Brett King

Posts Tagged ‘NFC’

Customers will never use Facebook to login to their bank!

In Engagement Banking, Future of Banking, Groundswell, Mobile Payments, Social Networking, Twitter on December 7, 2011 at 07:16

We’re experiencing a massive shift in consumer behavior right now with the explosion of Facebook, Twitter, YouTube, and other community collaboration and social media platforms. A world where Facebook has 800 million inhabitants and a President who is a college dropout (albeit Harvard).

We’re seeing the global domination of mobile across the entire world, where before long every person on the planet will have a mobile phone – and soon that phone will be a wallet. Smartphone owners will be the majority in just a few years as smartphones are virtually free on contract, and unlimited data is bundled free. Already the average smartphone user spends more time using Apps than they do using an Internet browser on their computer.

The traditional players amongst us say that such things don’t really change the fundamentals, that “it will take time for people to trust these new mechanisms”.

I’ll never login with Facebook to my bank.

I won’t pay with my mobile phone unless I understand how secure it is. This NFC technology is too new and there’s no common standard.

Huh?

The same people who said this probably said…

I’ll never use email, there’s nothing like calling someone or a face-to-face discussion to solve a problem

I’ll never use an ATM machine, I don’t trust a machine to give me money.

I’ll never get a cell phone – I don’t want people to be able to call me whenever and wherever I am.

I will never put my credit card details on a website online – are you crazy?

I’ll never bank online. Not in my lifetime…

I’ll never need a Facebook account – it’s a waste of time, it’s just for college students.

Really?

If you are saying you won’t do something that millions of other people are already doing, that’s a sure sign that it’s going to disrupt the hell out of your business and you’re in trouble.

If you’re not planning to work differently, if you’re not thinking differently, then you’re just out of touch, you’re just one step away from irrelevance. You’re fighting the flow upstream and getting pushed towards disaster.

The one constant of the internet-enabled world is that you have to be ready to change constantly. Resistence is not only futile, it’s stupid and very costly in the long run. It’s cheap and easy to be social right now, same for mobile – it won’t be in the future.

Right now you have two choices.

Start experimenting with how to adapt to these new methods

Start figuring out what people want to talk about on social media. When they’re using their phones at a store, for searching on products, when they check-in, tweet or update their facebook status.

Start talking to them. Start sharing content that isn’t marketing messages pushed down their throat, but helps them.

Start trusting consumers to talk to you about your brand, your products and about what they want from their bank or services provider. Understand you can’t control the conversation, but you can and should participate in it.

Open up new products and services based on social media. Get consumers to give voice to their needs and help you form those ideas. OCBC, DBS, First Direct, ASB, Comm Bank are all trying different types of crowdsourcing to develop better relationships with their customer base.

OR… Ignore the obvious, get ready to be displaced

Our customers don’t feel safe using Facebook for login!

But some of them might… how long before most of them will? How do you meet your KYC requirements and keep customers safe when allowing them to do this? Are you going to wait till everyone else is doing it, or are you going to learn how to do it properly and securely now. Are you asking your compliance teams to find ways of figuring out how to do this stuff safely?

It will take years for the mobile wallet and NFC to take off!

Right now Google and Apple are eating your lunch and you don’t even know it. You are getting ready to write off the one device that is most critical for connections and context with your customers in the later part of this decade. Someone else is going to own your customers, and as banks we’re going to be paying the likes of Google to include our branded card in their wallet, or our products and services and messages on their platform.

We already have to ask permission from Google and Apple to give our customers our App.

Don’t want to change! You will…

The fact is most of the last two decades we’ve been facing constant change, and no one organization has been able to resist the shift because customers decide how and when you’ll engage with them.

Customers have already decided they want their mobile device to be their bank. They’ve already decided that they want to discuss your brand and your service capability in the open community of social media.

Now it’s time for you to decide that you want to stay relevant to your customers. Or ignore the obvious and go away.

