A whole new generation of consumers is emerging who don’t carry physical wallets or purses. All they need is their phone. When they pay for something in a shop or a cafe, they wave their smartphone over a credit card terminal or other point of sale device and, hey presto, the payment has gone through without a single note or coin changing hands or a credit or debit card making an appearance.
At present, the two principal payment methods on the phones are Apple and Google Pay. Once either app is running on your phone and is linked to a credit or debit card you are able to make payments. And these are being joined by others such as Mastercard with its Pay By Bank app which allows users to pay using any online banking app already on their phone and choose between different accounts depending their needs or where they still have credit.
The convenience of these apps is proving very popular with consumers. “The mobile phone is becoming the de facto payment system,” says Kevin Curran, professor of cybersecurity at Ulster University. “I haven’t used a credit or debit card in three weeks, and I’ve been to Majorca and France and back in Belfast during that time. I used the phone all over the place and I have the same amount of cash in my pocket now as I started out with.”
The interesting thing about all of these apps is that they rely on traditional credit and debit cards to work. "This is an interesting one," says Robert Doherty, director of product and scheme compliance at AIB Merchant Services. "People talk about disruptors and what's going to change. Debit and credit cards still control the market. We have gone from paper to digital to phone and so on, but Visa and Mastercard have built a massive payments infrastructure and that's not going to change."
Indeed, even the some of the main players who are seen as disruptors are reliant on that infrastructure. "Revolut has been seen as a disruptor but it uses Mastercard," says Doherty. "Revolut targeted a certain age group – 18- to 25-year-olds who are happy to share bills in a certain way. One pays and the others transfer their share to them using their phones. AIB had a solution like that five years ago but it failed because it only worked AIB account to AIB account. Interestingly, Revolut and Apple both use the Visa and Mastercard rails. People want something as quick as a credit card and as secure. The payment system has to be fast, it has to work within two or three seconds at the point of sale device at the till."
The same is true of Fire, the latest venture from Irish payments innovator Colm Lyon. It offers digital accounts to businesses and personal customers based in the UK and Ireland. Accounts are opened online and provide customers with access to a range of payment and data services. It supports sterling and euro bank transfers, a Mastercard debit card and an API that enables integration from customer's systems to the data in their Fire account. The personal account also supports sterling and euro bank transfers, a Mastercard debit card with real time notifications, social payments and requests to contacts and other apps. "Fire is already connected into UK banks and AIB," Doherty points out.
Customer experience is front and centre of the payments evolution as companies look for ways to make transacting for their products and services more seamless, according to Owen Lewis, a management consulting partner with KPMG who is working as part of the firm's global payments team. "Changes in the payments sector, including real-time payments and security-enhancing data, are being driven largely by technology-savvy consumers and businesses demanding a full digital experience in their daily transactions,"he says.
“In theory consumers will be able to have much richer access to their total financial position and make use of innovative payment services in a secure and safe way,”he continues. “Traditional players have kept up with the pace of change largely driven by regulatory deadlines – the challenge now for the established banks is how to capitalise on this investment.”
He expects to see three main areas of focus in the coming years – customer experience, product design, and infrastructure. “There will be a clear focus on delivering a superior customer experience and access to a range of bank-owned and third-party services, often to a targeted segment of potential customers, through aggregation and product targeting,” he says. “For business customers, this will include greater integration between financial services organisation and clients’ businesses through value added services such as accounting package integrations, data and analytics insights and active monitoring.”
On product design he sees companies becoming increasingly agile at designing and adapting products to meet the needs of individuals. “Product design will be complemented by a deep understanding of how the front-end platform algorithms work to ensure products remain highly recommended.”
Infrastructure developments will see the main players leveraging economies of scale and potential operating efficiencies. This will see back-end infrastructure providers to the banking industry providing the balance sheet and payments infrastructure that keeps the system operating.
However, an area of concern shared by both Kevin Curran and Robert Doherty is the prospect of some benefits offered by the traditional payments providers being eroded in this brave new world. “Laser came to an end because it didn’t offer the same level of security as Visa and Mastercard,” says Doherty. “If you book a flight and the airline goes bust and you’ve have paid with Visa or Mastercard there is protection there and you get your money back from the credit card company. For new payment systems to succeed they will have to offer that same level of security.”
“There is a worry that some banks are putting the onus back on the customer,” says Curran. “Did they have a strong enough password? They may not always come forward to help like they did in the past. That’s a bit of a worry – not so much for tech savvy people but for older people and others who you hear about being scammed.”