ISSUE 03 2013
China
Chinese payments are on a roll 2012 in review
A year of change and innovation
P2P
The new payments battleground
NFC payments
Putting the card before the horse?
introduction | Issue three
Welcome to Cards & Payments Insight – our magazine for professionals in the fast-evolving consumer payments sector Each edition will highlight Datamonitor’s latest research into the essential issues affecting your industry. We’ll bring you a selection of topical feature articles written by members of our expert analyst team, based on our recently published research. In this edition, we start by taking a look back at the biggest competitive developments and product innovations of 2012. This is no nostalgia trip though – as Analyst Theresa Jameson explains, the changes we witnessed across areas such as digital wallets, P2P platforms, and mobile POS make all of these the topics to watch in 2013. On the theme of trends to watch, Lead Analyst Gilles Ubaghs examines the potential for growth in China’s payments market. With few legacy infrastructure hurdles to overcome and a population keen to embrace technological progress, the world’s largest payment market is also well positioned to become a global leader in mobile payments. My take on the current state of P2P payments is our third feature in this edition. This is a huge potential market, and technology is once again changing the game and bringing new players to the market. To complete this issue of Insight, the Cards & Payments team sat down with Koichi Tagawa, Chairman of the NFC Forum, to discuss the current state of the NFC market and how the technology is being applied in new and often surprising ways. I hope you enjoy and find value in these insights. We’d love to hear your feedback and any suggestions you have for future issues of Cards & Payments Insight. In the meantime, please continue to access your Financial Services Knowledge Center for our latest research and analysis. If you do not have a subscription, get in touch to learn more about our service, or visit our website: datamonitorfinancial.com. Thank you for reading, and enjoy.
Kieran Hines Head of Content for Datamonitor Cards & Payments and Private Wealth Management We actively encourage feedback from our readers, so if you have any comments or questions, please contact us at enquiries@datamonitorfinancial.com.
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Issue three | contents January 2012 Elavon launched MobileMerchant mPOS service.
February 2012 Visa partnered with Vodafone to launch a mobile wallet service, which became the first of many launched in 2012.
March 2012 Barclays launched Pingit, the UK’s first bank-launched mobile P2P service. PayPal launched PayPal Here, an mPOS acceptance device and service.
April 2012 Barclaycard introduced new mobile contactless payments service PayTag to the UK market.
May 2012 American Express launched: A partnership with Foursquare to offer location-based deals in the UK. A new mobile offer engine that recommends and ranks relevant merchant offers in realtime for US card holders.
March 2012 American Express launched its P2P Serve app for Facebook. They also introduced a new Twitter Hashtag savings scheme for card holders.
Infographic
China
2012: A year of change and innovation
Chinese payments are on a roll
page 4
page 8
April 2012
MasterCard announced its plans to move into the daily deals market to offer a new rewards scheme.
June 2012
American Express released a participatory mobile advertising campaign with Zumobi.
June 2012 June 2012 mPowa launched mPOS services in the UK and US.
China UnionPay signed a number of agreements and memorandums of understanding with several significant domestic and international players – which notably include mobile network operators.
P2P
NFC payments
The new payments battleground
Putting the card before the horse?
page 14
page 18
EDITORIAL Editor Giovanni Musio Art Editor Kazimierz Kapusniak CONTRIBUTING WRITERS Kieran Hines, Gilles Ubaghs, Theresa Jameson, and Arnie Cho. ABOUT Datamonitor Financial At Datamonitor Financial, we deliver intelligence-led insight and data on financial services markets, competitors and consumers. Our robust forecasting methodologies, proprietary databases, and the experience and knowledge of our in-house analysts help clients to make better strategic decisions in the areas of Cards & Payments, General Insurance, Private Wealth Management, and Retail Banking. Our research on cards and payments will help you identify new market opportunities, develop customer-centric propositions, and track competitor activity.
Get in touch To find out more about Datamonitor Financial get in touch at: e: enquiries@datamonitorfinancial.com t: EU: +44 20 7551 9201 | US: +1 212 652 5353 | AP: +61 2 8705 6900 w: www.datamonitorfinancial.com tw: @DatamonitorFS
DISCLAIMER While every care is taken to ensure the accuracy of the information contained in this material, the facts, estimates, and opinions stated are based on information and sources which, while we believe them to be reliable, are not guaranteed. In particular, it should not be relied upon as the sole source of reference in relation to the subject matter. No liability can be accepted by Datamonitor LTD, its directors, or employees for any loss occasioned to any person or entity acting or failing to act as a result of anything contained in or omitted from the content of this material, or our conclusions as stated. The findings are Datamonitor’s current opinions; they are subject to change without notice. Datamonitor has no obligation to update or amend the research or to let anyone know if our opinions change materially.