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When your Telco becomes a Bank

In Customer Experience, Economics, Future of Banking, Mobile Banking, Mobile Payments on September 8, 2011 at 16:46

The announcement that the Canadian carrier Rogers Telecom has applied for a banking license should hardly come as a shock to the retail banking fraternity. There is already a plethera of mobile carriers fully engaged in mobile payments right now, from Safaricom in Kenya, Orange (with Barclays) in the UK, the ISIS collaboration in the US, LG Telecom in South Korea, and the list goes on. Everywhere you look right now, there are carriers trying to muscle in on the mobile wallet and payments space.

Should Banks be Worried?

They should be terrified.

The fact is that it makes perfect sense for mobile operators to start thinking about offering banking products and services as we dispense with plastic and start using our mobile phones as payment devices. Increasingly, banks are being detached from the end consumer by a technology layer. Let me prove it.

PayPal reinvented the customer experience layer around payments, and in doing so set the benchmark by which Peer-to-Peer payments are made. Sure there are banks at the back-end of PayPal, but today I can take out my phone or get online and send you money and all I need to know is your email address or your mobile phone number. This is compared with the average wire transfer which requires account number, account name, bank name, bank address, SWIFT Code/ABA Routing Number or IBAN, etc, etc. Now we’re all wondering why it’s simpler, and in many cases cheaper, to use PayPal than a wire transfer through our traditional bank. Why go back to complexity and friction?

Today, if a bank wants to allow their customers access to Mobile Banking they have to go through a layer of technology called an App Store (or Marketplace). Sure, there is HTML5 and mini-browser mobile sites, but the fact is that if you want best-in-class interaction and engagement, you need to go App. So today, a bank must ask Google, Apple or RIM for permission to have clients access their bank via a smartphone.

Mobile Carriers are a significant threat to day-to-day banking

Are Telcos a Threat to the High Street Bank?

Well, yes and no.

If you look at broader offerings of financial service products, then mobile operators really don’t want to play in that arena. What most of the mobile operators are looking to do is play in the payments space, taking control of the wallet on your phone or offering pre-paid debit card type services.

In 2008 about 17% of the US mobile subscriber base were on prepaid deals, but since the GFC (Global Financial Crisis) approximately 65% of net new subscribers are prepaid users. In emerging markets like India and China 90%+ of the subscriber base is prepaid, and the same counts for sub-Saharan Africa, and broadly across Eastern Europe and Asia. So what does this have to do with banking?

Prepaid subscribers for mobile phones generally speaking are more likely to be at the lower end of the scale for retail banking (less profitable, underbanked) or even in the unbanked segments. These are customers who don’t have extensive multi-bank relationships, and who increasingly are moving to products like prepaid debit cards to facilitate their day-to-day banking needs.

So guess what happens when you combine a prepaid debit card with a prepaid mobile phone? It’s a marriage made in heaven! What’s the difference between making a telephone call, an ATM withdrawal or a debit card transaction at a merchant – they are all just transactions from a value store.

It’s likely that as Telcos figure this ‘secret’ out that they will be aggressively going after that marginal layer of customers that are underbanked, and promising utility that a bank can’t provide in the payments space. The combination of prepaid phone deal with a prepaid debit card will likely result in the loss of around 10% of the retail banking consumer market in developed economies in the next 5 years in my opinion, as they migrate to this type of modality.

So What? We can Afford to Lose a Few Marginal Customers!

This will be the justification for lack of action from many retail banks; that the loss of these less profitable customers is not a bad thing. There’s two problems with that logic.

Firstly, this shift will create momentum behind changing payments behavior that will fragment day-to-day banking for many customers. Increasingly even your best, most profitable customers will be abandoning the old ways of payments to go for the utility of a combined mobile phone and payment device. Once I am managing your day-to-day spending activity, I can start to influence your decisions, spending and choices for more complex financial products too.

Secondly, the fact is that even these ‘marginal customers will likely be extremely profitable for Telcos, because to them it is just new revenue, and they don’t have all the expensive infrastructure that banks have around the very traditional (some would say antiquated) retail banking system.

The implications for banks is that they lose touch day-to-day with customers, and the day-to-day retail front-end of banking becomes owned by telcos, App stores, social networks and marketing organizations. The bank becomes the back-end manager of risk and the product manufacturer, with the lowest margin of the whole value chain.

Will the US be last in the drive towards a cashless society?

