Monetizing The Digital Slipstream

Banks and mobile operators have been vying to dominate the mobile payments space but Silicon Valley companies could end up reaping the richest rewards.The reason?  It is not those that process the transactions but rather the companies that manage to leverage the rich information in the electronic trail clients leave behind – the so-called digital slipstream – that will win in the networked economy, say industry observers.

 “Clients live in the digital slipstream,” says Dan Marovitz, a Deutsche Bank managing director and a scheduled speaker at Sibos, an annual banking industry conference taking place in Toronto, Canada, September 19 to 23. “The Internet companies bank their business on it. Banks ignore the slipstream at their peril.”

 In the U.S. and Europe the mobile payments focus is on near field communications, or NFC, a technology that transforms mobile phones into electronic wallets.  Mobile wallets connect with a merchant’s payment terminal and not only record the sale but offer a whole host of other services, such as customer loyalty cards and wirelessly transmitted coupons.

Successful entrants into the mobile payment space will need to think about new and different ways in which consumers might save and spend their money – “ways that have nothing to do with today’s default vendor run gimmicks such as loyalty cards  “sales”, coupons and rewards that are meant to trap us, herd us and shake us down for more money,” Doc Searls, a Silicon Valley technology seer and a scheduled speaker at Sibos, says in a recent blog post.  The real potential of mobile wallets is giving consumers “more control over how, why and where we spend (or actually save – as in a bank) our money," says Searls.

For banks looking to cater to customers in markets like the U.S. and Europe that might mean developing value-added  mobile services based on both presence and preference, such as one that allows consumers in a store to instantly check whether they can afford – and how they might finance – a coveted big ticket item.  Consumers will “pay for value, including services that make our wallets serve us,” says Searls.

But it is not just about getting consumers to pay for new services. Data about consumers is worth money – lots of it. Google makes money by leveraging its view on customer preferences – what they choose, browse, purchase, view, like, dislike, repeat, enjoy and ignore– whereas banks make money on and view the actual transaction. The margin banks make on domestic and cross-border transactions continues to plummet globally, notes Marovitz. Banks can’t protect margins by continuing to do the same thing when faced with regulatory changes, well-informed clients and a tough competitive environment, he says.

He urges banks to follow the example of Silicon Valley companies like Google. The search engine giant, which is set to launch its NFC-based mobile wallet service this Fall, has already received backing from a number of retail and financial service companies. While lack of hardware and a sole telecom partner will limit its initial reach, industry observers say Google is in a very strong position to become as powerful a facilitator of physical world transactions as it is online.

 Ditto for Apple.  More than 200 million people already have Apple iTunes accounts tied to credit cards with one-click purchase capability and the company has reportedly filed patents for a smart wallet. Apple “is going to be a serious force,” predicts Mark Beccue, an analyst at New York based ABI Research.  

For its part, PayPal, now owned by online auctioneer eBay, is already making $3 billion a year in mobile payments and expects to grow that business to $7.5 billion by 2013, says Martin Herbst, director of operations and strategy for PayPal Mobile. The company is rolling out mobile applications that allow for point-of-sale transactions at 500 pizza shops in the UK and some 3,000 retail outlets in the Netherlands.

Then there is Square, launched by Twitter co-founder Jack Dorsey. Earlier this year Square announced a new app called  Card Case, which allows consumers, after a one-time manual registration process, to open a tab at a particular merchant to pay for in-store purchases via an iPhone app instead of swiping their credit cards.The app can be used to see what's for sale and to review receipts and purchase history and includes a directory of stores nearby that accept Square.

Banks are not ceding the market. For example, BNP Paribas and Credit Mutuel CIC banks are participating in a large-scale trial of NFC-based payment systems in France, paying four French mobile operators to host the payment application on their SIM cards.

 And, in the U.S. banks have fought to become part of ISIS, a mobile wallet initiative led by AT&T, T-Mobile and Verizon.  Initially, ISIS hoped to capture the entire customer transaction without including banks in the program , says Ryan Hughes, ISIS’s chief marketing officer. The banks pushed back so ISIS, which will be paid a fee for hosting payment cards in its wallet, now includes Visa, Mastercard, American Express and Discover.

But a Bank of America or a Deutsche Bank is big enough in its home market to launch its own consumer-facing mobile app services and reap bigger rewards from mining the data, argues Marovitz. Banks have to decide whether to leverage the digital slipstream to do more, he says, or watch potential profits slip away.

-Informilo Editor-in-Chief Jennifer L. Schenker contributed reporting to this story.

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