Why the iPhone 5 means the end of the swipe and cards

It took almost two decades for credit card payments (followed by debit cards) to become globally ubiquitous, so it might be reasonable to think that a paradigm shift at the POS will take years to become mainstream. Why would you spend money deploying expensive NFC-enabled (Near Field Communication) POS terminals unless consumers were going to use them, right? Is this why Apple chose to snub NFC technology in its latest iPhone?

In normal circumstances, if there were no competition, this would make good business sense. The problem for the banks and networks is that they think the "card" is defensible -- that this product has enough inertia for consumers to not be bothered by the fact that they can't yet pay with their phone at every POS terminal. In the U.S., this inertia has not only meant a slow roll out for NFC, but has also seen U.S. merchants slip seven to eight years behind their EU counterparts. In the EU, already 75 percent of cards support the EMV standard, and more than 90 percent of terminals, whereas in the U.S. only 30 percent of merchants support EMV. So we hear frequent stories of U.S. travelers in Europe unable to pay for the simplest of purchases or transactions with long-outdated card tech. Worse for the U.S. card industry is that the industry is paying 3c of every transaction in preventable fraud right now due to outdated signature and mag-stripe tech.

Maybe Apple is simply waiting for NFC to become mainstream before it jumps in. That's undoubtedly part of the reason, but I think there are other explanations that present real problems for the incumbent card networks and banks.

Not-for-consumers?
NFC is sometimes referred to by skeptical industry pundits as Not-For-Consumers. But the technology is sound, has been around for more than a decade, and is a logical transition when you are trying to move consumers from a plastic "swipe" to a phone-based "tap."
Let me tell you why I think Apple baulked this time around with NFC. I think there are three main reasons, but they have little to do with the consumer-adoption angle:

• Firstly, the most obvious. Apple wants maximum utilization of its device and technology, and it's likely true that it's waiting for better U.S.-based infrastructure (its home market and one of its largest) to support phone payments at the POS. Apple is not known generally at leading consumers with new technologies, they weren't the first with an "MP3" player, neither were they the first tablet manufacturer. Apple is known for their impeccable timing with new technologies, along with creating disruptive ecosystems to support those technologies (like iTunes).
• Secondly, it doesn't control the ecosystem and they're not keen on providing tech that banks and card networks make money on, but they don't. While it is true Apple has such phenomenal market and brand power that it could move the market on this, why move the market so that banks and card networks continue to make interchange fee, and Apple makes nothing beyond the handset sale?
• Lastly, it has figured out that it just doesn't need to support the existing POS technology to enable payments at all -- so the longer banks and networks wait to deploy NFC ready merchant capability, the less likely it is that Apple will go for NFC all together. In fact, the lack of NFC industry adoption means Apple is choosing to pursue support for digital wallet solutions, taking the card and swipe out of payments all together.

Was it a good decision for Apple? That's highly debatable, although it isn't going to hurt iPhone 5 sales. Apple could have re-released the iPhone 3G and called it the iPhone 5 and it probably would have sold 20 million units without blinking.

So does this mean there's life left in cards?
Not a chance. In fact, the lack of NFC roll out is actually creating significant momentum behind a much more serious and disruptive trend. The trend to go cardless and POS-less completely.
While banks and networks have been debating the merits of NFC, and while US merchant acquirers and card issuers have been debating the roll-out of EMV and new POS technologies, there has been a quiet but steadily growing shift towards payment experiences that don't require a swipe or tap paradigm at all. Pay with Square, PayPal merchant payments, Amazon checkout, closed-loop mobile apps like Starbucks' app, or clever applications of back-end payments like Uber, Apple Store (app) and iTunes are rapidly growing in credibility, both at the POS and online through e-Commerce.

The beauty of NFC, for the banking industry, is that the industry could simply have migrated customers from card to phone and all the existing value chain stayed in place. You still needed a bank relationship, they issued you a card number (or Primary Account Number -- PAN, as it is known in industry speak) and you still went along to a merchant and used your bank generated account (now theoretically on a mobile phone with an NFC chip) to pay a merchant through their POS terminal. It is a simple way to keep the card and swipe paradigm going and it meant that both the issuing banks and the card networks kept getting interchange fee because there was no alternative to their incumbent rails.

The problem for the industry is that right now we're doing away with the swipe paradigm altogether, primarily because there wasn't a rapid enough adoption of NFC-enabled payments. We've simply circumvented the poor user experience of the swipe card, for a richer user experience on the mobile device.

The driver for reinventing payments is not putting the card into the phone to get rid of the plastic in our wallet -- it is about reinventing and leveraging a payment instance married with data. The trouble for the incumbents is that you just don't need a card, a swipe or even a POS terminal when it gets down to it. A rapid transition to NFC would have saved the swipe-at-a-POS paradigm by allowing for a rich data support envelope around the payment.
With the poor industry adoption of next-gen POS payment tech, consumers and innovators are seeking that user experience without the swipe at all.

Maybe no card is better anyway
If you've tried Uber, for example, you would have pre-registered your account online or through an app and then the time comes for your first trip in an Uber car around town. You book a car through the app, and it shows you the driver coming your way via GPS and how far away he is. Then you're in the car and off to your destination. When you arrive you exit the car and you receive a receipt for the trip on your phone via the app. No card, no swipe, a seamless payment and ride experience. It's the new paradigm of payment -- seamless, frictionless, and information rich.
Alternately you may have recently walked into Starbucks to order a no-whip, skim soy mocha Frappuccino and a bagel (toasted), but at the point of sale you simply pull out your phone scan the app-generated bar code and you're off. Soon you'll be able to just say your name via Pay with Square at the register and the payment will be processed.
Whether it is Square, PayPal, Uber, Dwolla, Venmo, iTunes, Apple Store, Starbucks, or any other app-enabled digital wallet, we're finding that we don't need to swipe to pay.
Now I know what you're thinking -- that we still need a card number, we still need an issuing bank, and we still need the merchant rails, right?

