This is going to be a big year in the payments industry.
Payments This is going to be a big year for those of us in the retail payments world. Apple has legitimised the nascent mobile sector, so with their mindshare blessing we will see soon begin to see the phone as our core financial services device.
David G.W. Birch is a Director of the secure electronic transactions consultancy, Consult Hyperion. He is an internationally-recognised thought leader in digital identity and digital money, and ranked one of Wired magazine’s favourite top 15 global sources of business information.
We have the Bitcoin and cryptocurrency crowds snapping at the heels of (as they see it) the banking industry dinosaurs. We have services live on top of the Faster Payment Service (FPS) that provide immediate inter-bank settlement, unlike anything in the US, and we have a rash of startups coming out of the London Fintech scene. So, with all of this going on, where should financial institutions be pointing their payments skunkworks for the coming year? Well, here are five suggestions based on the work that that I see my colleagues and Consult Hyperion doing right now, suggestions as to areas where I think financial services organisations should pay serious attention to technology decisions that are being made in the short term because of what they mean for business in the long term. These are fundamental business strategy decisions at the dawn of a new payments era: don’t leave them to the IT department!
The first area is in-app payments. The UK has a very well-developed contactless infrastructure and the use of contactless payments is now mainstream in London. Naturally, much of the discussion around ApplePay, NFC and retail has focused on the “tap and pay” simplicity of the mobile phone using contactless technology. However, there are lots of reasons for thinking that this will be a sideshow rather than the main event. The introduction of new security infrastructure (what the payment wallahs call “tokenisation”) means that in-app payments (“app and pay”) can now be more secure than chip and PIN payments and since I rather imagine that most retailers would prefer no POS (point-of-sale) at all to enhanced POS, there will be pressure from them to shift. As far as they see it, tills and chip and PIN machines and cash drawers are waste of good retail space: chuck all of that stuff onto mobile phones and they’ll be more than happy. Given the experiences that we already see around us from Uber to AirBnB and KFC, I think that in-app payments will become the norm, the most frictionless way to pay. Once again, this is hardly a wild prediction, given the number of organisations in the US that have already implemented Apple Pay inside their apps. As Google and Samsung and others shift their offerings into the same space, I predict that it will become natural to pay with your Waitrose app, your Shell app and your Burger King app (collecting your rewards as you go) rather than use something from your bank.
This leads on to my second suggestion as to where to look for change. This what I’ve clumsily labelled re-localisation. We’ve lived through a period where there is been great pressure for internationalisation and the globalisation of payment solutions. Nobody wants to travel with 100 different cards in their pocket and when I get off the plane in the US or Australia or anywhere else I expect to be able to use my Visa, MasterCard or American Express card just as I do at home. But a combination of factors ranging from interchange regulation to in-app payments to non-bank players means that we will see a swing back toward more domestic solutions. In many parts of the world national payment solutions are seeing a resurgence, many of them looking at China Unionpay as an exemplar. But I think the trend toward multiple three-party systems instead of a small number of four-party systems means that we may see a return to payment systems that are owned and operated by retailers (as Starbucks has already done), brands and perhaps even local communities. It will be only a matter of time before foreign visitors landing at Heathrow will download their London app, put their credit cards details in and set off to tap their way around the tube, buses, cafes and shops of the great city.
The third area is privacy. This is rising in the public consciousness, but no-one knows what to do about it. As a society we’re not sure whether people should be allowed to have privacy or not. My observation is that have privacy, you need security. Here again, the mass market use of smartphones is changing the landscape. Once we have reasonable identification and authentication technology in place we can begin an intelligent discussion about how to use it and one of the first uses will be privacy. I think that for many stakeholders in the payments industry, the opportunity to make privacy part of their customer proposition, something that must be founded on strong security, is now a feasible business strategy. Privacy, as can already been seen in the actions of Apple and Google, is moving from a back-office hygiene factor to an integral component of consumer products.
The fourth is the blockchain. This is the technology behind Bitcoin. Now, I’m on the sceptical side of the fence when it comes to Bitcoin becoming a currency. But that’s not because I’m in with the secret cabal of bankers who are conspiring against it. Having been involved in a number of conversations with regulated financial institutions, and working as I do for a company that provides paid professional services to more than one of the same in connection with cryptocurrencies and the blockchain, I can tell you right now that I have never heard even one banker ever say any such thing, what ever the Bitcoiners might think.
If Bitcoin becomes a digital asset with a liquid market then bankers will trade it just as they trade frozen orange juice futures (these are real, by the way, they weren’t made up for Trading Places). If Bitcoin becomes the only money in the entire world, I’ll still need to borrow it from a bank to buy a house or car so they will lend it to me. So banks aren’t stopping Bitcoin. It’s just that it doesn’t solve the right “bundle of problems” (who wants anonymous money, for example, other than the rich and unaccountable?). So Bitcoin has an uncertain future. But the technology it is built on, the open public ledger known as the blockchain, well that is something different.
Why is blockchain so interesting? Well, in parallel with a demand for privacy there is a growing demand for transparency. When you look at how a product like Venmo is evolving you can see that certain groups within the population are opting for their own notions of privacy and transparency and I think this represents an underlying and more general demand for transparency from institutions and control for individuals. This is where blockchain technology scores. Whether you think much about Bitcoin as a currency or not, trading digital assets using an open distributed public ledger means a new way of trading that can combine privacy and transparency to create new and trusted markets. And the City, I might observe, has always been about markets.
The uniqueness of blockchain assets (the end of what we technologies call “double-spending”) may mean that the impact of the technology is also felt in the physical. As Eric Schmidt of Google observed, this is the real technological breakthrough. Now you can have only one of a digital asset, that means that it can correspond to a physical asset. This leads me on to the fifth area of focus: the Internet of Things. I agree with the predictions I see all around about 2015 being a turning point in the evolution of the Internet of Things and I see examples of new collectivity and new devices around me all the time. What I don’t see is a security infrastructure emerging to manage those connections and manage those devices and this is where I think we may see intellectual effort rewarded in 2015. In fact, I can see that this might become the key focus area of the coming year as the Internet of things comes together from digital assets that are traded transparently, previously for the people involved in the training, in-app transactions using a variety of local identity and payment systems make for a seamless new environments of interaction and transaction. The new era of payments isn’t all about you tapping your iPhone at Marks & Sparks. It’s about your stuff paying other stuff, and it’s an incredible opportunity for the payments industry to expand and deliver.