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INFOGRAPHIC | 2012: A year of change and innovation
Infographic
2012
A year of change and innovation
Theresa Jameson Analyst, Cards & Payments
2012 was a whirlwind year of innovation and change for payments. Datamonitor Analyst Theresa Jameson examines the biggest changes over the last 12 months and looks ahead to see what trends you should expect to see developing in 2013.
Even more so than in 2011, the major product developments in 2012 revolved around two themes: mobile and innovations in customer targeting. See our timeline over the next three pages for more information.
Mobile There was a strong focus on the future of mobile in the payment industry in 2012 – with several major launches and strategic partnerships signaling the way in which mobile payments will develop and ultimately shape the future payments landscape. As the year unfolded, the application of mobile to facilitate payments for goods and services manifested in a number of new forms: digital wallets, person-toperson (P2P) applications, mobile point of sale (mPOS) units, and mobile-contactless payments services.
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Innovations in consumer targeting The expansion of several major players into new product areas as well as the revamping of services, particularly with regards to loyalty and rewards programs, was a key part of the year’s developments. The buzz around daily discounts and the potential for location-based services in particular grew throughout the year. Such moves suggest that payment providers are recognizing the need to continually adapt and develop their product offering to specific markets.
Other developments There were other notable developments throughout the year that had a major impact on the market and are worth discussing – these included PayPal’s move to restructure its business, North America progressing towards EMV compliance, and retailer-branded pre-paid cards entering the market.
2012: A year of change and innovation | INFOGRAPHIC
January 2012 Elavon launched MobileMerchant mPOS service.
February 2012 Visa partnered with Vodafone to launch a mobile wallet service, which became the first of many launched in 2012.
March 2012 Barclays launched Pingit, the UK’s first bank-launched mobile P2P service. PayPal launched PayPal Here, an mPOS acceptance device and service.
March 2012 American Express launched its P2P Serve app for Facebook. They also introduced a new Twitter Hashtag savings scheme for card holders.
April 2012 Barclaycard introduced new mobile contactless payments service PayTag to the UK market.
May 2012 American Express launched: A partnership with Foursquare to offer location-based deals in the UK. A new mobile offer engine that recommends and ranks relevant merchant offers in realtime for US card holders.
April 2012 MasterCard announced its plans to move into the daily deals market to offer a new rewards scheme.
June 2012 American Express released a participatory mobile advertising campaign with Zumobi.
June 2012 June 2012 mPowa launched mPOS services in the UK and US.
China UnionPay signed a number of agreements and memorandums of understanding with several significant domestic and international players – which notably include mobile network operators.
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INFOGRAPHIC | 2012: A year of change and innovation
July 2012 Bank of America announced the rollout of EMV chip technology on many of its credit cards.
August 2012 Google switched its wallet service to cloud-based payment storage to facilitate acceptance of all major debit and credit cards.
July 2012 North America’s move towards EMV migration gathered pace – with Discover, American Express, and MasterCard joining Visa to set up a roadmap for all their merchants to be fully EMV-compliant.
September 2012 September 2012 Apple released new iPhone 5 without near field communication (NFC) functionality but interestingly included a digital wallet platform, Passbook – giving greater emphasis to the emerging area of cloud-based mobile wallet payments.
EU gave green light to Weve’s digital wallet scheme following antitrust legislation investigations.
September 2012 Groupon entered mPOS space with GrouponPayments service.
September 2012 Bank of China launched virtual card service for its platinum credit card holders.
October 2012 O2 launched new mPOS service with Visa Europe and Global Payments.
October 2012 National Australia Bank teamed up with VeriFone to launch mPOS service.
October 2012 RBS and Visa Europe launched TouchPay, a mobile-contactless payments service for UK iPhone users.
October 2012 The much-hyped Isis launched in two cities in the US that have a combined population of only 1 million.
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2012: A year of change and innovation | INFOGRAPHIC
October 2012
October 2012 American Express introduced new premium, invitation only Centurion card to the Chinese market.
October 2012 PayPal opted to streamline its business, cutting jobs across its product and technology units.
Square: Announced game-changing partnership, which will see Square’s mobile wallet accepted at 7,000 Starbucks stores in the US. Introduced mobile card reader and Pay with Square app to Canadian market. Upgraded its Square Wallet app to include a Square directory, a web-based search engine that allows buyers to discover new merchants, loyalty deals, and specials.
October 2012 Walmart partnered with American Express to release its new Bluebird pre-paid service in the US.
November 2012 iZettle launched mPOS service in the UK.
November 2012 American Express launched a new range of rewards and benefits for American Express Halo 4 gamers.
November 2012 American Express made an investment in the integration of mobile commerce with the TV viewing experience.
December 2012 Square added virtual gift card feature to the new version of its Square Wallet app.
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2013: Trends to watch 2013 will be a very big year for payments. Expect to see even greater innovation in mobile, rewards, digital commerce, social networks, and the cloud, as new entrants look to take a slice of the payments market and incumbents react to shifting consumer habits. Following PayPal’s lead, expect to see other big payment players restructure and reorganize to take advantage of the opportunities (and meet the challenges) that will continue to develop in the payments landscape.
