Pennies and banknotes are so twentieth century. The future of payments is not only cashless, but also pinless, as contactless and mobile payments gain popularity. While the credit and debit card business proved profitable for banks thus far, new regulations and the rise of start-ups offering mobile payment methods threaten those gains. As money increasingly becomes a digital entity, banks face the challenge to offer more digital and effortless kinds of payment methods. If they do not, many start-ups are ready to provide those services mobile users want.
In the half-century they have been in circulation, credit and debit cards became lucrative payment systems for banks, which could charge an interchange fee for every transaction made by card. In the UK, this usually amounts to a standard fee, around 30p., for debit card, and a percentage charge, usually 0.75%, for credit cards. These fees increase each year, but they are soon due to be regulated by a EU law capping the transactions fees to 0.2% for debit card rates and 0.3% for credit cards. Until then, these costs are borne by the merchants and can easily eat into small business owners’ profits, which is why many corner shops and local shops tend not to accept card payments. Yet card payments remain very popular, with a current average of 375 transactions registered each second in the UK – the first time ever such figures have been published by UK Cards Association, a trade association.
This amount includes contactless payments, for which the interchange fees remain the same. The cost of providing the contactless reader is also completely borne by the business, which is yet another expense for the smaller business owners. 150,000 readers for contactless are currently up and running in the UK, with major retailers and shops like Marks & Spencer, Tesco, and McDonald’s adopting them. One in five UK consumers are expected to make a contactless payment over the course of this year, according to a research by Gocompare.com, but consumers register a certain reluctance to experiment with contactless, as 46% of Gocompare.com survey’s respondents stated they were concerned with the risk of fraud.
The cost of card payments on the business owners’ side and the security concerns for consumers inspired the rise of start-ups offering alternative payment methods. It is “a more technology-driven, cheaper and more democratic way” to send money, said Luke Courtenay-Smith, Merchant Manager at Droplet, a UK start-up providing free mobile payments. The app funders were looking into a field that had yet to be revolutionised by mobile technology. “We see ourselves as backing this quiet revolution […] We make it free to everyone and ‘democratise’ this technology,” he said, meaning, in fact, that mobile payments are just as easy to use for small coffeeshop owners as it is for Starbucks.
This idea in itself is not revolutionary. In other parts of the world, particularly in African countries, even before smartphone technology became available payments or other financial services were managed by mobile phone, as only one in five people in Africa uses formal banking services. Leo Mirani, a journalist writing about technology for publications like Quartz, doubted mobile payments’ potential to make “life much easier for users” in Europe. In the UK, Mirani explained, online banking systems are a lot more advanced, as almost £1 billion mobile and internet transactions are processed every day.
Banking apps also enjoy popularity, with more than 15 000 people a day downloading banking applications in the UK, while the use of traditional branches has decreased, as reported by the British Bankers’ Association and EY, a consultancy. This signals growing consumer demand for mobile services, demand that banks need to fulfill before start-ups do. If they do not rise to the challenge, they will have to “eventually change their profit model,” of charging the merchant to accept a payment “because people won’t use the technology they produce,” said Courtenay-Smith.
Alternative payments like those through mobile apps already increased globally by 9.4% in the past year, the 2014 World Payments report by Capgemini and RBS found, indicating the need for banks to keep up with a growing, competitive industry. Banks are reacting by heavily investing in the financial technology (fintech) sector. Major banks have invested in IT start-ups, and the global investment in fintech has tripled from 2008 to 2013 to almost £2 billion. In the UK and Ireland alone, the increase has been of more than £500 million in the same period, according to research from Accenture.
Some major banks like HSBC are developing in-house venture capital funds of sizes ranging from £30 million to £160 million to directly invest in technology companies. Courtenay-Smith thought that independent start-ups still retain a timing advantage: “With start-ups like ourselves we can design something and then enact it with within a month, days even. Banks are big and caught up in their own administration, to do something like free mobile payments it would take years.”
According to Mirani, start-ups hardly threaten the banks dominant position in managing payments, because for most transaction needs customers are satisfied with the banks’ services: “If I want to transfer money to someone in Scotland it’s fine, my bank won’t charge me.” There is, however, a weak spot that could seriously affect banks were start-ups able to compete with them: “If I want to transfer money abroad then I do get charged, and there I see the difference these start-ups can make because they are able to charge significantly lower rates for these services,” added Mirani. Indeed, start-ups like Droplet are already looking to that option.
Even then, bypassing the banks altogether seems unlikely: “Any mobile payment system that is going to take off, is not going to take off outside of the banks and the cards, it is still going to run on their rails, as the expression is” said Tim Green, a journalist who runs a blog called Mobile Money Revolution. He thought at Apple exploring the field of mobile payment with the introduction of Apple Pay on their iPhone 6 as an interesting development because the company may be able to turn credit cards into software and change the way we do banking, just as they previously changed the way we purchased music.
Now that the barriers to enter the payment transaction sector are lower, and the field is populated by start-ups and tech giants, banks are pushed to find ways to innovate their systems, and to keep on innovating. Whether this will lead to a full-fledged revolution in payment habits or not, innovation is clearly underway, and the days of cash as king are numbered.
Photo credits to Melanie Colosimo for Bank Simple, Flickr under Creative Commons License