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. Google, Apple, Amazon and Facebook know this and are masters at it. And all four all likely to embrace near field communications, or NFC, a technology that transforms mobile phones into electronic wallets, disrupting existing players such as telcos and banks, according to a joint study by DLD and market intelligence and information service StrategyFacts, which is due to be released for the first time at the DLD conference in Munich January 22-24.
Today NFC payments are just ramping up. Most consumers still don’t have NFC-enabled phones and merchants are struggling with the necessary investments and interoperability issues. But, in the November StrategyFacts global survey of 221 NFC experts from the telecommunications, Internet and banking sectors, 89.1% said they believe NFC technology will be a standard component on smartphones of all categories as a mainstream payment method within three years.
NFC 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.
Visiting retail websites is one of the fastest-growing activities among smartphone users across Europe, according to another joint study to be released at the DLD conference, involving DLD, ComScore and Telefonica. The survey estimates that in October 2011, more than 13.6 million smartphone users in France, Germany, Italy, Spain and the United Kingdomaccessed a retail site through their smartphone.
For example, more than 20% of UK smartphone users searched for the location of retail stores during October 2011. And once they arrived at the store, 16% took a picture of a product and nearly 9% shared that picture with friends or family. Another 6% indicated that they compared product prices while in-store.
Going forward, consumers could use their NFC mobile wallets to access a number of new, personalized services while shopping. Successful entrants into the mobile payment space will need to think about 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, says in a 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 and telcos view and make money on the actual transactions. The margin banks and telcos make on domestic and cross-border transactions continues to plummet globally. They can’t protect margins by continuing to do the same thing when faced with regulatory changes, well-informed clients and a tough competitive environment.
“Clients live in the digital slipstream- they live in a world of implicit and explicit choice- and they vote with their wallet,” says Daniel Marovitz, a former Deutsche Bank managing director and Internet veteran who now runs a London-based start-up called Buzzumi. “The Internet companies base their business on it. Banks ignore the slipstream and focus on just the final piece- enabling the purchase- but there is a huge amount of value in all the behavior that precedes the purchase.”
He urges banks and telcos to follow the example of Silicon Valley companies like Google. The search engine giant, which launched its NFC-based mobile wallet service last Fall, has already received backing from a number of retail and financial service companies. Respondents to StrategyFact’s survey say it 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 mobile wallet.
When asked by StrategyFacts, “How do you rate the likelihood that Apple, Facebook and Amazon will enter the NFC market?”, 75.6% of the NFC experts thought it was very likely that Apple would enter, while 41.6% considered it very likely that Amazon would do so; only 26.7% believe it’s very likely that Facebook will.
Banks and telcos are not ceding the market. For example, 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. 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.
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 and telcos have to decide whether to leverage the digital slipstream to do more, he says, or watch potential profits slip away.
“NFC-based payments will disrupt the existing digital payment ecosystem,” predicts Veit Siegenheim, a consultant at StrategyFacts and a scheduled speaker at DLD. ”Winning companies will combine strong relationships with merchants, customers and advertisers with the capability to subsidize market development and necessary investments. Existing players who miss any of these capabilities, like most telcos and banks, will be on the losing end.”