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FEATURE | Chinese payments
China
Chinese payments are on a roll Gilles Ubaghs Lead Analyst, Cards & Payments
Over the past 10 years, the Chinese payment card market has gone from underdeveloped potential to the world’s biggest card market. As China changes its leadership and enters the next phase of its economic development, Lead Analyst Gilles Ubaghs looks at how the payments market will continue to take shape in new and unexpected ways.
@GillesU_DMFS
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Chinese payments | feature
W
ith the Chinese economy and indeed wider society poised for further rapid changes in the years ahead, there remain several key considerations for payment providers both within China and those desperate to get in. While the overall market has grown at eye-watering levels, the Chinese card market has been held back by a combination of an as yet still largely untouched market away from its major urban centres and relatively low card penetration rates by Asian standards, strict regulations and restrictions across card products and players, and the still untapped huge potential of mobile payments.
UnionPay’s growth is testament to the scale of the market
Foundation
Cards in issue 2012
Despite high growth, overall card penetration is relatively low The rapid rise of UnionPay is testament to the power and scale inherent within the Chinese payments landscape. Officially founded only in 2002, making it younger than PayPal, UnionPay has now risen to become the world’s largest payment scheme, with estimates suggesting it reached 3.5 billion cards in issue in 2012. To put that into context, there were almost 692 million payment cards in issue across all of Western Europe in 2012. With UnionPay now expanding its agreements around the world and many merchants and international banks eager to begin accepting card payments from increasingly mobile and international Chinese consumers, there nonetheless remains a sizeable domestic market for Chinese cards to expand into. With an estimated 3.5 billion cards in issue this equates to an overall level of card holding of between two and three cards per person in China. Although the card penetration level in China is
2000
2002
Paypal
UnionPay
692m
3.5bn
Western Europe
UnionPay
Card penetration in china is relatively low China between 2-3 cards per person
Japan near six cards per person
South Korea close to five cards per person
China will likely be conscious of the experience of South Korea when it pushed credit cards in the late 1990s and early 2000s as a means of increasing domestic consumption. The market grew to great effect but quickly overheated
on par with many Western regions, it remains substantially below many of its comparable Asian neighbours. In Japan, which has one of the world’s most advanced payment landscapes, card holding levels stand at near six cards per person, and in South Korea close to five. More importantly, however, the distribution of the existing cards in China remains extremely variable. Major urban centres such as Beijing and Shanghai and elsewhere remain substantially more developed than many of the country’s rural regions, where population densities nonetheless remain very
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FEATURE | Chinese payments
Historic and forecast cards in issue and penetration rate, China Source: Datamonitor’s Global Payment Card Analyzer 5m
400%
300%
3m 200% 2m
Card penetration rate (%)
Number of cards in issue (000s)
4m
100% 1m
0
high. As economic development continues in these more rural regions, overall card holding and usage levels due to improved infrastructure and economic power will continue to grow. China’s card market has grown at staggering rates but still has plenty of room to keep growing.
Credit cards will increasingly be used as a means to boost domestic consumption (potentially allowing more foreign providers in) The growth in overall card penetration levels and subsequent usage rates will be driven in large part by a liberalisation of the Chinese payment card market. Although growth has been extremely strong over the past 10 years for payments, this has all been against a backdrop of strict regulations and tight controls on everything from APR levels to a near total ban on foreign providers entering the market unless partnered with a local Chinese player. With China’s recent leadership transition, early indications are suggesting that credit cards in particular will be used as a means to increase domestic consumption and help fuel the next wave of China’s economic growth. Many economists now believe that China’s growth cannot be sustained purely on exports, and that domestic consumption must increase to help maintain these
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2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
0%
growth levels. With the Chinese Communist Party reliant on maintaining high levels of growth in recent years to maintain China’s stability, credit cards will continue to gain a more prominent role in helping to increase domestic consumption levels. With China’s highly centralised government and regulatory bodies, any changes in the many restrictions and regulations in place can occur very rapidly, with little advance notice. Most notably, in December 2012 the People’s Bank of China announced it would be imposing limits on credit card interchange fees, in an explicit bid to expand domestic demand, and “promote circulation and consumption.” The new rules took effect on February 25, 2013, with cuts averaging nearly 24% for most categories, but notably higher for the food and entertainment sectors with cuts of 37.5%. It is likely hoped that these cuts in interchange will lead to a reduction in costs for merchants that will then be passed onto consumers. However, whether these savings will be passed on remains debatable following the examples of Australia and now the US in recent years. Alongside this remains the potential for China to open up its credit card market to foreign financial institutions. Although China lifted restrictions on foreign players entering the retail banking
Chinese payments | feature
The sheer scale of the Chinese market also means that even a ‘trial’ launch is in effect a large-scale commercial product. For example, with its population of 23 million Shanghai alone is comparable in size to Australia
market, leading to HSBC and Bank of East Asia officially incorporating in the region, restrictions nonetheless remained in place for credit card issuing. Any financial institution that wanted to issue credit cards in China could only do so in partnership with a local provider of some description. However, in 2012 Citigroup was the first foreign banking body allowed to begin issuing credit cards in China without the need for a local partner. Although its operations in China remain fairly limited so far, this could be the first sign of a thawing out on older restrictions. If the authorities do want to increase domestic consumption through credit cards, one key element of driving this will be increased competition in the cards landscape through allowing in more players and increasing the availability of credit to consumers. If China does open the gates to issuers, those that can move quickly will likely hold a significant advantage.
