Mobile wallet wobbles


2 November 2012


Banks, mobile operators and retailers have all announced plans to develop mobile wallets. But is the near-field communication technology behind these innovations just another opportunity for cybercriminals, and is now really the time to introduce a new, potentially risky payment method? Philip Kleinfeld speaks to Gilbert Arira, senior vice-president of cards at BNP Paribas, about a lack of customer enthusiasm and the potential for market fragmentation.


Things don't move too quickly in the payments space. The strange longevity of the chequebook bears that out - few people predicted the old paper system would still be around at the turn of the century, but in France alone £4bn worth of transactions were completed using this method last year.

"It's important to understand that means of payment are not evolving at the same pace as other areas of business," says Gilbert Arira, senior vice-president of cards at BNP Paribas. "And that's because habit is very important."

It's a strange admission from one of the industry's leading payment experts but it rings true. Looking back at the history of payments, it's clear that the means by which we spend money are surprisingly difficult to destroy.

"Only 19% of Americans have expressed an interest in adopting contactless payment technology, according to Javelin Strategy & Research."

That psychological fact goes some way towards explaining the surprisingly slow uptake of contactless payment. It was, at one stage, billed as the ultimate in consumer convenience, but the idea of waving a mobile at a faceless retail terminal doesn't seem to have washed too well with the modern shopper.

Only 19% of Americans have expressed an interest in adopting the new technology according to a recent survey by Javelin Strategy & Research. And consumer fears haven't been helped by a series of bruising critiques from the tech industry. Among them, Canadian software designer Vincent Kadar went as far as stating that the NFC acronym meant "not for commerce" rather than near-field communication.

His critique, however, is not entirely fair. Some forms of contactless communication have been around for a while. For example, London's entire tube network is fitted with smartcard readers that funnel commuters through the gates with gormless efficiency. Meanwhile, in the financial space, the contactless card is making significant strides. Spanish retail bank La Caixa is building a citywide tap-and-go system for Barcelona, while parts of Asia and Africa have also adopted new NFC technology.

Mobile wallet security

But that success hasn't been replicated with the mobile wallet, which remains deeply problematic from a security perspective as it only takes a small device, malware code or an opportunistic thief to tap into the wireless technology and capture all the data included on the platform.

"We've been too optimistic about replicating the security of the plastic card into a phone," admits Arira. "The NFC card is secure and can be deployed on a large scale, but in the mobile environment things are much more open and interactive than the card. They have a radically different ecosystem.

"The mobile wallet remains deeply problematic from a security perspective."

"It's a deeply complex problem. A lot of thought and investment is being made in working it out. The solution might be to have a cloud system where the payment is activated only when the customer is in a position to make the transaction."

Apple, which has a huge influence on the wider technology market and can stir entire trends almost single-handedly, highlighted its concerns by snubbing the NFC chip in its most recent iPhone 5. It was a big blow for those with stakes in the technology.

The delay in adoption hasn't, however, stopped other organisations - both bank and non-bank - from rushing to develop new mobile payment platforms. Many members of the banking community still see payments as part of their core lifeblood, but the major telecoms companies are equally keen to utilise the technology they already have. Even retailers such as Wal-Mart and Starbucks are looking to introduce their own platforms and avoid excessive payment provider fees. This area has become something of a battlefield with Google, Amazon, PayPal, Visa and MasterCard all developing new systems.

"There's a lot of movement in the industry, particularly from the US and Asia-Pacific," says Arira. "Things are going to change rapidly in the landscape and the banks will have to be very focused on their payment potential. There's going to be a big conflict."

Developers like NFC

The functional utility of mobile payment explains why, despite the practical challenges, NFC technology remains popular among developers. The quicker fast-food merchants and retailers can turn over customers, the stronger their value propositions will be.

"The idea is conceptually strong," says Arira. "Mobile wallet technology offers a lucrative business intelligence proposition for companies that see payment utilities as useful for them to leverage their core business. The data is monetised in a way that gives groups valuable insight into the shopping habits and lifestyle patterns of consumers.

