Busy Few Weeks in the Payments World

It has been busy few weeks in the payments world. Not surprisingly, reaction to Apple Pay’s announcement is the hottest topic in payments. It even manages to dominate European conferences with no specific agenda items dedicated to Apple. We at Celent added our own voice to the debate by publishing a new report on Apple’s entry into payments, in which we describe Apple Pay and assess its prospects. Celent clients can download the report here, and all are welcome to join me at the webinar next Monday, October 20th. By then, Apple Pay should be up and running – the iOS upgrade which would launch Apple Pay is expected over the weekend. In the meantime, PayPal announced that it would separate from eBay and its core auction business, and would get a new CEO, Dan Schulman, a seasoned payments executive from American Express. Arguably, both companies will be able to better focus and compete as stand-alone businesses. However, it’s difficult not to think that the separation also makes them both more “in play” in the industry consolidation. Immediately, rumours started swirling around who might buy/ merge with PayPal; some of the loudest noises concentrate around Square, although so far those rumours have been denied by Jack Dorsey via Twitter. Autumn is traditionally a conference season, and this year again, many of us are attending the leading events from Sibos and EFMA to Money2020, AFP, and BAI. My colleague Stephen and I were last week at Mobey Day in Barcelona, as usual an excellent event; many thanks to Mobey Forum for their cordial invitations! As a sign of its growing presence and influence, Mobey Day became two days this year. It focused on two major themes – Host Card Emulation (HCE) and biometrics. While the latter was brought to the forefront by Apple Pay, the former can certainly be an alternative strategy for banks looking to deploy NFC solutions for Android devices. Dan Latimore and I will soon be attending Money 2020, and are very much looking forward to spend a few days immersed in payments innovation and meeting our clients. Our diaries are filling up fast, but if you are going to be there and would like to meet, let us know or reach out to your Celent account manager. However, as much as we all get excited about innovation in payments, we can’t afford to forget what makes it all work in the back office. We have been conducting extensive research this year into card management and transaction processing (CMTP) market and the vendors that serve that market. Our report offering “a dozen observations” on the market trends has been out for a couple of weeks now and I will be hosting a webinar on this topic next week on October 22nd – join us if you can.

