What Will It Take To Turn The Hype Of Mobile Payments Into Reality? INDUSTRY INSIGHT

Paradigm Shift

The term “paradigm shift” entered the ranks of knowledge advances and described the catalyst for “gobbledygook” many years ago. That is too bad since the process as being a paradigm shift. it is a word with a very important, legitimate pedigree. Fifty-five years ago, Thomas Kuhn made the word Before Kuhn, the view was that science evolved famous. He was writing about how scientific thanks to long slogs by past researchers, theorists and experimenters, if not towards “truth,” then at US Proximity Transaction Value, least towards greater and greater understanding of 2011-2017 the natural world. Kuhn’s version of how science billions and % change develops differed dramatically. $58.42 273.8% Where the majority saw steady, cumulative

225.6% “progress,” he saw discontinuities – a set of 173% alternating “normal” and “revolutionary” phases in which communities of specialists in particular fields are plunged into periods of turmoil, uncertainty and $26.45 angst. The revolutionary phase of the Kuhn Cycle 148.6% often occurs when existing information is 120.8% interpreted differently than it was in the past. 93.4% $9.69

$2.59 $0.17 $0.54 $1.04 2011 2012 2013 2014 2015 2016 2017 Proximity mobile payment transaction value % change

Note: point-of-sale transactions made by using a mobile device as a payment method; includes scanning, tapping, swiping or checking in with a mobile device at the point of sale to complete transaction; excludes purchases of digital goods on mobile devices, purchases made remotely onmobile decives that are delivered later on, and transactions made via tablets. Source: eMarketer, July 2013

1 When it comes to mobile payments, existing with this recently-introduced mobile payments information, and interpretations of it, abound. Some option. Meanwhile nearly 80 percent of iPhone interpretations are oppositional and some users and almost 75 percent of Android users complimentary. Many are very limited and self- completed their instore purchases with credit serving. The fact of the matter is, though, that as of or debit cards. this moment in time, most of the predictions How We Paid on Black Friday 2015 concerning when the widespread adoptions of payments made with digital devices instead of cash iPhone Users and cards would occur have been off the mark. Apple Pay2.7% Credit or Debit 79.2%

Neither18.1% Some analyst firms that watch the industry have downgraded their forecast as is the case with the chart above from eMarketer.com. Other organizations Android Users tasked with reading the tea leaves related to this topic Mobile Wallet 2.0% may also want to consider adopting a more bearish Credit or Debit 73.5% INDUSTRY INSIGHT stance around mobile payments given the data from Neither24.4% the annual consumer feeding frenzy that now extends from Thanksgiving Day through Cyber Monday. Source: InfoScout 2015

Information gathered by the firm InfoScout on Black Low use levels of on Black Friday Friday indicates consumers are still in love with their 2014 were expected, since the service was just plastic. InfoScout tracked the use of Apple Pay and a month old and only available on the latest Android Pay compared to other forms of payment. iPhone model. However, the data coming in Their findings should silence any commentary that from InfoScout and others a year later seems suggests the current, dominant model for delivering to suggest that this tech-company-driven instore mobile payments is progressing. version of mobile payments delivery seems less than a hit with the consumer. Apple Pay Usage as a percentage of Apple Pay eligible transactions

6% If there is going to be a paradigm shift in

5% payments, then it is yet to come. Indeed, one

4% has to question whether the current efforts

3% being made actually represent progress. Using

2% Apple Pay as a test case and comparing year

1% over year use trends, it could be argued that

0% this type of approach is discouraging adoption. Nov DecJan FebMar AprMay June July AugSep OctNov 2014 2015 2015 Maybe we need to step back and shine a Source: InfoScout 2015 different light on our experience to date and Not only was use of Apple Pay low but, in fact, the some of what is unfolding in the present. percentage of consumers using Apple Pay reached an all-time low. InfoScout found that only 2.7% of Apple It is how Dr. Kuhn would have done it, looking Pay-eligible transactions were made via the service, a critically at certain assumptions in his field that number considerably lower than last year’s 4.9% Black may be leading away from the paradigm shift Friday total. that is needed for progress to be made. In the case of mobile payments, there is a set of red Android Pay use was even lower with only 2% of herrings that are impeding the movement forward toward options that the consumer will eligible transactions on Black Friday being completed find attractive enough to adopt.

