Payments Evolution in the Mobile Millennium: The Challenge of Aligning Solutions to Customer Needs

Margaret Weichert

Market Platform Dynamics

In the United States and much of the Western world, discussion and debate among “payments professionals” has been consumed in recent years with technology debates and regulatory battles, even while the broader world continues its steady march towards the new realities of a mobile millennium.

In developed markets, e-commerce continues to grow at double-digit rates, despite the relative maturity of those markets. Still other less developed markets, such as Mexico, are experiencing triple digit e- commerce is growth, as broader economic growth and technology to mobile Internet capabilities dramatically ramps up the e-Commerce/m-Commerce markets. Even markets with relatively low overall Internet usage are poised to experience dramatic e-Commerce growth as , policy makers and business leaders recognize that the mobile web is a profound tool for financial inclusion. Low cost internet-enabled POS devices will enable a wide range of consumers to have access to web-enabled commerce. In India, for example, nimble entrepreneurs and technology companies are working diligently to enable 250 million Indian users to get access to the mobile web via POS mobile technology.

Mobile commerce is already a meaningful part of the payments ecosystem and is poised to grow even faster than e-commerce did. However, one of the biggest challenges in global adoption of mobile commerce solutions is a fundamental mismatch between the payment preferences of most global consumers – for debit card payments – and the accessibility of debit-oriented mobile payment solutions, especially in the quickly evolving world of mobile web commerce.

While mobile innovators are developing entirely new mobile business models, complete with different economics, customer value propositions and consumer-oriented, lightweight (often cloud based) technology solutions, traditional payments companies are deep in discussions about NFC, EMV, and interchange – issues that remain rooted in the realities of the 20th century, and do little to meet the practical challenges of the new mobile ecosystem. Many in the payments industry have focused on credit-card centric models that view mobile technology as simply another form factor that will replace plastic cards for POS transactions.

However, the reality of the evolving mobile commerce is much more complex and dynamic and requires more thoughtful solutions. First and foremost, what is clear is that response to emerging mobile commerce capabilities must address the needs and realities of the market and meet fundamental market needs for 1) customer ease/convenience; 2) seamless portability across channels; 3) security and scalability; and 4) global solutions for merchants.

A range of players — both traditional payments companies and alternative players — have introduced innovations designed to address these global commerce challenges. However, only a few of the solutions attempt to bridge the core challenges of serving all payment channels (physical POS, e- commerce and mobile) across geographies. Three key solution categories bear watching:

• Innovative PIN Debit Solutions (e.g. Acculynk PaySecure) • Global Card Networks (e.g. Visa, MasterCard) • Alternative Payment Networks –(e.g. PayPal ) Importance of Emerging Channels – Why Cross Channel Payment Evolution Matters

Although some merchants took a while to understand the importance of taking a cross-channel approach to retailing, consistent double-digit growth in e-commerce sales volume educated most merchants of the importance of a solid cross-channel strategy. Today some of the largest e-commerce merchants are multichannel retailers, with multi-channel powerhouses like Walmart, Target, Tesco and Staples dominating the e-commerce top 10 lists globally and in individual markets.

Continued impressive growth rates in e-commerce sales (NRF U.S. estimates - 12% YOY) will partially offset lackluster growth in the retail sector overall (expected to be between 3-4% in the U.S. and less than 2% growth in the UK)1 Mobile growth rates are even more impressive, and are expected to grow over 98.6% to $20.85 Billion in the U.S. alone.2 This growth trend is expected to continue unabated, as sales of tablets and smart phones will soon cause mobile web access to outstrip PC-based web access. (Figure 1).

Figure 1

Source: Gartner Research, 2010

1 National Retail Federation – U.S. Holiday Sales Estimates – October 2012; Opera Solutions Retail Predictor, September 2012. 2 Internet Retailer, MCommerce Sales, September 2012. In addition to expected mobile retailers like Apple and Amazon, major multi-channel players like Walmart, Marriott, Orbitz, EasyJet, Intercontinental and Expedia are driving significant commerce volume via the mobile channel. And far from being a channel for just digital goods, data already shows that mass merchandisers like Walmart and Amazon account for 63% of mobile sales volume.3

Given these impressive growth rates and meaningful mobile sales results already, it is clear that mobile web payments are already taking place, despite lack of significant uptake of mobile payments at the point of sale (POS). This trend suggests that mobile web payments will in fact lead the way to broader mobile payments activity, so any mobile payment strategy must start with a mobile web strategy. As such, a comprehensive payments approach should address all the existing barriers to mobile web growth and adoption.