Apple Enters Payments

Yesterday Apple announced entering the payments space with Apple Pay, a new way to pay in physical stores and mobile apps. The move was not unexpected – the question of when and how Apply would do something in payments was subject to much speculation in recent months. At Celent we also published a report in March this year called Apple in Payments: What to Expect? Yesterday, we got the answer. Details of the announcement can be found here. In this blog I would like to focus on some of the key highlights of the solution and consider its chances of success. As we predicted in March, Apple did NOT launch an open wallet available on all mobile devices, including those using Android and Windows operating systems. Instead, Apple focused on providing a seamless payments experience for customers using Apple’s own hardware devices. In fact, those devices are only limited today to the newly announced iPhone 6 models and the Apple Watch. We can only assume that any future iPad models will also have this capability, as otherwise Apple would be shooting itself in the foot in the m-POS market. Our report also discussed that Apple was going to make use of its relevant assets, namely access to card details registered at iTunes, Passbook app, Touch ID and biometric customer authentication, iCloud keychain, AirDrop and iBeacon. The first three are indeed at the heart of Apple Pay’s proposition. However, I was surprised to see no mention of iBeacons, especially given their potential synergies with payments. P2P payments capability is also currently missing. Again, I would expect we will hear more from Apple on both of those topics. We thought that Apple would start with payments facilitation online before entering physical stores. However, yesterday’s solution addresses both areas immediately. Also, we thought that Apple might want to leverage NFC technology, but would implement it differently from traditional NFC contactless payments. Indeed, Apple Pay uses NFC in a very different way – instead of storing actual card details, Secure Element on the new iPhone only stores a token associated with a card. The payments transaction requires combining that token with a dynamic security code generated for each transaction and a biometric customer authentication based on Touch ID. This approach also turns card provisioning on its head – instead of starting with banks and TSMs, it starts with the customer who can take a picture of the card and have it “tokenised” immediately (assuming it is issued by one of the participant banks.) It is interesting to note that when Google Wallet launched, they were not going take any cut on the payment transaction, but were seeking to make money from transaction data. Apple claims not to see any of the transaction data, which would alleviate major concerns for both merchants and issuers. However, it also begs the question of how Apple intends to make money from this service. One view is that they won’t. However, although unconfirmed, there are rumours that the issuers will be paying Apple up to 25 bps for each transaction. Some speculate that Apple, confident on the security of its approach, has promised issuers to take on some of the transaction risk. Others argue that Apple can pull it off because of its size and importance, perceived or otherwise. Which brings us to a number of questions:
  • How easy will it be for Apple Pay to scale? The announcement talked about the issuers who agreed to participate as well as merchants that will be able to accept the service. But what kind of pre-existing relationships are required between Apple and issuers and merchants for the system to work? Clearly, issuers will need to be able to handle tokenised transactions, although that perhaps can be done by 3rd parties on their behalf. However, if they also need to negotiate the commercials, the enrolment process is likely to be more onerous. For merchants, my understanding is that any merchant capable of accepting contactless should be able to accept Apple Pay; however, online and in-app merchants would have to integrate Apple Pay into their checkout experience.
  • How will the merchants react? On one hand, Apple and its market clout can set the standard for the industry providing a much needed direction to merchants where to invest. It also helps that the approach is aligned with EMV migration in the US and any new terminal that the merchants install should be capable of accepting Apple Pay transactions. However, other questions remain, such as:
                    – How will MCX react? MCX just recently announced their own payments wallet, CurrentC; most of the big MCX merchants were notably absent from the list announced by Apple. Can MCX afford to boycott Apple? Can Apple Pay be successful without MCX merchants?                     – What will it do to merchant transaction economics? US merchants have been enjoying reduced debit interchange rates and ability to decide how to route the transactions. Apple Pay is likely to tilt the balance back towards credit transactions. And how will the routing choice for debit work in the tokenised Apple solution?
  • How will the consumers react? Clearly, the early demos show a very slick user experience, as we have grown to expect from Apple. However, without any additional bells and whistles, will it be enough to convince the consumers to reach for their mobile phones instead of their cards when paying? Sure, Apple’s approach is more secure than a mag stripe transaction, but will consumers understand the nuances of tokenisation or will they rather remember the nude pictures stolen from iCloud? In Europe, these arguments are even weaker – many consumers already enjoy the benefits of EMV and the speed and convenience of contactless (card) transactions.
So, how significant is this announcement? Time will tell, and it’s not going to be an overnight success. Consumers will need to get the new phones, and while there are 800 million or so iTunes accounts, about 25 million of them are in the US and eligible for an upgrade next year. Merchants in the US will need to install and switch on contactless. And Apple will need to go internationally, where it enjoys a much smaller market share. Having said that, it is clearly good news for mobile payments, paving the way forward for new payments technologies such as tokenisation and biometric authentication. And after all the failed and floundering mobile payments initiatives, this is surely a cause for the industry to be cautiously optimistic.

Of Apples and Banks

Zil’s most excellent post about his recent experience with a new payment type highlights one of the challenges that all new systems face – they’ve got to work “out of the box”. Few people (including Mrs Zil!) would have been so patient. That reminded me of a recent conversation Zil & I had around iPhones, and more generally Apple. Last year Zil swapped his iPhone for another leading brand of smartphone, for a variety of reasons. But he’s almost certainly going to be swapping back, primarily because the iPhone works “out of the box” with other things he has. That phrase again. The Apple ecosystem works well together, and, for most people, life is far more straight forward by sticking to just Apple products. I think we forget sometimes that this is perhaps the single biggest differentiator for Apple. The total picture is more thought through and designed than most others. For example, many people don’t realise that Apple weren’t the first to market with the mp3 player. They were 3 years behind the first, and still after Intel (yes, that Intel!), Sony, Creative, and Bang and Olufsen. Nor was it the best (and arguably still not) in terms of features and functions. But it came with iTunes which consumerised the process of managing music – and more importantly, the buying of music, seamlessly. iTunes, for the advanced user such as me, is a real pain. Not only does it not provide the functionality I require, but it struggles with the (atypical) size of my music collection. But I still use it, because it works with my ecosystem more broadly and that offsets the deficiencies. So what’s the point of this post? I think a couple of things stand out for me. Apple are rumoured to be moving into mobile payments. The issues Zil faced will almost certainly be overcome by Apple, because of their approach to things. Equally, we can expect that it’ll be far broader and better thought through service than many offerings. And as a result, whilst it may not be the best service, it’ll probably get traction quicker. Secondly, the other take-away for banks for me is not to rush innovation, but to get it right, and to seek to how to make it a more seamless service. One positive thing as a result of being an analyst is that my bank has now provided me with a relationship manager, who can highlight to me a range of services, and is “just a phone call away”. Amazon and Apple are remarkably accurate in suggesting things I might like to buy. Not only does my bank not do it, (and I think they must have a “lucky dip” approach to the mailshots they send me!) but rarely is my relationship manager or bank manager empowered to do even start the sales process, even for something as simple as getting a credit card. This isn’t about omni-channel in terms of technology, but omni-channel in terms of customer. As a customer, I don’t care whether it’s a different part of the bank that the product is coming from – if has the same bank logo on, then too me it’s the same people. Some banks have lost sight of the old adage – it should be easy to buy, not easy to sell.

