Banks and Credit Card Issuers beware – Apple just stole your business

200 individuals were the first to receive credit cards issued by Diners Club in 1950, the brainchild of Frank McNamara. It was the start of a completely new era in personal credit and payments. American Express entered the credit business with its own card in 1958, within five years had issued more than a million cards.

Today there are more than 1.6 Billion credit cards in circulation, and the US credit cards industry generates $2.8 Billion dollars a year in revenue. One in 12 households in London (or 8 per cent) have used credit cards to pay their mortgage or rent in the last 12 months and outstanding credit card balances stood at £63.5 billion in November 2009. By 2013, China’s consumer credit market—encompassing credit cards, mortgages, and other personal loans—will account for 14 percent of profits in the banking sector.

Growth in Contactless Technologies

In recent times we’ve seen the move to NFC or Near-Field Contactless credit cards. It is estimated that NFC enabled credit cards will reach the tipping point in 2011, with a total of 30 million British contactless bank cards alone being issued by then. The ease of use of an NFC-enabled card is obvious, no swiping, no inserting. Steve Perry from Visa Europe said that the rising popularity of contactless technology brings the promise of a cashless society where there is no longer any need for people to carry notes and coins around with them.

“Contactless is as revolutionary as the shift to internet payments was five years ago. It will mean having no notes and coins – it will certainly mean having no coins. It will move us almost to a cashless society.” – Steve Perry, Visa Europe

But as the modality shifts toward NFC, the reality is that the physical card itself does not represent a competitive advantage or differentiation for banks or issuers, not that it does today. Once the move to NFC-enabled POS terminals is ubiquitous, it’s probably easier just to carry your phone to make payments than a gaggle of credit and debit cards. That’s not going to happen overnight though right? Cards as a product are still too strong to be replaced by mobile quickly, so we have plenty of time right?

It will happen quick…

WRONG. We know that Apple is working on an NFC-enabled phone, and given their recent hires in the space, it is assumed that the iPhone 5 will be the platform for this change. So how will Apple’s NFC-enabled iPhone 5 work? We know a few things about the likely capability of the phone based on the patents issued by Apple. Firstly, the payment application will be a core app integrated into the phone, there will be a biometric strip (presumably enabling fingerprint authentication) and the phone will ostensibly work just like an EMV-chip credit card.

Some of the detail of Apple's NFC patent for the iPhone

The question you are probably asking is, how will the payment mechanism work? Here’s where it is largely speculation because Apple is being extremely tight lipped. We know that the primary payment app will work as an interface to your bank or credit card company as you need it to. However, it doesn’t take a rocket scientist to work out that Apple could use its current iTunes store platform to provide stored value for an effective debit card mechanism. If Apple was to use this mechanism as the underlying currency or stored value behind their core ‘debit card’ equivalent payment capability, they would effectively become a bank overnight, and one with perhaps an even stronger differentiation than any other debit card on the market today. Other handset manufacturers and mobile platform providers would be sure to follow as Apple’s payment capability quickly becomes ubiquitous. That is, if the payment networks talk to Apple’s iTunes store…

Competing with Apple, Google and Microsoft Mobile

So how will banks compete in such an environment? Well banks can’t issue their own mobile phones like Apple or Google’s partners can, and plastic cards and checks look downright archaic in comparison to such a payment paradigm. The only choice of Card issuers and banks would be to embrace the new technology and scramble to partner with the handset manufacturers and mobile OS owners. Visa has already deployed their Visa Paywave solution on the iPhone, but currently you need a cradle or sleeve that the iPhone sits in to do the sexy NFC bit, that simply won’t be necessary on the new device.

So the question for banks in this new environment would be how do we now issue cards to customers? Do they have to come into the branch for us to configure their phone? Given how easy it is to upload iTunes credit, this would be a huge competitive disadvantage, so the compliance procedures applied to the current physical process of card issuance become a millstone around the bank’s neck and result in rapid disintermediation. Within the space of 3-5 years, banks no longer have a credit card business. Sure, they might eek out a small business settling payments between Apple’s iTunes store and the bank, but compared with the size of the card business today this would be miniscule.

Challenges Ahead for Banks

What about if a customer could download a new “credit card” from the iTunes’ App store, or from Google’s Marketplace? Well how would you qualify for the card as a customer, are there different card apps for each bank, what is the onboarding and risk assessment process?

Don’t be tempted to think that the protection of existing payments networks or a bank license will protect your existing business from such innovation. If Apple does launch their NFC phone and announces collaboration through Visa and Mastercard’s payment network, do you honestly think with millions of iPhone 5’s going out the door that the regulator is going to call a halt to payments from a phone?