2 Red Herring #1: The Mobile Wallet Metaphor If we know anything about U.S. consumers in particular, we know that technology which makes A search for the origins of the term “mobile wallet” life harder, takes more time to use and requires a returns 36 million hits. A cursory review of the first change in ingrained user habits dies a rather quick couple of pages of these results reveals no author to death. Thus, at a minimum, the idea of mobile attribute the creation of the term to, which is probably payments being the same as a mobile wallet that for the best. The term is a poor metaphor for doing adds to the complexity of life certainly has not been payments from a smartphone or wearable and is itself helpful to the adoption of either. It might have been an inherent barrier to adoption. better to search for a term that translated more into the digital rather than physical world given the Aside from the fact that the term speaks volumes about limitations and associations with the current choice. the primarily male tech industry lack of farsightedness – since mostly men carry wallets – consumers are not

Why not think of the ability to make payments on a INDUSTRY INSIGHT asking for a mobile wallet. What they want is more smartphone the same way we do other services convenience and value-add when purchasing goods and offered on it? Currently there are various apps for service. Should the originator of the terminology be smartphones that do specific things – e.g., serve as discovered and interviewed, it is likely his intentions newsfeeds, flashlights, cameras, compasses, were mostly innocent. Likely his reasoning for choosing activity monitors, et al – but generally the owners of to create the metaphor was to offer consumers a these devices attribute the functionality to the conceptual bridge from how they frame payments device – e.g., my iPhone is also a flashlight, etc. – currently to a future that would offer them better and rather than to a specific app. easier ways to pay. The bridge, however, is rickety and does not connect the present to the future. This is actually what Apple wanted to achieve with Apple Pay; i.e., not the creation of another mobile The mobile wallets debuted to date do not replace wallet but rather the creation of a service delivered physical ones. In addition to a driver’s license and on an iPhone that would make that device even , there are an array of other things in physical more vital to its owner’s everyday life. wallets (e.g., gym membership card, insurance card, Unfortunately, the Passbook on iPhones was just metro pass, notice of allergies to certain medicines, etc.) too easily coopted as “wallet” and Apple, apparently, that cannot be easily put in the mobile version. So, great, could not avoid the temptation. Approaching now I have TWO wallets to keep up with, which is LESS payments as a “utility” has proven effective in not more convenient. fostering adoption.

62% Convenience 84% For example, Kenya uses a system called M-Pesa, 43% Reduce queue time 57% run by a company called Safaricom. Nearly every

24% consumer payment in Kenya, from utility bills to Prefer to carry less around with me 37% groceries, is paid for with a cell phone. How did an 23% Easier to use / no PIN numbers 31% economic and technological superpower like the 23% of America get left in the dust in this If I lost my phone I would be aware more 33% quickly than if I lost my credit card category of technology by an East African nation 21% I always remember to carry my mobile 33% phone but not my cards with a small population and limited technological 8% I think it would be more secure 12% development?

