Mobile Payments: How U.S. Banks Can Deal with Disruptive Change


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Banks are well-positioned to benefit from mobile payments, if they invest in the technology infrastructure and forge strong partnerships to out-maneuver emerging non-traditional players.

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Mobile Payments: How U.S. Banks Can Deal with Disruptive Change

  1. 1. • Cognizant ReportsMobile Payments: How U.S. BanksCan Deal with Disruptive Change Executive Summary • Retailers looking to enhance the point of sale Mobile phones and disruption seem to go hand- (POS) experience. in-hand. These devices have radically altered the business landscape across industries over the Non-traditional players are shaking up the past decade, driving significant operating model payments arena, threatening to marginalize change. Companies that have failed to overcome banks’ role. These include mobile carriers, device the challenges presented by mobile technology manufacturers, e-commerce players, alterna- have learned the hard way how costly this can be. tive payment networks and software developers. Globally, mobile payment adoption among Now it’s the financial services industry’s turn. consumers is growing. As mobile devices become Coupled with the rise of smartphones and the ubiquitous in consumers’ daily lives, they are mobile Internet, mobility has changed the way reshaping the payment landscape, making it people bank, shop and network. Furthermore, imperative for banks to create services that will the use of mobile devices as a means of payment keep them ahead of the competition. is perhaps the biggest disruption the banking industry has ever seen. Much can be said about the potential mobile payments trend, but in the U.S., it is still a As mobile devices morph into wallets, they revolution in the making. A cohesive mobile provide a new avenue of growth for banks in payment ecosystem will require adoption of a a slowly recovering global economy. However, common technological platform for payments, technological advancements have opened up interoperability and cooperation from key stake- the mobile payments1 field to accommodate holders in different industries. Greater coopera- non-banking players that could cut into one of the tion is also required to tackle another problem: traditional strongholds of banks. Several factors a classic chicken-and-egg situation wherein are driving this change, including: merchants/retailers are reluctant to embrace • Consumer willingness to adopt new payment mobile payments unless consumer adoption systems. increases, and vice-versa. Creating awareness • Technological advancements in mobile about the benefits of mobile payments is devices, such as mobile Internet, mobile wallet critical to its long-term success. That apart, data and near-field communications (NFC). security has emerged as the primary barrier to cognizant reports | april 2012
  2. 2. greater adoption of mobile payments at the • Prioritization of customer privacy and dataconsumer end. security. • Focus on customer education to generateFor banks, however, the writing is on the wall: greater buy-in.These institutions are best positioned to • A strong value proposition to gain and retainbenefit from mobile payments, provided they customers.act quickly and make the right moves. Even whilestudies show decreased consumer confidence Mobile-Enabled Disruptionin the banking industry as a whole, customers Using mobile devices as a medium for paymentsstill trust banks to secure their money and their is by no means a new idea. In Japan, DoCoMopersonal data. How banks leverage this trust will introduced a mobile wallet service back in 2004.determine their success in the long run. Going However, in the U.S. and Europe, several factorsforward, banks will need to invest in building have had to fall into place for this idea to becomecapabilities to support a strong mobile strategy. more feasible. These include important develop-The decisions they make regarding partner- ments on the infrastructure and technology front,ships could determine whether they survive the including availability of faster wireless Internetonslaught from emerging non-traditional players. access for mobile devices and the proliferation of smartphones and applications.On the technology front, banks need to investin creating an interface between their legacy Over the past few years, consumer behavior hasbanking systems and their mobile operations. changed dramatically regarding Internet access,This calls for investment in a new set of capa- with mobile devices becoming a key means ofbilities, including data management, security, doing so. In fact, the number of mobile Internettechnology deployment, application development users will surpass desktop users by 2015.2 Thanksand management, etc. to their “anytime, anywhere” utility, smartphone usage has surged in the U.S. over the past fewWe believe the following are key imperatives years, overtaking feature phones in terms offor banks: ownership among adult consumers.3 Growth in• A clear strategy for partnering/competing smartphone ownership4 has meant consumers with the different parties involved in the are increasingly comfortable using these devices payment lifecycle. for a greater range of previously unheard of tasks,• long-term view regarding investment A including product comparison, shopping, etc.5 in technology.Mobile Payments Expected to Grow WorldwideGross Value of Mobile Payments Transactions, 2009 - 2015 U.S. $m $1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 2009 2010 2011 2012 2013 2014 2015Source: IE Market Research, "3Q.2011 Global & Regional Mobile Payments Market Forecast", 2011.Figure 1 cognizant reports 2
