The future: are you excited or scared?

Jul 10th, 2015

As industry analysts, we often comment on the impact emerging technologies and innovations have on our clients’ business. How can a financial institution become more “digital?” Will Apple Pay be successful and how quickly? How can a bank deploy data analysis tools to its advantage? These are questions we and our clients are dealing with on a daily basis.

Many of us have also seen presentations by futurists painting their visions of an increasingly digital future, where everything is connected and always on, where machines have reached human levels of intelligence, and so on. Given the relentless progress of technology, it is probably only a matter of time until such visions become reality.

However, I would argue that what many of us don’t do often enough is pause and reflect on the impact of technology on us as individuals and on the society as a whole, especially in the long term. I recently read a book that made me pause and think: The Circle by Dave Eggers. If you haven’t read it yet, Circle is a fictional internet technology company, sort of an imaginary amalgam of Apple, Facebook, Google, and Twitter. The best and brightest work there bringing to market their latest inventions, such as TruYou, “one account, one identity, one password, one payment system, per person.” Of course, that also means no more anonymity, so, for example, customer satisfaction survey scores are always close to a 100, and any lower ones are chased by the reps until they are re-scored. Tiny camera devices that can be left anywhere unnoticed and stream high quality video are introduced as an innocuous way for the surfers to check the waves at the remote beaches, but soon turn into a “Big Brother”-type ever-present eye. Some of the characters opt to go for “transparency” and start wearing always-on cameras, with unsurprisingly chilling implications for privacy.

What made the book particularly scary for me is that it is not an outlandish vision. Most of these things already happen today, albeit at a smaller scale. Anybody with a smart phone has a camera ready to shoot and post online, whether you like it or not (just ask Prince Harry!), and of course, we do need a better approach to digital identity, but hopefully not the kind that destroys any right to privacy and anonimity.

It’s not “just” the loss of privacy. If, as predicted, robots take over many of our activities, what are the implications for our societies built around work and jobs creation? And if you are not familiar with the work of Nicholas Carr, take a look at this essay, which warns against dangers of our brains being re-wired as a result of constant exposure to hyperlinks, tickers of “breaking news” and zings announcing a new email. We become easily distracted, always looking for the “next thing”; reading a longer piece or a book becomes a challenge.

Now, I don’t want to sound like a Luddite raging against technology. First, it’s not very original – Socrates warned us about the dangers of writing back in ancient Greece. Second, the progress of technology has brought and will continue to bring wonderful benefits. And I genuinely get excited about new technologies and amazing innovations. Overall, I am also excited and positive about the future. But it doesn’t mean that we can’t be critical, and have to succumb to every new hype or lose sight of what makes us human.

With summer holidays approaching, I will try and disconnect from gadgets. I look forward to spending time with my family and hopefully immerse myself in a book or two. If you are also heading for the beach, you could do worse than taking a copy of The Circle with you. Happy summer!

New banks, new names

Gareth Lodge

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Jul 10th, 2015

Dave Birch over at Consult Hyperion wrote a very interesting article today around the need to better name the stream of new non-traditional banking entrants. Have a read here.

This is something we’ve talked about with Clients in a similar way, but in the context of traditional banks. When you run a brain storming sessions, particularly for innovation, it’s often useful to “blow up” the problem. That is, magnify the problem to its maximum so you look at truly radical solutions rather than incremental ones. One such example was a scenario where traditional banking ended up with two types of banks –

1) IT banks, providing products and services to others. Citi with its co-opertition model might be an example of this. I labelled these manufacturers.

2) The other extreme was banks focusing on the customer, and focusing on providing the best products and services, an agora of things built by the manufacturers. I called this ISO banking.

Dave used iso to define one of his groups but in a very different way. He used iso from the Greek to mean equal. I wasn’t quite so clever – I used ISO as in the US group of card solution providers known as Independent Sales Organisations.

Which leads to a broader thought. The PSD2 introduces the concept of XS2A – essentially any third party can access account level information of any financial institution in Europe and be able to initiate a payment from that account. That muddies the distinctions above even further. For example, Dave’s descriptions imply (I think!) two components – a front end (a mobile app) and a back end (a funding account). In the neo- and iso- flavours, it’s the back-end that distinguishes the two, with neo a traditional platform, and iso with a far simpler account platform (a pre-paid card).