But China will likely hold some reservations However, there remain two factors that may limit China’s willingness to liberalise its domestic credit card market. Firstly is the fact that China, and indeed many Asian countries, remains culturally highly debt averse, with high levels of personal debt often perceived as a moral failing and a social ill to be avoided at all costs. Penalties for defaulting on debts in China remain high, and it is unclear how willing authorities may be to loosen these restrictions. This is also tied in with a high cultural propensity for saving. Domestic levels of saving remain very high compared to many other markets due to a relatively weak social safety net, and shifting consumers away from this may be a longer-term challenge than many hope. This aversion to debt and high level of savings further suggests that consumers are likely to spend at least part of their savings before they turn to credit-based spending. Secondly, China will likely be conscious of the experience of South Korea when it pushed credit cards in the late 1990s and early 2000s as a means of increasing domestic consumption. The market grew to great effect but quickly overheated, with a major contraction in the card market and an adverse impact on overall credit availability and the real economy. Chinese authorities are likely to have learnt from those lessons and will
likely limit the extent to which they are willing to liberalise the market in the years ahead. How these contradictions between careful protection and expanding the market develop will be a delicate balancing act for Chinese regulators.
China will rapidly become the world leader in mobile payments Regardless of shifts in wider payment card holding, and the deregulation and opening up of the credit card market, the Chinese mobile payments sector for both remote and proximity payments will quickly emerge as the world’s largest in the near term. China Unicom and China Merchants Bank recently announced they are launching a trial of an NFC-based mobile wallet in Shanghai, prior to a wider national rollout, and will benefit from a very large and enthusiastic consumer base for mobile payments. Chinese consumers remain overwhelmingly positive about mobile payments, with 87.1% of them claiming they are interested in using mobile phones to pay for things in shops, the highest level in any country surveyed by Datamonitor. This level of interest falls to 41.4% in the US and 38.6% in Japan. The sheer scale of the Chinese market also means that even a ‘trial’ launch is in effect a large-scale commercial product. For example, with its population of 23 million Shanghai alone is comparable in size to Australia. Alongside this, Shanghai already has an estimated 160,000 contactless POS terminals in place, compared to the UK’s 135,000. Planned remote P2P payment capabilities in China Merchants Bank’s service will also likely find a significant market in a country with 120 million internal migrant workers.
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FEATURE | Chinese payments
China nonetheless faces the same hurdles as any other market when it comes to developing a fully functioning mobile payments ecosystem. Key amongst these issues is a lack of clarity on the business models involved and competing players all vying to gain a stranglehold on the market. However, China, with its track record of enormous and rapid development, maintains a few aces up its sleeve, chief of which is the sheer scale and dominance of its regulatory bodies and its largest players, both in the issuing and telecoms space. The People’s Bank of China recently announced its technological standards for NFC, while China Mobile is already the world’s largest mobile network operator. Similar to the situation that drove Japan’s early development in mobile proximity payments, Chinese players have the scale to dictate terms on how the market will develop and the means to implement them quickly If China meets its potential and does soon emerge as the world leader in mobile payments, in advance of other regions, this may potentially provide a model for other countries to follow. As it
stands the developments in the Chinese mobile payments space are likely to have a long-term impact on the wider global mobile payments landscape.
Chinese payments show no sign of slowing China as a whole remains a vast and complex market with considerable opportunities, and risks, for those keen to tap into it. The payments space is no exception. While many may think that the levels of growth seen in the past 10 years are unsustainable, China has a long history of surprising its critics. Players that recognise the continued potential for growth in Chinese payments and actively get involved in the market now will be well-placed to help shape the future of the next payments superpower. For further analysis, read the report: Payment Cards in China Access the report through your Knowledge Center
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Chinese consumers are overwhelmingly positive about mobile payments Source: Datamonitor’s Financial Services Consumer Insight Survey 2012
78.5%
Consumers interested in the ability to pay for things in shops using their mobile phones (%)
81.7%
69.7% 65.4%
41.4%
China
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South Korea
Singapore
Hong Kong
US
38.6%
Japan
P2P | feature
P2P
The new payments battleground Kieran Hines Head of Content, Cards & Payments and Private Wealth Management
While developments in mobile commerce and NFC hog much of the limelight in the consumer payments space, Datamonitor Head of Content Kieran Hines warns that person to person (P2P) transactions are becoming the area to watch, as technology is once again changing the game and bringing new players to the market.
