With 2016 set to be yet another defining year the mobile payments, we have taken time to reflect on 2015 and what we can expect to see in 2016. Last year, we saw the UK welcome numerous innovative and alternative payment methods, such as Apple Pay and Samsung Pay, and further expansion is anticipated for 2016.
We have already seen the introduction of mobile payments through smartwatches, but we can expect to see mobile payments become less smartphone-dependent over the next year. Instead, new wearable technology including bracelets and even rings will enable us to pay on the move. As a result, we will see more European countries cutting down on the use of cash and increasingly adopting alternative payment methods, in turn encouraging the revolution of the cashless society.
2015 saw the use of the password, PIN, and fingerprint authentication methods, but these all have one thing in common; they are weak. In turn two-factor authentication will be increasingly needed to improve security in 2016, placing tokenisation and biometric authentication, amongst other user-friendly methods, high on the list of priorities.
Turning to regulations, after a tough two-year negotiation period, the EU has now, finally, agreed on a second payment services directive (PSD2) which involves strengthening the security requirements for online payments by improving customer authentication in order to combat fraud. Whilst the European Banking Authority (EBA) is set to develop more detailed guidelines and regulatory standards for applying the directive, the payment industry should ensure they prepare themselves now for implementation.
One thing is certain, 2016 will be another ground breaking year for the mobile payments industry. With alternative payment methods becoming more secure and streamlined within our society, we can expect to see the industry reach new heights.
1. Mobile Payments
Although mobile payments have been an established trend for the past five years, they haven’t really come out on top. 2016’s list should also include smartphone payments—although the reasons are more specific. Whereas mobile payments have always been a fascinating topic (and one supported by myriad user benefits), 2016 is set to be a defining year for their providers. The reason is that it looks, at least, as though Apple Pay is planning a major European launch in 2016: an event which could throw the already fragmented mobile payment world into chaos. While setting up a unified payment system overnight would be impossible, Apple Pay will, however, almost certainly provide impetus in that respect—with its competitor Google also jockeying for position. Another trend involves mobile payments that are no longer wholly smartphone-dependent. Instead, smartwatches, bracelets and rings will also be equipped with payment options.
Another familiar face among the payment trends of the past few years is Near Field Communication (NFC), a topic closely related to mobile payments. NFC, however, goes way beyond making payments using smartphones. After all, there are also many credit and debit cards which contain NFC chips. These speed up POS payment processing by enabling smaller amounts to be paid quickly and easily without requiring a PIN or signature. While there are, of course, other POS payment methods, such as QR codes, for example, we anticipate that NFC will come out on top. Merchants should ensure they have an overview of the current POS options and should, if needed, upgrade to the latest technology.
Security is an essential element with any payment option. In 2016, in particular, two fields will strongly influence the payment industry: tokenization and biometric authentication. Tokenization is an extremely interesting method of securing credit card data. Instead of using actual credit card details, companies substitute pieces of information known as tokens. The original data is stored securely on a tokenisation server, and only the tokens are used during the payment process. If they are stolen, there is no harm done. One current stumbling block involves the lack of widespread tokenisation standards. Instead, there are a number of different approaches. Viewed in this light, this security technology is still in its infancy. In 2016, however, we anticipate a shift in the market.
When it comes to authenticating payment processes, there are several new inventions in the works for 2016. The current methods are password, PIN, and fingerprint. These methods all have one thing in common: they can be expanded upon to allow increasing use of two-factor authentication. User-friendly methods—including, for example, new biometric processes like voice recognition, keystroke detection, finger vein scanners and pulse recognition—are set to become increasingly significant. The trend aims to simultaneously increase both security and convenience.
4. International E-Commerce
Companies seeking e-commerce success will find it increasingly difficult to manage without an international strategy. Providers who are already active in multiple markets will, in future, probably expand into other continents. Expanding e-commerce activity involves more than just translating websites and establishing efficient logistics. Instead, offering locally relevant payment types is at least as important. Asia, Eastern Europe and Latin America are the most interesting markets for European online retailers. As credit card penetration tends to be lower there, it will become even more important in 2016 for providers to know their way around alternative payment types and to market these to specific target audiences. Merchants should consider which markets are particularly suited to international strategies and simulate potential market launch models with partners like payment service providers.
