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2015 onwards – The future of payments

What will the world of payments look like in 20 years’ time? PCM dusts off its crystal ball to get a glimpse into the future.

We are on the threshold of a brave new world of payments. If the last 20 years are

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What will the world of payments look like in 20 years’ time?

anything to go by, the next two decades promise even more mind-boggling innovations that will transform the payment process.

But, for the time being at least, plastic payment cards aren’t going to vanish any time soon, even as mobile payments begin to take off. And it is the emerging markets of Asia and Latin America that are underpinning growth – writes Victoria Conroy.

The 2014 edition of the World Payments Report, published by Royal Bank of Scotland and Capgemini, shows that non-cash payments volumes are expected to grow 9.4% to reach 366 billion transactions in 2013, fuelled by strong growth in developing markets. With the continued acceleration of electronic and mobile payments growth, the payments industry is seeking to find new and innovative ways to support customer demands.

It’s clear from the report that developing markets continue to be pivotal to growth. Overall, more than 50% of global non-cash payment growth comes from developing countries despite them only making up one quarter (25.5%) of the market size at 93 billion transactions. China remains a relatively underdeveloped market for non-cash transactions but its population and growth rate suggest in certain conditions that it could soon outstrip the US and Eurozone within the next five years. Currently, one in five people in the world that are using mobile banking, lives in China.

Alongside China, growth rates for Central Europe, Middle East & Africa (CEMEA) followed closely at 23.8%, emerging Asia at 22.8%, and Latin America at 11.0% – all hotbeds of mobile payments activity.

Despite high growth in developing markets, the US and the Eurozone are still ahead in the number of non-cash transactions made per inhabitant. Finland, with 448 transactions per person per annum, continues to be a clear leader and recorded growth of 10.6% during 2012, outstripping other nations in Europe and North America. The US has the second highest number of non-cash transactions per inhabitant, at 376, but grew by only 2.6% for 2012.

William Higgins, managing director of payments at RBS, said: “China, for instance, is one to watch over the coming years, with the report showing that if growth rates remain at the current high level, it could become the largest market for non-cash transactions within just five years. These soaring growth rates in key markets put pressure on the global payments arena to innovate to meet rapidly increasing consumer demand.”

Increased use of tablets and smartphones is creating a convergence of e- and m- payments. In 2015, m-payments are projected to grow at 60.8% while e-payments growth is forecast to decelerate to 15.9% annually over the next year, as more people use mobile devices to make payments.

The evolution of mobile wallets

The increasing array of mobile wallet services worldwide poses a number of challenges

MBNA launch digital wallet with MasterPass

The evolution of mobile wallets

for the payment industry. Handsets can become outdated very quickly, while app developers – both within and outside the payment industry – have to contend with new operating systems and technologies on a continuous basis. For banks and financial services providers, the costs of establishing a successful mobile wallet proposition can be onerous, hence the focus on value-added services designed to attract, retain and increase customer loyalty.

The evolution of mobile wallets over the next decade and beyond will likely encompass services designed around loyalty, rather than the actual payment process. One only needs to look at the success of the Starbucks app to see how offering a strong value proposition can drive adoption and usage. With 6 million average weekly transactions in the US, it now accounts for a full 15% of transactions made at US Starbucks-operated stores. The app incentivises regular purchases through its rewards loyalty programme, and the app works on the majority of smartphones. The app’s success is not due to the ease of payment with a phone. So it has succeeded despite the fact that it is not more convenient than credit or debit cards or cash.

It is difficult to say at this point which of the current mobile wallets in the marketplace will thrive and which will wither under the onslaught of competing services, but it would be fair to say that consumers will use a mobile wallet service when they are convinced that they are deriving tangible benefits in the form of loyalty services, discounts and redemption.

Speaking to PCM, Nils Winkler, CEO of Yapital, points to a few trends emerging in m-payments, which could become definitive over the next two decades.

“Apple Pay will undoubtedly put a fire under the mobile payment market, with both smartphone manufacturers and service providers jostling to partner or compete. But consumers are interested in more than just technology – as customers move between different channels on their way to buying goods, retailers need to offer payment methods that keep up with them, reducing the gap between buying impulse and completed purchase.

“Consolidation in the mobile payment market will see established players in the financial services sector such as banks take on new roles, with partnerships emerging that will help to take mobile payment mainstream. And with customers increasingly using online and mobile banking services, the industry may begin to consider the phasing out of traditional bank/credit cards.”

The rise of wearable tech

A trend which has emerged over the last few years – wearable tech – is likely to cause

Wearables Payment study

The rise of Wearables

even further innovation and further disruption in the payment space. After all, it is all about the chip – now that chips have been freed from traditional form factors like plastic cards and arguably, mobile phones, they can be found in a myriad of wearable tech propositions, like contactless-enabled wristbands, smart watches, smart glass headsets and other innovations.

