriptions according to the International Telecommunication Union. The ITU also shows rapidly accelerating demand for mobile access to the Internet with broadband subscriptions growing from about 600 million at the end of 2009 to over 1 billion now. Worldwide, people want the convenience, access and connectedness mobile brings. And more people are getting comfortable with conducting more serious business on their mobile devices – new innovative modes of conducting financial business transactions and payments are emerging. It is predicted that there will be roughly 250 million active mobile payment users by 2014 (5% penetration). The tidal wave of mobile is changing the very nature of how business gets done right now, and is impacting strategic planning for shrewd business and government organizations large and small.
CD: Seems the era of the Instant-On enterprise is here, and we’ll see major uptake of new models particularly among younger generations where day to day life is so strongly integrated with technology – it is second nature. How will the evolving nature of payments impact the world?
AG: In the developed world there is a huge payments infrastructure. Most people have bank accounts and credit cards. Two key things are happening- more people are adopting smart phones which means more online transactions, more volume, more new applications to integrate into systems. You also have the emergence of new technologies like Near Field Communications (NFC) where the phone will act in a way, as a virtual credit card. Merchants will increasingly have NFC readers and it will be much faster and more convenient to make daily transactions via smart phone versus traditional modes of payment.
CD: What does this mean for the financial institutions in the developed world?
AG: They will have to effectively contend with the sheer increase in volume of transactions, ensure security to customer accounts and rethink their financial models.
CD: What is an example of how their financial models will be impacted?
AG: Customers will be completing much smaller dollar value transactions, so banks will likely no longer be able to charge $1/transaction fee. For example, would you be willing to pay $1 fee on a $3 cup of coffee purchase? New models and different charging methods will need to be worked out.
BK: Arun makes a good point about how customers view payment transactions. Another key stakeholder is the retailer. Retailers have very specific needs when it comes to payments. In order for mobile payments to be successful, they have to address these needs.
Take Starbucks as an example. Starbucks recently announced a new iPhone application. Customers can manage their gift cards, pre-paid cards using this application. They can check balances and add money to their accounts using this new application. In addition, the application allows customers to manage their loyalty points. They can also pay for a coffee drink or buy other goods that Starbucks sells. Clearly, this adds a level of convenience for the customer. And what about Starbucks?
When a customer pays for goods and services with this application, Starbucks reads a bar code displayed by the app. The card attached to the account is debited. More importantly, this type of transaction is significantly quicker, saving 30 to 40 seconds per transaction. So, Starbucks can service more customers in less time. If you think about it, cutting down the time spent in line benefits both Starbucks and the customer. A long line is not very enticing to new customers. Reducing lines and increasing staff efficiency adds to Starbuck’s bottom line.
Finally, Starbucks can exploit location-based services. When a customer opens the Starbucks app, they can click on “Stores” and they get a map of with the location of the nearest stores, along with directions. Again, it is about customer service. Helping the customer find a convenient location just adds to customer loyalty, and it also gives Starbucks the opportunity to push an “in store” advertisement.
CD: Most people I’ve talked to are a little nervous about the security of these types of mobile payments. Are they more, less or equally as secure as traditional credit card payments? Why?
BK: Security is becoming increasingly important in all financial transactions. As a new means of commerce, customers, retailers, banks and MNOs have to have confidence that this new type of payment is as secure as credit/debit cards. Phones with Near Field Communications (NFC) devices address the many of the security concerns. NFC is considered to be inherently secure since two physical devices (the phone and the reader) must be brought together in a short range. Furthermore, data between two devices can be encrypted using AES standards. But, there are vulnerabilities and challenges. Encryption is not required. Without encryption, someone could “eavesdrop” on the transactions. More importantly, what happens if you lose your phone with private, financial data stored on the phone. Clearly, strong password protection is required.
Here's a great primer to check out on NFC
CD: How about the emergence of new service oriented payment applications? What integration challenges are ahead?
BK: When people talk about mobile payments, many think that an entirely new infrastructure needs to be built out to support this new class of payments. Nothing can be further from the truth. Mobile payments are simply put a new access method to the current payments infrastructure. The European Payments Council highlights this fact as part of the mobile payment business case they make in their white paper on mobile payments. “The payment transactions enabled by mobile devices and services should build on existing SEPA (Single Euro Payments Area) Rulebooks and SEPA Cards Frameworks and (global) standards as far as possible.” http://www.europeanpaymentscouncil.eu/content.cfm?
This is good news for HP’s customers and partners who have a large investment in capital and IP to protect. Instead of needing to invest in new infrastructure, our customers need to examine increased capacity needs as more payments occur via mobile devices. Our partners need to plan for supporting these new devices. The MNOs also have significant capital and IP investments to protect. Mobile payments in the MNO model are like other mobile phone expenses. The charges get added to a customer’s mobile phone bill. Again, new access point but the same infrastructure.
What does change is the way payments are made at the retailer. NFC readers and barcode scanners will be required. Online retailers will have to be able to send SMS messages for payment authorization. Never the less, these are extensions, rather than radical changes.
CD: How is HP helping financial customers contend with these big challenges, particularly with HP Integrity NonStop systems? What is new and on the horizon?
AG: The Integrity NonStop portfolio is built on the proven NonStop architecture, consistently delivering the world’s highest application availability. We just introduced our new quad-core Integrity NonStop BladeSystem, the NB54000c, doubling the scalability in the same data center footprint. That will really help organizations successfully contend with increasing volume of transactions with no downtime. The new quad-core has near linear scalability of up to 16,320 cores. It offers up to 192,000 program processes per node, and an incredible 48,960,000 program processes in an Expand network.
CD: This is really interesting stuff to think about Arun and Bob, thank you for taking the time to share your ideas and insights with our readers.
In this post we explored the future of payments in the developed world in this post, next up will be a look at perhaps an even more fascinating future in the developing world. For those of you planning on joining us in June at HP Discover in Las Vegas you may be interested in knowing that Arun will be speaking on this topic. It is session 4823 called "Financial services industry—dynamics, trends and the impact on IT".
Readers please do use the comment section below to share your thoughts and pose questions on the future of payments. I'll track down Arun and Bob for some more thought provoking answers!