There are two aspects to online transactions: one being online payments and the other online banking and growth. Both are currently being driven by the proliferation of mobile devices.
With brands routinely pushing promos into your hands and the Internet pulling up images that draw your eye, buying stuff whether you need it or not has never been easier. And each time you oblige, someone gets to process the transaction and charge a fee for the service. In fact, Forrester expects that mobile payments will grow from the current $52 billion to $142 billion by 2019. That’s a huge opportunity that everyone wants a share of.
So here we take a look at the systems that make this possible-
Payment Technologies
Technology plays an important role in both online and in-store payment systems, and both areas are undergoing rapid change.
In the store, mobile devices can be enabled with near field communication (NFC), quick response (QR) code, Soundwave or Bluetooth low energy (BLE) technologies. There is also the necessity of an enabled POS system at retail outlets (in some cases) to accept payments using these technologies. Apart from the simplicity, time savings and security (the card number details aren’t shared) of such transactions, there is also the convenience of data storage (information related to multiple cards can be gathered under one umbrella by linking to a single user name, and some also allow the saving and application of discount coupons).
For online transactions, the security and convenience of the umbrella system — usually referred to as a digital wallet — is particularly attractive because it is hard to gauge the security of the retailer’s site. Also, the less intrusive the payment system, the more effective it is likely to be for online transactions. That’s because first, mobile devices are increasingly being used for purchases and mobile screens are smaller, making it harder to navigate between different pages; and second, because moving away from the retailer’s site detracts from the shopping experience, often leading to abandoned carts.
The demographic using mobile devices and online payment platforms is also important. Trends show that younger people, many of whom have been using the Internet from a very early age, are likely to spend more online. For example, consumers aged 25-33 (Gen Y) spent an average $563 million online compared to consumers aged 34-47 (Gen X), who spent $535 on average. [Forrester report May 2014]
A Pew Research study from Aug 2013 found that affluent, educated, white Americans were also more likely to use mobile devices for online payments.
In Aug 2014, Aite Group reported that 50% of U.S. smartphone users made at least one mobile payment, 40% purchased in-store and 45% transferred money to another person.
The online payments segment continues to evolve, with Apple Pay (AAPL) being the hottest new entrant. But guess what: even MCX, or the Merchant Customer Exchange — which includes big retailers like Wal-Mart (WMT – Analyst Report), Best Buy (BBY), Target (TGT – Analyst Report), Sears , Gap (GPS – Analyst Report), CVS (CVS), etc. — isn’t dead yet.
By far the most successful online payment system, and the one that has been around the longest, is eBay’s (EBAY) PayPal. The business grew leveraging eBay’s client base but management helped things along with the Braintree acquisition (facilitating in-app purchases), a card-swiping device called PayPal Here, and a tie-up with Discover Financial Services (DFS) (so Discover merchant partners accepted PayPal). The unit is being spun off now, which should further increase its flexibility and help growth.
PayPal recently bought payments startup Paydiant, which owns the technology behind the QR-based CurrentC mobile payments system developed by MCX. CurrentC (an iOS or Android app) was created to eliminate the charges retailers had to pay networks and gain direct access to customer data and relationships. Steep fines for members supporting rival payment systems have so far kept MCX members away from NFC, but Target is an exception, which could be an indication that the winds are changing. Since U.S. financial institutions are forcing retailers to upgrade POS terminals to support electronic EMV credit cards or accept liability for fraudulent transactions and identity theft, retailers are racing to meet the Oct 15 deadline. It won’t make any sense to leave out NFC, a technology supported by leading platform providers Google (GOOGL) and Apple.
Google’s digital wallet enables in-app purchases and mobile payments in addition to POS purchases and money transfer. Other than credit and debit card information, users can store loyalty cards, discount coupons and offers that they can apply during purchase. The service can be used on both NFC-enabled and older terminals. Google pushed adoption by making it compulsory for Android development partners. But it didn’t quite catch on because of rival systems developed by carriers (Isis/Softcard) on the one hand and merchants (CurrentC) on the other. Things are now poised to change with Google’s swallowing Softcard, carriers pre-installing Google Wallet on the devices they sell and Google taking charge of last mile broadband access (new data plans) so it can incentivize use of the wallet and its other services. Merchants will very likely see the light (as Target has done), making life easier for Google and Apple.
The latest devices from Apple incorporate NFC technology as part of Apple Pay, and Apple has extended the service to some other devices as well. Its soon-to-be-launched Watch will also include Apple Pay. iTunes customers tend to spend more money and Apple already has a treasure trove of payment information that is attractive for both merchants and banks. As a result, it has been relatively easy for it to rope in banks, payment networks, retailers and even the government to become a very broadly-accepted solution. Since customers are also heavy data users, Apple also has clout at carriers.