Undoubtedly, these innovations are helping to drive awareness of new consumer payment methods, and in some cases are helping to displace low-value cash transactions. The fundamental tenets of electronic payments are consumer convenience and the speed of the transaction. If a consumer can carry the payment chip on a piece of wearable tech, then they do not have to bring their payment cards with them, which helps to assuage consumers’ security fears.

Despite the all the hype so far, it’s fair to say consumer uptake has been somewhat slow, but wasn’t this the case with contactless and NFC? It’s only now, a decade on from the emergence of contactless technology, that people around the world are warming to contactless cards and mobile payments. As speedy and as convenient as these propositions are, what could be more secure and convenient that a wearable item that the consumer has with them at all times?

While the likes of Caixa Bank and Barclaycard have entered the contactless wristband space, a Canadian tech start-up, Bionym, is taking things to the next level by launching a technology trial that links its Nymi Band, a wearable device that provides identity based on the uniqueness of a wearer’s heart, to a MasterCard card for payment. The technology is known as ECG-authenticated payments. The Nymi is the first product to offer identity, proximity and motion information all in one wearable electronic device, and more are likely to follow.

The much-lauded Google Glass headset has attracted attention from the likes of Caixa Bank, which has developed its own app for Google Glass to enable the bank’s customers to conduct transactions. Other apps for the headset which are currently in development include Eaze, which uses voice and image recognition to activate the service and nodding head gestures to confirm and complete payments.

A slew of recent studies and surveys indicate that consumers around the world are expressing great interest in wearable payment tech. In September 2014, Mercator Advisory Group found that in the US, 38% of adults, especially young adults (62%), are interested in wearable technology devices with a mobile interface that enables various activities, which may include making payments or mobile banking. When asked to rate the importance of 11 features to include on such a device, 50% of respondents interested in wearable technology considered mobile banking and, separately, making payments to be important. The report also found that as of 2014, 43% of US consumers surveyed have tried mobile payments, up from 31% in 2013.

“Consumer enthusiasm for new wearable technology demonstrates that consumers want to use mobile payments but only if it’s easy to use and embedded with other relevant functionality,” states Karen Augustine, author of the report.

Writing on his blog, Dave Birch of Consult Hyperion says that many payment players have the wrong focus altogether when it comes to wearable tech. “At the heart of our world right now is technology, and a lot of banks see the technology as a differentiator.  So they want to be first to roll out the sexy new thing.  Yesterday, it was the app, today it’s the wearable app and tomorrow it’s the embedded app in your internet of everything.  So what? An app’s just an app. The focus needs to be on the process of ubiquitous connectivity.”

Even with wearable tech in its infancy, some players are going one step further. Why not just take the chip and directly implant it into an individual? As far-fetched as this may sound, wouldn’t this be a logical evolution? While not to everyone’s liking for a whole host of privacy and security reasons, interest in this space is picking up.

A US tech start-up, Applied Digital Solutions, specialises in designing syringe-injectable microchip implants for humans, positioned as fraud-proof payment solutions for cash and credit card transactions. According to the developer, the chip’s biometric “under-the-skin format” will make it a veritable “loss-proof solution” that can put an end to identity fraud.

Chip implantation into humans is not without precedent. Mexico is one country where RFID chip implants are being used. The country’s organised crime division requires its workers to wear the chips for security reasons. RFID implantation is also used to record and provide information related to a wearer’s medical history, including drug allergies and other key details. At the same time, these implants are being targeted as useful payment methods. In fact, in Spain, Rotterdam and the Netherlands, people can already use them to avoid long lines and pay for drinks at a few exclusive clubs.

In essence, implanted microchips serve to make the physical body machine-readable to make payments easier and more secure. At the same time, because these devices transfer data through the wireless non-contact use of radio-frequency electromagnetic fields, they’re susceptible to the same malicious attacks as non-implanted chips. These attacks include hacking, cloning and the uploading of viruses. This risk was made clear when researchers at University of Reading were able to successfully upload a virus to an implanted RFID transponder. As the virus took control, it didn’t just comprise the data on the RFID implant, it was able to use the transponder to copy and spread itself to computer systems within secure infrastructures that played host to the wearer.

For the time being, human chip implants are not likely to be popular with consumers due to questions of ethics and security fears, but who knows what will change over the next 20 years?

The Internet of Things

With billions of connected devices already in existence, the evolution of wearable tech represents a major disruptive innovation in payments. Isn’t the next step to look at payments within the Internet of Things (IoT)? Science fiction writers of the 1950s may have only dreamed of such a thing, but it very much becoming a reality now, thanks to technology convergence enabling different devices to communicate with each other and transmit data.