In PSD2, there are numerous variations. Three examples off the top of my head that illustrate what I mean:

  • No-back-end. PSD2 could create a third category where the “bank” provides the front end, but no back-end at all as it uses the platforms of one or more other FIs
  • Every end. This is in some ways an extension of the above, but with a slightly different spin. Bullet 1 reflects that consumers often have products spread across multiple institutions. At its simplest, XS2A allows true PFM for the first time in some countries. But this second point reflects that the lines are blurred already, particularly for a consumer. I suspect many would want to include all their money holding accounts – say your PayPal acount. Most consumers would think that as an non-FI, but, as they have a banking licence I assume they would be included as well under PSD2 (thoughts please!). But what about the true non-FI’s?
  • Front/back weighting. With XS2A, how many will be provider slick but simple skins, and how many will provide functionally rich front-end (and perhaps back-end too) that will far enhance the standard offerings. You can imagine this particularly in the wealth management space. These feel very different beasts, and need distinguishing.

The upshot is that Dave has hit the nail on the head in that we need more/better/different nomenclature. However I wonder if in Europe in particular we probably need a much more fundamental rethink. As the regulator explicitly seeks to disaggregate the payments value chain, this, coupled with technology advances, have much broader implications, and make traditional labels misleading at best.

I’ve only just started really thinking about this – but the more I do, the more I realise the more I need to do.


Biometrics: the next generation of corporate digital banking authentication

Patty Hines

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Jun 30th, 2015

Corporate treasury departments initiate and approve millions of dollars in high-value payments on a daily basis. As an example, in May 2015 the average amount of a US Fedwire transfer was $5.7 million. Because of the dollar value of these transactions, banks were early adopters of enhanced authentication for corporate online banking applications. Many banks continue to offer one-time-password authentication (on top of traditional username and password) using RSA SecurID or Vasco DIGIPASS hardware tokens at both login and payment initiation.

When Celent published its report “Corporate Mobile Banking Update: Adoption Conundrums and Security Realities” in September 2014, it highlighted alternatives to traditional two-factor authentication for corporate online and mobile banking applications. Alternative methods include voice, pattern and biometric authentication methods.

As discussed in the Celent Banking Blog “Logging Into Your Bank in a Heartbeat”, several banks have rolled out Apple’s Touch ID fingerprint authentication technology for consumer online banking login authentication. However, as quickly demonstrated by clever hackers, Touch ID is vulnerable to various hacking methods. For this reason, banks are turning to more sophisticated biometric authentication methods for its corporate online and mobile banking applications.

The focus remains on layered, multi-factor authentication, but combines authentication technologies in unusual and unique ways. Barclays Bank’s offering combines biometric and digital signature technology in an offering called “Barclays Biometric Reader.” To overcome limitations with traditional fingerprint scanners, Barclays is implementing Hitachi Europe’s Finger Vein Authentication Technology (VeinID) which reads and verifies the user’s unique finger vein patterns.

The latest authentication announcement comes from Wells Fargo who is combining facial recognition with voice biometrics. Wells Fargo is working with SpeechPro to pilot the new bi-modal security solution (VoiceKey.OnePass) and fine-tune the biometric authentication features. The solution uses a standard smartphone microphone and camera to capture a facial image and voiceprint. Wells Fargo is also working on authentication using eye vein scanning (as opposed to typical retina scans).


New authentication technologies, from a slew of relative newcomers to the financial services space, could eventually replace traditional hardware tokens and eliminate multiple authentication hoops throughout the digital corporate banking experience. Watch this space.

He who hesitates…?

Gareth Lodge

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Jun 29th, 2015

Mining data to create better products and cross-sell opportunities is a perennial topic of conversation with banks. We’re often asked who does it well – in fact, I was asked this just last week. And the answer is…not many, frankly. More the exception than the norm.

Some other industries who have recognised this however have taken action and made significant investments to tackle the problem. One of the more visible ones is perhaps Tesco, the UK retailer. It may have fallen on harder times over the last few years, but we shouldn’t forget the transformation they’ve gone through.

20 years ago they were one of the smaller, more old fashioned supermarkets in the UK, but at their peak became the third largest supermarket in the world, with one in ten pounds in the UK being spent with them.