In Economics, Future of Banking, Mobile Payments on September 1, 2011 at 23:50

Although it is a long-time off yet, we can now envisage a time when most of the developed world, and indeed most of the developing world will no longer deal in hard currency. There are a number of drivers for this:

1. Impact of mobile payments
2. Tighter money laundering requirements, and
3. Cost of physical handling versus electronic transactions

Since the mid-20th century many have heralded the impending cashless society, but it may be that the emergence of mobile payments is the final tipping point in that outcome. Indeed, empirical evidence is already available that cash is in serious, if not terminal decline.

Strong incentives

For years regulators and governments have worked to track the movement of physical currency across border, and in the case of terrorist financing and criminal activities. The Financial Action Task Force developed 40 core recommendations in 1990 (revised in 1996) designed to reduce the risk of money laundering, but the greater part of the effort was focused on the movement of hard currency and it’s role in criminal undertakings. The reason for this is that it is harder to track currency, and if it can move freely around the system, the criminals, terrorists and “evil doers” can support their activities without restraint.

The strongest case for the removal of cash is around criminal activities. David Warwick posted an excellent review of the issues around cash and it’s active involvement in crime in a recent post entitled “The Case Against Cash”. In it he cites the following facts:

“Now consider that low-level drug offenses comprise 80% of the rise in the federal prison population since 1985 (though those numbers have begun to go down in more recent years)…The vast majority of those illegal transactions are cash-based. Greenbacks are also the currency of choice for Mexican drug cartels, which funnel between $19 billion and $29 billion in profits out of the United States annually, according to the U.S. government.”
David Warwick, CBS Interactive Business Network, Aug 2011

The biggest costs and risks are in cash

In recent times in places like the Netherlands, the cashless society has already started to become a reality. In 2010, the Amsterdam City Government moved to create ‘cashless’ zones in the De Pijp and Nieuw-West (New West) districts as a result of rising crime rates. You can now only use Chip and Pin to pay in those locations. This has been successful enough that it is now being rolled out across other districts in Amsterdam.

In Ireland, Belgium, Netherlands and other locations, banks are increasingly going cashless to reduce costs and crime. In recent years banks like SNS Bank in Utrecht and National Irish Bank, were two such European banks to commence the move to Cashless. Both cited the rising costs and risks of dealing with physical cash, and low volume of real ‘cash transactions’ in-branch, as a metric for justifying the move.

Emerging economies may be first

In the Philippines, Kenya, Somaliland, Nigeria, Senegal, India and other such locations, the success of mobile payments and remittances is starting to see a dramatic shift in the day-to-day operation of the economy. In Somaliland where there are no ATMS, and almost no banking infrastructure, mobile payments enabled by mobile operators, the hawalad and money changers, might mean this province could become one of the first cashless societies.

The key to moving away from cash, is reducing the reliance on cash day-to-day. RBA Governor Malcom Edy noted that cash use in Australia had declined from 40% down to 30% of traditional ‘retail’ payments. In the UK, cash usage is also in decline, with the UK Payments Council estimating that it will represent just 0.8% of retail payments by 2018 (this is down from 90% in 1999). In both cases, the use of Debit Cards has been cited as the contributing factor.

In Rural India, Sub-Saharan Africa and the Philippines mobile payments are booming

It’s all about behavioral shift in payments

The shift towards cashless requires reducing momentum in the ‘cash system’ by shifting to alternative modes of payment. The Debit Card has been an obvious ‘cash-killer’ in places like the UK and Australia, whereas mobile payments have had a much more rapid and profound effect on emerging economies. So with Peer-to-Peer (P2P) mobile and internet-based payments rapidly accelerating, and the move to NFC payments – the likelihood of ‘saving’ cash from terminal decline looks less and less likely. Check out PayPal’s P2P solution using NFC enabled Android phones for example.

In this regard, the EU with it’s strong support for debit cards, chip and PIN and increasing mobile enablement, and the emerging economies of Africa and Asia with both low friction against cash and the pressing need for financial inclusion, probably mean that the US, who is so strongly and emotively married to the ‘greenback’ and stuck with outmoded mag-stripe will likely be among the last to go largely cashless sometime in the next decade.

