Google entering UK P2P payments

Last week Google announced that it will be rolling its email based money transfer system to the UK. The feature was launched about two years ago in the US and allowed those with a Gmail account to hover over a $ sign and add money to an email message like an attachment. It is expected that it would work similarly in the UK, with a $ sign naturally replaced by £. Why now? Why P2P, and not, for example, HCE-based NFC payments, ahead of the expected Apple Pay launch? We admit we don’t have insights into Google strategies (and if we did, we couldn’t blog about it), but here are some of my thoughts. P2P payments has rapidly become a competitive space in the UK. Consumers can already choose between PayPal and other “wallets” or individual bank-based initiatives, such as Barclays’ PingIt and Natwest Pay Your Contacts. Also, last year, Paym, an industry-wide solution was launched in partnership with banks. Paym recently reported having signed up 1.8 million consumers who transferred £26 million. Admittedly, it’s not much yet, but with some banks so far it’s only possible to sign up to receive payments via Paym, but not send. While all these solutions are making more consumers more comfortable with the idea of sending money based on a mobile phone or an email address, at the same time, Google will have to differentiate to stand out from the crowd. One clear differentiator is the email-based approach. While I don’t have specific numbers, my sense is that Gmail is a popular mail service in the UK, and all these customers will now be able to enjoy a new feature. Assuming they like what they see, and start sending money to each other, Google is likely to enjoy increased wallet balances, at least until the recipients are ready to cash out. I also suspect this is a customer acquisition play for Google Wallet, which has not received as much publicity in the UK as it did in the US. Every Google email user can send money, but you do need a Wallet app to accept money. Once Google Wallet establishes a customer base, it can then take on Apple Pay more directly by rolling out its full wallet services to Android users in the UK. With Android representing ~60% share of smartphone users and a growing contactless acceptance infrastructure, the UK market might prove to be an attractive opportunity for Google Wallet.

Apple’s earnings call: an encouraging story about Apple Pay

Yesterday Apple announced its results for Q1 2015: revenue of $74.6 billion, profit of $18 billion over the three months, apparently the largest quarterly corporate earnings of all time. While these numbers are hugely impressive, of course, the payments industry was looking for any hints of Apple Pay performance. This is what we learned:
    • On enabling consumers:
      • Apple sold over 74 million units of phones, mostly iPhone 6/ 6+, which is ~9 million more than expected by the investment analysts. This matters to Apple Pay, as the new phone is a prerequisite to be able to use Apple Pay. This is a global figure, but it still means that there are millions, if not tens of millions of new phones in the US where Apple Pay has been first launched.
      • 750 banks and credit unions have signed up with Apple Pay. Of course, as we discussed in our earlier blog, the number of FIs actually already supporting Apple Pay is much smaller – 54, but the momentum is clearly there. Furthermore, the participating institutions represent over 90% of credit card transaction volumes.
    • On enabling merchants:
      • Tim Cook, Apple CEO admitted he was “positively shocked” at how many merchants were already supporting Apple Pay and revealed that POS suppliers were reporting “unprecedented demand” from merchants. Undoubtedly, the ongoing EMV migration is helping stimulate that demand for new terminals.
      • USA Technologies announced a nationwide rollout of new acceptance points for Apple Pay. This will add about 200,000 acceptance points, “bringing the advanced mobile payments service to owners and operators of coffee brewers, vending machines, kiosks, laundry equipment, parking pay stations and other self-serve appliances.”
    • On actual usage:
      • Apparently, Apple Pay is responsible for $2 out of $3 spent on Visa, MasterCard and American Express contactless transactions. While the specific statistics were not revealed, and two thirds of not much is still very little, Apple certainly demonstrated ability to acquire market share in a short period time from competitors such as Google Wallet and Softcard.
      • Apple Pay represents nearly 80% of mobile payment transactions at Panera Bread, while Whole Foods Market had seen an increase in mobile payments by more than 400% since the launch of Apple Pay.
    • On evolution and future plans:
      • Tim Cook acknowledged the opportunities around both in store and in app use cases of Apple Pay and that market specifics will determine which will be more important in any given geography.
      • As expected, Apple Pay will be expanding internationally. The management acknowledged that each market is different and will require “heavy lifting to scale,” but confirmed they were ready to tackle the challenge.
Tim Cook concluded that 2015 will be the year of Apple Pay. This might be debatable, but Apple Pay certainly had a very encouraging start. This also further validates Celent’s perspective we articulated in the latest edition of our Top Trends in Retail Payments report, which was published yesterday and is available to our clients.