Learning from Apple Store’s Mistakes

Apple is often cited as an excellent example of how bank branches should be – Apple Stores that is. I couldn’t disagree more. Far from a thorough analysis, let me support my disappointment with the Apple Store customer experience. I recently had need for a simple transaction. All I wanted was a new iPhone. What could be simpler? I recently lost an iPhone to an unfortunate (and easily avoidable) vacation accident. It was less than a year old and I had no upgrade credit yet with my wireless carrier. My colleague Jacob Jegher suggested that exchanging it for a new phone at an Apple Store might be the best way forward. The nearest store was 19 miles away and located in the center of a large retail mall. In Atlanta, 19 miles is a long ways away! Early afternoon round trip time was 90 minutes not including time spent in the store. I’m an advocate for lower branch densities – but not this low!
Apple Store – Perimeter Mall, Atlanta, GA

Apple Store – Perimeter Mall, Atlanta, GA

Wisely, I called the store before making the trip. The extremely friendly and knowledgeable Apple rep on the phone politely reassured me that I could have a new phone for $199 + tax as long as I still had my previous phone and was willing to leave it at the store. All I had to do was make an online appointment and check in at the Genius Bar once there. Simple enough, but why didn’t the Apple rep make an appointment for me while I was on the phone? I strategically planned an appointment on a Thursday afternoon, thinking it best to avoid weekends, particularly for a retail mall based store before Christmas. Arriving at the store, I found it a bee hive of activity. The relatively small store must have had 60 people in it. After checking in, I was asked to sit at an apparently random bar stool. Ten minutes later another Apple employee greeted me, verified my identity, confirmed the purpose for my visit and politely asked me to move to a second bar stool deeper into the store. Why couldn’t the first person meet my very simple need? Apple Store 2 After another 10 minute wait, a third Genius greeted me and repeated the information exchange I had recently engaged in with his two colleagues. He did this while multitasking – he was also helping a young lady with some technical problem. A short time later, he returned with a new phone and proceed to enter serial information into his system using, of course, an iPad. I was struck at how manual the transaction was. The box was bar coded. It could have been trivially scanned in the back-office. After agreeing to terms and conditions, the chap was ready to part with the phone in exchange for my payment. After three unsuccessful swipes on his separate iPhone based POS terminal, a re-boot was necessary. Finally, I was finished. Total elapsed time: 40 minutes. There is much for banks to learn from Apple: Apple Table