All Those who have / would consider / would definitely use mobile phone technology

3 In part because of the difference in the state of the come even more rapidly for whatever new, shiny payment’s infrastructures of the two countries with the option is being proposed. U.S.A. having a complex payments ecosystem and Kenya Reasons for lack of interest in using smartphone having hardly any at all. However, it seems significant to to make in-person payments point out that Safaricom does not primarily pitch M-Pesa as a mobile wallet but rather as a payment Don’t see any reason to switch from 58% cash or payment cards 62% utility that makes the lives of average Kenyans easier to Don’t want to store sensitive 62% navigate. information on my phone 68% Don’t want to transmit sensitive 55% information to the merchant device 51% E-commerce (Desktop) E-commerce (Mobile) Mobile In-Store Worried that my smartphone might 36% Total U.S. Retail loose connection 32%

Worried that my smartphone battery 27% will run out 22% 9% $5.3 $5.6 $4.9 $5.1 $4.5 $4.7 Don’t understand how to use it 8% 6.1% 6.1% 8% 5.8% 6.0% 5.5% 11% INDUSTRY INSIGHT 6% 5.1% Don’t know where I can use it 9% 4.0% Something else 8% 2.8% 3.0% 6% 3% 2.0% 1.4% 2.0% September 2013 November 2012 0.7% 1.0% 1.0% 0% 0.1% 0.3%

0% 2013 2014 2015 2016 2017 2018 Many of the early stage companies providing mobile For an example closer to home, consider the more than wallets and other types of technology designed to $500 billion of goods and services sold to U.S. support instore payments made with a smartphone consumers via the Internet each year. Remember all the have smart people leading them who know a great various “wallet” concepts that appeared early on in the deal about innovation but not so much about adoption of e-commerce? Not too many left today. Why? payments. The big tech companies have tried to Because Americans wanted to shop online, not manage remedy this obvious weakness by using their capital another wallet. It is about convenience and the concept to recruit rock stars from the payment industry of a “mobile wallet” suggests the opposite. Words whose names they hope will legitimize their efforts. matter. As an industry we need to focus on mobile Of course, a couple of recruited rock stars into a payment services and abandon our focus on mobile culture more tech than financial services doesn’t a wallets. payment company make.

Red Herring #2: Tech Cost Will Lead the , founded at by Lucas Payments Revolution Duplan and his classmates, is the poster child for History demonstrates the technology that requires what happens when raw inexperience challenges changes to an existing, proven, heavily-used the existing payments industry. Clinkle’s vision was infrastructure usually flames out. Incumbent payments to create a product that would allow users to pay players resist change because with it comes expense with their smartphones and leverage that to become that eats into profits. These expenses are driven by the new PayPal. In the summer of 2013, it obtained everything from the need for different technology at the more than $30 million in convertible debt from point-of-sale to training the individuals who handle the Stanford professors; Stanford’s non-profit transaction how to use that technology. If the accelerator StartX, entrepreneurs including Marc technology being proposed requires changes in Benioff and Richard Branson; and a host of venture customer behavior at the checkout, then death may capital firms including Partners, Andreessen

4 Horowitz, Index Ventures and . Two plus For the most part, with the exception of some bank years later the company is more soap opera than execs with prophetic leanings, the established payments innovator. players in the payments arena do not appear to be overly alarmed. There is a reason for that. The The press around big tech firms that have encountered existing payments infrastructure is powerful and rough waters in the payment space is even more ubiquitous involving hundreds of thousands of prominent than the coverage afforded debacles such as players on a global level. Disintermediating it and Clinkle. Amazon has had a couple of forays into the the vested interests of those players is, as the payments space that stalled. Google has been in a start/ lawyers say, non-trivial. In addition, this stop mode with its wallet on more than one occasion. infrastructure features a level of reliability and Softcard nee Isis folded and CurrencyC seems to have security second to nothing of its kind. more issues than the typical adolescent. Even Tim Cook’s voyage into payments with Apple Pay been so choppy his If you have been in payments for longer than a few predictions of a cashless society may need to be put on years, then you remember when there was