Apple Pay: A few surprises – or are they really surprises?

Apple Pay continues to provide excitement to many in the industry who are looking for signals indicating that Apple Pay is either doomed or is becoming a mass-scale success. In reality, it’s neither at the moment – it’s still early days. A few recent stories also caught my eye. At first glance, they seemed a little surprising, although I don’t think they should be. The first was the InfoScout blog discussing their research that 90.9% of iPhone 6/ 6+ users have never tried Apple Pay, and only 4.6% of those who could use Apple Pay during Black Friday, actually did, which has prompted some commentators to announce the death of Apple Pay. Considering that smooth consumer payment experience is one of the major Apple Pay’s attractions, low usage might appear a little surprising. However, if you think about the shortage of merchant locations, lack of awareness which merchants would accept the transactions, general stress of shopping on Black Friday and the fact that we are talking here about “normal” consumers (albeit early iPhone 6 adopters), not payment geeks, it starts to make more sense. Various other surveys found that consumers who have used Apple Pay, compared it highly favourably to using a traditional plastic card. And according to the same InfoScout blog, of those who have not used Apple Pay, 31% said they didn’t know if the store accepted it and 25% said they simply forgot – factors that will fall away over time with more training, communication and experience. Bank of America recently said that 800,000 of its customers have signed up with a total of 1.1 million accounts. The second was a recent story in Digital Transactions that there are now 54 banks and credit unions supporting Apple Pay. Only 54? Didn’t the announcement from Apple in October state that it signed up another 500 FIs in addition to its launch partners? Well, there is clearly a difference between signing the paper and actually supporting customers and their cards from technical and operational perspective. Still, it is encouraging to see that the number of institutions continues to grow and includes issuers across the spectrum, from the largest banks to small(-ish) credit unions. My final surprise was data from research that ACI Worldwide conducted at a recent National Retail Federation (NRF) show. ACI surveyed 200 participants, 85% of whom were based in the US and over half represented merchants. 47% of respondents expected that Apple Pay would “win the mobile wallet war” with Google and PayPal being other main contenders; only 6% opted for MCX. In our last year’s report assessing Apple Pay’s prospects, we predicted that the US merchants would be the most likely major barrier for Apple Pay’s success. However, if merchants start to believe in Apple Pay, they might start switching on the contactless capability on the new terminals they are installing as part of EMV migration. And if that happens, then mobile payments might arrive sooner than even the most optimistic of us expected.

The Resurgence of NFC

This is the time of the year when we begin to cast our eye back to 2014 as well as forward to 2015, and reflect on the top trends we are seeing in the market. One of the constants over the last few years in our annual Top Trends in Retail Payments report (coming up again in January 2015) has been our commentary on the ups and (mostly) downs of NFC and contactless payments. Yet, for the first time in years, it genuinely feels that NFC has finally taken a large step towards establishing itself as a major technology standard in mobile payments. Without a doubt, the biggest event in payments in 2014 was the launch of Apple Pay. Having resisted NFC for so long, Apple has finally added NFC capability to its latest devices, such as iPhone 6, thus opening up NFC to iOS. And, in a typical Apple fashion, it didn’t just add a bit of hardware, it created a fully-fledged solution with unparalleled user experience. However, the first few weeks after launch seem to have confirmed our concerns that Apple Pay was not going to be an overnight success. While the early news was encouraging with more than 1 million credit cards activated in the 72 hours following the launch, so far too few consumers are actually using Apple Pay. According to the InfoScout blog, 90.9% of iPhone 6/ 6+ users have never tried Apple Pay, and only 4.6% of those who could use Apple Pay during Black Friday, actually did. This has prompted some commentators to announce the death of Apple Pay and argue that its fate will be the same as that of many other attempts to revive NFC. The future of the payments industry remains hard to predict and the NFC “nay-sayers” may yet prove to be correct. However, we see a number of signs to be optimistic, both about Apple Pay and NFC adoption overall. The ongoing US migration to EMV and growing consumer awareness and adoption of new devices over time will help boost Apple Pay usage. More importantly, globally, as Apple Pay launches internationally and more banks become aware of Host Card Emulation (HCE) technologies, the issuers will have genuine options to deploy NFC solutions. Of course, contactless and NFC payments, even when they do gain mass adoption, are not going to be the only mobile payments option in the market. However, if for so many years it felt that the NFC land has been gripped by a long and harsh winter, we expect that it will feel a lot more like spring in 2015.