Omni-Channel Roundtable in Toronto — the Summary

We recently held a banks-only roundtable at our offices in Toronto to discuss “New Imperatives for Omni-Channel Delivery.” With representation from Canadian and US financial institutions, we had a robust conversation around the movement from “multi-channel” (old and siloed) to “omni-channel” (integrated and mutually reinforcing). Some of the attendees had interesting – and fairly recent – titles: “Director, Multi-Channel Experience” and “Director, Multi-Channel Strategy” were two that were particularly noticeable, while two others had “Channels” in their title.  Taking an integrated view of the channels portfolio appears to be catching on in Canada! Some interesting observations surfaced.
  1. Banks are rolling out channels and touchpoints without necessarily teaching the customer how to best use them.  When ATMs (or ABMs, north of the border) first came out, bank personnel would walk customers over to them and give them a basic tutorial. There is precious little analogous activity in our new digital channels; we simply assume that customers will pick up on how to use them.  Apple has trained us to think that really good experiences need no tutorial, but that’s not necessarily the case in banking, particularly when it comes to security concerns.
  2. The session didn’t address Personal Financial Management (PFM) directly, but when we touched on it, the group took off on a twenty-minute tangent!  There’s clearly a lot of interest in PFM despite anecdotal adoption rates that continue to hover around 10%.
  3. Piggybacking off existing infrastructure, e.g., the AppStore ratings engine and comments section, is a great way to garner customer feedback. The key, obviously, is to listen and act on the comments that customers provide, and at least one bank watches its ratings assiduously and uses the feature requests and complaints as a key driver of release improvements.
  4. As in the U.S., the fate of the branch network is an important strategic issue. One component that will have some bearing on this is video banking, whether through hardpoints or consumer devices (laptops or tablets). Bankers are clearly keen to determine how video can supplement other channel experiences.
  5. A sneak peek of a Celent survey of Canadian banking customers showed their behavior to be remarkably similar to Americans’.  While there were a couple of exceptions (to be detailed soon in an upcoming report), there were no huge disconnects.  Despite some of the differences in the structure of our two banking systems (oligopolistic vs. fragmented, and cooperative on infrastructure vs. wildly independent), our consumers tend to view and use their banks similarly.
We’re looking forward to additional roundtables in 2014.  If you’ve got specific topics you’d like to see addressed, or cities you’d like us to visit, please let us know!

Would You Rather Check-in Or Check-Out?

You know the drill – you go into the store, select your goods, and take them to the cashier to check out and pay. What if we flipped the process on its head and you started with a check-in instead? You come to the store and your phone announces your arrival. The merchant knows you are here and is able to communicate with your phone as you move around the store, providing relevant information, such as product details, stock availability and special offers. When you see something you like, you just add it to your virtual shopping basket and when you are done, you simply leave (most likely, after you’ve demonstrated to someone that the contents of your shopping bag correspond to the items in your virtual basket.) What about payment? Well, the payment simply happens in the background based on your registered preferences (e.g. a card). Forget NFC, EMV and other complex buzzwords. We already highlighted this as a potential future scenario in our report on Digital Wallets last year. A number of announcements in the last 10 days or so indicate that this future might be closer than we think. Both Apple and PayPal announced new developments based on Bluetooth Low Energy (BLE) technology, iBeacon and Beacon respectively. The Beacons are essentially small devices that merchants can put around their stores. These devices then use BLE technology to communicate with other devices, such as Bluetooth compatible phones. Their energy consumption is very low and they don’t need Wi-Fi or a phone signal to work. Most excitingly, with built-in micro-location geo-fencing features, Beacons can enable new applications in indoor mapping. For example, iBeacon supports “enter” and “exit” events, so it can send different notifications while entering into the range and exiting out of the range. BLE has been touted for some time as NFC killer, and it’s easy to see how it can replace the NFC payment (NFC in card-emulation mode). Of course, NFC is also simply a communications technology (peer-to-peer mode), so BLE will also be competing with NFC tags. BLE devices are more expensive than NFC tags (~$30-50 vs $0.10), but their communication range is much bigger (up to 50 metres vs ~4cm), so the merchant would need fewer of them. It may be a coincidence, but there were further bad news to the “NFC camp” in the last few days in the US. First, Capital One, one of the three issuers that supported the Isis pilot (Chase and Amex were the other two), announced it would be withdrawing from Isis. Then, Google Wallet announced its new app with many new features, such as P2P payments. The app will be available to all Android phones, including those running on MNOs other than Sprint. While Sprint was the original and the largest MNO partner, Google Wallet has since rolled out to a number of smaller networks, including Virgin Mobile, US Cellular and Metro PCS, so technically it was available to more than one MNO, just not the 3 large giants behind Isis. The new app doesn’t change that – if you want to use NFC payments at the POS, it will still only work with selected handsets on Sprint and those other MNO partners. However, to me this is another indication that Google Wallet is re-focusing its attention on e-commerce, P2P, and other payment use cases, just not physical POS payments. I also thought the announcement on offers was interesting, as the wallet allows the customer to capture the offer irrespective of where it comes from and present it for scanning at the POS. The significant shifts here are the expansion of the universe of available offers and the fact that you don’t need NFC and tapping to get them redeemed, both of which could important catalysts for increased usage of the wallet. Mobile payments never cease to be exciting and interesting. Integration of BLE technology could be a game-changer for the industry.