Market Requirements

As outlined above, it is clear that e-commerce has established itself as a mainstream channel, while mobile web commerce is well on its way to becoming ever more important. As Internet commerce has grown over the last 10-15 years, a range of new payment solutions evolved to ease the friction and challenges associated with the new channel. PayPal, Bill Me Later, Acculynk, eBillMe, Secure Vault Payments, and many others created capabilities that addressed unique challenges of e-commerce payments. As the mobile payments market evolves, some of these same players may emerge as leading mobile commerce solution providers, even as purpose-built mobile payment experiments attempt to gain scale.

What will determine which solutions succeed is how well they meet fundamental market needs for 1) alignment with customer needs; 2) seamless portability across channels; 3) security and scalability; and 4) global solutions for merchants.

• Alignment with customer needs – successful payment solutions must be easy to use, with minimal enrollment or change required by consumers. Solutions that require consumers to change behavior spend more, or sacrifice convenience, rewards or other benefits will face major challenges in competitive markets like the US. Most importantly, solutions must incorporate the underlying electronic payment types that consumers prefer, which in most of the world means debit and prepaid. • Seamless payment portability across channels – solutions must easily adapt across channels so that consumers and merchants aren’t required to adopt completely new payment solutions to take advantage of new business models or channels, especially in the evolving mobile payments ecosystem.

3 Internet Retailer, Mobile 400 Merchants, September 2012 • Secure, technically scalable solutions - beyond all the “sexy” attributes of a mobile payments solution, consumers won’t adopt and continue to use a solution unless it has robust security features and near flawless technical delivery. Consumers may accept imperfect service delivery when it comes to cell phone coverage, but they will not trust or tolerate service quality or security issues when it comes to their money. • Global merchant solutions – practical evolution of global commerce solutions require the ability to operate at scale across national boundaries, since most of the global e-commerce and mobile commerce volume is being driven by global retailers that operate across broad geographic boundaries. In addition, many of the global commerce innovations are being driven by global players like Apple, Amazon, PayPal, and retailers that want to expand revenues by selling globally. To date, key players have customized payment solutions to work differently according to the underlying requirements of different national payments systems. However, this national customization is expensive, inefficient, and sometimes confusing for consumers that need to adopt varying solutions depending on the country of origin of the merchant or retailer. Solutions with the most scalability will work seamlessly for both retailers and consumers, regardless of payment preference and/or country of origin.

How Different Alternatives Stack Up – Evaluation of Potential Solutions

Although there are a host of solutions evolving to address these complex market requirements, three categories of solution have the most promise for developing global scale. These three include:

• PIN Debit - Globally PIN debit is the preferred electronic payment solution by far. However, PIN debit’s evolution in e-commerce and mobile channels have been hindered by lack of cross- border consistency, and the challenges of securely adapting PIN debit to non-face-to-face channels. Innovators like Acculynk have partnered with debit networks worldwide to attempt to address these challenges in a consumer friendly way. At the same time, national debit networks, have introduced unique innovations (including PINless debit, online “credit push” solutions, one time passwords, etc.) to address these challenges. • Alternative Payment Networks - PayPal and its global competitors (which may evolve to include Skrill, Square and Alipay) have taken the opportunity to build solutions that minimize the complexity of national payment systems, so that consumers can use a simple username/password authentication process to pay from a PayPal wallet, which can be funded by a range of underlying payment instruments. • Global Card Networks – Visa, MasterCard, and to a lesser extent , China Union Pay and JCB are attempting to create solutions that allow consumers to use their cards for global, multi-channel commerce. Through a layered approach that includes solutions like EMV (Chip + PIN other solutions), NFC, and 3D Secure, the networks are trying to serve as interoperable solution providers for all types of electronic transactions.

Alignment with Customer Needs and Preferences – it goes without saying that successful solutions will need to be easy to use and provide attractive benefits to change consumer behavior. In addition, the solutions must align with the existing payment preferences and habits of consumers if they are to have a chance to achieve scale.

• Debit is the Preferred Global Payment Solution – Inherently consumer friendly, debit is the leading card solution chosen by consumers worldwide, with continued high growth expected for both -issued debit cards and prepaid cards. Even in credit-card centric geographies like the U.S. and the UK, debit card usage is growing, while debit card volumes are exploding in the highest growth markets in the world (e.g. China, India, Brazil). (See Figure 2)

Figure 2

Any solution that supports expanded use of debit for e-commerce and mobile transactions must be considered. Clearly, Acculynk, PayPal and Visa/MasterCard debit all offer credible debit options.

