Pay phones on the move

9 December 2013

Contactless and mobile have started to make their mark in the payments arena and banks are already anticipating a rapid move towards the mobile phone as the contactless payment method of choice over the next few years. Future Banking spoke to ING’s director of payments Arjan Bol about trialling the technology in the Netherlands and encouraging customers to adopt it.

The switch from debit cards to mobile phones as the preferred technology for contactless payments intuitively makes sense, as bank customers are accustomed to using phones for online purchases and a host of other applications. Putting the functionality to make small purchases in retail outlets onto mobile handsets would simply be a case of the banking sector following the lead of other industries.

"The technology is driven by both customers and banks. In many industries, there is a move to mobile devices. Take the market for cameras, for instance, where 80% of new sales are in the form of mobile phones. The same trend is happening in banking. At the point of sale there is a need for customers to pay using their mobile phones," says Arjan Bol, director of payments at ING.

"Electronic payments are better than cash and there are times when it is just too much hassle to put in a card and a PIN code."

This summer, ING is running a soft launch of contactless mobile payments in Leiden, a town in the Netherlands (see 'Building on Lieden', right), with a view to a national rollout in 2014. So far, the country has seen considerable success with contactless credit card transactions for payments under €10.

"Electronic payments are better than cash and there are times when it is just too much hassle to put in a card and a PIN code, such as when you are buying tickets in a train station. Using mobile phone technology would be just as fast, but it must be safe to use. It is easy to get the low-hanging fruit like this, but we must start looking at the next level," says Bol.

Investments in mobile phone payment

A telling sign that the move to mobile phones for contactless payment is gathering pace can be seen in the approach taken by the major banks in the Netherlands. Three - ING, ABN AMRO and Rabobank - have more than 90% of the market, but while only the first two have put out contactless debit card payment technology, all three have invested in mobile phone payment capability.

"Both technologies will be used at first, but in the long term the mobile phone will become the preferred payment device. A lot depends on how the technology for mobile phones develops, but most handsets have NFC [near-field communication] capability, and Apple iPhones may soon have it, too," says Bol.

"Once people use the technology it is hard to go back. I am one of those people. There is a pilot scheme in the ING canteen, so people can buy their lunch with their mobile phone. I thought I would use a contactless card, but now I only need to take my phone, not my wallet."

Contactless and secure

The move to mobile phone payments seems highly appealing from the point of view of customers seeking convenience, but there are nevertheless challenges to their uptake of the new functionality. The security of their money is the biggest concern, although Bol feels that this has been overcome from a technical perspective and what remains is to convince users that this is the case.

"The issue is actually the perception of security. The technology itself is secure, but we have also put a limit of €25 on any single transaction, and €50 is the maximum that can be spent per day. For transactions greater than that you would need a PIN code. So, if someone loses their phone they won't have their bank account emptied," he explains.

"Another challenge is making sure that we have the terminals ready. For some shops, such as those selling luxury goods, contactless payments make no difference, but they make a big difference in outlets like coffee shops.

In the Netherlands, there is a strong history of cooperation, so we have seen retailers get heavily involved."

Infrastructure first

There is still a lot of work to be done to devise and implement a robust and reliable infrastructure for mobile phone payments, with a range of options for banks to choose from. What is certain, however, is that banks can lead the way, laying down the necessary infrastructure by working with the retailers and, to a lesser extent, the telecoms companies.

"We use international standards, so whether payments are made by contactless card or mobile phone they ultimately become a debit card transaction. Three years ago, we started the programme in the Netherlands along with three major telcos, although they had other objectives - mainly to make money from it. The way we saw it, the way forward was to put down the infrastructure first and then compete on added value through the data generated by transactions," says Bol.

"The public is hesitant, but once people use it they take to it quickly, just the same as with internet banking."

"It doesn't matter whether the handset makers or the telcos are on board - that is much less important, although the secure elements on the phone are important. We are looking at different technologies. Our pilot programme is working with one telco, but we are also looking at technologies that work independently of any telco or any handset. At the moment it is all about learning what works best."

The work of ING and other banks is currently focused on finding the right infrastructure before widespread efforts begin to bring customers on board. That process will begin with initiatives to raise awareness and overcome any concerns the public may have about issues such as security in order to ensure that once customers start to use the technology they will embrace it wholeheartedly.

"The public is hesitant, but once people use it they take to it quickly, just the same as with internet banking. Once you have it you don't want to be without it. Right now, we are learning about different technologies and processes. We are also learning about how to implement them, but there is no doubt that we will," notes Bol.

Banks fight their corner

The approach of the banking industry to mobile phone payments is part of a broader strategy in the payments space, where banks face threats from new entrants into financial services. Concerns about the disintermediation of banks in the payments space have led the industry to focus intently on getting their payments infrastructure and services right. The approach of banks in the Netherlands suggests that there is a case for greater cooperation between banks to defend their ground against competitors such as PayPal and Google Wallet.

"There is strong competition from services like PayPal, and there is a lot of potential for new entrants into the payments space, but in the Netherlands we have the advantage that there are relatively few major banks, and those banks work well together in the payments space to give better services to their customers. We have, for instance, over 50% market share for online shopping, while PayPal has around 4%. In the Netherlands, there is less of a gap for services like PayPal to fill, so the banks have a stronger position to defend," explains Bol.

"It is all about cooperation, which is easier in the Netherlands where there are only three major banks, but more difficult in a country like Germany, where there are over 800 banks."

"P2P sounds cool, but the scope is relatively small and alternatives already exist."

Bol adds, however, that "Google doesn't want to become a bank - it wants more data to make better predictions about customer behaviour, so bank processes and bank accounts underlie Google Wallet, which means it is a different type of competitor to PayPal".

For now, banks are focusing their attention on innovation in the mobile payments space as it applies to retail opportunities, rather than other services such as peer-to-peer (P2P) payments.

"P2P is a very interesting idea, and it would be cool to do it through mobile phones, but in the Netherlands fewer than 2% of all payments are P2P. Payments are usually for services, not to other customers. P2P sounds cool, but the scope is relatively small and alternatives already exist, such as simple online banking tools," says Bol.

"Keeping things account-centric helps us to compete with other technologies, like PayPal or wallet technologies. The debit account is the centre of everything. That is where salaries are paid."

Bank accounts are at the heart of everything in the payments space, and the banks want to make sure that remains the case, which spurs them on to put themselves front and centre in new key initiatives like mobile payments.

As director of payments at ING, Arjan Bol is responsible for payments products and processes within ING Netherlands.