Microsoft and Nokia: What Kind of Marriage Will It Be?

Today Microsoft announced that it has purchased Nokia’s mobile phone business. According to the announcement, “Under the terms of the agreement, Microsoft will pay EUR 3.79 billion to purchase substantially all of Nokia’s Devices & Services business, and EUR 1.65 billion to license Nokia’s patents, for a total transaction price of EUR 5.44 billion in cash.” Both companies have been struggling to adapt to changes in mobile computing – Nokia has lost its leadership in handsets, and Microsoft was rather late in announcing its latest Windows mobile operating system, which remains a distant third to Apple and Android. So, what can we expect from this marriage? One of the commentators on The Times website summed up the question rather bluntly and concisely: “Interesting. Microsoft, who failed to anticipate that computers would become more like phones, merges with Nokia, who failed to anticipate that phones would become more like computers. So will they end up in a perfect partnership of complimentary skills and experience? Or will this create a behemoth that consistently fails to predict the future?” In many ways, the merger is a natural progression of the deep partnership that the two companies struck two years ago. It appears now that both agreed that the next step in the integration was required. Or was it perhaps a defensive move for Microsoft to make sure its main handset partner does not fall into competitive hands? Mobile platforms so far have been characterized by two rather distinct approaches. In the “closed” camp, there is Apple with its tightly controlled and integrated ecosystem, from operating system to handset to strict app approval process. In the “open” camp, we have Android – an open operating system available to multiple handset manufacturers. Microsoft and Nokia alliance so far seems to have fallen in between the two camps – it was neither as tightly integrated as Apple, and given Nokia’s dominance of Windows-based handsets, perhaps not as widely open as Android. While the merger is pointing towards increased integration, the question remains whether the combined Microsoft/ Nokia indeed want to fully emulate Apple’s closed strategy. One of the selling points of the latest Windows platform is its seamless integration across devices, from desktops and laptops to mobiles and tablets (a move Celent applauded when it was announced), and I don’t think Microsoft has any intentions of entering the hardware market in the traditional computing space. The outgoing Microsoft CEO Steve Ballmer described today’s announcement as a “bold step” and “a signature event in our transformation.” It certainly is. More competition in the mobile platform space is very welcome, so we wish Microsoft and Nokia’s marriage is a success.

Now, Virtual ATMs?

All things mobile are so hot right now, and for good reason. Smartphones are quickly overtaking mobile telephony devices at breakneck speed. Remember when people talked on their mobile phones? AT&T activated 8.6 million iPhones and 10.2 million smartphones in the last quarter. Verizon iPhone activations increased by 47% in th3e past quarter. 6.2 million of the 9.8 million smartphone activations in the past quarter were iPhones. Beyond the growth in smartphone usage, it seems new mobile payment options are emerging with mind-numbing regularity. But what about cash? As much as mobile payment proponents would love to see it occur, cash hasn’t shown much migration to digital payment alternatives. Will the erosion of cash usage accelerate? I think so, but cash will be commonplace for the foreseeable future. In fact, that’s why there are so many ATMs. Until recently, 90% of bank-owned ATM transactions were one thing…cash withdrawals. This need for cash spawned the installation of 135 ATMs per 100,000 adults in the US – that’s roughly one ATM for every 750 people (including non-bank owned devices)! As far as we know, this represents the highest ATM density in the world, except for Spain and Canada (see below).

ATM Density

ATM sales have stalled over the past few years to no surprize. We probably have enough of them deployed – in developed countries at least. But what if there were a credible alternative to ATMs for cash dispensing? Apple apparently thinks it has one. It has filed a patent application accordingly. I was made aware of this courtesy of Janney Capital Markets.