This IoT umbrella term defines a network of objects and devices connected to the internet via telecoms and technology, and has the potential to completely reshape people’s lives. Until recently, there was a lack of devices and infrastructure required to make the IoT a reality. Now, hardly a day goes by without a new IoT device being profiled. There are currently about 200 potentially connectable devices per person. By 2020, analysts expect that there will be 26 billion connected objects around the world. IT behemoth Cisco predicts that the value of the “Internet of Everything” (which brings together not just things but also people, processes and data) will be $14.4 trillion by 2022.

According to ABI Research, more than 30 billion devices will be wirelessly connected to the IoT by 2020. Additionally, a recent survey conducted by the Pew Research Center found that 83% of technology experts and engaged internet users agreed that the IoT, and embedded, wearable computing, will have widespread and beneficial effects on people, businesses and communities by 2025.

With the proliferation of connected devices becoming more closely embedded in our everyday loves, any object with a digital heartbeat could be networked enabling a multitude of transactions.

Birch added: “The internet of things is where the world changes next, and wearable is just a transient moment in that movement to the internet of things.

In other words, banks can make a momentary headline with a new app, but the bank that really places digital in its heart and mind, through its processes and people, will be the one that wins the next technology game changer. Not the one that launches a wearable app.”

The IoT is already posing many interesting questions for the payments industry. If a consumer can simply walk into a shop, order what they want and pay on their connected device, could this lead to the end of the check-out?

Using innovations such as BLE sensors and beacons, stores will gain access to certain shopper information upon a consumer’s entrance into a shop and to any previously stored payment information, making it easy for customers to simply walk in, select an item and walk out with it.

There are some examples of how the IoT is changing consumer behaviour already. In the US, several restaurants offer self check-out at the table using tablets, while in the UK, supermarket chain Tesco is rolling out self-scanning technology and “smart trollies” which add up purchases as items are placed in the trolley. At the end of the shopping process, the consumer simply uses an automated self check-out payment terminal.

These early examples show how the IoT is already making payments even more seamless than they are already.

A short-term use case for IoT devices is the data it provides for targeting adverts and consumer offers. A card issuer or merchant who only has data from a consumer’s mobile device might leverage its location data to send a coupon to the closest restaurant. But if the provider also had data from social media plus access to information from a connected car, it would know that the consumer is driving to another town to celebrate a birthday. The provider could then send offers based on the consumer’s destination instead of the consumer’s current location.

According to Jeremy Nicholds, executive director for mobile at Visa Europe, when it comes to payments in the future, customer experience has to remain centre stage.

“That means ease, flexibility, choice – and security and reliability. It is trust that is the consistent non-negotiable factor. The future provides almost boundless opportunities for payments, often triggered automatically and underpinned by technologies like NFC. The reality is that the future is now. The worlds of payment and mobile are well along the path to convergence. Consumer expectation and behaviour has shifted dramatically: look, for example at the huge growth of contactless payments in the last two years.

“The IoT is about innovation. It’s about pushing the boundaries. And while these technologies may develop separately, their futures are clearly intertwined. Payments, mobile and digital technologies are innovating at an incredible rate. Ultimately, that will allow us to unlock new digital services that offer consumers even more innovative, convenient and flexible ways to pay and to manage their money – and to know that they’re safe while they do it.”

Of course, anything dependent on software and connectivity is susceptible to fraud and hackers, as we have learned from recent high-profile data breaches. Every IoT device is connected to the internet, making them vulnerable to hackers. Issues of data encryption and device authentication will be key but there is no clear consensus as to how the IoT will be secured and standardised.

Data capacity will also be a key consideration. The IoT will transmit and generate astonishing amounts of data, which will in turn boost usage of cloud services. Is there enough bandwidth and storage capacity to handle this coming explosion of data? And with a relative lack of regulation over the IoT thus far, what will this mean in terms of liability along the IoT chain?

The mounting number of data breaches has cast doubt on retailers’ ability to secure consumer data and sustain consumer confidence in sharing data, creating a barrier to the adoption of IoT technologies. It’s estimated that enterprise businesses will spend $114 billion dealing with malware-related cyber-attacks in 2014 and, per multiple industry reports, tens of millions of credit cards have been compromised this year.

Chip manufacturer Intel has launched Intel Data Protection Technology for Transactions, in what it claims is the first IoT-aimed solution to provide end-to-end encryption of consumer and financial data that is built into POS platforms. Developed in collaboration with NCR, the Intel Data Protection Technology for Transactions combines software optimised for retailers with Intel hardware, including Intel Core and select Intel Atom processors, to deliver a higher level of security from the start of a transaction until transaction data is stored on a bank server. The software resides and runs on the Intel chipset for enhanced security and helps close the gaps between data transmitted between POS devices and the data centre.

“This solution is a significant improvement in today’s retail transaction data protection without costly hardware upgrades, and provides retailers a path for adopting new IoT technologies,” said Michelle Tinsley, director of mobility retail and payments at Intel. “It also sets the stage to expand to other industries such as financial services, healthcare or even government agencies.”

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