Are the days of credit cards numbered?
Mobile payment technologies are in development that could replace not only cash but plastic cards too
Back in 2004 supermarkets in Oxford, Swindon and Gloucester started to let their customers buy groceries with their thumbs.
The system was the UK’s first and only implementation of Pay by Touch, a biometric payments system which linked a customer’s thumb print to their credit card or current account, freeing them from traditional payment tokens like cards and cash.
It was also the first time that British customers were able to make payments without their purses. Bill Laird was the chief operating officer for the trio of Co- Ops during the rollout, and says that the main benefits of the system were to reduce the risk of theft and card fraud in store, and to simplify age-checks for young people buying alcohol.
“Unfortunately our endeavours did not excite other key high street players such as Tesco, Boots, and M&S,” says Laird. “The benefit of 'paying by touch' could only be gained when shopping at one of our stores so it quietly withered on the vine, and was Pay by Touch did not catch on, but since then the field of payments – so fundamental to the functioning of an economy – has seen an unprecedented period of innovation.
A key driver for this innovation has been the advent of the smartphone. Consumers now carry small but powerful computers with them everywhere they go, and the consequences for commerce are only beginning to be realised.
To date, most ‘mobile payments’ innovation has focused on using smartphones as an adjunct to the existing credit and debit card infrastructure. There are good reasons for this, not least the pervasive coverage of that infrastructure.
But there are also technologies in development that could spell the end not just of cash, but of the ubiquitous 3.4" by 2.2” plastic card too.
Point of sales
In 2009, Twitter co-founder Jack Dorsey struck upon his next big idea. Reportedly inspired by a friend who could not sell his hand-crafted taps and bathroom fittings because he could not process credit card payments, Dorsey created Square, a mobile application that allows smartphones to read the magnetic strips on the back of credit cards and transact payments.
In Europe, however, most retailers use Chip-and-Pin or Chip-and-Signature technology to authenticate card transactions. The UK uses chip-and-pin exclusively, but these terminals are more expensive than magnetic card readers, because they handle the encryption of the data. One company that is trying to do for chip card payments what Square has done for magnetic cards is Swedish start-up iZettle.
iZettle has developed a card reader that attaches to a smartphone or tablet, but does not does use the smartphone to transact the payment. Instead, processing takes place in the cloud.
“What you want to achieve is a situation where none of the information from the card ever touches the device, but where it just acts as a stupid modem,” says CEO Jacob de Geer. The only work being done by the card reader itself is to encrypt the card data.
Like Square, iZettle gives the app and card reader away for free and charges merchants 2.75% of all transactions. The system is aimed at tradesmen such as plumbers, tilers and home IT helpers who would like to be able to accept card payments, says de Geer, a group he describes as “prosumers”.
“We are not interested in any of the other segments,” de Geer says. “20 million companies in Europe are left out of card payments because chip and pin [point-of-sale] terminals are too expensive.”
De Geer is hoping to bring iZettle to the UK. He says that the company has been testing its system here with a limited number of users, and that there have been no hitches so far.
“I honestly don't think that, from a tech and process perspective, we will have to change anything,” de Geer says.
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Closer to home, a number of organisations are developing technologies that will allow users to make financial transactions directly from their bank accounts using their mobile phones.
The Payments Council is an industry body responsible for “making sure payment services in the UK work”. It oversaw the establishment of Faster Payments in the last decade, reducing the clearing time for electronic payments from several days to several hours. The supporting infrastructure was built by payments processing service provider VocaLink, and is today used by all the major high street banks.
The Payments Council and VocaLink are now working on a mobile payments system that will allow bank account holders to link their mobile phone numbers with their accounts, letting them transfer money using just their phone number.
To do this, VocaLink is building a centralised database that will allow UK banks and their customers to opt-in, making a connection between customers’ bank accounts and phone numbers. Once banks come on board, mobile payments will be processed using Faster Payments as well as the LINK infrastructure, which is used for ATM transactions.
Richard Martin, the Payments Council’s head of innovation, says that the system is designed to support the kind of payments that are usually made with cash or cheque.
“We saw that we could leverage the investment the industry had made with Faster Payments, but make it into a much more customer friendly proposition with the idea of a mobile payments service,” Martin says.
He says the service will provide another option for individuals to transfer and receive money. “You can put cash or checks in an envelope, or create a direct debit instruction,” he says.
“All these things exist because they are all addressing different needs of the market, the business and the consumer, and I think the same will be true of mobile.
“Mobile is a channel that can support of a range of payment services,” he says.
Meanwhile, Barclays Bank has recently launched a service called PingIt, a mobile app that allows users to transfer money to one another only using their phone. The free-to-use application lets the user transfer up to £300 a day to “friends, family and small businesses”.
According to independent payments consultant and analyst Marite Ferrero, however, mobile money transfers have their work cut out if they are to replace point-of-sale transactions.
For one thing, unlike in the US, UK banks offer free money transfers between accounts.
“There’s less opportunity for mobile payments here in the UK, because payments are already free,” Ferrero explains. “If you are a mobile payment provider, that basically takes the wind out of your sails. Why would consumers use your service when they can do it for free with a bank?”
Similarly, the cost to the retailer of receiving a mobile transfer is much less in the UK than in the US. Large retailers such as Sainsbury’s and Tesco pay 1.14% on each card transaction, Fererro says, around a third as much as US merchants. This leaves less of an opportunity for mobile payments providers to disrupt the market.
Another concern is that bank transfers cannot be verified in real time. “When you take a payment from a credit or debit card, you get an instantaneous response from the issuing bank as to whether the account has money or not so, your settlement risk is zero,” Ferrero says.
This is not true of direct transfers, which means that this particular kind of mobile payment is unlikely to replace cash or cards at the point of sale for now, she says. Customers buying a coffee are not going to wait two minutes for a payment to clear through the Faster Payments network, let alone the maximum guaranteed time of four hours.
However, Ferrero claims to have found a way around this, by allowing merchants to test a customer’s bank account for available funds during the transaction, although she will not divulge much detail.
“I found a way to process instant BACS payments [which take three days to clear] and cut the payment service provider’s settlement risk to zero,” she says. “Not a lot of people in the industry know that. I told a client the secret to this in my last project, and as soon as that bank does it, I’m sure the other banks will follow.”
Nevertheless, her arguments suggest that consumers and merchants will need something extra from mobile bank transfers if they are to become a new standard form of payment.
The Payments Council’s Martin says that its mobile payment processing system could be a platform for supplementary features, such as location- based services or targeted advertising. He is clear, though, that it would be up to the bank and its customers to agree to this kind of engagement.
Martin believes that there is ample opportunity for mobile payments to disrupt the system of a card and cash that surround us.
“Sometimes you do get new entrants to the payments market which do change the world,” he says, pointing to online payments processor Paypal as an example. “There’s no reason [someone else] couldn’t come along and do something similar by creating a killer reason for people to want to use it.”