@KieranH_DMFS
Cards & Payments Insight
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FEATURE | P2P
P
2P, the payments that individuals make to other individuals, is one of the hottest areas of the payments market. The combination of large transaction volumes and heavy use of paperbased tools is enough to make this a very attractive market for the ‘traditional’ payment players looking to replace cash and cheques. However, P2P is now one of the most dynamic areas of the payment space, with a myriad of competitors using digital wallets, credit transfers and social media-based services to take a stake in this market, and use it as a stepping stone for winning a share of point of sale (POS) transactions.
P2P: less straightforward than it sounds (and used to be) The classic way to view P2P payments is as a very simple concept: the transfer of funds between consumers. P2P is therefore very different from purchase transactions, which are made between consumers and businesses. From a traditional point of view, the way to think about P2P is whether the transaction is made in person or remotely, with the further complication of whether a remote transaction is within or across borders. However, as with so many other areas of payments, new technology is enabling bank and non-bank players alike to approach this market in different ways, and even to break down some of the traditional barriers between P2P and purchase payments.
Cashing in on a large and untapped market With so much of what is happening in emerging payments seemingly focussed on replacing or disintermediating cards, it’s easy to forget that the way electronic payments add most value to consumers and society as a whole is in replacing cash and cheques. And P2P payments are a huge opportunity for replacing paper in the payment ecosystem. Cash accounts for a huge proportion of P2P transactions, particularly at the lower end of the value range. Just over four in every five of the lowest value payments (those of $10 and below) globally are made with cash, with just under 2% made using cheques, and 2.2% of consumers preferring to buy something of equivalent value.
The higher the value of the payment, the lower the use of cash. For payments above $100, just under 33% of P2P transactions are made with notes and coins, with cheques accounting for 13%. Interestingly, direct transfers from bank accounts are the most widely used form of payment for higher value P2P payments, accounting for 33.2% of the market. P2P payments are made by almost all consumers, and this is at the heart of the opportunity. Over 90% of consumers globally make payments to friends and family below $10 in value (or local equivalent) to settle small debts, while 86% make payments between $25 and $100. Above $100, the proportion of consumers making P2P transactions is 82%. Very much the same trends are seen with payments as gifts, with cash dominant for low value payments. However, cheques and gift cards or vouchers become more important the higher the value of the gift. As with consumer behaviour in all other areas of payments, it is the easiest and most convenient method that is used each time. This is what creates the opportunity for electronic payments.
Game-changer 1: Mobile technology However, none of these payment trends are particularly new, and cash has dominated P2P payments since bartering went out of fashion. What is new is the way in which technology and online commerce have changed the game. As with so many other aspects of payments, the biggest driver of change in P2P is mobile technology. The availability and capability of mobile handsets has transformed the way many consumers, particularly in countries with an underdeveloped payment and banking infrastructure, transfer funds between each other. M-Pesa in Kenya is the classic example of how mobile handsets have replaced (at least some) cash in P2P transactions. Having charged their M-Pesa account with funds, one consumer can send money to the account
Just over four in every five of the lowest value payments (those of $10 and below) globally are made with cash
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P2P | feature
The opportunity: P2P payments are made by nearly all consumers Source: Datamonitor Financial Services Consumer Insight Survey 2012
$
89.5%
86.4%
82.8%
Proportion of customers who make P2P payments to split a bill or when they owe someone money
90%
$0-$10
$10-$25
$25-$100
$100+
Payment value
of another M-Pesa user within the country in a matter of moments. This has saved many consumers the inconvenience and cost of either travelling in person with cash for these payments, or in paying an agent to deliver the funds for them. The majority of users do draw cash out of M-Pesa once they receive it, but the potential for this to form the basis of a cash-replacement tool is clear. In many other countries, the impact of mobile on P2P payments has been more subtle, but no less transformative. The use of social media, instant messaging, and online browsing is becoming more and more mobile over time (51% of US consumers browse the mobile Internet every day, for example), and this behaviour shift is driving change in consumer payment needs. Indeed, if consumers are arranging events or discussing splitting bills or other costs via
their handset or online, then they would also value a mobilebased solution for making those payments.
Game-changer 2: P2P commerce The other important driver of change in the P2P payment space has been what has happened in P2P commerce. The growth of online auction platforms such as eBay, along with sole traders and independent producers trading online more widely, has led to a clear need for individuals to be able to easily, securely, and cheaply accept payments from other consumers. In these situations, cash, cheques, and bank account transfers carry too much risk for one party in the transaction, which is what led to the gap in the market so famously and effectively filled by PayPal.