Forget Digital Wallet. Apple Wants to Turn YOU Into an ATM Via Ad-Hoc Cash Dispensing Network A recent patent application filed by Apple (AAPL – $456.83; Buy, Janney analyst Bill Choi), describes an iTunes-based ATM network. “Need some quick cash right now and there’s no ATM around? Launch the Cash app, and tell it how much do you need. The app picks up your location, and sends the request for cash to nearby iPhone users. When someone agrees to front you $20, his location is shown to you on the map. You go to that person, pick up the bill and confirm the transaction on your iPhone. $20 plus a small service fee is deducted from your iTunes account and deposited to the guy who gave you the cash.” The patent application makes 24 claims and makes interesting reading. The idea invites a few questions…
  • Could Apple pull it off? Effortlessly! It has all the requisite components: a critical mass of iPhone users, geolocation enabled on the vast majority (I think), a distribution mechanism for the requisite apps and its iTunes accounts each iPhone user must maintain.
  • Would anyone use it? That invites a less obvious answer. Both Apple and the cash provider would need some incentive. Research suggests consumers aren’t fond of ATM surcharge fees, particularly as they grow over a couple of bucks. The fee structure would be key as would the user experience. A few attempts with poor response, or fast response by a total jerk, for example, would likely present an adoption barrier.
So if this comes to market, it might never see widespread usage. Even so, the cost to deploy is so small compared to maintaining vast fleets of ATMs, I find the idea compelling. I hope it is available the next time one of my kids asks me to borrow 20 bucks.

Insanely Simple: Banks Can Learn From Apple’s Success

While at the AFP conference last month, I had the pleasure of hearing Ken Segall speak at a breakfast event sponsored by USDataworks. Ken worked closely with Steve Jobs as advertising agency creative director for NeXT and Apple. His experience inspired him to write Insanely Simple, published earlier this year by Penguin Books Ltd. Two events in the past week caused me to recall the wisdom of Apple’s obsession for simplicity. The first was the announcement that iOS again regained the #1 U.S. market share position over Android in the most recent quarter. This is an astonishing (and repeated) achievement in my opinion given the relentless competition in the smartphone market. After all, it is Apple versus the world. Equally impressive was the reported 40% of iPhone sales going to new users. The other event was prompted by the recent demise of my #2 son’s laptop. Such devices are a necessity for college students. I was immediately put in-charge of shopping for a new laptop we would present for his upcoming birthday (I’m assuming he doesn’t read my blogs). Since he is a Windows user, a MacBook was out of the question. After several evenings of reading and seeking advice, I narrowed down the search to HP – right before “Black Friday”. Perfect! My task was nearly over – or so I thought. HP offers 8 operating system choices, 7 screen sizes, 7 processor choices, 3 memory configuration options and 7 storage options across its 6 separate laptop product lines. Really? Apple, in sharp contrast offers two models (MacBook Air and MacBook Pro) with a handful of options each. Apple has its detractors, and its maniacal devotion to simplicity isn’t the only factor contributing to its success. But Successful it is. One look at its share price over the past few years ought to convince. What about your product line? Can your customers and prospects quickly distil the essence of your products and services unmistakably? Or, have you convinced yourselves, like HP apparently, that you provide inherently complex solutions that must be communicated as such? Read the book. It’s available for $15.26 in hardcover at Amazon.

So Now We Know For Sure – No NFC in iPhone 5

Yesterday Apply confirmed what many of us speculated on for months – iPhone 5 would not have NFC capability. It’s a beautiful phone – slim, elegant, with many attractive features, and no doubt will sell very well in the market. However, the payments industry was mostly interested in the question of NFC – “will they or won’t they?” The answer matters because as the single most popular smartphone, iPhone has significant power to influence the market sentiment. The inclusion of NFC would have been seen as an important endorsement of technology and would surely have given impetus to NFC deployments around the world. The fact that Apple chose not to include NFC keeps the questions open about what technologies will ultimately prevail when it comes to exchanging payments credentials and other information at the POS. Apparently, there are two main reasons for not including NFC at this stage. The first is that the focus this time was very much on getting the phone as slim as possible and NFC would have detracted from that. As laudable as that objective is, I think it is the second explanation that was the determining factor – Apple didn’t see the need at this time. Apple’s Senior VP Phil Shiller was reported saying that “Passbook does the kind of things customers need today”. Apple are known for only including technologies in their products that they believe would be widely adopted and used by the customers right away. And, as we all know, NFC today suffers from not being “immediately useful” given the lack of capable terminals and other relevant infrastructure. Just to be clear, (as far as I know), Apple has not made a statement that they would not support NFC in the future. However, it is a statement that the ecosystem needs to develop further before Apple decides to throw its weight behind NFC.