hold. skepticism that transaction volumes would ever INDUSTRY INSIGHT exceed 500 tps (transactions per second). Today, All these companies have payment experts in their there is a large network that maintains a system stables but they are not payment companies and, as that processes 15,000 tps. That system operates such, their ability to disrupt the industry is limited to the every minute of every day of the year, year after kind of “flavor of the month” phenomenon we have seen year. where there is some initial success followed by mostly apathy if not outright failure. This scalability and continuous availability did not manifest by accident. It required a special level of Yet, daily, there are new proclamations declaring the next knowledge about technology and payments to big thing that will come from outside the payments achieve. It is not that new players, even those who industry and turn it, as well as the organizations that may seek to circumvent the role of existing players support it, on its head. Generally, these soothsayers lack in the payments system, cannot work with these the years in the business it takes to understand its networks. After all, any new source of transactions nuances and challenges and so far, nary a bank nor credit means more income for many along the payment union has hoisted the white flag of surrender. The processing value chain. opposite is ultimately what will happen over the coming several years. In the book The Art Of Strategy, authors Dixit and Nalebuff explore how game theory can be applied in a variety of situations from the reality television Red Herring #3: New FinTech Will Uberize show Survivor to nuclear war scenarios to combat Existing Payments Infrastructure between corporate giants. In a discussion on how to react to potential competitors, they write: A regular feature in the FinTech landscape includes a chorus of commentators crying warnings reminiscent of “You can imitate as soon as the other has Old Testament prophets about the impending doom that revealed his approach…or wait longer until is coming to the incumbents of the payments industry at the success or failure of the approach is the hands of this start up or that early stage company known …The longer wait is more with a young tech savvy founder or CEO who has visions advantageous in business because, unlike of growing his or her company into a unicorn. in sports, the competition is usually not winner-take-all. As a result, market leaders

5 will not follow the upstarts unless they also Red Herring #4: Mobile Payments Just believe in the meritsof their course.” Aren’t as Simple as Using a Card

Generally speaking, when it comes to payments, financial Investors do not like business models that bet their institutions, networks and processors OWN the market. success on anything that requires changing the They created and now control directly and indirectly the behavior of the end users. They know that asking infrastructure of the payments used around the world to consumers to change behavior around any deeply fuel commerce and allow individuals to support the needs ingrained practice can require a long time and a lot of their daily lives. of money unless there is a clear and compelling benefit for them to do so. Perhaps even more importantly, these incumbent payment players – especially the financial institutions Payment cards have been around for decades. – own the “trust” franchise with consumers when it Most of the people in the US know how to use comes to money in general and payments in particular. It them. Today, more than 44 percent of all purchase is important to note that “trust” and “like” are two transactions in the world are made in this country, INDUSTRY INSIGHT different attributes. many involving a variety of card types. The convenience provided by these cards continues to Inside Secure’s 2015 Holiday Shopping Trends, data drive their use. The average American carries at indicated that more than half of the consumers polled least seven cards not including prepaid, loyalty and would prefer a way to do mobile payments that comes gift cards. from a financial institution. Time and again, polls have been done asking Banks May Have The Trust Advantage consumers what is the greatest barrier that prevents them from using mobile payments.

Consumer Reasons For Not Adopting Mobile Purchasing 51% Percent of mobile phone owners who do not use thier device for purchasing of mobile payment holiday shoppers said they would prefer to use a payment app from their bank instead I prefer to use my usual payment method. of a third party service like Apple Pay or Samsung Pay 55%

I am concerned about the security of mobile payments. 40% Though a number of the established organizations in the I don’t see the value of using mobile payments. 30% payments industry are favorite punching bags for anyone I don’t have the needed features on my phone to use mobile payments. wishing to complain about their various shortcomings, 25% most have management teams that understand the role I don’t really understand all the different types of mobile payments. they play in providing trusted services for consumers. 16% The cost of data access on my wireless plan is too high. 12% That is why these institutions have been content to play The places I shop don’t accept mobile payments. wait and see as technology companies, telcos and FinTech 5% firms have invested billions in testing a variety of premises Source: Javelin Strategy & Research 2014 around digital payments. This is a classic strategy for any organization or cartel that owns a particular space.

