Mobile payments: why we’re on the verge of a revolution

Over the past few years, the movement towards mobile payments has been one of disruptive trends in the banking sector. New payments services are already accelerating the move away from cash. According to Deloitte’s 2015 Payments research, in the UK, the use of cash is decreasing while other payment forms are gaining popularity.

Mobile payments can take many forms, including device initiated credit and debit transactions, digital wallet transactions and peer to peer payments. The opportunity they present is significant - the market for mobile payments is estimated to be worth US $2.8 trillion by 2020. However, with so many new players entering the market and looking to capitalise on this opportunity, retail banks will need to adapt in order to beat the competition.  

Challenges for banks

Payments have traditionally been a key revenue stream for banks as well as a strategic source of competitive advantage, allowing them to sell a range of other services, from current accounts to loans to customers. However, payment technology is threatening this existing status quo, and a new landscape is emerging. Last year, Apple and Samsung both launched their own payment apps and credit card giants Visa and MasterCard have recently taken steps to capitalise on the sector. Android Pay also finally arrived in the UK this May, allowing users to pay for goods and services using an Android smartphone equipped with Google's contactless payments system.

One of the main issues for banks is that the smaller fintech players are usually able to be more agile and innovative due to fewer regulatory restrictions, and being unencumbered by the costs of traditional retail branch infrastructure. Deloitte suggests that while the mobile payments may not pose a ‘life-threatening’ threat to the traditional banks, the growing popularity of alternative services will require a ‘defensive response’ from the sector. This means taking steps to ensure that their card products remain sufficiently attractive, as well as developing a mobile wallet strategy, and continuing to invest in new technologies.

Resolving security issues

In order to succeed, mobile payment systems will have to solve multiple issues that have obstructed adoption in the past. Technology can also help here. For example, new biometric technologies like fingerprint scanning and facial recognition are already enabling safer transactions. In fact, Juniper Research predicts there will be nearly 770 million biometric authentication apps downloaded per year by 2019. 

Blockchain will also potentially help to ensure the security of mobile payments, by providing a ledger of all transactions while cutting out the middleman. Although currently used mainly for Bitcoin transactions, the technology will soon be used by banks and for recording trades of physical goods. Many banks are already trialling blockchain technology; blockchain startup Ripple recently announced it was working with banks Banco Santander SA and UBS Group AG, using its network to make cross-border payments as an alternative to Swift. Four of the major banks: UBS, Santander, Deutsche Bank, and BNY, are also in the process of creating a digital bitcoin-currency alternative based on blockchain technology.

Revolutionising emerging markets

Beyond fintech, the impact of mobile payments will also be significant for emerging markets. Many of these markets are in unusual situation, with low penetration of bank accounts but high adoption of mobile phones. Take India for example - a recent report by GrowthPraxis, showed that the market for mobile payments in the country grew more than fifteen times between 2012 and 2015 to reach its current size of $1.4bn (£979m).

And this is naturally reflected in the actions of the key m-payments ecosystem providers; Visa recently teamed up with one of Africa’s largest mobile operators, Bharti Airtel, in order to bring mobile payment services to seven markets in Africa. Similarly, MasterCard partnered with eTranzact, a pan-African mobile banking and payment services company.

While we may not all be swapping our wallets for phones just yet, these services offer organisations a real chance to differentiate their offerings and build customer loyalty by offering added convenience to existing customers in developed countries, and provide a new way to reach a large numbers of customers in emerging markets. For these reasons, mobile payment technologies not only have the power to revolutionise the finance sector, but also to become a vehicle to achieving financial inclusion. And that is the real payments revolution.