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FEATURE | P2P
when cash, cheques, or bank transfers are almost entirely cost-free to both parties. Any payment service that is trying to compete with that will struggle unless it offers a benefit, or package of benefits, to merit the fee. This is the issue that has long held back P2P payment innovation. Where is the business case in investing and innovating to compete against a free product? The arrival of new entrants in the payment space has turned this argument on its head. Changes in consumer payment needs, allied to moves from established players such as PayPal looking to leap into physical POS payments, have led to money transfer providers, card schemes, and banks all innovating to protect their share of both P2P and also future POS transactions. Using P2P as a means to create additional value for customers – and therefore retaining wallet share – is
While these should technically be considered as payments made to merchants, the fact that the same payment tools that are used for these payments are also used for other P2P transactions demonstrates how the boundaries have begun to blur (although it should be noted that the fee structures are different between the two types of payment). PayPal has filled this niche so well, in fact, that it is used by consumers to make around 3% of global P2P payments, regardless of value.
The business case for banks now is maintaining wallet share The big challenge in any standalone P2P business model is revenue, specifically over who pays for each transaction. The standard four party payment model requires the recipient to face the costs of the payment, but this cannot work for P2P
Cash and cheques dominate P2P, representing a huge opportunity for bank transfers, digital wallets, and prepaid cards Source: Datamonitor Financial Services Consumer Insight Survey 2012
Bank transfer
Cash
Cheque
PayPal
Prepaid card
82%
How do you pay someone when you are splitting a bill or owe them money?
74.1%
52.5%
35.8% 36.2%
25.2%
14.3% 10.9% 6.8% 1.6% 2.8% 0.6%
$0-$10
10.1% 4.6%
3.1%
0.8%
$10-$25
$25-$100 Payment value
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3.3%
3.5%
1.6%
$100+
1.9%
P2P | feature
becoming an important element of the business case for some new payment products.
Barclays Pingit – leveraging its account base to add value
Over 90% of consumers globally make payments to friends and family below $10 in value (or local equivalent) to settle small debts, while 86% make payments between $25 and $100
Barclays Pingit is an ideal example of a bank leveraging its large account base and access to a national payment hub to offer an innovative P2P service. Barclays customers can send up to £300 ($475) from their bank account and receive up to £5,000 ($8,000) per day via a simple smartphone app. There are no charges for using this service domestically (or to buy the app) making it a potential lossleader for the bank. However, by providing an alternative to paper transactions and non-bank payment services, Barclays will benefit both now and in the future, particularly if it is successful in adding remittance capabilities to the service.
American Express Serve – blurring the boundaries between P2P and POS Serve, launched by American Express in 2011, is another clear example of both the pace of change in P2P and also how rapidly the boundaries are blurring between P2P and POS transactions. Serve is a digital platform combining online, offline, and mobile payment options into a single account. Customers can use their Serve wallet to purchase goods from online retailers, physical merchants via a partner Serve card, or to send money to other customers. One of the most interesting aspects of Serve is its connection with Facebook. Users can send money to each other via Serve but from within Facebook, by selecting the recipient from their social network. They simply have to decide on the amount, and click to send. Customers who receive funds can then use these to make both P2P and POS transactions. Serve is one of many players using the connectivity of platforms like Facebook or Twitter as a means of offering P2P services (which included Facebook itself until it dropped plans for its own currency), and this highlights just how quickly the P2P space is changing.
As for 2013, watch out for P2P becoming the Trojan Horse of POS payments The big story in P2P is less about these transactions themselves and much more about the future of the POS space. Consumers always lean towards whatever gives them convenience and simplicity, and this is as true for payments as anything else. The way mobile handsets have become the default alarm clock, camera, portable browser, and music device for so many consumers highlights this. The impact on payments is clear. The tools that consumers find most effective and comfortable for most of their needs will be the ones that are used for the majority of their payments in the future. That includes POS transactions. It’s generally agreed that we will see more consumers adding ‘payments’ to the list of mobile handset functions listed above, but this need not be card-scheme or bankbranded payments. With so much innovation in P2P based around social networks or peer-to-peer commerce, it’s no stretch to see large-scale adoption of one of these tools first gaining traction online, then among independent retailers at the POS, and to grow from there. Unless banks and payment schemes focus on P2P innovation, they leave themselves exposed to losing a big share of the future POS market. For further analysis, read the reports: P2P Payments: Three Key Lessons for Profiting from P2P P2P Payments: The Global Opportunity P2P Payments: Defining the Potential Access the reports through your Knowledge Center
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Interview | Koichi Tagawa, NFC Forum
NFC Payments
Putting the card before the horse? Cards & Payments Team
The Datamonitor Financial Cards & Payments Team recently sat down with Koichi Tagawa, Chairman of leading industry group NFC Forum, to discuss the current state of the NFC market and how the technology is being applied in new and often surprising ways to both payments and other use cases.
