Online pay

Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

Even if the discipline of classical economics has become increasingly discredited in recent years, two basic facts remain: money not only continues to act as a store of value (more practical, say, than a bag of grain which may be subject to rot), but also as a convenient tool for satisfying a mutual coincidence of wants (rather than the metaphorical grain owner who wants a pig needing to find not just a willing seller of pigs, but also one who is keen to buy grain). However, there is nothing to suggest that money needs to exist in a physical form. When one thinks about it, notes and coins are bulky, impractical and anachronistic, harking back to a non-digital era. New technologies and an increasing number of both consumers and businesses willing to embrace them mean that cash as we currently know it may progressively become a thing of the past.

The basic tools required for a transition away from cash are literally in our hands and already around us. Mobile telephones long since ceased to be devices simply for making calls, and indeed text-based banking services (allowing for the checking of bank balances, for example) have existed for over 20 years. Smartphones, however, offer significantly enhanced functionality, namely the ability, among other things, to be a digital wallet. In developed markets such as the US, the UK or Germany, around 30% of all mobile devices are smartphones (the figure approaches 50% in Scandinavia), and global growth in this category is running at around 20% a year currently, implying on some estimates, that by 2016 as many as one-in-four of the world’s cellular users will be enabled with such devices.

The other crucial factor that may accelerate the demise of traditional money is an increasingly prevalent technology called near-field communications (or NFC). The term relates to a set of standards for smartphones and other similar devices that establish radio communication with each other by either touching them together or bringing them into very close proximity. All a user needs to do is wave his/her plastic payment card or mobile device near to a reader module and payment for an item in a store or a journey on public transport, for example, is complete (the proposition is often marketed simply as being one of ‘tap and pay’) . The payment processors, MasterCard and Visa, introduced NFC-enabled propositions (PayPass and payWave respectively) in the mid-2000s and Nokia launched the world’s first NFC phone in 2006. Deloitte estimates that by the end of this year, the global circulation of NFC handsets will total 300m.

With these two ingredients in place, it is easy to make a case for how physical cash may soon end up being displaced. Put simply, electronic money is instantaneous, weightless and exact. It also offers speed and flexibility. If customers do not need to queue to get cash out of banks and also spend less time waiting at the point of sale, they are less likely to abandon their purchases and more likely to spend ever-increasing amounts. A study conducted by MasterCard in May 2012 showed that within 12 months of their first contactless payment, PayPass-enabled users spent almost 30% more than average using their enabled card. Moreover, this trend was manifest across all income groups. A separate study by Visa illustrated that a contactless digital transaction typically takes less than half the time of a cash one and that customers would spend 20% more than otherwise. In Japan, some merchants now even offer discounts to people paying with electronic cash.

It is against this background that significant growth for the mobile payment industry is foreseen. The Gartner Group estimates that the total value of mobile payments for digital and physical goods, money transfers and NFC transactions will rise from $170bn globally in 2012 to $600bn by 2016. Juniper Research is more optimistic, forecasting a total market size of $670bn by 2015. Others are even more bullish: Visa believes that over 50% of the transactions it processes by 2020 will come from mobile phones, while PayPal, a payment processor for online vendors (owned by eBay), forecasts that before the end of this decade, most people will not take their traditional wallet with them when they go shopping.

Examples abound of the growing prevalence of non-traditional payment options. Contactless payment has existed in the UK for five years, with Barclays introducing NFC-enabled cards in 2008, at the same time as which EAT (a sandwich retailer) began rolling out terminals in their branches. Today, there are some 31m cards in circulation with contactless functionality and 143,000 retail outlets with operable terminals according to the UK Cards Association, an industry body. At the Olympic Games in London last summer, Visa reported that 15% of all payments under £20 were made in the sporting venues with either a contactless card or mobile phone. Contactless payment is also available in many London taxis and similarly in cabs within many of America’s largest cities. Meanwhile, in numerous locations across Austria, Finland, Germany, Italy and New Zealand, NFC-based ticketing systems have been installed on public transport networks.