Seriously, if you are a bank, it’s likely that in just 8-9 months you’ll be faced with competition from non-banks who can do the whole NFC-enabled phone payments thing much faster, easier and more compelling than you ever could by issuing a plastic debit or credit card. And guess what?

If you’re the CEO of a bank, you probably don’t even have someone appointed to work on mobile credit card onboarding yet, so what’s the likelihood you’ll be ready to compete?

Let’s try plan B – let’s go to the regulators and see if we can stop mobile phone payments as a mechanism shall we?

Comments

  1. Hi Brett

    Great article.

    It encapsulates just how out of the road the banks are on this one. I remember just a year ago discussing this as a possibility, and now here we are.

    I’m very interested to see how this gets handled at Sibos next week in the Innotribe. additionally I am out of contract on my iPhone in the next few weeks. Now wondering if I should delay until the summer for my replacement? Any thoughts.

    Jacqui

  2. Aldo says:

    Interesting article as always, Brett. This sums up my recent thoughts on and concerns with the banking industry. The most used device I have right now it my iPhone (heck, it has even taken time away from my desktop). I practically do everything with it save for the occasional heavy photo or mp3 editing.

    Yet even with the surge in mobile banking usage, and the ubiquity of mobile devices, banks still require the use of plastic ATM cards, a not so handy passbook, physical cheque deposit boxes (complete with chained pens for account number entries), and a contact centre telephony system that keeps on asking me to key in my number of choice again (and again, and again!).

    I for one, am really looking forward to this new feature from the next gen of the iPhone. This will hopefully consolidate the many cards that I have to use (one for credit, the other for public transport, the other for withdrawing cash, etc). The thought of Apple allowing third-party apps to customize the functions of the NFC for corporations and office use (probably even for condominium security use) is not too far-fetched, isn’t it?

    When this NFC-enabled device future finally turns into reality, won’t Apple or Google or whichever innovative startup relegate banks into mere “vault-keepers” of our money? I would imagine that for a banker, that future doesn’t sound appealing at all.

  3. Ron Shevlin says:

    I’ll ask you the same question I ask every other pundit, blogger, fortune teller, prognosticator, and payment expert who has said what you’ve said in this post:

    Who’s going to pay?

    Everybody and their dog will want a cut on a mobile transaction. Will consumers willingly pay extra for the “privilege” of making a mobile transaction? Retailers sure as hell won’t.

    If Apple wants to get into this business, great. It’ll have to get into core banking, as well, because, at some point (the way things are now), the money has to come OUT of a bank account and INTO somebody else’s. When a bank gets an interchange fee, they’re a little more inclined to make that transfer happen fast and free. Take out the interchange fee, and the term “float” is coming going to float to the surface again. Pun intended.

    Technological innovation in the payments space is far, far outpacing economic innovation in that world.

  4. Yann says:

    @Brett Paypal is still a layer on top of the payment infrastructure. (a very nice and interesting layer none the less)

    @Ron, I agree the question of fees in mobile payment is key now, but I think the economic model is still not set (people coming from the internet payment world would like to take a nice cut but its way easier when you are selling virtual pigs that have almost no cost in the first place, adding to a physical product is much more difficult). The underlying trend for me is that bank are slowly being commoditized, with intermediate services taking the lead on the client relationship.

  5. Ron Shevlin says:

    PayPal stands to make a lot more money by partnering WITH banks than by displacing them.

  6. Brett King says:

    Ron,

    I know PayPal stands to make more money partnering with Banks, and PayPal knows that too. It’s just the banks don’t realize that…

    BK

  7. flip says:

    Congress shall have power…. To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures

    Interesting article but no where does it consider the fact that banking is a heavily regulated industry and the government has a strong vested interest in how all this works. To be sure, they (the regulators) are not yet paying attention (at least not observably so) to this area at this time. But while I am no economist, it seems clear that virtual cash which is in the news a lot these days and new payment mechanisms which have the opportunity to add or subtract from the flow of money are and will increasingly be an item of interest for the government.

    • bank2book says:

      Flip,

      There are already cases of virtual cash having a destabilizing effect on economies – check out QQ coins in China versus the Yuan/RMB.

      However, the problem is that, just as with M-PESA in Africa recently, QQ in China, Linden Dollars in Second Life, etc – these innovations occur normally way ahead of the regulators. Regulators can really only ‘regulate’ once something appears and starts to be defined, that is they need to establish standards once the role of the new initiative is ubiquitous. I think Congress might very well have the power, but not necessarily the innovation impetus.

      Undoubtedly in the future we’ll see more and more regulation built into the system. However, I see that as a lagging trend, not a leading one.

      BK

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