Karen McCandless explores why the future of payments is no longer just about the way we pay
By 2014, there will be more mobile phones on the planet than humans, says the International Telecoms Union. Meanwhile, the average consumer now uses four different devices each day. The proliferation of devices means mobile payments has taken off, with an eMarketer report predicting that mobile payments in the United States will break the US$1 billion barrier this year and hit US$58 billion by 2017. Add to that the rapid adoption of social, with social media now being the number one activity on the web, according to best selling author Erik Qualman’s Social Media Revolution 4 report. As a result, the way consumers shop is changing. They are more socially and digitally connected, interacting with banks in completely new ways and expecting to be able to pay using any device and channel.
“Banks can no longer only focus on traditional payments channels,” says Colin Kerr, industry solutions manager in the Worldwide Financial Services team at Microsoft. “However, when banks think about the future of payments it is important not to become too focused on point-of-sale technologies, but to consider broader payments opportunities where banks can add substantially more value. Many people have hailed near-field communications (NFC) as the future, and it is certainly an important technology, but this is just one slice of the mobile channel as it only focuses on one payment method on one device. Payments innovation needs to consider a host of scenarios and use cases to cater to the changing needs of consumers. And with the internet of things – intelligent devices connected to the internet – in the near future, consumers could be placing orders and paying from any device such as gaming consoles, even a fridge.”
While NFC may not be the complete answer, digital wallets are likely to increase in popularity. Almost 90 per cent of respondents in a Paypal survey said they don't want to have to carry a wallet and would prefer a digital payment method. Windows Phone 8, which was unveiled late in 2012, includes a digital wallet hub, as well as the ability to enable contactless NFC payments. “The wallet hub allows companies in the commerce value chain to build and deliver apps that can hook in to the wallet and display contextual, relevant information. This could be account balances, loyalty rewards, or incentives and offers near your location,” says Kerr. “The extensibility of apps into wallet hubs is designed to deliver a digital wallet experience that surpasses a traditional wallet experience. Microsoft also offers its customers additional channels and devices through which payment and commerce capabilities could be developed, for example Xbox, digital advertising and Bing offers.”
Many banks feel threatened by mobile network operators because they have the ability to prepopulate the wallet. However, banks need to focus on differentiating their payments brand within in the digital wallet instead of worrying about controlling the wallet or POS technologies. To do this, they must better understand consumer behaviour through the whole transaction rather than just the payment itself in order to influence consumer shopping habits.
“If banks just treat payments as transactions they won’t build relationships with customers,” says Kerr. “Processing payments was the value banks added 40 years ago. Today, they must add value to the shopping and payments needs of customers. Payments have moved from being a transactional business to an informational one where the information about the payment is as important as the payment itself. Banks have the opportunity to increase customer loyalty and brand equity by becoming more relevant in a customer’s shopping experience. Why are customers shopping at one retailer instead of another, why are they buying their coffee at Starbucks instead of Costa Coffee? This information can then be connected with demographic information to give a clearer picture of customers and enable banks to have more influence on where consumers shop, what they buy and of course how they pay. This is an incredibly underused touch point in the banking experience, but banks that can influence shopping behaviours and experiences will be most effective at driving consumer and merchant customer loyalty.” In order to influence consumer buying behaviour, banks must ensure they connect their payments products with compelling incentives. One way is to target consumers with relevant and easy-to-use offers. By using a combination of big data, social analytics, and an analysis of the payments and spending patterns of customers, banks can now start to direct very targeted offers to their customers.
“With GPS positioning and geo-location services, banks can target consumers in real time and offer relevant offers based on where they are and what they are doing,” says Teri Abel, senior vice president, product and program management at FreedomPay. “They can provide an offer that will drive them to a merchant they are doing business with. For example, instead of going to Starbucks, they will go to Costa Coffee. And rather than just offering a generic coupon such as US$2 off your purchase, the bank can say ‘you were in here last week and bought X so maybe you would be interested in Y’. Banks can also offer additional services, for example if a person is spending a lot of time at home improvement stores maybe they’re selling their house and would be interested in mortgage offers. Combining information from both banks and merchants is hugely beneficial to enabling a cohesive approach.”
Payments have moved from being a transactional business to an informational one where the information about the payment is as important as the payment itself.
Colin Kerr, Microsoft Kerr agrees, indicating that: “such programmes could offer white-labelled incentives solutions to small and local business customers. This is an innovative way to add value and forge very deep relationships between banks and their business customers.”
