Another 46 US banks signed up to Apple Pay in September. Apple’s mobile wallet platform, launched last October, has now signed up 500 of the country’s banks, including the largest – but have they made a mistake?
The US is the first country to receive Apple Pay but its retail payments infrastructure is the least supportive of advanced digital wallet technology. Apple Pay and the US banks may be ready to go, but “if only 5% of places in the US accept NFC then it’s not yet at the forefront of consumers’ minds when they go to a merchant,” says Thiago Olson, chief executive of payments card, Stratos.
Chip and pin technology has only recently started to take off in the US, and near field communication (NFC) capabilities that mobile phones use for payments depend entirely on this Europay, Mastercard and Visa (EMV) standard. While chip and pin technology was mandated in several countries as a means for faster payments with a lower risk of fraud in face-to-face transactions, fraud has been less of an issue in the US, and the cost of moving to EMV technology has been considered too high.
That opinion has now changed. Fraud related to low-value retail payments is expected to cost $10 billion this year, while the move to EMV-standard technology will cost $8.5 billion. Merchants will bear most of that. But that delay means the US is already six or seven years behind many countries, where people are now used to waving their cards at Starbucks to pay for their lattes.
According to EMVCo, some 96% of West European card-present transactions were EMV in 2014. In Canada, Latin America and the Caribbean that percentage was 85%. In Africa and the Middle East it was 80%; in Asia, 27%; but in the US, just 0.12%.
Even if the US was ready for mobile payments, Olson says it should not be the sole focus of the banks. This year the value of mobile payments is expected to be just $214 billion.
“We think there will be many types of payments and Apple Pay will be just one,” says Olson. He points to Japan, where NFC payments have been in operation for a decade. “Payments using a smartphone topped out at around 17% of total NFC payments. The vast majority of people are using contactless cards.” Even in Japan with its advanced NFC adoption and mobile payments, cash is still used more than in any other developed market.
That’s bad news for US banks who have sidelined other innovations in consumer finance and have waited instead for Apple Pay. Perhaps the banks thought this would be cheaper than investing in their own innovation. The economics are hard to judge. Neither Apple, nor the banks, are speaking publicly about the arrangement but it is thought that Apple Pay has signed contracts with each US bank demanding a percentage of every transaction.
Banks in other countries did not wait for Apple, however, and that has given them a competitive advantage against disruptors and new market entrants.
Danske Bank launched MobilePay in 2013. It’s an app that allows Danske and non-Danske customers to make payments from their mobile devices to merchants by holding their mobile phones up to the point of sale, or by paying online or via other apps for free. It now has 2.5 million users – about one in every two smartphones in Denmark – and two-thirds of those are not Danske customers.
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Mark Wraa-Hansen is head of the MobilePay department at Danske. “In the Nordic countries we view innovation as important for our customers but also more efficient for our banks,” he says. “Start-ups and mobile payment firms are changing the bank model. We cannot sit on our hands and wait but have to lean forward and define our future.”
Similarly Barclays in the UK launched Pingit, a mobile payments platform, while in Singapore DBS Bank has PayLah!. Alfian Sharifuddin, group head of consumer banking channels technology at DBS, says it has served the bank well not to wait for Apple. “By entrenching the bank’s services in the customers’ daily lives through these innovations, we are able to increase usage of our services at both consumer and merchant ends,” he says. “It also opens up new business streams such as micro-payments or peer-to-peer payments.” Apple Pay launched in the UK in July and is planning next to launch in Canada and China.
But by waiting for Apple and focusing on mobile payments, US banks have fallen behind in the global digital consumer innovation wave. “The fintech firms gain ground very fast and they pick their battlegrounds,” Sharifuddin says. “While banks do everything – mortgages, auto loans, payments and deposits, mutual funds – the new entrants can pick one sector and in a short time disrupt it and make it their own. Venmo and PayPal have eaten up the payments landscape, Lending Club and Prosper are eating into loans. And look at Alibaba. In 12 months Alibaba’s UML mutual fund raised $93 billion in assets under management, becoming one of the top 10 mutual funds in the world. If they can amass that much money in such a short space of time then its very clear banks have to innovate immediately.”
The belief that Apple Pay could never be disintermediated because it’s Apple is not valid
Even within mobile payments, it’s not certain that Apple Pay will be the clear winner. Every day new payments innovations are being launched.
Robert Flynn, head of payments in North America at Accenture, says: “Mobile has taught us that you can pick the trends but you cannot pick the leader.” Take CurrentC. It is a merchants’ alternative to Apple Pay, piloting this year to lower interchange fees. Wal-Mart spearheaded the initiative with the idea that many retailers working together could convince consumers to adopt their own mobile payment system. Instead of paying interchange, the merchants would pay lower fees using Automatic Clearing House. Powatags is a similar offering already up and running in Asia and Europe.
There will be plenty of competitors like CurrentC that will make it cheaper for merchants and potentially consumers. “The belief that Apple Pay could never be disintermediated because it’s Apple is not valid,” says one former banker.