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Koichi Tagawa, NFC Forum | interview
How would you describe the current state of the NFC market as a whole? Koichi Tagawa: How do we view the current situation? I would say the momentum is continuing: more and more NFC devices are being announced and NFC is going beyond smartphones into tablets, PCs, and other gadgets as well. If you look at the NFC Forum, membership numbers continue to grow, and we are seeing increasing interest from all the industry segments that will benefit from NFC. What we’re seeing and hearing from the verticals is that the interest is still growing. The momentum is building. In the early days, when NFC was first launched, people thought of this technology as being only about card emulation for payments or transport. But NFC has two other modes: reader/writer and peer-to-peer, which is the capability of one device talking directly to another. These two arenas are proving to be more interesting, and we’re starting to see more companies and people becoming interested in these arenas and jumping onto the wagon.
In terms of the evolving markets, are there any verticals showing faster growth? Koichi Tagawa: There are already some payments based on EMV, and Google is doing some things, so that’s a very early start, of course. Set that aside, what’s probably more an “open-the-box” type experience is when you buy a device and you can open it immediately. When you buy a Sony Xperia smartphone with NFC, it comes with three or four tags in the box. One or two are configured differently, so that when you tap that particular tag, you can then set things automatically. For instance you can set alarms or be set to go automatically into music mode, instead of going through the menus digging up the application, just by tapping the tag.
One of the other things Sony and some other industry players are doing involves making a Bluetooth connection between two devices. Without NFC, the first-time connection takes 10 or 11 steps to get the Bluetooth devices connected. It’s a complicated and not so easy way to get the two devices to connect. With NFC what we can do is tap the devices and all the connectivity in the Bluetooth set-up is written on that pad, and can be connected on that pad in just one tap. Many car manufacturers are now interested in this as well, because you can get your smartphone connected quickly to your car’s hands-free phone feature. With NFC, all it takes is a tap to get your car connected to your hands-free smartphone. Those types of non-card emulation, consumer electronics applications are really picking up right now.
What about advertising – we see a lot of smart posters out there these days, what kind of interest is there from advertisers? Koichi Tagawa: That’s a good question. There have been many trials and many commercial deployments and advertising is definitely picking up. But to get the world populated with NFC tags will take time. So while NFC advertising is picking up, to an average consumer in an average-size city, it’s still not that easy to find where the tags are happening. Now, if I were to go to a Japanese bank to talk about NFC, I would expect them to ask me about what kinds of capabilities NFC can provide for their secure operations. However, I’ve been surprised that, on more than one occasion, bank executives have asked me what they can do with NFC in terms of their retail operations. It shows that they are looking at the tags as another opportunity to draw customers into their banks. So you’re right – the tags are picking up, but it will take time for the NFC tags to populate the world.
In order to get an NFC phone or this kind of device really running, you must have the contactless infrastructure available
Do you feel there is a shift in perception of where NFC may be, away from payments into other uses? Koichi Tagawa: From the NFC Forum’s point of view, what is happening today – payments, transport, and these types of
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interview | Koichi Tagawa, NFC Forum
Koichi Tagawa Alongside his chairmanship of the NFC Forum, Tagawa-san is also General Manager of Global Standards and Industry Relations for Sony, where he has supported the popularization of NFC and FeliCa from a standardization point of view since 2002. He was Vice-Chairman of the NFC Forum from its founding in 2004 until becoming Chairman in 2008.
consumer applications – are all starting to pick up together, and this is what we anticipated. Our specifications were designed in that way. For us it’s a natural thing that is happening. Yes, you are right – outside of the NFC Forum, many people expected to see NFC first in payments mechanisms and ticketing mechanisms, and maybe not in the consumer electronics world. It may now look and sound differently to those people, but it is something the NFC Forum anticipated.
Does the NFC Forum have a view on whether NFC will become a widely used payment product? Or do you think something else may happen? Koichi Tagawa: Payment is a very important application service area for NFC. When you look at the ecosystem, the payment ecosystem is complex and needs lots of security and interoperability and certification that will ensure that. It will take time to put all of these pieces together. However, the good news is the NFC phones that are out on the market today can later be configured via a software download update, and can become payment devices. So you can use the tag applications today, and then when the payment applications are ready, they’ll be downloadable. Nevertheless some applications are already available today.
Are other technologies like QR codes, Square or GPS a threat to NFC? Koichi Tagawa: QR codes are gaining in popularity, even on the iPhone. But look at Android: in order to use a QR code, you need to download an application, otherwise it doesn’t support QR codes. NFC stacks, however, are supported on Android, Symbian, Windows 8, and RIM Blackberry. These devices don’t need a download to get them up and running as they are built in. That’s a big advantage from a consumer point of view, because when you buy it, it’s already there. In terms of the merchants, or whoever is deploying it, there are advantages to NFC over other solutions. You know, the beauty of NFC payment applications is that, when you have it, it also comes with those tag-reading and peer-to-peer capabilities. What we have seen already happening is in a single tap for a payment transaction,
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you can do also coupon, loyalty redemption, and similar transactions because of the NFC communication capability. It’s not the same as a simple plastic card doing a contactless payment. With an NFC phone, you can do more. I think that is something where NFC will add value.