How did they achieve this? In no small part their loyalty programme, ClubCard, which it launched in 1994. This was backed by initially hiring an analytics company called Dunnhumby. Such was the success of the scheme that Tesco believe that ClubCard paid for itself within 6 months. The then chair said at the first board meeting after the launch: “What scares me about this is that you know more about my customers after three months than I know after 30 years.” In context, the supermarket first to the market in the UK with loyalty, Safeway, abandoned its loyalty card in 2000, with the CEO claiming at the time “people have lost interest in points.”

Tesco bought a 53% share in Dunnhumby in 2001 for £30m, finally buying the business outright a few years later.

So why the post today? A couple of reasons:

Firstly, given the change of fortunes in Tesco, they’ve put up a number of assets for sale, including Dunnhumby. The price tag is believed to be in excess of £2bn.There seem to be a broad range of people interested in buying, so the price is likely to be achieved.

Secondly, it’s not just private equity firms interested, but big technology firms such as Google who are considering buying them as well. It’s not just the data they’re after the skills and techniques. That said, 20 years of data for over 1 billion customers globally (in excess of 40 terrabytes of data), has huge value in itself, which is why the ad agency WPP is one of the other bidders.

The take-away for banks is perhaps a wistful “if only.” If only the banks had stopped worrying about competition from the supermarkets, and had emulated them a little more, they too might have benefitted from the insights from similar companies, and might also have such a prized asset as well.

Banks are fast followers rather than leaders and have been very risk averse. With perhaps the golden age of fintech firms upon us, banks ought to be taking an even more proactive approach. Incubators are all good – but banks need to be more entrepreneurial and take a more speculative approach, or they stand to not reap all the rewards.


The new face of digital banking

Jun 26th, 2015

I’m just back from a very interesting week in London at the Marketforce-sponsored “The Future of Digital Banking” forum.  I served as Chairman for Day 1 of the two-day conference and had a front-row view of the proceedings. The theme of the conference was that customer-centricity and innovation need to be the guideposts to a bank’s transformation from a bricks-and-mortar operation into a digital enterprise.

Perhaps my favorite presentation of Day 1 was offered by Dr. Nicola Millard, the Head of Customer Insight & Futures at British Telecom (You mean the phone company? Yes, that BT!). Nicola has a PhD in Human-Computer Interaction, a very hot area of IT these days as the focus is on UI organization and the impact on user experience.

According to Nicola, when dealing with the increasing demands by clients for digital service provisioning, banks should are assume that clients are self-centered (it’s all about me!), believe that all banking services should be extremely easy to use, and yet require quick access to a live person when all else fails (live chat is preferred). One stat that struck me was that 90% of BT’s clients would like the ability to email the customer service agent that they had spoken with on the phone – not sure how this would work out in banking, where phishing is always a concern – but still great food for thought.

On the heels of the conference came news that Atom Bank, a new challenger bank in the UK, had received its full license from the Bank of England.  Sophie Haagensen, Head of Strategy and Planning for the Durham-based bank, had participated in a panel on Tuesday and had indicated that Atom Bank would seek to leverage its position as a legacy-free direct bank (no physical branches) to build a new model for customer engagement.

As if to drive home the point, Atom Bank announced that it will initially be operating in “mobile only” mode, with online banking to be rolled out at a later date. It was also announced that FIS was selected as Atom Bank’s IT outsourcing partner. The specific core banking platform selected was not disclosed, but it’s likely to be Profile, the real-time system that FIS leads with in the international market.

This is certainly good news for FIS, which had been looking to put some points on the board since global rival Fiserv announced in July of 2014 that it was launching a new outsourcing service called Agiliti (based on its well established Signature core banking platform), with Think Money Ltd. as its launch client. With more than two dozen firms having applied for banking licenses in the UK, it appears that the competitive heat of summer has finally arrived in London.


The next step in European ACH competition?

Gareth Lodge

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Jun 26th, 2015

Yesterday saw very interesting news coming out of Europe regarding a joint venture between 6 European ACHs.  To understand why many of us have sat up and taken VERY close interest in the announcement, we need to review some recent history first. Much of this will be covered in more detail in a forthcoming report on ACHs.