Samsung, Apple’s biggest rival in the smartphone market, has announced a new payment system called Samsung Pay that will launch this summer in the U.S. and Korea on its just-launched S6 devices. The move was facilitated by its acquisition of LoopPay, in which it was an early investor. Samsung Pay will use magnetic secure transmission (MST) technology to exchange signals with not just current terminals, but also new ones supporting NFC. Samsung has already signed on Mastercard (MA – Analyst Report) and Visa (V – Analyst Report) and is in talks with American Express (AXP), Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM – Analyst Report), U.S. Bank (USB – Analyst Report), etc. It expects to reach 30 million merchants worldwide with financial institutions’ support. Security comes from KNOX (Android-based security software developed by Samsung) and TrustZone data isolation technology from ARM. On the devices side, Samsung’s now providing a finger-print scanner that is something like Apple’s. It’s not clear how much of a lead its broad reach will offer, since new terminals will be in place by Oct 15 and Apple Pay already has retailers, banks, networks, etc on board. But it could be a good fight.
After just a few months in operation, Amazon decided to discontinue its “Amazon Payments” beta digital wallet that only enabled the storage and application of gift cards on any desktop and Android/iOS-powered device. The system got its impetus from Amazon’s (AMZN) existing user base (including the sticky Prime customers). Amazon hasn’t said if another wallet is in the offing, although officials claim to have learned a lot.
Stripe is a payments startup (one of many) most recently valued at $3.5 billion that has a number of illustrious investors including Andreessen Horowitz and PayPal co-founders Peter Thiel, Max Levchin and Elon Musk. It allows merchants and developers to configure their sites to accept Stripe payment processing. The service comes for a higher transaction fee than traditional credit cards, but has no other hidden costs.
Visa and Mastercard have been adjusting their online payment strategies in recent times. Visa started out with a wallet of its own, but moved on to Visa Checkout (a tab available on partnered merchant sites). This essentially simplifies the system further, allowing consumers to stay on the merchant site and pay in a single step by clicking the tab. The lure for merchants is the elimination of the fee Visa normally charges per transaction and the Visa brand name that signifies security to consumers. Its wallet V.me continues in Europe, however, and is in fact expanding in the region. Mastercard’s MasterPass is a similar effort.
The FIS Mobile Wallet from Fidelity (FIS) is basically a bar code reader that feeds information related to the purchase into the user’s smartphone and uses it as a medium to transfer the information to the cloud. Online purchase of merchandise is also possible.
A Forrester analyst commenting on mobile banking in 2012 said that banks had focused on mobile remote deposit capture (RDC) that year, so the service had grown rapidly. Earlier, Aite Group said that mobile banking logins topped online logins for the first time in 2013. It is now saying that bill payment is currently the top priority for banks, with 86% already offering the service or preparing to offer it by 2015-end.
Second on the priority list is checking account apps, which is followed by car loan apps. Mobile shopping capabilities remain a relatively low priority for banks where less than a third have a crystallized product or plan. Also, 20% of banks plan to integrate their offerings into a single app, 30% into separate ones and the balance remain undecided. This could be the reason Accenture predicts that by 2020, traditional banks will lose 15% market share to online-only players including branchless banks and new technology entrants.
It is believed that high smartphone penetration, higher income and greater digital sophistication will drive increased demand for mobile banking services. Since mobile banking is expected to be the most cost efficient for banks, investment in technology to improve and expand mobile banking services is likely to increase.
Security
Mobile banking has not picked up sufficiently in either the U.S. or Canada, due to security-related concerns. But adoption should increase as more Generation-Y consumers become new banking customers.
With online transactions expected to boom over the next few years, the topmost concern remains security. While banks will spend significantly on secure payment systems, hackers are expected to have a field day, targeting the flood of customers going online.
Notably, even “secure” payment platforms like digital wallets using NFC technology can be infected by worms within close range of devices (“bump and infect”). An infected device can give out personal information during the payment process that can be used to steal from the wallet. It’s also possible that the entire wallet will be stolen if the concerned cloud is hacked.
Mobile security offerings currently come from AirWatch, Apple, Avast, Check Point (CHKP), Cisco (CSCO), IBM (IBM – Analyst Report), Juniper (JNPR – Analyst Report), Kaspersky, McAfee, Microsoft (MSFT – Analyst Report), MobileIron, Blackberry (BBRY), Symantec (SYMC – Analyst Report) and Trend Micro, among others.
Mobile security is becoming a focus area for technology companies as transaction volumes increase and data breaches are more widely reported.