By Matt Herren
Like it or not, alternative payment options like Apple Pay and Walmart Pay have effectively inundated the financial industry. And although some are more popular than others, digital payments present both growth opportunities and new challenges for community banks.
And ready or not, it’s time to take notice. According to an eMarketer forecast report on proximity payments, while 2015 closed with about $9 billion in digital payment transactions, that number is expected to rise to $27.05 billion in 2016 — and $210.45 billion by 2019.
Although there are a few exceptions, the major mobile payments players can be broken into two distinct factions — one that will propel financial institutions forward, and one that stands to take a chunk out of your interchange income.
Mobile Wallets from the Card Space
The first group comprises the mobile wallets that preserve the existing interchange model by utilizing the credit card network rails (Visa, MasterCard, American Express and Discover). These include:
- Apple Pay
- Android Pay
- Samsung Pay
From a consumer standpoint, these mobile wallets conduct payments using Near Field Communication (NFC) at a growing list of supported terminals. The user simply “taps to pay” at an enabled terminal to complete an instant, secure transaction.
According to the Aite report, Mobile Proximity Payments: A Disruption in the Force, “NFC has the greatest potential to become the standard transmission method for mobile proximity payments. NFC’s nearly ubiquitous presence in smartphones, the rapid increase of NFC-capable terminals driven by EMV reterminalization in the United States, and the launch of Apple Pay will accelerate implementation and usage of NFC payments.”
The Merchant-centric Crowd
Conversely, the second set of digital payments players is largely composed of retailers. This relatively new and growing group uses the ACH rails to facilitate payments. Why the push for this breakaway faction? Very simply, money. Going the ACH route essentially costs these merchants little to no money, whereas with the existing card rails, they pay a percentage of each transaction to both the card network and the issuing bank — the interchange fee. By eliminating the interchange model, they boost their profit margins. This merchant group includes:
- CurrentC/Chase Pay
- Walmart Pay
- Target REDcard
CurrentC, a mobile payments app currently available only in test markets, was created by a consortium of retailers — the Merchant Customer Exchange (MCX) — including Best Buy, Dunkin Donuts, Old Navy, Exxon , Kohl’s and several more. Here, the merchants are essentially trying to reinvent the wheel (with limited success) in an effort to achieve the same payment speed and convenience consumers demand, while eliminating the interchange model and accompanying fees — thereby boosting their profit margins. In some cases, like Walmart, this can mean millions.
Aside from the true plastic REDcard, most of these digital payment alternatives work by having the consumer download an app and scan a QR code on their phone to facilitate the payment. The dynamic barcode changes after a few transactions — their form of security. The drawback is, taking a picture of a QR code on a screen doesn’t seem particularly secure or technologically advanced.
Without a Doubt — the Card Space Wallets Are Your Bank’s Ally
Ultimately, it’s the digital wallets from the card space that will continue to drive community banks forward and preserve their interchange income. By riding the existing card rails, they’re sustaining a process that is far from broken.
The biggest difference these mobile wallets have brought forth is an added layer of fraud security through tokenization. Indeed, fraud prevention is a major impetus driving change in the payments space.
The industry has made great strides with EMV chip cards, which surround static card numbers with dynamic data to encrypt the transaction. And that’s a big boon to fraud prevention. But tokenization takes security yet another step: Not only does dynamic data surround the credential but also the actual core credential itself — the card number — changes. Essentially, merchants receive one-time credentials that can only be used for a single transaction — making it virtually impossible for cybercriminals to predict what the next dynamic credentials will be.
So, What’s Happening with Online Payments?
The online digital wallet space has a similar premise, and players, as the mobile wallet space. From the card network side, you’ve got Visa Checkout and MasterCard MasterPass, working to preserve interchange income. And from the merchant-oriented, anti-interchange side — PayPal.
This online payments option essentially is an answer to the steady growth of mobile commerce: Consumers are using their phones and tablets, rather than laptops, to make more online transactions.
However, when you’re purchasing an item on a website, the form-fill of traditional boxes for shipping information, card number, etc., makes for a less-than-seamless experience. But with each of the online digital wallets, the experience is similar: The consumer enters their card number once; and, thereafter, the data is stored and purchases are made with a tap or click.
Risks of Ignoring Mobile Wallets
Banks choosing to not engage with alternative payments like Apple Pay, et al., risk losing consumer mindshare. If your card can’t be added to a digital wallet, consumers are going to use someone else’s card. Think of it this way: More than 80 percent of Americans have a smartphone of some type. So will phones be a larger or smaller part of everyday life in five years? The answer is pretty clear.
How to Get Started
To ensure you’re serving as many customers as possible, your best path is to enroll in Apple Pay, Android Pay and Samsung Pay. It makes sense because the card networks have waved their costs for processing and facilitating the payments.
And when you’re ready to jump into the mobile wallet pool, you should first reach out to your debit card processor. Your processor should act as your partner in completing your agreements with MasterCard and Visa and your addendum with the digital wallet providers, as well as ensuring your bank’s card art and logo are populated in the wallets and, finally, informing you of your “go live” date.
Digital Truly is the Future of Payments
As for securing customer buy-in, it comes down to making them aware that digital payments are available, and encouraging their use. Right now, about one-third of mobile devices are capable of making proximity payments. But from now on, all new models will feature this capability. Since people naturally upgrade their phones every couple of years, digital payments will rise exponentially. Will your bank have a sure footing in the digital payments space?
As product manager for Payment Analytics, Matt Herren has expanded CSI’s ability to address fraud through early identification of merchant breaches and fraudulent testing techniques. His work helps to increase bank profitability through fraud mitigation and card portfolio analysis, allowing customers to realize industry-leading results and maximize program performance.