In the very early days of SEPA, the European Commission made many public comments. As SEPA was as much a political goal as anything, many of these were observations on how the Commission thought the market ought to develop. Given the size of the task and the perceived reluctance to the banks to do anything about SEPA, the Commission narrowed down the observations to a set of specific requirements, eventually culminating in the regulations that made migration mandatory in Euro countries. The downside is that some of the initial elements triggered some activity, but they were never fully pushed through. One such item was the Commissions perceiving their to be an over-supply in payments processors. In the Commissions view, a single market would reduce the 50+ processors to between 5 and 7. That would be enough for a competitive market, but not so many for an inefficient market. The latter stance is based on the fact that processing is broadly a fixed cost business and so the larger the volumes processed, the cheaper the cost per transaction is to process.

As a result of this statement was a flurry of activity amongst the ACHs to be one of the “survivors”. It triggered a wave of mergers (Equens is a German/Dutch/Italian merger for example), near mergers (everyone courted everyone else!) and direct approaches to banks and markets to acquire them as customers and boost volumes.

But whilst there were mergers, the market broadly remained unchanged. Indeed, some markets chose to build their own SEPA compliant ACH, rather than use the services of a SEPA-ready ACH. There are many reasons for this, not least ownership and control.

The announcement yesterday therefore was very significant. At face value, 6 ACHs are going to collaboratively process cross-border SEPA payments. Given the tiny volumes, this isn’t exciting.

However, dig deeper, and it becomes clear that Equens – arguably the largest ACH in Europe – is providing all the infrastructure and services to the new company, and the new joint entity company is registered at… Equens HQ. Those other 5 ACHs are considerably smaller – their volumes combined are still dwarfed by Equens.

Secondly – it’s for cross-border SEPA payments today but mentions possibly delivering the real-time payments interoperability that’ll be required going forward. That means more ad more services that will be offered by Equens to these other ACHs. It’s particularly noteworthy as many believe that EBA Clearing has been positioning itself to provide exactly that service, and has been leading the discussions.

The third point is a broader one. There has been considerably more talk in the last few months about processing, given various elements of PSD2. It’s not yet clear whether the scheme/processor split will apply to “just” card companies, particularly when some of the ACHs process cards. A number of organisations have also mooted whether the XS2A provision potentially provides a way to bypass ACHs – that is break the connection between bank and ACH. Given the range of potential impacts, it seems likely that there will at least some impact.

Finally, we are aware of more than one discussion in Europe about the future of that countries ACH, particularly as they ponder on how to deliver a real-time payments solution for that country. All bets are off.

The net result suggests to me that we’re entering new phase for payments processors, particulalrly ACH, which has been a relatively stable market for many years. The industry – and technology – is in a very different place than when the discussions happened in c. 2005. What made sense then may not make sense now. We believe that the announcement yesterday will be just the first of a number over the next 2 years. The phrases exciting times and ACHs can be at last mentioned in the same sentence!

London calling: “payments are missing”

Jun 18th, 2015

From a brief scan of the morning headlines comes news of an IT glitch at the Royal Bank of Scotland.

RBS Help announced via its Twitter account at 5:45 AM London time yesterday that “some customer payment are missing this morning — we are investigating this issue as a matter of urgency,” and further advised that affected clients could call or visit their branch if they “have been affected and need to access funds today.” Six hours later, RBS reported that the underlying issue had been fixed and that all missing payments – reportedly 600,000 payments directed to client accounts at RBS, NatWest, Ulster Bank, and Coutts – would be restored no later than Saturday.

While certain questions remain (like what sort of a payments glitch would take a three full days to resolve?), to RBS’s credit, it attempted to get ahead of the issue quickly in order to allow customers to mitigate any problems that might arise from the bank’s glitch.

Somewhat predictably, some industry observers are already pointing to RBS’s mainframe-based “legacy” payment processing systems as the root cause of the problem. Huh?  The logic appears to be that systems that are old can’t operate reliably, simply because they’re old.  One observer went so far to claim that the lack of courage was the key reason why banks delayed needed modernization projects (OK, courage was not exactly the word used, but you get the point).

To put this in perspective, RBS is said to have roughly 20 million retail clients in the UK.  RBS has yet to make an official statement on the matter, and so we’re left guessing whether the 600,000 payments impacted by the glitch represented a small part, large part, or all of the bank’s payment flow on Tuesday.  (I’m guessing it’s a small part, but that’s no consolation to those who were impacted).

