About a month ago, T-Mobile launched a wallet with a prepaid card in the US. (link) And this week in Barcelona (February 2014) we will hear many announcements about digital wallets from banks and payment schemes in partnership with Telcos of course. Yet none of them will be successful as none of them were in the last 5 years. Even mighty Google was not an exception.
1) Heritage and Legacy: Money and the cards in our physical wallets are created and/or given to the consumers by the banking system. Central banks print money and commercial banks issue debit and credit cards. It has been like this for decades (and in case of cash for centuries). It is imprinted in the minds of consumers. Just because a telco/a GSM operator can offer a digital wallet doesn’t mean that consumers will change their attitude toward how to use cash and cards….in spite of the fact that their satisfaction with the banks have not been much to envy about. Technology is a disruptor but changing how people behave involves much more than just 1 and 0.
2) DNA: The main job of a Telco is to provide connectivity. And in that job they have many issues to deal with. Government licenses, competition, infrastructure, regulators, consumer demands, OTPs, and so on. Providing a wallet is neither in their DNA nor in their top 10 list. A digital wallet is a totally different business model. Just because you can do something technically does not mean you will be able to do it.
3) Ownership: In many cases, realizing the limitation above, telcos opted to build alliances with other telcos, or with payment schemes. Yes in fact alliances are good to offer industry solutions but never come even close to perfect when designing products and services. Innovation never comes out of committees and needs clear idea ownership and focus which by nature you won’t have in a coalition.
4) Branding: You can’t change consumer habits unless you have a wonderful new product and keep investing in its brand to differentiate. There is so much competition among telcos for their normal product offering, all of their marketing money goes into it. Especially as what they sell is air time which is the least tangible service, they always need to communicate their brand and that requires a very high budget anyhow. How were they going to put aside money to start and cultivate a new way to pay all of a sudden?
5) Infrastructure: A wallet and digital money is good only if you are able to pay. That part of the value chain is owned by banks, payment schemes and by processors. Namely POS terminals. There are about 30 million of these devices around the world and only about 10 percent of them are contactless that would allow the NFC technology work and enable consumer to tap and go with their mobile phones. Banks have been very slow to adopt this technology as a typical POS terminal has about 5 to 7 years of life time. With limited numbers at the point of sale and no clear branding to identify them, wallets were in effect useless as consumers could not pay.
Am I saying that the telco wallets are dead due to all these reasons? No. There are now some other developments that will kill the telcos role in the payment space altogether.
The very reason why telcos went into this space is being evaporated….by technology again!
There was one simple reason for the telcos to go into payments. SIM card. We need to to authenticate the transaction and verify the cardholder at the time of the transaction. Chip and PIN for instance has been very effective doing this. USA still uses magnetic stripe and signature but even that involves the presence of a card and a cardholder at the same time and place. For digital wallets to interact securely with the POS terminals banks needed to verify the transaction and for that they needed a secure element embedded into the SIM card which is a processing chip anyhow. As this processor called SIM card owned by the telcos, they believed that banks needed telcos to make payments. And they were right. Hence, with business cases relying on the revenues that they would make renting space in the SIM card to the banks, telcos embarked on this journey to provide digital wallets to the consumers which faced all the above mentioned difficulties and never fly high.
Now that very reason of needing a SIM card within a mobile device is gone. There are two developments that are happening simultaneously.
1) HCE: Host Card Emulation is a virtual representation of a smart card using only software. NFC transactions were mainly carried out using the Secure Element approach so far. With the release of Android 4.4, Google introduced a new platform support for secure NFC-based transactions through Host Card Emulation (HCE), for payments, loyalty programs, card access, transit passes, and other custom services. With HCE, any application on an Android 4.4 device can emulate an NFC smart card, letting users tap to initiate transactions with an app of their choice. So this means that banks will not need to “rent” space from the SIM card to verify the transactions.
Of course this is only Android and not iPhone. And even for all android phones to work with this release, it will be months. Yet it shows clearly where the direction of the future of payments going.
2) Tokenization: Finally payment schemes (Visa MasterCard, Amex, CUP, Discover, JCB) got their act together (!!!) and announced a proposed framework for a new global standard to enhance the security of digital payments and simplify the purchasing experience when shopping on a mobile phone, tablet, personal computer or other smart device.
The proposed standard will allow the traditional account number to be replaced with a digital payment “token” for online and mobile transactions. With a token, consumers will no longer be required to enter an actual account number when shopping online or on a smart device. Tokens provide an additional layer of security and eliminate the need for merchants, digital wallet operators or others to store account numbers.
Key elements of the proposed standard include new data fields to provide richer information about the transaction, methods to identify and verify a consumer and a common standard designed to simplify the process for merchants for contactless transactions.
Once a standard is agreed to and implemented, issuers, merchants or digital wallet providers will be able to request a token so that when an account holder initiates an online or mobile transaction, the token – and not the traditional card account number – will be used to process, authorize, clear and settle the transaction in the same way traditional card payments are processed today. Tokens can also be restricted in how they are used with a specific merchant, device, transaction or category of transactions enabling much more secure and targeted segmentation.
Going back to where we start, the automatic role of a telco renting a secure place on the SIM for digital payment transactions will be disappearing. However only by investing user friendly and functional wallets banks will be able to dominate this new area. Failing to deliver that, they may face the same technological distruption very soon.