Quick Thoughts: Implications for the Payments Industry of an NFC-Enabled iWallet
Both Wired and the Financial Times are reporting that, at its September 9th media event, Apple will announce the use of NFC-enabled wireless communication in the iPhone (including for mobile payments) along with longer-range Bluetooth-enabled wireless (including for in-store location and real-time messaging/e-couponing). As discussed in our note of May 23rd, “Apple versus Banks in Mobile Payments”, Apple could have implemented mobile payments with Bluetooth, but this would not have been compliant with financial industry “EMV” standards for chip-enabled payments and would likely have made the iWallet more expensive to merchants than a card-swipe.
Unlike existing mobile wallets, the iWallet will likely have broad functionality beyond payments because of integration into Bluetooth-enabled iBeacon technology which Apple has been working on with premium-brand retailers. Andy O’Dell, Chief Strategist at Clutch, over-states only slightly when he says that “the digital wallet has nothing to do with the transaction, but rather with everything that comes before and after that transaction … that’s the benefit of digital that consumers do not get with plastic … if retailers can create a solution where the plastic card (including the loyalty card), mobile, in-store and online experiences are tethered together, then we’ll have something that is game-changing”. Our note of Aug 25th, “Payments and the Convergence of Physical and Digital Commerce”, makes the case that the resulting digitization of in-store workflows and customer experiences provides a means for retailers to mount an “app-and-mortar” or “omni-channel” challenge to the digital brands such as GOOG and AMZN.
The significance of the iWallet to the financial industry is that Apple has the ability to shape consumer behavior around payments in a way that the Google wallet did not, and we expect it to catalyze consumer interest in mobile payments; it is no coincidence that Visa has just launched its digital acceptance brand, Visa Checkout. By storing card-credentials on a secure element of the ‘phone rather than on a SIM card, Apple releases the iWallet from the dependence on carrier-provisioning that undermined the original Google Wallet, and Apple can leverage 800mm iTunes accounts (versus 250 mm active Amazon accounts and 140mm active PayPal accounts). Finally, Touch ID allows finger-print risk-scoring and this identity-and-verification (“ID&V”) information can reduce the fraud risk on iWallet transactions below ‘phone transactions that are risk-equivalent to online transactions (as in the case of the PayPal wallet), below card-swipe transactions, and even below chip-card transactions (and ‘phone transactions that use Google technology to allow Android to “emulate” a chip-card).
While premium-brand retailers will likely be early-adopters of iBeacon technology to increase their appeal to iPhone customers, mass-retailers will be more cautious. They remain concerned about data-leakage from mobile wallets into the Visa/MasterCard ecosystem, and the prospect that these data will be used to steer customers to competitors. Indeed, having attempted to engage in payments data-flow at the merchant level through Google Wallet, we believe Google is now looking to engage at the network-level through data-partnership with Visa. The excellent blog from payments consultant Tom Noyes carries this comment from a “top-5 retailer”: “I think of Commerce as a highway, the payment networks are like a toll bridge. I don’t mind paying them $0.25 [i.e. the Durbin cap on debit interchange] to cross the bridge but they want to see inside my truck and take 2-3% [i.e. credit interchange] of what is inside. Hence, I am looking for another bridge”.
These other “bridges” include the MCX payments network (enabled by FIS and whose members have committed not to accept other mobile wallets), ChaseNet, and direct-routing solutions such as those enabled by ACIW where transaction instructions pass directly between retailer and issuing bank. We expect to see these solution roll-out in the next twelve months as the iWallet catalyzes consumer interest in mobile payments and as merchants install EMV-compliant payment terminals (which can be NFC-enabled for mobile payments) in response to a network deadline of October 2015 when fraud-liability on EMV-compliant card transactions will shift from banks to retailers that do not have EMV-compliant terminals.