The last time a similar outage in RBS’s payments system occurred (in June of 2012), the culprit was found to be a problem with a systems upgrade, specifically a piece of software that handled the processing of payment batches. RBS has not yet officially commented on the cause or scope of the glitch this time, so much of what has been written in the last 24 hours is little more than speculation.

What is clear is that most mainframe systems do work reliably on a daily basis – RBS is said to process on average more than 20 million payments a day – and systems rarely fail spontaneously of their own accord. So when RBS does comment on the situation, I will be looking to read the tea leaves for signs of the human element at work here – inadequately tested system upgrades or simple human error that was not immediately detected by the bank’s internal controls.

That’s not to say that banks should ignore the opportunity to continually update and improve their legacy processing environment (they ought to!), but it does seem a bit cartoonish to treat every processing glitch as another call to action for wholesale systems modernization.

The banks that do embark on systems modernization projects are not Cowardly Lions returning from the Land of Oz.  Rather, they are forward-looking institutions that seek market leadership through the delivery of better products and a more satisfying banking experience for the customer. For these banks, innovation is the goal and IT agility is the route to their destination.

Where front-office innovation leads, back-office legacy will follow, and so it will be in time with the mainframe.  In the meantime, let’s show some respect to our long-serving and trustworthy friends.

Let’s stay tuned…


Is the branch the newest digital channel?

Stephen Greer

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Jun 17th, 2015

The branch is an important channel is every bank, but the rise of digital raises two questions: what’s its role in with a digital engagement model, and how should banks think about its value? First, consider some of the challenges of the traditional branch for the modern, digital consumer:

  • Branches suffer from lack of talent availability. The best person for the job is not always going to be in the right location at right time. Yet mobile is driving “right time, right place, instant” contextual interactions, and consumers are increasingly expecting this level of service.
  • Many of the frontline staff are underpaid and undertrained, yet are the face of the institution. They often aren´t trained properly or paid enough to care about delivering the kind of customer service banks are trying to deliver through digital.
  • It’s difficult to distribute foot traffic across locations. Some branches suffer from massive queues, while employees at other locations are killing time on Facebook. This adds cost, lowers efficiency, and is incompatible with demand for instant service from consumers as well as modern IT delivery.

Digital has allowed industries to overcome some of the barriers facing other customer experiences. The challenges facing branches are no different. Virtualizing the workforce, aggregating talent, and allowing customers to access them remotely, either in a branch environment or from a personal device, is at least one path forward. Banks need to start thinking about the branch as a digital channel. Some institutions like Garanti Bank in Turkey, ICICI in India, and Umpqua Bank in the US are already starting to think in terms of remote delivery.

As video service becomes more mature (i.e. video advisory through tablets), user experiences across devices will begin to blur, and the branch of the future will look even more like a digital experience. In the new environment, the branch becomes another presentation layer.

Vendors like Cisco are already starting to move in this direction, combining telepresence, remote signature, displays, and other infrastructure to allow banks to facilitate remote interactions using context information. Others in the market are beginning to follow suite.

The branch of the future has been a topic of discussion since the advent of online banking and mobile. While some meaningful progress has been made in branch transformation, some large institutions have launched numerous pilot ideas and concept branches that have amounted to little more than PR stunts. The role of the branch is changing, but it’s obvious that many aren’t exactly clear what that role is going to be. By talking about the branch as a digital channel, institutions may be better able to craft a true omnichannel strategy for customer experience.

Corporate banking: serving the needs of business clients

Patty Hines

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Jun 12th, 2015

Last week I joined Celent’s banking practice as a Senior Analyst covering Corporate Banking. I join fellow corporate banking analysts, Gareth Lodge and Jim O’Neill. Gareth covers payments back office, payments infrastructures, and payments connectivity. Jim covers core systems modernization, the impact of cloud computing, and treasury management technology. My coverage will be focused on the technology impacts of meeting the financial management needs of business customers, ranging from global multinational corporates to small businesses. This includes global transaction services, small business services, commercial and small business lending, and the changing role of corporate treasury and its impact on meeting the needs of corporate banking clients.