  3. 3. Moreover, smartphones have transformed transactions by 2013 and 100% of all cardthe behavior of consumers in their personal transactions in 10 years.7 Driving this trend isand professional lives. A Google and IPSOS OTX a proliferation of devices that are capable ofMediaCT survey6 of smartphone users found mobile payments and are supported by paymentthat 79% of respondents used a smartphone to infrastructure providers and mobile networkhelp with shopping, while 74% made a purchase operators. For industries such as retail and banks,after conducting research using their device. this channel provides an important mediumMeanwhile, individuals are growing more inclined for staying close to customers because it tiesto carry their smart devices to work and use them together multiple touchpoints such as stores andfor business-related purposes when away from Web sites. For example, retailers have been quickthe workplace. to implement mobile payment initiatives to create an enhanced POS experience in which customersThe millennial generation is at the forefront of check out using their mobile devices throughsmartphone adoption. This generation is known applications downloaded to the smartphone.for its savvy purchasing behavior, using thesedevices to seek advice, research products and For banks, this is an opportunity to breakservices and find the best possible deals. They traditional payment boundaries and expandare active on social networks and prefer to into in-store and non-proximity payments. Totransact with their banks online. When it comes accomplish this, it is imperative for banks to workto purchasing, they move across channels with closely with players outside their domain, such asease and are increasingly comfortable using mobile network operators (MNOs). With mobilemobile phones as a means of purchase. Mobile payments, this relationship will evolve, and banksdevice manufacturers, meanwhile, have upped will have to open up to additional players inthe ante by developing highly intuitive devices the payment ecosystem, such as mobile devicecapable of handling more complicated tasks than manufacturers and application developers.their predecessors. State of TransformationThese developments have been complemented The ongoing transformation in the paymentby key trends in the payments ecosystem. Mobile landscape has huge implications for all consumer-payment volumes are expected to grow expo- facing industries. Some companies in thesenentially over the next few years (see Figure 1, industries have taken the first steps towardprevious page), representing 15% of all card a mobile payment-driven future. A survey byConsumer Convenience is Top Driver for Mobile Payment InitiativesQ: What are the top two pressures driving your company to focus resources on mobile payments? Need for greater consumer convenience 61% Desire to take advantage of customers mobile phone 33% or digital affinity Need to improve customer retention and loyalty 28% Desire to be a market leader 24% 0% 20% 40% 60% 80% Percent of respondentsSource: “The Mobile Payment Opportunity: Get Paid Anytime, Anywhere,” Aberdeen Group, January 2012.Response base: 75Figure 2 cognizant reports 3
  4. 4. Aberdeen Group found that 24% of respon- Several technological innovations are at playdents across sectors such as retail, banking and in the mobile payments arena. These includefinance and hospitality have deployed mobile NFC-enabled devices, mobile wallets, mobile Webpayment-related technologies.8 Awareness is payments and payment stickers. Still unknown isgrowing about payment options such as mobile which of these will emerge as the dominant tech-wallets and NFC-enabled transactions, and nology driving mobile payments. Initial trendsseveral factors are pushing companies to point to NFC, which enables devices to readadopt these initiatives. Top among these, not tags and conduct transactions.8 Handsetsurprisingly, is the need to enhance the customer manufacturers have already begun shippingexperience (see Figure 2, previous page). NFC-enabled devices in greater numbers; about 100 million devices are expected to be shippedIn some cases, consortiums are forming to roll in 2012, and the number is expected to hitout mobile payments, such as Isis’s mobile wallet 700 million by 2016.10 Developments inapplication, which is provided through a partner- technologies supporting NFC have the potentialship of U.S. credit card companies, mobile carriers to support POS systems and mobile applications.and banks. In other cases, individual companies NFC’s success will have much to do with howare launching their own versions of the mobile retailers, MNOs and banks collaborate.wallet, including Google and Starbucks, the latterof which is seeing one in four card transactions Hurdles in the Waynow conducted via mobile device.9 Elsewhere, the The road ahead is not without stumbling blocks.POS terminal is being transformed into a wireless Fast-paced innovation by industry players hasand paperless digital entity. These terminals can remained disconnected from the common goale-mail receipts, read signatures and, with further of creating a standardized mobile paymentadvancements in technology, support