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.

The Networks’ Support for HCE Breathes Life Into NFC Payments

In my report on Top Trends in Retail Payments published a few weeks ago, I wrote the following paragraph: “Of course, doubts remain over HCE. For example, the payment schemes are yet to clarify on whether they will deem the security and performance of the technology acceptable. However, we view it as a positive development. Inexplicably, HCE was being described by some as the “NFC killer.” Yes, if successful, it might indeed kill the SIM-based business model (and have a negative impact on Trusted Service Managers), but it might actually breathe life into NFC and contactless payments.” The developments this week removed some of those doubts. Both Visa and MasterCard announced their support for Host Card Emulation (HCE) technology, paving the way for banks to offer NFC-based secure payments without relying on the secure element inside the phone. HCE reduces the need for banks and telcos to cooperate, thus helping overcome the business model challenge. However, approval and recognition from the networks was a critical pre-requisite to the technology’s success. Networks executives stressed that it is not an “either/ or” situation and they will continue to support the “traditional” SIM-based secure element solutions. As such, it doesn’t immediately change any of the established ventures, such as Isis, but it certainly makes it easier for others to take an alternative path. I would expect HCE to be important in Europe, which already is further ahead than the US in terms of deploying contactless terminals. European banks have been issuing contactless cards, and HCE will make it easier for them to make use of that infrastructure for mobile payments as well. Having said that, HCE technology is only available on Android, so iOS devices continue to be excluded from these developments at least for now. It will be interesting to see what Apple does in payments. I plan to publish a short report soon speculating on how Apple might enter payments more aggressively – keep an eye on it!

Weve and MasterCard Collaborate on UK Mobile Payments

I’ve been following today various news reports about the announcement that Weve and MasterCard have partnered to drive forward contactless mobile payments in the UK. I am still hoping to speak to my contacts at the companies involved, but wanted to share some of my early thoughts. It is not surprising to see Weve, the JV between three leading UK mobile network operators (MNOs), pushing into payments. After getting approvals from the European authorities, Weve started with building out a “single point of contact” infrastructure for retailers and other parties to deliver marketing messages to consumers. However, it always had the ambition in payments, and after hiring David Sears, a seasoned payments executive, as a CEO, it was always only a matter of time before we would hear more about it. This seems like a significant win for MasterCard, although the devil will be in the details. All the indications are that this will be a “traditional” SIM-based NFC payments solution, but the announcements so far have been a little vague about the set-up and the role of various partners. The Financial Times and other sources reported that “under the terms of their agreement, MasterCard will provide technology and integration services to banks and financial institutions that use Weve’s payments platform.” What kind of “technology and integration services” will MasterCard be providing to banks? Who are the other parties involved, e.g. TSM services? Another question crucial to the success of any NFC initiative is how the business model issues will be solved, i.e. the commercial terms between banks and Weve acting on behalf of MNOs. Mobile Marketing reported Weve CEO saying that they now have a “‘commercial agreement’ with banks, via the MasterCard partnership. Banks will be able to plug in their existing payments infrastructure and pay for the service on a general usage rather than a percentage of transaction model.” This could potentially represent a breakthrough and fresh thinking in how banks and MNOs can work together. Weve is reportedly in discussions with many banks, although at this stage, no bank has yet announced its support or participation. Finally, most of the UK’s card spending is on debit rather than credit cards. Debit card spending is also growing at nearly twice the rate of spending on credit cards. According to the UK Cards Association, spending on debit cards in 2013 was £31.8bn which grew by 7.2% since 2012 compared to £13.7bn and 3.7% respectively for credit cards. MasterCard’s strength in the UK is in credit cards, whereas Visa leads in debit. To succeed, Weve needs to ensure all major networks, including Visa and American Express, are eventually part of its ecosystem. At this stage, there are still perhaps more questions than answers to the outsiders, but it is certainly a welcome development in the UK mobile payments market.