5. Real-Time Payments (Instant Payments)
The European Central Bank (ECB) will bring instant payments strongly to the fore in the near future. Modelling instant payments on the lowest possible infrastructure level, however, will take a few years. At the application level, on the other hand, solutions will be developed which are much faster to implement, or which already exist (e.g. real-time guarantees). These are much more important anyway than actual real-time transfers of money to merchants’ account. The real-time guarantee is particularly important for digital goods, which are intended to be made available to customers instantly, as well as for express deliveries, so that goods can be shipped out immediately the payment confirmation is received. Instant or real-time payments are a trend which will be with us for a long time to come.
6. Blockchain Technology
The blockchain technology on which bitcoin is based is set to cause a commotion in 2016. The blockchain is a database in which every bitcoin transaction is recorded. It comprises a long series of data blocks in which one or more transactions are put together, encrypted, and then stored in a tamper-proof manner. One advantage is that transactions are both fast (if not in real time), and cheap. Ideas for alternative uses of the blockchain technology are currently being developed. Basically, however, one thing is already clear: wherever transactions must be carried out and where a “trusted third party” has, until now, been required, the blockchain will not be far off. It will replace the trusted third party cost-effectively and efficiently. One example is smart contracts, in which computers (rather than lawyers) draw up the contracts, verify the conditions in real time, and automatically execute certain provisions.
7. E-Money Accounts
The “bank accounts for everyone” requirement coincides with the current reduction in bank retail services. In 2016, therefore, e-money accounts will come increasingly into focus. These have the tremendous advantage that they are easily acquired, placing bank-like structures within reach of population groups (such as refugees) who have, until now, been denied access to such services. Additional benefits of e-money accounts include their data frugality, their generally state-of-the-art interfaces, and more advanced features. In addition, some already offer the instant payments described above, which are not yet available with bank accounts.
8. Regulatory Changes
The first Payment Services Directive (PSD) from 2007 is still currently implemented domestically. Among other things, PSD defines the information requirements for payment services within the EU single market. It also stipulates that payments must be completed no more than one day after a payment order is processed. After a tough two-year negotiation period, the EU has now, finally, agreed on a second payment services directive (PSD2). The proposed revision defines several priorities, one of which involves strengthening the security requirements for online payments by improving customer authentication in order to combat fraud. PSD2 will also provide a legal framework to stimulate competition. This framework will facilitate market entry for new providers and allow the development of innovative mobile and Internet payment methods. It will also force banks to grant such providers access to accounts. The European Banking Authority (EBA) is set to develop more detailed guidelines and regulatory standards for various industries. Although enshrining these in national legislation in all EU countries will take a further two years, payment industries should begin preparing themselves now for implementation. Doing this will allow them to be ready for the appropriate steps necessary in 2016/2017.
9. Declining Interchange Fees
Multilateral Interchange Fees (MIFs) are paid by acquirers to issuers to compensate them for their involvement in authorising, releasing and processing credit card transactions. The costs of this type of transaction are normally borne by merchants, who pay these fees to the acquirer. The acquirer then pays all the other fees involved, including, for example, the “scheme fee” to the credit card network (Visa, MasterCard, etc), as well as the multilateral interbank fee to the credit card provider (usually the purchaser’s bank). The regulations, which will come into force at the end of 2015, will therefore reduce merchants’ costs, and it is anticipated that these measures will result in a corresponding price reduction by 2016.
The lower bank interchange fee is, however, deducted from the earnings received by the card-issuing banks, which means that these will probably introduce additional card (or even transaction) fees. A reduction in MIF revenue means that card issuers have less revenue to pass on to their marketing partners, such as cobranding companies and program managers. This means that cashback systems and loyalty rewards, like air miles or bonuses, will sooner or later, probably be curtailed.
10. Cash on the Retreat
Could this be the end of cash? You could be forgiven for thinking so, if you were watching the developments in several European countries or following the current discussions in the economic media. In Sweden, for example, it is now almost impossible to use cash to pay for bus tickets. Acceptable payment methods include customer cards, credit cards, and payments via mobile app. Even traditionally cash-based bakeries no longer exist in Sweden. Instead, many bakeries now display signs requesting that customers use cashless payment methods for even the smallest amounts. The situation in Denmark is similar. There, the government is currently debating whether or not to release smaller retailers from the obligation of having to accept cash as a payment method.
Doing away with cash, however, is currently more of a theory among economists. In Germany, for example, around 80 per cent of retail sales are still transacted in cash. If, however, we look at sales revenue, cash makes up just 53.3 percent, a figure set to drop further in 2016. Cash is on the retreat, and alternative payment methods are advancing. Among the multitude of technologies (like cards, apps, wearables) available today, cash is, however, still very high on the list. It’s an essential element in the mix. Fears that cash is dying out in Germany are, therefore (as yet) unfounded.