mobile ecosystem. This has much to do with the highlypayments. POS terminal manufacturers are competitive nature of the market. In countriesoffering their own wireless payment solutions to where mobile payments have taken off, such asmerchants. Collaborations like these imply that Japan and Singapore, a standardized paymentthe traditional payment landscape is primed for infrastructure was implemented, led by thea complete transformation (see Figure 3). dominant market player or regulatory body. This infrastructure serves as the backbone forTraditional Ecosystem Meets Non-Traditional Players Traditional Payments Description Ecosystem Networks Device manufacturer Companies that research, develop and manufacture mobile phones based on consumer demand and technical innovation. Mobile network Mobile phone companies that sell NFC- operators (MNOs) and other payment-enabled phones. Issuing Bank Acquiring Bank Value-added service Companies that provide additional providers mobile services such as couponing, loyalty, advertising, etc. Software/application Companies that create mobile payment Processors developers applications that come pre-loaded or downloaded to the consumer’s mobile device. Alternative Companies with strong brand presence solutions providers and known for developing consumer- Consumer Merchant friendly mobile applications. Trusted service Independent third parties responsible managers for provisioning the consumer’s financial information (credit, debit, etc.) to the mobile device.Source: “Dialing up a Storm: How Mobile Payments Will Create the Most Significant Revenue Opportunities of the Decade forFinancial Institutions,” PricewaterhouseCoopers, 2011.Figure 3 cognizant reports 4
  5. 5. interoperability of various mobile payment emerged as the top barrier to adopting mobile pay-offerings in these countries. ments (see Figure 5, next page). Creating greater buy-in for mobile payments will require banks,Comparatively, the U.S. mobile payment scene which are viewed as custodians of consumer trust,is at a nascent stage, with different proprietary to address these concerns payment solutions available. Regulatoryintervention to create a standardized payment Perhaps as important as sharing revenue isinfrastructure is highly unlikely. This means sharing customer data. At a time when a hugethat market players will have to voluntarily amount of customer data is being generated atcollaborate on creating standards that will help to various stages of the buying cycle, companiesreduce redundancy and costs in the long run. in the mobile payment value chain will want access to customer data to enhance insights intoRevenue sharing between players is another patterns of customer buying behavior. Thisimportant area that calls for cooperation between data can be used by banks, retailers and mobilecompanies across industries. Making payments networks for different purposes. It is critical,at a POS terminal through a virtual debit card therefore, that this issue is handled carefully byembedded in a mobile phone means that different all parties involved.parties need to agree on sharing the revenuefrom these transactions. As of now, there is little Business Model Transformationclarity on a revenue-sharing model, but surveys No other entity in the mobile payment valueindicate that partnerships between financial chain stands to be impacted more by theseinstitutions and mobile operators are the most via- ongoing events as banks. The mobile paymentsble option (see Figure 4). Going forward, revenue market is already highly competitive, and insharing will act as the key incentive for market addition to emerging non-traditional competi-participants to create awareness and demand tors, players across the value chain are uppingamong consumers – critical to overcoming the the ante to garner early market share. So whileinitial reluctance of consumers and merchants. banks can play a crucial part in the mobile payments value chain, they will need to signifi-For consumers, apart from the adoption of pay- cantly change their business and organizationalment technologies by merchants, security has models to remain competitive.Revenue-Sharing Models: Banks Play Critical RoleQ: What is the most feasible mobile payments business model? Mobile-financial institution partnership 43 Open federation model (common platform shared by alliance of carriers and financial 26 institutions) Third-party intermediation model (PayPal 20 mobile, MobileLime, etc.) Mobile carrier going solo 7 Financial institution going solo 4 0 10 20 30 40 Percent of respondentsSource: "Cell Me the Money: Unlocking the Value in the Mobile Payment Ecosystem," Deloitte, 2011.Figure 4 cognizant reports 5