The momentum for these changes are building and it is a longer-term trend that will change the way we view banks and money in the very near future. The more friction you have, the more consumers will find workarounds. At the end of the day, a mobile or P2P payment will have far less friction than a cash payment.

The Total Disruption of Bank Distribution – The Conclusion

In Bank Innovation, Customer Experience, Future of Banking on August 11, 2011 at 16:10

As we detach ourselves from physical artifacts associated with traditional businesses, traditional distribution models rapidly fail. The fact that you own or participate in a network or virtual monopoly that supports an outmoded distribution model is of no benefit when that network is surpassed by a generational leap in technology delivery at the front end or a significant and irreversible shift in behavior. The challenge is re-tasking your business to be a part of the technology or new distribution model that enables that different behavior.

Typically, the new technology or business model disrupts in one of the following ways:

  1. Creates a cheaper, simpler or more convenient approach when compared with the old method or processes,
  2. Involves a new technology that is vastly superior in speed, quality, form or function when compared with the old method (not an iteration, but next generation improvement),
  3. Creates a dynamic shift in components of the value chain such that the old method is no longer viable or worth the premium levied, or
  4. Results in the creation of a completely new model that completely replaces the need for the traditional players such as in the case of combining two previous products or business.

As in the case of the Telegraph and Fixed Line businesses, this was about a better approach to person-to-person communication. In the case of Encyclopedia Britannica, Stock Trading and Travel Agents, the new technology disrupted the value chain so that traditional distribution methods were no longer able to compete, or the ‘value-add’ of a human interaction was no longer worth the premium. In the case of media such as print, music and movie/TV content, it is a combination of disruption of the network, new technologies at the front end (i.e. computers/tablets/smartphones instead of TVs/newspapers/CD players) and a change in the distribution model in respect to the value chain and cost structures.

Is it really going to happen?

So how viable is this shift in banking? Well almost all the physical artifacts in banking can be replaced by something better. The cheque has already been replaced in most developed economies by debit cards and electronic transfer methods, but even plastic cards themselves are a target for disruption via NFC-enabled mobiles. Cash itself is increasingly becoming a poor instrument for day-to-day payments.

The branch, which originally was designed as a transaction point for cheques and cash, is increasingly facing the same challenges that Britannica, Merrill Lynch and Travel Agents faced – is the value-add of a human interaction enough to differentiate against a rich, optimized, digital interaction when and where you need your banking?

Everything about retail financial services that relies on outmoded physical artifacts, proprietary and outdated networks, and processes that are complex and unwieldy – all lend themselves to disruption. If you can think of a better way to do your banking, then you already realize that the current status quo is not sustainable. In today’s environment, if you can imagine it, then someone is probably building it.

If you are an incumbent player you might argue, for example, that NFC requires critical mass to reach adoption, but so did the internet, so did music downloads, so did Wikipedia and electronic stock trading.  The question is, do you wait until the disruption takes place to start planning for the new reality?

Where are the key threats?

The biggest single threat is distribution model changes. By 2015 aggregate interactions for retail banking will mostly have shifted away from branches to mobile, web, ATM, and call center. On that basis alone banks that are carrying large branch networks will face major disadvantages on an operational cost basis, against competitors who are more nimble, efficient and enable day-to-day behavior better. The good news is, before the decline really starts to bite, the evidence shows that when you strongly support new channels that it doesn’t cannibalize your existing business, it just adds new revenue to the mix. Get focused today on revenue generation through direct channels. Remove the friction, go after revenue.

The cloud, mobile and social will certainly be a part of the shift as well. PayPal has already shown that a new interface can work on top of the old architecture. Increasingly mobile payments are going to sit on top of that old architecture too. The opportunities, however, are more than putting new skins on the old payment system. The opportunity here is to understand the context of payments and work to augment the payments architecture through understanding payments behavior. Start focusing on why, when and how customers make payments, and work to reduce friction and enhance value.

Physical artifacts are going to continue to be challenged by modality. If you have retail banking management asking the question about how to get customers back into branches, or arguing that cash is king, ask yourself how these leaders will fare as increasingly they are faced with disruptive behavior and the breakdown of traditional models. Start looking for leaders who are excited about the future and see the opportunities for adaptation.