It’s an exciting time to return to the Corporate Banking analyst ranks. In the face of an uneven global economic recovery, evolving regulatory imperatives, and unpredictable supply chain disruptions, corporate treasury and finance teams have expanded roles and responsibilities. These developments are putting increased pressure on financial services providers in the areas of working capital management, liquidity management, external financing, payables and receivables, international trade, supply chain finance, merchant services and delivery channels.

For the large global banks serving corporate and institutional clients, transaction banking revenues and deposits are holding up due to strong transaction volumes, despite a low interest rate environment. Looking across the largest global banks, transaction banking’s share of total bank revenue averages 13%, with its share of deposits averaging 36%.

Transaction Banking Revenue and Deposits

Transaction Banking Revenue and Deposits

On the lending side, US commercial loan outstandings have more than fully recovered from the 2008-2009 financial crisis. US commercial and industrial loans, particularly hit hard during the crisis, have rebounded almost 45% since their lowest point in 2010. Commercial lending in the euro area is another story. Since their peak in 2008, loans to corporations have declined 9%.

As discussed in this year’s Top Trends in Corporate Banking 2015 report, banks are facing a complex new reality with disruptive technology, the changing role of corporate treasury and regulatory imperatives shaping corporate banking strategies in new and unprecedented ways. In order to maintain (and hopefully grow) corporate banking revenue and market share, banks need to address the top trends outlined in the report in the context of Celent’s three overall financial services technology themes:

• Digital and Omnichannel
• Innovation and Emerging Technologies
• Legacy and Ecosystem Transformation

If you have feedback on additional top corporate banking trends we should be covering, I would love to hear your ideas.


Apple Pay: welcome to the UK!

Jun 12th, 2015

This week Apple announced that Apple Pay will finally make its debut in the UK. Most of us expected that after the US launch, Canada and the UK would be the next countries for Apple Pay as it expands internationally. Those of us here were hoping it would happen by April, but it looks like it will now finally be arriving in July.

The UK market has many ingredients for Apple Pay to succeed. Apple’s market share is over 40%, having climbed upwards in the last 9 months on the back of strong sales of the latest Apple 6 and 6+ devices. And the acceptance environment is rather “contactless-friendly”: about 250,000 merchant locations already accept contactless transactions in the UK, including leading retailers, such as Boots, Tesco, Marks & Spencer, and many others. Importantly, Transport for London has upgraded its infrastructure last year to start accepting regular contactless bank cards, in addition to Oyster, its own prepaid travel card. TfL confirmed that Apple Pay will also work on the London transport network, which should be a significant contributor to Apple Pay transactions in the early days.

Most of the leading issuers are also on-board. Customers with cards from American Express, First Direct, HSBC, Nationwide, RBS Group and Santander will be able to use Apple Pay at launch, with the Lloyds Group, M&S bank and MBNA joining later in the year. One notable omission is Barclays, although apparently the two companies are continuing the dialogue.

What is not clear yet is the commercial terms between issuers and Apple Pay – everyone remains tight-lipped about it. I would be very surprised though if the UK banks end up paying any transaction fees to Apple. As I already called out in my report on Apple Pay, interchange rates in the UK and Europe are simply not high enough to support any revenue sharing. Furthermore, post Android Pay and the networks dropping charges for their tokenisation services, any wallet fees are looking increasingly unlikely.

Most contactless terminals today have a £20 transaction limit, which makes sense when you accept contactless cards, which offer no cardholder verification mechanism. It doesn’t make sense for an Apple Pay transaction which uses biometric cardholder authentication via Touch ID. That is, assuming Touch ID works – I’ve been struggling badly with it lately, as my shiny iPhone 6 simply refuses to recognise my fingerprints most of the time. If I can’t resolve it, I might have second thoughts about using Apple Pay, as the last thing I would want is “faffing around” trying to pay with my phone which doesn’t work… The transaction limit in the UK is going to £30 in the autumn. And those retailers who upgrade their terminals (at least, the software bit) should be able to decide against imposing any limits for Apple Pay transactions.

We’ve had options to pay by phone in the UK for a while now, such as paym, Barclays’ Pingit, PayPal and a few other solutions. Zapp, a mobile payment method that would allow customers to pay directly from their bank accounts, is also due to finally launch later this year. Still, Apple Pay’s arrival is major news, and should give a much needed boost to the UK’s mobile payments scene. Exciting times!