Banks, Networking, and Mobility

Now that we’ve explored some of the non-traditional payment platforms that increased convenience and mobility, as well as their effects on business and banking, we can begin to look at how banks are handling mobile payment methods. While online banking options have been available since nearly the advent of the internet, only recently have banks truly entered the market of mobile payment¹.

In early 2014, Visa and MasterCard began supporting cloud based mobile payments, which allowed banks to truly enter the market space¹. By being able to link their already established debit and credit cards to phones, users could conveniently and quickly make mobile payments just like they used to with their cards, except the card is now obsolete. Multiple banks have their own variations of the technology, from ChasePay to ScotiaBank Mobile Wallet², which are all targeted towards capturing the transactions that consumers were previously turning to alternative platforms for. This technological link between bank accounts and payment methods is helping to recapture the lost revenue from increased mobile payment options. 

While this mobile pay technology is complex, the logistics can be briefly explained. The technology utilizes near field communication (NFC) to allow phones to communicate with terminals, exchange information, and process the payment¹. Essentially it functions like the ‘tap and pay’ ability of traditional bank cards. NFC chips are embedded in nearly every smart phone today, creating a large network of mobile pay ready phones. 

However, the road to competition is paved with difficulties for traditional banks to overcome. For starters, services like PayPal have a large first-mover advantage which has led to their services being accepted universally and offering much more flexible payment options than traditional banks². The convenience brought by wide acceptance of services like PayPal has been studied to be the most important factor for first adopters of mobile payment³. They have been found to value convenience and ease of use over all other factors³. Additionally, the 2016 North America Digital Payments Survey found that more users trust services like PayPal to handle their mobile payments, as opposed to traditional banks⁴. Supporting research has found that the number one factor affecting this difference in consumer trust is the quality of the payment method⁵. Clearly, the options being offered by banks are still found to be lacking in the eyes of consumers, which is a problem banks must address as they carve out their space in the mobile payment market. 

Banks do have competitive potential in the fight for mobile payment transactions. The biggest advantage banks have is their ability to compete on transaction fees². While services like PayPal offer free exchanges between individuals, businesses must still pay fees to use the technology. However, banks like Chase have begun partnering with card service companies (like Visa) to undercut these transaction fees in the interest of maintain customer relations and carving out a large piece of the transaction pie². While this may seem to go against the card and transaction fees they have been known to charge (and which we discussed in earlier blogs), this change is a direct result of the advancement and competition of the mobile payment market². By forcing banks to adapt or lose significant revenue, mobile payment platforms have proven to be a disruptive innovation that can’t be taken for granted. 

Footnotes

1 Hernandez, Will. (2016, July 22). How will banks address mobile wallets? Mobile Payments Today. Retrieved From https://www.mobilepaymentstoday.com/articles/how-will-banks-address-mobile-wallets/

2 Back, Aaron. (2016, July 8). In Mobile Payment Wars, Big Banks Strike Back. The Wall Street Journal. Retrieved From https://www.wsj.com/articles/in-mobile-payments-war-big-banks-strike-back-1467998735

3 Kim, Changsu. (2010). An empirical examination of factors influencing the intention to use mobile payment [Abstract]. Computer In Human Behaviour, 26 (3), 310-322.

4 Harris, Rebecca. (2016, October 25). Mobile Payment Awareness Grows, But Not Usage (Survey). MarketingMag. Retrieved From http://www.marketingmag.ca/consumer/mobile-payment-awareness-grows-but-not-usage-survey-185751

5 Zhou, Tao. (2013). An empirical examination of continuance intention of mobile payment services [Abstract]. Decision Support Systems, 54 (2), 1085-1091. 

The Card Dependence

While it may be overlooked today, credit cards and debit cards are truly the first step into a wider world of mobile payment. No longer does a consumer need to go to the bank for his daily spending needs. Instead all their funds are accessible due to a tiny piece of plastic they can keep in their pocket. Instead of fumbling with change or large amounts of cash, consumers can simply swipe, insert, or tap to make their payment.

Early cards were not so mobile. The very first credit cards had to be manually recorded and copied, so a payment form could be sent away. This saved you the convenience of having to use cash but didn’t save you significant time. However, with the advent of magnetic strips for swiping or near field communication (NFC) chips for contactless purchases¹, the use of debit and credit cards became the first foray into a convenient version of mobile pay. All your banking information could be encoded into a card and complex computer networking techniques can process payment between cards and terminals, allowing consumers to be on their way in no time at all. 

However, as with all business transactions, there must be a trade off. Banks and card companies (like Visa or MasterCard) supply these highly sophisticated cards in exchange for a cut of sales. With the advent of card fees, ranging from transaction limits (for consumers) or a percentage of the transaction revenue, businesses and consumers must consider this additional loss when payment occurs². Often times businesses will pay this fee, so as not to deter customers from shopping with them. One might suggest that businesses simply refuse to accept these cards (as chains like Walmart have threatened in the past), however research suggests that paying the transaction fees hurts their profit far less than turning away customers who want to pay with cards. In 2012, in the U.S.A. alone, debit and credit cards were used for 73.2 billion transactions² and a 2015 survey by GfK, a market research company, found that a whopping 70% of Canadian transactions were done by card³. Losing customers over a payment method is bad for business, both in a profit sense and a customer relation sense but this impact to business profit from a new method of payment is something firms must consider in a world where convenient payment is necessary to attract customers.

While card payment may not be mobile payment in its true form, such as phone payment or online currency, it is an important first step to see how businesses must weigh consumer convenience and profitability. This swing towards convenience is here to stay, with consumers not even being deterred of card usage by reports of fraud and poor security according to market research⁴. Businesses must consider even these first developments in payment methods and adapt to it if they plan to stay competitive in the minds of consumers.

Footnotes
1 Mojtahedi, Negar. (2015, October 23). Tap and Pay Cards: They’re fast and convenient but are they secure?. Global News. Retrieved From http://globalnews.ca/news/2295763/tap-and-pay-cards-its-fast-and-convenient-but-is-it-more-secure/
2 Martin, Allison. (2015, March 1). Should Consumers Mostly Use Credit or Debit Cards? The Wall Street Journal. Retrieved From https://www.wsj.com/articles/should-consumers-mostly-use-credit-or-debit-cards-1425271054
3 La Rose, Lauren. (2016, February 03). More Canadians choosing credit cards, mobile payments over cash , study says. The Globe and Mail. Retrieved From http://www.theglobeandmail.com/report-on-business/economy/more-canadians-choosing-credit-cards-mobile-payments-over-cash-study-says/article28545469/
4 Kosse, Anneke. (2011). Do Newspaper Articles on Card Fraud Affect Debit Card Usage?. Working Paper Series, 1389, 3-21. Retrieved From https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1389.pdf?7f526cc700701fe84b39a3ab7c3121a7