With more devices being launched what are the next barriers to overcome for NFC to become a more widely used technology? Koichi Tagawa: There are many devices already coming into the market. Analysts are saying that in this calendar year 2012, there are 100 million devices already in the hands of consumers. Next year, there will be 300 million or more. However, except for those open-the-box type consumer experiences, it is still hard to find places where you can really use NFC. The biggest challenge the NFC industry faces today is how to get services up and running quickly, otherwise we are creating unhappy consumers in the order of 100 million per year and I don’t want to see that happen. I think that is the biggest challenge we have.
Where do you think NFC will take off first? Are there any regions or applications which will push it forward? Koichi Tagawa: As the Chairman of the NFC Forum, I am hoping everything will happen everywhere at the same time, and immediately. However, I don’t think that will be possible. Maybe it’s because I work for a consumer electronics company, but when you look at the global availability of the same use case, the consumer electronics arena will probably be the one to take off first. Many giant consumer electronics companies are already doing NFC globally for Bluetooth or Wi-Fi handover tag reading. These kinds of things are already starting to happen on a global basis. There is a very interesting thing happening here in Japan. The household electronics giant Panasonic has a series of NFCequipped white goods – it has refrigerators, washing machines, a microwave oven, an air conditioner – a full line-up of household white goods equipped with NFC now. This is a clear sign that the consumer world will take off before the others, and because the
Koichi Tagawa, NFC Forum | interview
KEY FACTS NFC Forum
2004
180
19
The forum was formed in 2004 to advance the use of NFC technology by developing specifications, ensuring interoperability among devices and services, and educating the market about NFC technology.
Over 180 global member companies – including manufacturers, applications developers, and financial services institutions – all work together to promote the use of NFC technology in consumer electronics, mobile devices, and PCs.
The NFC Forum has organized the efforts of the member organizations by creating Committees and Working Groups. The Forum has released 19 specifications to date. The specifications provide a “road map” that enables all interested parties to create powerful new consumer-driven products.
consumer electronics companies are usually global, this will start to happen globally. Panasonic explained in an interview to a Japanese newspaper that it has some niche customers who expect very high capabilities. For these types of white goods, no one would pay money to have them connected to the Internet directly. So what Panasonic is doing is using the smartphone as a device to connect them to the Internet. For instance, if you look at a washing machine, what you can do is, according to the Panasonic ad, go to their website and find the washing detergent or bleach that you are about to use, and click on it. It then configures the best washing time and drying cycles into the smartphone, and with the tap of NFC, the washing machine is configured for the best performance using that particular detergent or bleach.
Sounds like NFC will be used by consumers in an area like this before payments? Koichi Tagawa: For the majority of people who already have NFC devices, this is probably the way it will happen in the next year or so. But let’s say you live in a city where a mobile payment solution such as Isis or Weve is available, and you are buying a phone for that particular service and can set that up as your favorite application. For the generic global consumer the consumer applications will probably be the first, but if you’re lucky enough to live where you can enjoy NFC payments, that will be a different motivation.
What lessons can Japan provide about NFC payments? Koichi Tagawa: The Japanese deployment was mainly card emulation, secure application. There are three carriers in Japan – DoCoMo, KDDI, and Softbank – and among the three, only DoCoMo has the reader/writer and peer-to-peer capability,
supporting all three modes according to NFC Forum specifications. The other two do not. However, even in this DoCoMo implementation, it’s still not easy to set up or run a read or write function-based application service, or even the peer-to-peer case. You have to look at the Japan experience as one primarily based on secure-based card emulation, and not the other consumer-type applications. Another thing I will note is that Japanese NFC services started in 2004 but smartphones only became available a few years ago, so until recently, Japan’s experience was only with card emulation. I think that creates a mindset in which people’s expectations would be limited to just converting what they have as contactless plastic cards onto their phones, like the train tickets, or the loyalty cards or some payment cards. That’s the way it happened in Japan. Now, the lesson probably learned in Japan is that it’s a very natural thing, that in order to get an NFC phone or this kind of device really running, you must have the contactless infrastructure available. If you are going to deploy NFC and the contactless infrastructure together, that’s a big challenge. You should have a well-established contactless card base operation and then as a feature, you add NFC or card emulation onto your phone. Without this migration, the cost of deploying services becomes too expensive. Consumers are not experienced with this contactless world, so the advantages of NFC become lost in the attempt to launch contactless and NFC together. That I think is one lesson we have learned. For further information, read the report: Digital Wallets: Picking the Pocket of the Future This report will be available soon on your Financial Services Knowledge Center and the Datamonitor Research Store
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All the articles in this magazine are based on Datamonitor’s latest research into Cards & Payments. For more information about any of these features, or the Datamonitor Financial proposition, please get in touch. www.datamonitorfinancial.com enquiries@datamonitorfinancial.com EU: +44 20 7551 9201 US: +1 212 652 5353 AP: +61 2 8705 6900