  6. 6. New-age competitors such as Google pose a clear The threat for banks is clear: They couldthreat to banks’ hegemony in payments. The be pushed to the sidelines as easy-to-use third-mobile wallet service offered by Google allows the party mobile applications take center-stage oncompany to position itself uniquely at the POS consumer smart devices. Countering this threatterminal and provide value-added services such will require banks to overhaul their mobileas financial planning. Mobile transfer facilities offerings to make them attractive to end users.provided by MNOs is another threat for banks, asthey allow customers to bypass the mobile/online Imperatives for Banksbanking services that banks offer. In this model, As mobile payments evolve, banks findbanks are pushed to the back-end, virtually out of themselves in unfamiliar territory, dealing withthe consumer’s sight. competition from players that have developed niche capabilities to target customers preciselyThen there are the innovations at the POS termi- where they spend their time shopping, such asnal. Retailers, many of which are well-positioned retail stores and mobile Web sites. As banks moveto understand their customers, are known to be into a highly regulated future that could addworking on their own mobile payment solutions.11 to their compliance costs, mobile paymentsOther start-ups, such as Boku, are introducing have emerged as a welcome source of revenue.innovative platforms that mobile carriers could Banks that have invested in building mobileprovide to their subscribers, allowing them to use infrastructure now stand to benefit by extendinga prepaid debit card to make online, mobile and these capabilities to the payment arena. Mobilityin-store payments. is an effective distribution channel that has the potential to cost-effectively help banks reachOnline payment company PayPal, in the mean- new customer categories, such as the unbanked,time, has already created a strong presence in emerging affluent and new-to-credit payments. Its mobile payment volumesjumped five times, reaching $4 billion in 2011, and Historically, banks have lagged behind init has launched a new device for scanning cards adopting new customer-facing technologies, suchat the POS terminal, similar to the one offered by as mobile banking. In May 2011, research firmSquare, a mobile payment startup that doubled Forrester found that 94% of banks surveyedits payments processing from $2 billion per year had a mobile banking strategy in place, of whichto $4 billion per year between October 2011 and 38% were put in place less than a year before.13March 2012.12Data Security: Key Concern for CustomersReasons for similar or decreased usage of smartphone for payments Im concerned about security/fraud 39% I prefer to pay with debit cards 38% I prefer to pay with cash 33% I prefer to physically go to stores to see 29% what I am buying I prefer to pay with credit cards 25% I dont know how paying for things with a 14% smartphone works Its harder to manage finances/ 9% account balances 0% 10% 20% 30% 40% 50%Source: "Appeal of Mobile Payment Solutions," Radius Global Market Research, March 2012.Response base: 1,005Figure 5 cognizant reports 6
  7. 7. With mobile payments, too, there has been a banks have an opportunity to improve theirtendency to adopt a wait-and-watch approach customer retention rates. This needs to betoward emerging and dynamically changing accompanied by efforts to promote the mobiletechnologies that are likely to dominate mobile channel for banking, which would involvepayments, such as payment through WAP, SMS, educating customers about the benefits ofmobile application, m-wallet and NFC. Neverthe- using mobile devices for payment and offeringless, it is clear that banks need to act quickly and promotions to generate buy-in.intelligently to remain competitive. • Protect customer data privacy: AsHere are some key points that banks must illustrated earlier, data privacy and securityconsider in order to play an important role in the have emerged as critical issues over the pastfuture of mobile payments: few years. Banks hold important personal• Create an enhanced mobile presence: information about customers, and the Mobile has proved to be an essential channel introduction of mobile devices introduces for reaching consumers,14 as well as a lower new threats of data hacking and fraud. cost one. To protect their share of the mobile Adverse incidents could harm customer payment market, banks need to apply more trust and, hence, retention. This becomes fire power to this channel. This calls for a even more critical in a scenario where play- comprehensive mobile strategy to be put ers across industries want access to customer in place, backed by in-house capabilities for data. Industry players should employ trusted creating a seamless and convenient cus- platforms and authentication protocols at tomer experience through mobile. Banks that different stages of the transaction to main- have invested in building a mobile banking tain the highest level of data security. Trusted infrastructure and creating a presence service managers could emerge as key across the buying lifecycle through mobile intermediaries to handle customer data as applications, Web sites and applications will it passes through the mobile payment value have a head start. chain. Here again, banks — historically seen as trusted guardians of personal data — need to• Build partnerships: With the threat of margin- educate customers about the technology they alization and disintermediation, partnerships have put in place to secure data. This becomes will play a key part in banks’ go-forward mobile more critical at a time when customer trust in payments strategy. Such a strategy will need alternate payment channels is on the rise. to be based on banks’ vision of where they fit in the mobile payment arena. Based on this, • Invest in technology: In the race for mobile they must identify and prioritize partnerships payments dominance, banks will have to work and revenue-sharing agreements with MNOs, with a technology backbone that allows for mobile phone manufacturers and technology standardized processing of mobile payments vendors. Google Wallet and Isis are prominent and interoperability of different payment examples of what banks can expect, and as platforms. An open platform along the lines of the market matures, partnerships like these Isis or Google Wallet is the most likely model are the best way for banks to maintain their that will emerge as players realize the value prominence in payments. it offers in terms of reduced costs and better user experience. This means banks will have• Improve the customer value proposition: At to invest in creating technological layers that a broader strategic level, banks need to revisit allow their legacy systems to work with such their customer value proposition on mobile a platform. devices. As mobile payment services increase, cognizant reports 7