6 In most polls, the number one answer is security but themselves by entering a PIN. Someone decided usually somewhere near the top will be “ease of use that asking consumers to “dip” then enter a PIN compare to other options” or something similar. This was just too foreign a concept to put forth, so in research from Javelin Strategy and Research found U.S. the PIN idea was replaced with a signature preference for the comfort and ease of existing payment common in the card swipe scenario. options trumps even security. As it turns out, EMV in the USA may be the most Much of this lack of a compelling user experience around significant change cardholders in our country have mobile payments has to be laid at the feet of mobile wallet encountered since adopting the use of cards providers for reasons previously noted and because much themselves. Because not every merchant has or of the motivation behind the offerings to date has been will outfit his or her store or stores with EMV- more self-interested than user focused. In addition, ready terminals, the checkout process will remain payment professionals know that a frictionless payment “mixed” sometimes requiring a swipe and experience is not a desirable goal when using most sometimes a dip. In addition, whereas the swipe is

anything other than cash. a relatively simple process that technology makes INDUSTRY INSIGHT mostly foolproof, an EMV card that is dipped must Friction in the payment process is often there for security be left in the terminal until the software “clears” reasons and therefore is unlikely to completely disappear the consumer to remove the card. especially as we move payment initiation onto inherently insecure devices such as smartphones. It is, in fact, a With all this to consider, hindsight would suggest desire to improve security for card users that has brought that asking consumers in the US to enter a PIN about a material change in the payments industry in the versus sign their name could not have added much United States that opens the door for mobile payments to more friction than was already present. Add to become easier to use – and perhaps more secure – than that the fact that a PIN is harder to steal and use using a card. than a fake signature is to produce, then you get an idea of why many articles are appearing The breach at Target that occurred in late 2013 – and the questioning whether the US rollout of EMV was others that closely followed it in 2014 – created a thought out as well as it should have been. commitment toward adopting EMV standards that had been mostly missing in the US payments industry prior to This turbulence is good news for mobile payments. that point in time. Rather suddenly and to the surprise of Card-based transactions no longer represent the some industry commentators, chip-based cards meeting most frictionless of options for consumers. EMV guidelines started to appear in mailboxes, and in Between knowing whether to swipe or dip and October 2015 the liability shift putting responsibly for insuring you leave the card in the terminal for the fraud originating from a non-EMV transaction on the appropriate time if you do the latter, tap and pay merchant occurred on time. via a smartphone sounds more like a convenience play than it ever has before. That digital devices Even before this sea change around EMV implementation can make use of tokenization and encryption began, there was much concern around the impact it opens options around security and combating would have on consumers. With EMV no longer would a fraud that are not as numerous in the card-based swipe be the method for beginning the authentication world. process at the point-of-sale. EMV requires the consumer to “dip” (i.e., insert) the card in a slot on the POS terminal. In addition, cardholders would typically identify

7 Conclusions

Think of these red herrings as pointing to the RS Software, the sponsor of this report, is a “discontinuities” Kuhn looked for as he sought to company of 1,000 resources focused understand change. They still have life in them. Some will specifically on the acquiring, issuing and be propped up long after they are dead because it serves payment processing space. For more than 20 the purpose of the vested interests of some companies years, RS Software has served this space and their stakeholders. However, as they erode, with a vertically integrated approach to momentum will shift away from the dismal performance providing solutions to many of the leading of the mobile payment and mobile wallet offerings to date brands in it. toward a focus on delivering a more convenient way to pay using smartphones and wearables.

If, as some have predicted, EMV in the US moves from INDUSTRY INSIGHT signature to PIN, the move to mobile payment services may happen even faster. The introduction of options that allow financial institutions to deploy branded mobile payment services with an ROI that fits their needs and features that address what their customers and members want also will accelerate things. It is the perfect storm that will provide the rain needed for the next revolution in payments to take hold within the existing payments ecosystem.

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