• Signature debit plays an important role in the future of e-commerce - Global networks like Visa and MasterCard have enabled tremendous growth in global debit for select global consumers. Historically, many consumers in “signature-debit” countries like the US are issued a Visa or MasterCard branded debit card as a standard practice, historically as a free service along with their checking accounts. These “deferred debit” cards work for non face-to-face transactions, and enable consumers to pay with funds in their checking accounts. Even for countries without signature debit, many banks offer or debit options that require entry of a special “3D Secure” PIN for non-face-to-face transactions. Unfortunately, even in countries where 3D Secure is required, not all merchants provide support for 3D Secure, particularly in geographies like the US. So the reality is that few of the leading global e-commerce and mobile commerce retailers support 3D Secure.

• PIN debit options are needed too – Since nearly all U.S. bankcards are issued with Visa or MasterCard Signature Debit functionality, many in the U.S. marketplace take for granted the ability to use debit cards for non-face-to-face transactions. However, outside the US, most debit transactions are issued and routed via national networks (e.g. – Canada, Dankort – Denmark, Carte Bancaire Nationale – France, etc.), which have varied and often limited accessibility and usage for non-face to-face transactions and/or international transactions. This means access to Internet or mobile commerce transactions across national boundaries may be a serious challenge, even for sophisticated consumers. The end result is that in many countries, consumers don’t have an easy option to access non-face-to-face transactions with their preferred debit vehicle.

Moreover, even consumers with “Signature Debit Cards” often prefer to use “immediate/PIN debit.” PIN debit is the leading form of debit, even in countries like the U.S. with large “signature debit” programs. Consumers offer a range of reasons for their preference: 1) knowledge that the funds are immediately debited from their account, which reduces the chance of overdrafts; 2) PIN security makes consumers feel more secure; and 3) it is familiar and/or convenient to use the same method they use for POS transactions. (See Figure 3)

Figure 3

Source: 2010 Study of Consumer Payment Preferences

Seamless payment portability – a clear trend that has emerged in cross-channel commerce over the last 10 years is that consumers don’t view online or mobile shopping experiences as distinct, separate behaviors from their broader commerce/retail interactions. Increasingly consumers want to move seamlessly from one channel to another, without thinking about logistical challenges or artificial barriers imposed by the different channels. Specific examples of emerging cross-channel behaviors include:

• Researching/browsing online and purchasing in the store • Purchasing online and picking up and/or managing returns in the store • Browsing/researching in stores (using barcode scanning apps) and buying online

Providing seamless cross channel experiences is critically important for multi-channel retailers, since the consumer wants to have a consistent interaction. And even for “online only” players like Amazon, managing cross-channel experiences is increasingly important as they introduce scanning and image recognition innovations to compete with “Big Box” retailers.

Players like PayPal, MasterCard and Visa have all developed solutions that work reasonably well in multiple channels using “signature” or “password” authentication. However, to date, only Acculynk PaySecure has provided a scalable, trans-national PIN debit authentication solution to the challenges of cross-channel payments.

Security and scalability – adoption and scalability of a workable payment solution requires that the solution balance the security and scalability needs of multiple parties: consumers, banks and merchants in a way that is cost effective and operationally manageable. And the last fifteen years have been littered with well-intentioned security solutions for e-commerce that have failed to gain momentum because they did not adequately balance the needs of multiple constituencies. A few authentication/security solutions, like PKI (for consumer transactions) and SET were outright failures, while others, like 3D Secure, have had mixed success, due to implementation challenges on the merchant side and frustration for consumers at checkout Technologically interesting solutions, like dynamic password generators, CD-ROM based authentication, biometrics and chip-based authentication have failed to achieve critical mass because of consumer adoption challenges. Solutions like Acculynk’s PaySecure virtual PIN pad solution and PayPal’s enrollment/authentication model are interesting precisely because they balance the desire for added security with a “thin” technology implementation that doesn’t require major changes from consumers or merchants.

Globally-oriented solutions are easier for merchants to manage than country-level solutions – Many countries and card networks with unique national debit schemes have recognized the limitations of these schemes for Internet/mobile commerce, and many have attempted to create alternative solutions to address those limitations. Interac Online in Canada, PINless debit bill payments in the US, and Internet-only card schemes in the Netherlands are examples of innovations designed to address these challenges. However, in general, these national solutions present significant challenges for merchants, requiring significant customization and operational complexity. Only some of the largest merchants (e.g. Amazon) are prepared to take on that level of complexity, and even then, they are likely to limit such customization to very large markets. Consequently, globally oriented solutions are easier for merchants to manage, than the programs offered at a country level by individual debit networks, banks or other nationally focused niche innovators.

Not surprisingly, innovators with a global perspective and a strong understanding of merchant implementation needs have had the most success in adapting local payment preferences to the global e- commerce marketplace. Players like PayPal, Acculynk and Skrill have demonstrated the flexibility and scale to work directly with large merchants and partner with the broader merchant integration supply chain to make e-commerce and mobile payments work seamlessly regardless of the peculiarities of the underlying domestic payment systems.