There are already several early examples of this in the market. BankAmeriDeals allows customers to choose the cash-back deals they want through their online or mobile banking. If they pay for their purchase with a Bank of America debit or credit card, the cashback will be automatically credited to their account by the end of the next month. Chase Bank acquired San Francisco start up Bloomspot to form the basis of offers-focused products. Using credit card data provided by consumers, Bloomspot not only better targets offers, but also verifies if the offer has been redeemed and how much the consumer has spent. Barclaycard also launched a free shopping service, which gives all shoppers, not just Barclaycard customers, access to over 5,000 special offers. Bespoke Offers allows consumers to search for money-off vouchers and special deals at high street.
To make these offers a success, merchants and banks need to share information to ensure they have the relevant data to drive customers in the right stores to pay with the right payments provider, something that many find a challenge. “Often information is siloed, with payment transactions in one area, customer interactions in another and what is going on in the industry in another,” says Abel. “This is a challenge for banks that are saddled with aging legacy systems, as they just can’t rip and replace the whole system. There are so many different parties involved in the payments industry that getting everyone to collaborate can be difficult.”
This is where Microsoft comes in, as it elevates the level of innovation among all participants, acting as an enabler for the next steps in digital wallets. FreedomPay, one of Microsoft’s key partners in this space, is revolutionising the payments world with its commerce platform that goes beyond what is currently available from other vendors today including an advanced real time incentive engine, mobile platform, and tight point-of-sale integrations down to the line item level.
“Our cloud-based platform features mobile payments and incentive functionality that can then be integrated with POS systems,” says Abel. “The FreedomPay Commerce Platform includes a gateway that can collect and transport detailed data from all the relevant parties in the payments value chain. This platform can also be used to improve sales, customer loyalty and incentive effectiveness by encouraging specific consumer behaviour. For example, if a customer comes in once a month, merchants can use our platform to increase this to once a week. To ensure payments are secure, we provide rigorous security tools. The solution can also be implemented on a modular basis, enabling banks to make the difficult first steps towards a full payments hub. To stay ahead of the game, the FreedomPay Commerce Platform provides the ability to integrate new technologies as they come to market, for example payment by iris scanner.”
This focus on innovation and new technology also has a great deal of resonance in the corporate payments world. With the volume of payments increasing and margins decreasing, coupled with the large choice of payment providers, innovation in the industry is key. Payments, especially if coupled with consumer offers, need to be processed much quicker, and in the best case in real time, as consumers look for a better and faster service.
“Some banks have decades old legacy systems that are unable to keep up with the increase in volume and speed of payments, while also being hugely complex,” says Amanda Gilmour, product director of payments at Temenos. “There is an expectation for faster processing times but these must be achieved with little manual intervention to ensure minimal errors and manage the associated risk. This can be achieved with new system innovations, which use condition-based rules to enable advanced automation. This approach, additionally offers benefit in terms of product innovation. Giving control back to the bank, it enables system changes to be made in real-time allowing banks to create new products without the need for the usual vendor support and the associated costs, risks and timescales for launching a product.”
According to Gilmour, flexibility is key to getting the most out of a transaction banking business. “With the vast number of payments channels available, banks also need a universal platform that can process any type of payment from any source to any channel in any format, while handling ever-increasing volumes,” she says. “And offering flexibility in terms of processing times also adds tremendous value. Corporates must be able to rely on their payment provider and have confidence that all payments will be processed on time. Banks should be able to have the necessary control to prioritise payments according to their corporate customers’ needs and their associated SLAs, for example, as well as having full visibility of where the payments are, if there is a problem or if there are any trends to support future product development.”
Temenos has been building a new enterprise payments platform for large international and regional banks in partnership with ABN Amro to meet these needs. Gilmour explains: “ABN Amro was looking for a new payments solution but there was nothing on the market that met their needs. The bank didn’t want to build the platform themselves so they approached us about co-developing a new product. We are due to deliver the last component to them in November. The solution is channel, source and instrument agnostic so it can handle any format, type or clearing house. For example, banks don’t have to worry about adding a new module every time they add a new clearing house. It’s plug and play on a grand scale. It’s also significantly cheaper to implement and lowers the total cost of ownership, maintenance and operational costs. When we have fully developed the platform, we will be the only vendor in the market that has the full suite of banking software.”
With both Temenos and FreedomPay leveraging Microsoft technology, the company is in a unique position to join all the dots between banks; retailers and merchants; mobile network operators; and consumers in the payments space. “At Microsoft, we see payments as a platform rather than a device story,” says Kerr. “With our technology stack, we can provide universal access through our Windows Azure cloud offering, which can then be localised at the end point. This provides a high amount of flexibility as the future of payments changes, meaning that banks don’t have to build a new payments platform as the industry evolves and new payments methods – many of which we can’t even imagine now – emerge.”