For now, yes.

But not for long...
The problem, however, for banks is that value stores such as Dwolla, Venmo, PayPal, iTunes only require you to pay a fee to the bank every time you top-up your value store account. Then, if you're using a digital wallet to pay, you avoid interchange at the transaction level.
For solutions like Pay with Square, Apple Store, and Uber, there is obviously ongoing interchange fee for the network, but because the swipe paradigm has been removed, the back-end rails could be replaced with another P2P (peer-to-peer) payment network solution that avoids the Visa and Mastercard rails all together, perhaps through use of the cloud.
In fact, the fastest growing payment class today would simply be classified as peer-to-peer electronic payments. Increasingly merchants and consumers are going to be seeking simply to make a payment and the incentives to pay in real-time directly from one bank account to another. This is fast becoming the holy-grail in payments. The problem is that ultimately a P2P real-time payment could entirely circumvent the card networks.
So whether you are a bank or a card network, the decision of Apple to avoid NFC probably just killed your chances of keeping the status quo of interchange via the card/swipe paradigm.
The likelihood is that the digital wallet, whether via a smartphone-initiated payment or simply built contextually into shopping experiences, has got too much momentum now to save the swipe paradigm. The next step is simply to avoid interchange, the networks and traditional value stores all together. That's where merchants and start-ups want to take this, and they're all leading with a better user experience than the existing incumbents. It's all up for grabs now...
 

mPowa - Somebody stop me Moneypenny!!

The empire on which the sun never sets may be long gone, but people keep looking back at its long track record. Most of them are historians who still rummage through reams of paperwork and other relics of a bygone age and usually come to conclusions that are diametrically opposed to the ones reached by their predecessors. And then there is Dan Wagner (pictured), whose approach to mobile payments, the Wall Street Journal’s Ben Rooney informs us, “might have taken a leaf out of the British Empire’s playbook”.

Wagner is the founder of mPowa, a U.K.-based Square lookalike, which recently entered the U.S. market. We examined the newcomer back in early July and liked it quite a bit. See, most of the Square copycats, which keep flooding the market, are hoping to beat Jack Dorsey’s juggernaut at its own game, because… well, I don’t know why. mPowa, on the other hand, had come up with a unique strategy, which, I believe, gives it a fighting chance. Furthermore, drawing the right lessons from Empire’s glorious past won’t hurt, will it?

mPowa vs. Square
So what separates mPowa from the rest of the mobile payments crowd? Here is Rooney’s take:

The slick-haired and expensively suited Mr. Wagner is back with what at first looks like nothing more than a Square/iZettle clone. In reality, it is a far more subtle, and far bigger, play than that. Called mPowa, and launched earlier this summer, the hardware device is a chip-and-pin reader, which separates it from Square (mag stripe only) and iZettle (chip and sign).

Well, that comparison is quite insufficient. There is more than subtlety and size that makes mPowa stand out from the crowd and it all has to do primarily with flexibility. Here is what we said in our initial review of the service:

On the outside, mPowa’s service does look very Square-like. Users get a card reader that plugs into their smart phones and they are ready to go. Yes, mPowa supports BlackBerry and Windows, but that’s a relatively insignificant upgrade and yes, mPowa supports EMV-based, as well as mag-stripe-based cards, but there are still virtually no EMV cards in the U.S. So where is the competitive advantage? Well, for a change, this time there actually is one. The British start-up allows its service to be used as an addition to, not necessarily a replacement of, its users’ existing credit card processing services. None of its competitors does that and I think mPowa may be on to something.

It’s far from certain that flexibility will be enough to make a difference, but it gives the start-up a chance, I think.

The End Game
However, payment processing is not exactly Wagner’s ultimate objective, we learn. In reality, “the card reader is actually a Trojan horse to a far bigger goal”, Rooney tells us. So what is the end game then? Well, here it is:

The ultimate aim of mPowa is not to provide a hardware device for people to take plastic cards. Mr. Wagner hopes it will be the way by which banks, or any one else (Mr. Wagner won’t be drawn but says he has had considerable interest from a large number of major brands) can seize the mobile wallet crown. It is about getting merchants and banks to aggregate around a technology.

He sees a future where a bank or card providers’ customers have been using mPowa for payments for some time.

“Down the road, say five years from now, your download history is captured by us. Now the bank says to you download my personal wallet from us. If you download this app, all of your cards will already be embedded in it, it is a trusted source – it is your bank – and there is your wallet. End of story.”

So Wagner’s proposition is to white-label his service to banks and anyone else who might want it and to collect a small per-transaction fee (0.1 percent or so) from his clients. Will his strategy work? I don’t know, nor do I think that Wagner knows any better at this stage of the game. The rate at which the Square clones are popping up all around us suggests that building one is a fairly trivial process. If that is the case, why would you not build your own Square, rather than paying to use someone else’s?

The Takeaway
Rooney really runs away with his Empire / Wagner thing (am I the only one detecting some James Bond-type of flair?):

Britain sustained its empire not by conquest, but by annexation. It simply took over existing power structures. Mr. Wagner is not seeking to own that wallet himself, nor is he seeking to replace the banks or other providers. He simply works with them.

However, the difference is that back in the days of Queen Victoria, if someone half a world away had the insolence to reject a royal demand, Empire could send in the gunboats, which usually proved to be very skillful negotiators. Wagner, in stark contrast, like the rest of us, is left to rely on much less glamorous negotiation techniques. How I wish I had an empire…