Cashless Retailing March 2013
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The majority of money in the world is digital, not physical. Many airlines' in-flight services and some retail stores on the ground do not accept cash payments. And in the United States, cash transactions make up only some 27% of in-store sales, according to analysts at Javelin Strategy & Research. The vast majority of cashless retail purchases in the United States rely on bank cards, which effectively serve as ID cards in physical stores. Mobile phones are important enablers of cardless, cashless point-of-sale payments in specific nations—notably in Japan and Kenya, each of which enjoys unusually favorable conditions for mobile-payment business developments. Elsewhere, many stakeholders are aware that mobile phones have the potential to become a major channel for point-of-sale payments. MasterCard and Prime Research recently studied some 85 000 comments about mobile payments that social-network users in 43 nations posted via Facebook, Twitter, blogs, and forums over a six-month period. Users expressed a mix of interest, confusion, and concern about security, usability, and other matters. Probably, mobile payments will become very popular wherever they are available, convenient, and free of charge to users.
Convenience is important. In theory, future mobile-phone users will not need to carry cash, payment cards, loyalty cards, paper receipts, paper coupons, and other artifacts of today's checkout-counter experience. Some security risks may abate: The rise of cashless wallets could prefigure the downfall of pickpockets, and with the rise of mobile payments, fraudulent cloning of magnetic-stripe cards may become decreasingly common. Users may have varying feelings and opinions about the kinds of discounts that are likely to arise in a world of mobile transactions and promotions that are more or less customized to unique buying patterns. Doubtless, some will respond to such offers; others will object to insensitive microtargeted advertising messages that appear on smartphones and are triggered by personal events such as pregnancy or mortgage foreclosure.
However, user acceptance is merely one factor in gauging the outlook for mobile payments. Many entities have both interests in and veto power over deployment of mobile-payment systems. These entities include retailers, banks, mobile-service providers, and smartphone-OS champions Apple and Google. Interestingly, mobile-service provider Verizon responded to an inquiry by the Federal Communications Commission (FCC) by claiming Google Wallet "may not work" on "our devices," implying that the app is not compatible with Android phones that it sells. Whether true or false, that statement illustrates the competitive struggle among smartphone-technology and mobile-service vendors. The struggle concerns several areas of opportunity: transaction fees, information flows, and technology licenses.
Thus, outcomes depend on business models and politics, not just user and merchant preferences. Banks are likely to continue to enjoy the lion's share of fees for processing each electronic transaction, but other parties hope to capture some small percentage of all purchases made by their customers. Information about transactions, which indicates users' personal preferences, is likely to be important to sellers of advertising—notably, Apple and Google, which are also likely hoping to win revenue via an increased volume of customized Groupon-like promotions. In theory, an advertisement or "daily deal" could be highly relevant if the algorithm for selecting a message considers a comprehensive, 360-degree view of a user's behavior. Unlike cash, loyalty cards, and other transaction platforms, a mobile phone has the potential to serve as the central point for capturing information about a user's purchases, browsing activity, geographic position, social position, and so on.
Technology licenses may also be important factors for deploying mobile payments. Notably, since 2004, Sony has partnered with the largest mobile-services provider in Japan, NTT DoCoMo, to implement the Mobile FeliCa contactless-payment technology. Probably, FeliCa inventor Sony needed to partner with the mobile carrier mainly to overcome business obstacles—not technical obstacles—to integrating its payment system into phones. In turn, the Sony–NTT DoCoMo joint venture (FeliCa Networks) licensed its technology to the second- and third-largest mobile carriers in Japan. Similar licensing activity could arise for whatever mobile-payment systems take hold in other nations.
Regulatory considerations will also likely have significant impact on outcomes for mobile payments. In Kenya, leading mobile-service provider Safaricom operates the popular mobile-payment service M-Pesa, despite the objections of several Kenyan commercial banks; the Central Bank of Kenya reportedly "regularized" the service and "blocked plans to kill M-Pesa" when the nation's finance minister sought to probe Safaricom's finances in 2008, according to Nairobi-based newspaper the Star. M-Pesa has some 16 million users in Kenya, where tax legislation recently led to a 10% rise in transaction fees. Generally, as volumes of mobile transactions increase worldwide, political, regulatory, and judicial decisions could affect outcomes in any nation that adopts mobile payments.
