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Payments innovation: Apple Pay, disruption, and transformation

NOTE: This is the first in a four-part series on payment industry innovation, looking at the challenges that face all industry stakeholders.

Payments innovation, what does it all mean? Get a taste here: “These next 5 years are going to be complete chaos for consumers. What do we want them to do? Swipe, dip, chip, pin, tap, QR…? We have been planning for EMV for 3 years… am I really supposed to jump to Apple in 4 weeks?” – the words of a top five U.S. merchant representative as told to payments industry blogger Tom Noyes, and published in a recent blog post.

This merchant spokesperson may be a harbinger of doom but this imminent payment industry upheaval will not be confined to the consumer, and will not be unique to the U.S. market.

payments innovation

Merchants across the globe are in need of guidance. Payment innovation is developing at a breakneck speed. A new partnership or product seems to crop up every week on the tech sites.

Snapchat (yes, the perceived digital playground for teens) has just entered the payments space. Via Snapcash, and in a link-up with Square, they have produced a product that enables users to send money to each other. This service is currently only available in the U.S. to users aged 18 and over.

The Snapchat offering is another in a long line of P2P payment options (pioneered by M-PESA, with the likes of PayPal, internationally, and Dwolla in the U.S. following suit). With the demand for real-time payments, there’s a plethora of mobile e-wallet POS payment options (Google Wallet, Apple Pay, and a range of localised operators in Europe). There’s also mobile online payments (Apple Pay, PayPal) as well as what now seems like our ‘old’ friend, the contactless EMV card.

There’s an abundance of payment choices, but when a merchant is faced with the decision of which payment type(s) to accept, whom do they follow? Wouldn’t it be great if the acquiring partners of merchants could enable them to accept all payment types, without carrying out a complete overhaul of their internal systems? Well, you know there is a solution.

Innovation can lead to lucrative rewards

Innovation in the payments industry is accelerating as the rewards are so lucrative. The increasingly digital-savvy customer is demanding a quicker, easier, and safer way of paying. These are the demands that are fueling innovation and the growth in the mobile payments industry. Gartner have forecast that the global mobile payments market will hit $721 billion in 2017, with more than 450 million users. This is a rip-roaring jump from the estimated 2013 market of $235 billion.

Innovation means change, but whom do the merchants trust? The traditional payment processing system that has served merchants well for over four decades, or the new kid on the block? Then, there’s the headache of what type of payments to accept. Do they side with the tried and trusted, or take a leap of faith and board the disruption juggernaut?

If they decide to change there are the questions of timing and implementation. Should they change their systems immediately, or wait until the payment world has settled down? If they decide not to change will they be crippled by the fear of the unknown? Will they be stranded as the disruptive payments juggernaut cruises past them, leaving them with a payments interface that no one uses?

Who are the leaders in the payments field? Whom should they follow? Will P2P payments take hold and transform the traditional banking system? Has Apple Pay cracked the market for mobile payments?

Apple Pay in China before Europe

Let’s take Apple Pay. The service has yet to launch in Europe, where contactless payments have been part and parcel of daily life for nigh on a decade. Europe, of course, also successfully transitioned to the EMV POS standards since the turn of the millenium – the same standards that U.S. merchants have been told to upgrade to by October 2015. Europe would appear to be the perfect breeding ground for Apple Pay but, for some reason, the launch has not yet happened. In fact, China has come before Europe.

Apple recently announced that Chinese iPhone users can link their UnionPay credit or debit cards with Apple Pay. They stopped short, however, of announcing when Apple Pay will be available for use in Chinese stores. China is Apple’s second largest market for app downloads so the link up with UnionPay is a no-brainer. UnionPay has issued 4.5 billion payments cards in co-operation with 400 financial institutions in 140 countries. During a visit in October 2014 (when he also visited a Foxconn iPhone workshop) Tim Cook described how important the Chinese market was to Apple. “China is a really key market for us,” said Cook. “Everything we do, we are going to work it here. Apple Pay is on the top of the list.”

