‘What is Fintech’ Series: Mobile Payments

By Michelle Chin

Payments

Payments ecosystem is very large and complex, which consists of consumer and retail payments, foreign exchange (FX), cryptocurrencies as well as wholesale and corporate payments.

Consumers and providers alike are aware of the rapid growth of payments and the need for a technology layer to mediate, yet financial institutions are underprepared in adjusting to such changes. The 2008 global financial crisis introduced a plethora of new regulation, leading them in diverting precious funds away from research and innovation and into compliance-related projects.

Yet, as we move on into a world where a lot of systems are automated and information is within the reach of our fingertips, consumers are also demanding the need for quick and convenient payment methods.

Besides incumbents in the space and up-and-coming startups trying to disrupt the industry, in wake of the potential, we have seen non-financial tech giants, attempting to break in as well. Big tech players such as Facebook, Google, Apple, Samsung and more have been creating their own payment solutions as well, in efforts of taking a piece of the ever-growing pie.

 

Mobile payments

Mobile payments is a segment within the entire payments ecosystem whereby payment services are performed from or via a mobile device, instead of using cash, cheque or cards.

In the past, mobile payments were operated mainly through SMS payments, whereby the consumer sends a payment request via an SMS text message or USSD to a short code and the service provider then charges them through their phone bill or online wallet.

Nonetheless, this model had many downsides: poor reliability, slow speed, security, high costs and low payout rates for operators.

There are several types of technology within mobile payments today:

1.QR code payments

 

qr code
Image taken from www.qrstuff.com

QR codes are machine-readable codes used for storing information. Before a payment, users can generate a QR code within their mobile devices, which is later scanned by a point-of-sales (POS) terminal or via the mobile device of the payee. Examples of companies using QR code payments technology is Starbucks.

 

2. Contactless Near Field Communication (NFC)

http://www.libramation.com
Image taken from www.libramation.com

NFC is mostly used for in-store transactions or when paying for transportation services. Users can ‘tap’ or ‘wave’ their mobile phones on point-of-sales (POS) terminals as a payment method upon registering their cards into the systems within their phones or mobile applications. Apple Pay uses NFC technology on top of their Touch ID sensor for identity verification.

 

3. Cloud-based mobile payment

Image taken from www.laptopmag.com

Image taken from www.laptopmag.com

Cloud-based payments are done by storing payment information in a cloud solution which later enables users to perform NFC card emulation without the need for a physical device. Google Pay and PayPal are examples of companies using cloud-based solutions for mobile payments.

Payments processing networks like Visa and MasterCard are winning in the space as they continuously innovate and open up opportunities to work alongside emerging payments companies.

 

Asia?

The technology behind mobile payments is revolutionizing access to financial solutions, especially in emerging markets. The fragmentation of Asia Pacific in particular is creating a pool of opportunities for this segment to prosper.

Asia Pacific accounts for nearly 75% of global payments transactions, surpassing Europe and the USA. The growth of payments revenues in APAC is rapid, with consumers shifting their behaviours from cash transactions to electronic payments.

China is a big player and has been significantly disrupting the financial services sector with giant players such as Alibaba and Tencent, both of whom have ventured into the space of mobile payments. Yu’E Bao, an online money-market fund run by Alibaba, reached $96 billion in assets under management at the end of last year. It comes to no surprise as China’s mobile payments industry hit $90 billion in gross merchandise volume in 2014 and is expected to hit $150 billion this year.

According to the McKinsey Insights on Payments, Asia-Pacific will account for over 50% of global payments revenue growth over the next 5 years.

 

Challenges

App and user experience:

While mobile payments are set for incredible growth, there are still security and customer experience issues. Customer experience kicks in to assist in seamless transactions using mobile as a payment option instead of grabbing a credit card. Besides that, an all-in-one solution where customers are able to manage all their payments within a single platform requires work in the user experience area.

Security:

There are security issues associated with smartphone memory banks as issuing banks have to surrender digital card details to the phone’s memory, which is now connected to cloud storage. Generic tokenization solutions are still standard and there is a need to develop more secure and seamless security measures for the best experience.

Risk and fraud:

The ability to pay for goods and services while highly convenient, invites a new set of issues with risks and fraud. Besides payments companies requiring high levels of risk and fraud management systems, mobile device manufacturers will have to look into ensuring more secure systems within their hardware.

 

Conclusion

The future of payments is shaped by 3 main factors: technology, regulation and socio-demographics.

The mobile payments value chain is actually becoming more fragmented though by the large number of fintech companies entering the industry alongside solutions from existing banks (JPMorgan Chase,) and tech giants (Google, Apple, Samsung).

There is still a lot of room for innovation and improvements in the mobile payments segment as they are still reliant on traditional financial solutions such as bank accounts and credit and debit cards. This is still a pressing issue in terms of serving the unbanked population.

Besides that, the available solutions are still not widely adopted by merchants and consumers. There is a lack of incentive for merchants to adopt mobile payments. The reluctance boils down to costs as businesses need to pay interchange fees to credit card companies – which is why cash payments are still preferred. For merchants, understanding the system may be an issue and extra cost, plus, there is no guarantee of having incremental sales from adoption. As for consumers, there is a lack of encouragement and information regarding the usage of the services.

The potential in mobile payments is vast and the amount of exploration done and results achieved are still at its early stages. Companies will need to work on creating a seamless experience for users and attempt to incorporate an all-in-one payments solution into their systems.

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