MasterCard and Visa separately made significant announcements at the GSM Association's Mobile World Congress in February 2013. MasterCard expects to deploy a mobile app that lets people scan bar codes, charge to their bank-card account, present an electronic receipt proving their payment, and—in the ideal case—avoid waiting in a checkout line. Visa is partnering with Samsung, whose phones will use NFC (near-field communication) to implement a tap-to-pay protocol that is compatible with many existing merchant terminals. Samsung will reportedly operate infrastructure for distributing security credentials. And eBay subsidiary PayPal is introducing a smartphone-size merchant terminal that is built specifically to fulfill regulatory and business-practice requirements in Europe.
Other significant announcements appeared in 2012, when Apple acquired fingerprint-sensor specialist AuthenTec, fueling speculation that future iPhones will expedite mobile payments via fingerprint sensors. Another announcement in 2012 concerned Square, the start-up that was cofounded by Jack Dorsey, who also cofounded Twitter. Square, which distributes free card-reader peripherals for smartphones, proposes to enable hands-free transactions. In theory, a Starbucks patron would use a smartphone app to order coffee, and the employee at Starbucks' checkout station would charge a prepaid account after comparing the patron's physical appearance with a photo that appears on a tablet. As of late February 2012, a Square web page indicates that at Starbucks stores, "Hands-free checkout will be enabled in a future update."
Banks, mobile services, handset makers, smartphone-OS brands, and payment processors are all jockeying for position to take advantage of a move to mobile payments. Although some parties appear to be wedded to tap-to-pay use cases, others are proposing alternative approaches with unique benefits. Notably, potential customer enthusiasm for Square's proposed hands-free payments or MasterCard's proposed use of bar codes to fully avoid checkout lines could draw attention away from tap to pay.
The success of any of these developments, as well as of existing mobile-payment offerings from Google and other companies, depends strongly on retailers that are ready, willing, and able to accept payment in innovative ways. Merchants will weigh affordability of payment terminals, payment-processing services, and operations. The number of competing proposals suggests that merchants—not just end users—will be confused about which technology options to embrace and how to proceed.
News items I discuss above illustrate significant considerations for business developers. Verizon's objection to Google Wallet indicates that mobile-service providers may well have veto power over a solution if they perceive no benefit of their own from mobile-payment innovations. The Kenyan government's 2008 investigation into M-Pesa finances and its 2012 legislation affecting transaction tariffs indicate that regulators and legislators will make their voices heard as well. And Samsung's reported role in Visa's new tap-to-pay initiative is unusual in enabling a company that has mainly focused on manufacturing to have a promising opportunity to develop a significant service-based business. In an ideal case for Samsung, the company will play roles in securing Visa's initiative even when other brands supply the handsets used to make mobile transactions.
An obstacle to a new mobile-payment service could arise in the form of app blocking by Apple or Google or both companies. During December 2012, Microsoft reported that Apple was blocking updates to Microsoft's SkyDrive storage service on Apple's App Store because of a dispute about transaction fees for users who purchase additional storage for SkyDrive. The news item illustrates how Apple or Google or both companies might block a third party from posting a mobile-payment app.
Apple's acquisition of AuthenTec seems to raise the possibility of a highly disruptive development on the horizon relating to fingerprint-based authentication. Apple—which has yet to implement the NFC standard that is likely essential for widespread adoption of tap to pay—seems unlikely to play a restricted role as a "dumb terminal" for transactions that other companies mediate. Apple does hold a number of patents that relate to particular uses of NFC technology, fueling speculation that a future iPhone model will support tap to pay; however, a number of recent transaction-related Apple patents do not depend on NFC. Recent months have tarnished Apple's image and leadership as its market capitalization and smartphone market share have contracted. But many forward-thinking users and merchants may take a wait-and-see attitude toward adoption of mobile payments until Apple makes its intentions clear.
Thus, how much influence Apple will have in the future and whether external mobile-payment developments will influence the company remain uncertain. One outcome may be for an Apple-AuthenTec solution to enhance whatever solutions the world adopts. A fingerprint sensor could serve as an additional factor in multifactor authentication and thereby present additional challenges to would-be criminals. Reduced risk of fraud via the combination of fingerprints plus smartphone credentials may even enable fees for Apple-mediated transactions to be lower than those for non-Apple-mediated transactions. Alternatively, if the future iPhone road map remains incompatible with tap-to-pay use cases, Apple-friendly users and merchants may tend to gravitate toward non-NFC solutions such as hands-free transactions or walk-through checkout. (A security guard may still require the user to show a virtual receipt displayed on a smartphone.) But if very many users, merchants, and other stakeholders begin to accept a solution that is not iPhone compatible, Apple may need to become a fast follower or forgo leadership in mobile payments.