Well, now that Apple Pay is available in China how long before it arrives in Europe? Visa Europe’s Chief Digital Officer Steve Perry (in a September 2014 press release) said, “We are working closely with Apple and with our member banks to bring this new service to market in Europe.” Here at Aviso we – like thousands of merchants – await developments on this front.

Payments industry in a state of flux

The payments industry is in a constant state of flux – innovation is creating disruption and there’s a sense of a vacuum waiting to be filled. This phrase ‘disruptive technology’ was first penned in a 1995 paper by Joseph L. Bower and Clayton M. Christensen titled ‘Disruptive Technologies: Catching the Wave’. The paper appeared in a 1995 edition of the Harvard Business Review. In the paper Bower and Christensen stated that “leading companies succumb to one of the most popular, and valuable, management dogmas. They stay close to their customers.”

The payment habits of customers are changing, indeed the role of the mobile phone in the payments space has ensured this. Some two decades since Bower and Christensen’s paper the payments industry is still experiencing almost constant ‘disruption’. However, a recent deal struck in the U.S. between BBVA Compass and Dwolla may be a glimpse into the future. A major bank has for the first time partnered with a ‘disruptive’ player, Dwolla, to bring real-time payments to their customers. Both win from the deal: BBVA Compass access the real-time payments space and Dwolla gain direct access to millions of new bank customers. This is in line with one of Bower and Christensen’s key pieces of advice, that “technologies [must] address the next-generation performance needs of their customers.”

This convergence of old and new has come at an opportune time. There’s huge risk involved for both parties, but if it works the rewards are huge.

The ‘Catching the Wave’ paper, though, also carries a word of warning: “Every company that has tried to manage mainstream and disruptive businesses within a single organization failed.” Transformation must come from both sides.

Transformation of the banking sector

BBVA Compass is the first major bank in the U.S. to take this leap of faith. The partnership is challenging the status quo. The traditional payment processing system is some 40 years old. In the past few years there has been an increase in the number of potential disruptive companies.

The modus operandi of the ‘disruptors’ is to radically alter the whole payment processing industry. They view the traditional payment processing system as being slow and expensive. Of course, many consumers agree, which has led to a rapid growth in peer-to-peer payments via email and mobile phone. This is a challenge that faces credit card companies and the banking sector.

Kristin Moyer, Research VP at Gartner, has recently blogged on the challenges facing traditional banks.

“Digital firms that have become involved in banking are innovating at a rapid pace. This pressure [encourages] banking CIOs to acquire talent from nonbanks and gain approval for more aggressive architecture, core banking, branch and other transformations.” This is the key. It’s all about transformation. The disruptive technologies will likely improve the traditional system.

This transformation, it is predicted, will also lead to banks opening their own app stores. Gartner recently predicted that a quarter of the top 50 global banks will open their own app stores by Q1 2016.

Payments innovation and where Aviso comes in

We know that merchants (under pressure from digital-savvy consumers) are demanding more from their acquiring partners when it comes to support for various payment types. We will go into more detail on the plethora of payment options facing merchants in next week’s blog post. We also know that there is a large (and largely unserviced) market of bricks and mortar merchants who would like to have an acquiring partner who can service all the payment types that are relevant in the markets that they operate in.

The onward march of online retailers is an even more striking example of a market that needs a straightforward, comprehensive solution to allow their customers to use the payment types that they typically wish to. Merchants should not feel stranded in this sea of payment options while consumers should not be hamstrung for choosing a particular payment option.

It is in the business interests of all stakeholders in the payment process to transform. This transformation should include the widespread acceptance of all payment types. Because of the aforementioned pressures, it is important that payments processors run a payments platform that makes deploying a new payments interface as simple and straightforward as possible.

At Aviso, much of our development effort on Novate has gone into solving precisely this problem. As a result of this effort, we have an elegant solution for payments processors who wish to support large numbers of payments interfaces.

Next week

We concentrate on the growth of new payment tech, such as Beacon technology.

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For more information on our products and services contact us at info@aviso.io, or follow us on Twitter and LinkedIn.

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