In America, various other disruptive developments are afoot. Most prominently, Google launched a mobile wallet in September 2011, allowing users to store debit, credit and store loyalty card details on their Android-enabled handsets and make secure payments via NFC at PayPass or payWave-enabled terminals. Some mobile phone operators and retailers, however, are seeking to circumvent the traditional payment processors and pioneer their own cashless systems. Three of the largest US wireless carriers (Verizon, AT&T and T-Mobile) are developing a proprietary digital wallet system called “Isis”, while in August last year, 14 prominent retailers including Wal-Mart, Target, CVS and Gap announced the launch of the Merchant Customer Exchange (MCX), a joint mobile wallet that would work in any of its outlets. Although there is little present detail, according to the MCX website, “the development of a smartphone application is underway.” Starbucks has taken a different approach, partnering with Square, a start-up led by the same team responsible for developing Twitter. As the name suggests, Square is a small four-sided device that plugs into any iPhone or Android handset and turns it into a mobile till that can make card transactions. Starbucks says that more than one million people use Square weekly to purchase their coffee. In San Francisco (where Square was launched), some 20,000 retailers have now adopted Square. Some industry studies also suggest that based on the success of Square, there are at least 40 ‘clones’ of this business model currently in trial/use around the world.

Sceptics do of course exist, but their worries seem unlikely to halt the momentum. Concerns centre on the loss of both security and anonymity. According to the UK Card Association, there has however been no evidence of any fraud losses arising as a result of contactless technology being added to cards, a view also endorsed by both Visa and MasterCard, neither of whom has witnessed an obvious increase in fraud. Customers also fret that if all of their contactless payments were to result in an electronic trail and a corresponding series of database entries profiling their purchasing behaviour, then the consequence may be a barrage of promotional coupons and other similar forms of intrusive advertising. While this may be an issue for some, there is a clear trade-off between convenience (speed and ease of purchase) and privacy, already a phenomenon many are familiar with from their experience of making online transactions.

It may be more valid to consider the importance for common industry standards in order to avoid industry fragmentation and potential customer confusion. To this end, the Electronic Transactions Association, an international trade body for the payment processing industry has formed a Mobile Payments Committee and is currently working on a series of directives, which should help minimise potential disruption. As the industry develops (bear in mind that even in the markets where NFC is most advanced, such as the US or Australia, fewer than 5% of all retail outlets have adopted the technology), scalability and reliability are factors that will need to be considered. Finally, do not discount customer inertia. It will take time to change long-established habits and banks/ cashpoints remain an integral part of the retail landscape. In emerging markets, where banking infrastructure is significantly less developed yet mobile phones are prevalent (61% of Chinese people have a mobile but not a bank account, for example, according to Visa), alternatives to cash may even develop more quickly than elsewhere. The M-PESA network in Kenya and several other similar systems have already met with large success in allowing individuals and retailers to conduct business via mobile handsets.

Despite a scenario where the benefits of mobile payments and NFC seem clear, it remains the case that today only 1.3% of all global payments by volume (and just 2.3% in the US) are made in this fashion, according to Gartner. By 2015, such payments will have grown by 70% globally and almost doubled in the US (to 2.2% and 4.5% respectively), but will continue to be small in the overall market context. The corollary of this is that industry winners and losers may not yet be evident, especially until a standard emerges that comprises the simplest and safest payment mechanism. Banks will clearly be keen to maintain their role as the primary (and trusted) handlers of payments; mobile operators will likely want to profit from their close relationships with handset owners; and, retailers, may continue to seek to form their own mobile-payments services in order to exploit their direct relationships with customers. In all of these circumstances, businesses that specialise in database analytics and marketing should especially benefit.

Beyond the more ‘obvious’ larger names (Visa, MasterCard, Google, eBay etc.), we would highlight the following businesses as being possible beneficiaries of the current trends afoot in the payment market: NFC chip manufacturers and hardware producers; security software providers; and application software vendors. In the first category, NXP is market-leader with a 40% share in the provision of NFC chips. It was chosen for the Google Wallet and its chips are built into over 50 different smartphone models. Ingenico dominates the global market for NFC terminals. These are used by 70% of the world’s top-50 retailers and it has partnerships with Apple, Google and Microsoft in place. In the security software space, Gemalto has an estimated 40% worldwide market share, working with 450 different mobile carriers and over 3,000 financial institutions in order to protect customer identities and transactions on digital networks. Monitise stands out among the mobile technology application vendors. Founded in 2003, listed in 2007 and now 16% owned by Visa, the company develops application software (primarily in the UK and the US) that provides real-time information, security and payment services. As of February, the company had 20m registered customers and is handling over 2bn live transactions annually. These four businesses have all delivered annualised shareholder returns of at least 20% over the last five years (since listing for NXP).

Alexander Gunz, Fund Manager


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