Outdated Checks and Magstrip costing the US $30Bn a year

In Bank Innovation, Economics, Mobile Payments on August 3, 2011 at 12:07

The US is enamored with outdated and costly modality that is costing Billions in lost revenue and fraud. While many argue the business case for moving to technology like EMV or NFC is hard to justify, the reality is it is incredibly simple to justify based simply on mathematics around today’s massive cost of fraud. The same goes for those that say shifting the US away from checks is too hard because of the momentum in the system.

The big cost of fraud

In the US alone, check (cheque) fraud costed US consumers and banks an estimated $20Bn a year in 2010, up from $10Bn in 1997. Identify theft is one of the fastest growing types of fraud. In the US identity theft victims grew by 12 percent to 11.1 million adults in 2010 (Source: Javelin Strategy & Research, “Identity Fraud Survey Report,” February 2010). 43% of this fraud, totaling more than $50Bn in costs, were check and card fraud. This doesn’t include the Billions of dollars spent internally by bank risk and fraud departments chasing, tracking and attempting to recover losses from fraud.

In 2009, three individuals were accused of engineering the largest case of card fraud in US history. The fraud involved the theft of more than 170 million credit and debit card numbers utilizing weaknesses in the payment processing systems based around mag stripe tech. Albert Gonzalez, the primary defendant in the case, was said to have thrown himself a $75,000 birthday party and complained about having to count $340,000 by hand after his currency-counting machine broke. The state retrieved around $1.65m in cash as part of a plea bargain, but the Secret Service identified that just one small part of Gonzalez’ operation a group of hackers called “ShadowCrew” took $4.3 million in the early part of the decade. It was also reported that Heartland Payments Systems Group, who was targeted by Gonzalez’ group, lost more than $12.6m in the attacks alone (source: Wikipedia).

Estimates for card fraud in the US banking range from around $5.7Bn a year to $8.6Bn a year (source: Oracle Financial Services Whitepaper).

Outdated technology killing the US banking system

There are various arguments given for keeping checks and mag-stripe going in the US, despite all evidence to the contrary. The biggest argument for keeping checks going is the momentum in the system around checks that stem from the practice of the mystical ‘float’ mechanism. The float has frequently been used as a mechanism in the practice of cheque kiting or ‘playing the float’, convincing a merchant to accept a cheque that takes 3 days for the fraud to become evident. Since cheques include significant personal information (name, account number, signature and in some countries driver’s license number, the address and/or phone number of the account holder), they lead directly to identity theft implementation.

In Germany, Austria, the Netherlands, Belgium, Finland, and Scandinavia, cheques have almost completely vanished in favour of direct bank transfers and electronic payments. In the UK, Ireland and France, while cheques are still used they are in rapid decline, with 95% of merchants not accepting them as a form of payment anymore. The key difference in EU markets where cheques have disappeared versus the US are two simple mechanisms:

  1. Cheques cost consumers to process, whereas electronic payments are free or cost less, and
  2. There are robust electronic payments systems like Giro that provide alternatives that are more efficient

As long as US banks insist on free checking and charging for wire transfers, along with a poor interbank payments capability, then checks have life left in them. Why they insist on this is beyond me?

Mag-stripe related fraud was successfully reduced by 75-80% in the UK and France as a result of the introduction of EMV chips. This is expected to be further reduced dramatically by the introduction of NFC and mobile payments, which allow multiple additional layers of security.

Savings pays for all the innovation we need

In the US alone check and card fraud costs close to $30Bn a year. By incentivizing the removal of checks and mag-stripe from the system, this could result in savings well in excess of 50% of these costs annually. $15Bn a year could pay for a lot of innovation.

In 2010 over 1.5million card terminals were shipped in the US. Accepting that these units cost around $1-3k to deploy, replacing mag-strip capable terminals annually would only cost around $10m for 3m merchants, $100m for 30m terminals. That solves the NFC/EMV issue very quickly.

Interestingly, removing cheques from the system not only reduces fraud, but reduces processing costs internally within banks by some 30-40%. Far in excess of the gains from the mystical float.

Mobile payments and NFC are clearly not only the way to go to reduce fraud, but to provide a massively robust business case for innovation. Anyone who argues for the longevity of cheques and magstripe in the US needs their head read IMHO.