"Juniper Research estimates the transactional volume [of virtual wallets] will reach $1.3trn by 2015."

"A certain percentage of the population will be carrying virtual wallets in the coming years so the market is definitely worth looking at. It's hard to say exactly what that percentage will be but it's going to happen."

Juniper Research, the telecoms analyst company, estimates the transactional volume will reach $1.3trn by 2015. It's an optimistic forecast given the present concerns, but it justifies the level of work being put in to NFC technology.

Arira welcomes investment in the new systems, and the broader competition that brings, but insists that attention should be focused on "ensuring that innovation does not harm the trust customers have in the payment system. We have to evolve, collaborate and innovate without ever losing sight of security." There is a danger of fragmentation with so many different parties involved in the development of mobile wallets, and finding a balance between competition and cooperation will be a major challenge for the industry as it looks to enter the mainstream.

Confidence low in banking

On the issue of trust, barring the more dramatic 19th-century bank runs, confidence in the financial system is about as low as it's ever been. Almost three quarters of consumers polled in a recent Which? survey said that banks had learnt nothing since the collapse of Northern Rock in 2007. The payments industry is clearly not culpable for a recession rooted in financial folly, but, nonetheless, its name has been tarnished.

"We're suffering from the mistakes of people involved in the banking industry," Arira says. "In the public mind, it doesn't matter whether it came from the trading floor or the payment guys: people perceive the bank as a single entity and hold everyone else responsible. The 2012 UK-based Libor scandal was bad because it came just as the image of banks was improving. If we have more problems like that we will never succeed in recovering our image."

"Almost three quarters of consumers polled in a Which? survey said that banks had learnt nothing since the collapse of Northern Rock in 2007."

Arira's frustration with the industry is understandable. Consumer apprehension about banking seeps into all aspects of its delivery, and the lack of faith creates expectations that hinder the perception and performance of new technology. Banks cannot hope to leverage the potential of NFC technology until they create levels of trust and familiarity that apply across all aspects of their business lines.

"It's not the moment to open up a new question about our image," he says. "It's already bad enough. We can't introduce a new means of payment that isn't as secure as the ones we already have. The lack of trust in the banking industry means we can no longer take those risks."

That puts retail banking in a strange position where it is derided by consumers for the omnishambles it produced, but yet is expected to keep pace with technological change and the risks it requires.

"It's tough," Arira says. "We're not in a position to stop technological innovation just because banking is perceived poorly. We still need to accommodate that progress and make the lives of our customers more convenient. We want to show our young customers something that is modern and new. But at the heart of our relationship is trust - and that's what we need to work on."

NFC: technology king

The crisis of trust may have hindered the progress of NFC technology, but its ideas are still set to make a big difference. Technological change has a habit of reshaping the face of retail banking. Gone are the days of boorish bank managers and their bowler hats, a time when young besuited couples had to beg for loans at their local branches; today's economic textbooks tell us the consumer is 'sovereign' - and the banks agree.

"The pressures of multichannel banking are likely to spur on the development of the mobile wallet."

"Customers can access their banks in various ways," Arira says. "Through the branch and call centres, on the internet or on their mobiles, tablets and laptops. It's no longer a branch-centric model. Online channels are becoming more important to the multichannel strategy."

The pressures of multichannel banking are likely to spur on the development of the mobile wallet, but with all the problems associated with NFC technology, its practical challenges may prove the most solvable. It is, perhaps, the deeper issues around the habits of consumers and their perception of today's financial institutions that pose the biggest threat to payment technology and to many of the industry's future ideas.

While NFC technology has been around for a while – for example, it is used on London Underground and by Spanish retail bank La Caixa's tap-and-go system – it's success hasn’t been replicated with the mobile wallet.
Gilbert Arira has been global head of cards (issuing, acquiring, ATM) for BNP Paribas Group since 2008. Most notably he is in charge of the card processing strategy and all innovations concerning means of payment. He was previously BNP Paribas head of card business for the French retail banking division, a role he took up in 1998.