Top Trends in Retail Payments: A New Celent Report Is Out

Last week we published our annual report on Top Trends in Retail Payments, which looks back at 2013 and calls out the main themes to watch for in 2014. In 2013 we observed interesting developments in each of the four dimensions defining the battleground for mobile payments – see the chart below. Starting with customer interface, we are seeing the rise of mobile apps from retailers and service providers. These apps focus on adding a digital layer over service provision with seamlessly integrated payments capability. We call this trend “contextual payments” – recognising that customers engage in a broad set of activities and ensuring they are able to pay in any context, while acknowledging that the actual service provider is likely to offer a richer digital experience and customer interface than a generic open payments wallet. Trends chart One of the effects of contextual payments is the increased willingness of banks to consider enabling all types of payments directly from the bank accounts rather than cards, either by building “push” solutions or deploying APIs to expose banking services and enable account access from retailer and other apps. While there has been no breakthrough in the adoption of NFC-based contactless payments in 2013, the emergence of host card emulation (HCE), might just breathe life into NFC and contactless payments by enabling banks and other providers to host credentials in the cloud while making use of the phone’s NFC interface but bypassing secure element owners. However, in our view BLE and Beacons will play a much more important role in marketing than they will in payments. Celent clients can download the report here. If you are interested in hearing me discuss these and other trends in more detail, please join me for a webinar on February 13th – more details here.

Looking Eastwards for Payments Opportunities

Last week I published a new report called “Retail Payments Market in Japan: A Land of Contrasts and Opportunity” – an overview aimed primarily at those seeking to get an introduction to payments in Japan. Our clients know that we don’t publish country-specific reports that often; instead, we tend to focus on themes and topics that have relevance in multiple markets. However, I had the opportunity to take a closer look at the Japanese retail payments market as part of a consulting engagement last year. Given how different and interesting the market is, I couldn’t resist the temptation to share the findings with our clients. It really is a land of contrasts. Despite Japan’s deserved reputation as an advanced payments market, it remains a cash-heavy society. Credit cards are popular, although the numbers have remained flat in recent years. On the other hand, transactions on debit cards are virtually non-existent. Credit cards are issued by a broad range of companies, not just banks, and most serve as both issuers and acquirers. The e-commerce market is large and fast growing, and it has a number of unique payment methods, such as konbini. Japan is often presented as an advanced case of mobile contactless payments, but those have been based on a proprietary standard (Sony Felica) and only now the country is starting to migrate to NFC payments. The report explores all these and other trends in much more detail. It’s also a land of opportunities. Based on our analysis, we see opportunities falling into three categories with different risk and investment profiles:
  1. A mobile app with sophisticated capabilities for cardholders to manage their cards and engage with their finances should be a “no regret” move for nearly all issuers.
  2. Some opportunities require a clear business case decision. Examples include card-based money transfer services, m-POS services, and targeted offers, coupons and rewards.
  3. Finally, Japanese issuers and their partners should make careful decisions where to place their bets and what kind of business model to pursue in mobile payments, as those opportunities represent relatively high investment and risk.
Japan is a mature payments market and may be overshadowed by the growth of China, India and other emerging markets, but it certainly represents opportunities for players both inside and outside the country.

Isis Launches Nationally In the US

Today Isis, the NFC-based mobile wallet, has announced its availability across the US. After all the setbacks, Isis must feel very proud today being able to launch nationally. However, it doesn’t mean that the road ahead is going to be without challenges. The launch really means a national availability of handsets at the operators; it does not mean national acceptance, which is going to remain the biggest stumbling block, largely outside of the operators’ control. And while EMV will help drive change in the acceptance infrastructure, the process is going to take time. With PayPal also making its new wallet much more widely available as a result of its partnership with Discover, the competition for mobile payments at the POS is heating up. And I am sure, MCX will want to have a say in what wallets will be accepted at their participating merchants, as it seeks to provide a consistent payment experience to their customers and merchant employees. Participation of issuers and ability for consumers to add their cards to the Isis wallet is another challenge. Capital One is no longer taking part in the rollout, so Isis is left with only two issuers, American Express and Chase. The new wallet features a re-designed user interface, which highlights the importance of the user experience. Even if the product is functionally rich, it won’t succeed in the market if the user experience is cumbersome. Perhaps the biggest coup for Isis lately has been its partnership arrangement with Amex Serve. Not only it enables those that do not have Amex or Chase credit cards to make use of an Isis wallet, it also gives the wallet more versatility. Through Serve account, customers can send money to their friends (P2P) or pay bills online; they are no longer limited to only physical POS transactions via NFC. Integration of offers, such as with Coca Cola, Jumba Juice and others, into the wallet experience is another important feature. After all the hard work, the Isis team deserves congratulations for reaching such an important milestone. Getting the customers to adopt and use the wallet and transactions flowing through the system must be the next goal.