Moreover, the growth of demand for simple, seamless global solutions has caused more banks in more countries to adopt Visa/MasterCard global debit solutions for e-commerce/mobile purposes, despite historic biases against those networks While the simple fact is that the Visa/MasterCard signature debit products are well suited to the non-face-to-face environment, to date most markets outside the U.S. are culturally and structurally committed to PIN debit.

Innovators are Addressing These Challenges

The importance of solving these fundamental challenges is self-evident. The e-commerce and mobile commerce marketplaces are compelling, high-growth opportunities that banks and retailers know they must address. It comes as little surprise, therefore, that the market is full of potential solution providers keen to address the unique challenges of these channels. Of the innovators I’ve reviewed, three categories of innovation appear to offer the most promise.

PIN Debit Innovators - Acculynk (PaySecure Internet PIN Debit product) is the most promising solution provider in the PIN debit arena, although a range of other offerings are emerging in Europe, using SEPA as a platform to extend national debit solutions throughout Europe. Perhaps because Acculynk has been working at its solution for nearly a decade, they seem to be the furthest along, with strong merchant and bank traction in the U.S., India, Puerto Rico, Colombia and a handful of other locations. At the most basic level, the Acculynk PaySecure solution (see Figure 4), which provides several implementation options (virtual PIN Pad, Internet-only passcode, activation via online banking, etc.), enables global merchants to offer a debit payment solution to domestic consumers in any country, regardless of what type of debit structure is in place.

Alternative Payment Players – PayPal’s success in alternative payments has opened the way to an explosion of new wallets and payment solutions that “sit on top of” core payments infrastructure. Skrill, Alipay and Square are all examples of solutions that attempt to solve the unique challenges of mobile and e-commerce payments in a global marketplace. However, PayPal is clearly the most advanced solution of its kind. PayPal enables merchants to leverage the PayPal wallet, which handles the complexity of dealing with national payment preference differences, while giving global e-commerce merchants the ability to offer in-country payment . (See Figure 5)

Figure 4 – Acculynk Example

Acculynk PaySecure: How It Works

Figure 5 – PayPal Example

PayPal: How it Works

Visa and MasterCard options also provide value where they are implemented, and the most basic solutions are relatively easy for e-commerce and mobile merchants to adopt. Ultimately the availability of these solutions varies on a national level, and is affected by the choices that the issuing banks themselves make, which often is driven by a range of complex financial, security and national policy issues. Alignment with the needs of e-commerce and mobile commerce growth may not be a priority in some countries, particularly in the developing world, where more basic issues of financial inclusion and access are paramount.

Assessment of Potential Options

Conclusion

It is clear that support of multi-channel commerce is as important ever, as mobile web commerce builds on the strengths of existing e-commerce infrastructure. Many of the innovations that have served the e- commerce world, including payments and alternative payment players like PayPal will play an important role in the future of e-commerce and mobile commerce evolution. Moreover, as mobile smartphone adoption provides new levels of access to the Internet in regions that have minimal previous e-commerce experience, new solutions and players must be considered. And in the end, banks, regulators, retailers and consumers alike will benefit, provided the solutions provide: • sufficient alignment with customer needs - including access and choice of payment methods to match the underlying customer payment preferences; • relevant portability across channels – so that customers can leverage online and physical world solutions seamlessly; • appropriate security and scalability – that balances necessary consumer and bank liability protection, without requiring onerous technology implementations; and • suitable global flexibility – that enables the leading e-commerce and mobile commerce retailers and service providers to serve multiple markets without cumbersome, highly-customized payment solutions that might limit growth

Ultimately, each of the key players in this market must prove that they can provide solutions to these fundamental challenges. The sheer size of this market opportunity provides the ideal market incentive for the best entrepreneurial and corporate innovators to continuously improve their solutions and rise to this challenge.

Appendix

Select International Debit Schemes

Country National Debit Internet Usage? Network Canada Interac Interac Online – solution works through online banking, but doesn’t include any large, international merchants Denmark Dankort Dankort cards can be used at most retail shops and some Danish Internet stores, but not internationally Germany o ELV Debit transactions for POS transactions only. Direct debit transactions available for some Internet subscription purchases France Carte Bancaire (CB) Consumers can pay an additional fee to get a Visa/MasterCard branded CB, but not all consumers choose that option India RuPay Most Indian consumers have ATM only cards that do not work for non-face-to-face transactions. By 2013, RuPay card holders will be enable through Acculynk’s PIN debit solution. Netherlands Equens Does not support Internet PIN debit, but some availability for direct debit subscription billing for purchases from Dutch retailers