  8. 8. Footnotes1 The Aberdeen Group defines mobile payments as the ability for a consumer to fulfill payment transactions using a consumer-owned mobile or tablet device at a merchant or retail POS/check-out location or elsewhere. Mobile payments technology includes but is not limited to the use of mobile contactless or near-field communications (NFC), short message service (SMS), payment sticker, mobile wallet, wireless application protocol (WAP), direct mobile billing, pre-paid, smart poster and loyalty.2 ”Internet Trends,” Morgan Stanley, April 12, 2010, techresearch/pdfs/Internet_Trends_041210.pdf.3 ”Pew: Smartphones Overtake Feature Phones Among Adults in the U.S.,” BGR, March 2, 2012, the-u-s/.4 ”Comscore Reports October 2011 U.S. Mobile Subscriber Market Share,” Comscore, Dec. 2, 2011, ts_ October_2011_U.S._Mobile_Subscriber_Market_Share.5 “Mobile Shopping Goes Mainstream: Majority of U.S. Smartphone Owners Performed Shopping Activities on Their Phone in September,” Comscore, Dec. 5, 2011, Events/Press_Releases/2011/12/Mobile_Shopping_Goes_Mainstream.6 “The Mobile Movement: Understanding Smartphone Users,” Google/IPSOS OTX MediaCT U.S., April 2011, “Non-Cash Payments Grew 8% Globally in 2010,” Bank Technology News, Sept. 14, 2011, “The Mobile Payment Opportunity: Get Paid Anytime Anywhere,” Aberdeen Group, Jan. 1, 2012, “One in Four Starbucks Transactions Now Done Via Card, Including Mobile,” Mashable, Dec. 5, 2011, Stephen Shankland, “NFC-Equipped Phones Set to Surge,” CNet, Sept. 14, 2011, http://news.cnet. com/8301-30685_3-20106237-264/nfc-equipped-phones-set-to-surge/.11 Robin Sidel, “Retailers Join Payment Chase,” Wall Street Journal, March 2, 2012, article/SB10001424052970204571404577255261085314318.html/.12 Alex Cocotas, “Squares Growth Reveals the Size of Mobile Payments Opportunity,”, March 7, 2012, revenues-climb-note-insight.13 Penny Crosman, “What’s the ROI of Mobile Banking? 15.7%, Forrester Says,”, May 2011, The Rise of Mobile Marketing: New Opportunities for Consumer Companies and Mobile Operators,” Booz & Co., 2008, cognizant reports 8
  9. 9. ReferencesAbhi Dhall, Dan Ewing, Kausik Rajgopal, Tariq Shaukat, “Payments 2020: Scenarios for DynamicEvolution,” McKinsey & Company, March 2011.Gary Matuszak, Tudor Aw, Sanjaya Krishna, Charlie Garbowski, Kunal Pande, Patricia Rios, “2011 KPMGMobile Payments Outlook,” KPMG, July 2011.“Dialing up a Storm: How Mobile Payments Will Create the Most Significant Revenue Opportunitiesof the Decade for Financial Institutions,” PricewaterhouseCoopers, 2011.Divakar Goswami, “Cell Me the Money: Unlocking the Value in the Mobile Payment Ecosystem,”Deloitte Touche Tohmatsu’s Technology, Media & Telecommunications Industry Group, 2011.Alenka Grealish, Stefan Mohr, Carl Rutstein, Jürgen Schwarz, Niclas Storz, Michael Urban, “GlobalPayments 2011: Winning After the Storm,” The Boston Consulting Group, 2011.Monica Adractas, Philip Bruno, Olivier Denecker, Viken Gazarian, Kiyoshi Miura, Kausik Rajgopal,“The Road to Mobile Payments Services,” McKinsey & Company, September 2011.“World Payments Report 2011,” Capgemini, The Royal Bank of Scotland PLC, EFMA, September 2011.John Ginovsky, “Lowly POS Terminal Now a Key Link,” ABA Banking Journal, March 6, 2011.“Mobile Payments: Risk, Security and Assurance Issues,” ISACA, November 2011.CreditsAuthorAkhil Tandulwadikar, Senior Research Analyst, Cognizant Research CenterAnalystShruthi Kalidindi, Research Analyst, Cognizant Research CenterSubject Matter ExpertVinay Kumar, Senior Consultant, Cognizant Business Consulting, Banking and Financial Services PracticeDesignHarleen Bhatia, Design Team LeadSuresh Sambandhan, Designer cognizant reports 9
  10. 10. About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business processoutsourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquarteredin Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deepindustry and business process expertise, and a global, collaborative workforce that embodies the future of work.With over 50 delivery centers worldwide and approximately 137,700 employees as of December 31, 2011, Cognizant isa member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among thetop performing and fastest growing companies in the world.Visit us online at for more information. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. 1 Kingdom Street #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA Paddington Central Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London W2 6BD Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 207 297 7600 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 207 121 0102 Fax: +91 (0) 44 4209 6060 Email: Email: Email:©­­ Copyright 2012, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.