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Security and Apple Pay Adoption: A Discussion with Datamonitor

I recently had the pleasure of speaking with Kit Carson, who is the head of Banking Products for Datamonitor Financial, based in the UK.  Kit most recently presented his views on Apple Pay during Payments International, the leading payments event in Europe for banks, corporations, technology and infrastructure providers, regulators and service providers from around the globe.  Kit was nice enough to share some of his thoughts with FICO on Apple Pay and how the marketplace will continue to evolve and adopt this new payment option.

Kit Carson Kit Carson

FICO: Kit, thank you for taking some time to speak with FICO about your latest presentation at Payments International.  Your session was entitled “Making Sense of Wallet Wars - Where will Apple Lead Us?”  I understand that you spoke to a packed house of executives during your session on Apple Pay.  Can you describe where the payment industry is right now with regards to mobile payments, and explain why this particular topic resonates so loudly?

Carson: Sure thing, John. Accepting that every market and sector is constantly evolving, I think this is starker when new technologies are involved. As we become more experienced with using technology we find our own niche use-cases as individuals – think about how we now use different devices in different circumstances. For instance, when I purchased a tablet I still had a fully functioning laptop. Fast-forward a couple of years, and while my laptop is still fully functioning, more often than not it’s gathering dust as I now find myself reaching for my tablet, which is preferable in terms of size and weight, ease of use, and the evolution of apps. The existing tool still does what I need it to, I just find the new one more suitable more often.

Applying this to online commerce, 15 years on from its beginnings we now see two distinctly different marketplaces evolving – e-commerce (PC-based) and m-commerce (mobile-based); it’s not just about being “online” any longer. As merchants and payment providers develop specifically for mobile, our understanding of the use-cases increasingly leads to tighter, value-add experiences that drive me to use m-commerce over e-commerce in certain situations.

Mobile proximity is the natural evolution of this – I think it’s quite neat that the development of online commerce has now come full circle to improve our experiences when in a physical shop.

This is the very reason why mobile payments are resonating with the industry. Beyond the commercial benefits of being or, more aptly, remaining a key part of the value chain, mobile proximity technology is in a similar evolutionary stage to video cassettes – it could go VHS or Betamax. Further, merchants and consumers are demanding omni-channel shopping experiences, which will only drive experimentation and further innovation. So with all this going on, I’d say it is better to be part of the conversation as opposed to sitting on the sidelines.

FICO: Do you think that Apple Pay has adopted the Field of Dreams movie mantra “If you build it, they will come”?  What is required here to make this new payment option have the sort of stickiness it needs to be successful?

Carson: Good reference! It’s quite applicable to many of the adoption arguments I see today – we have a history of adopting new tools as they become more integral to our own lives, so to an extent the blurring of on and offline is building a strong use-case for a single integrated tool: the mobile phone. Hence I do not believe the “build it and they will come” argument is far off the mark…for Apple, or any other provider.

To leverage this, product providers should focus on the consumer value proposition. At this time, the industry hasn’t quite nailed it, and as such the digital wallet use-case is not sufficiently better than cash and cards. However, it is in the omni-channel shopping experience that digital wallets come into their own. There are endless possibilities for digital wallets to be engineered into multi-purpose lifestyle tools, from shopping companion applications such as in-store navigation or price comparisons, to loyalty programs (how many stamped bits of paper do you have in your physical wallet and at home?!), and by extension to social commerce such as payments to friends after a dinner.

One potential conflict I can see arising is between the single merchant app versus ubiquity. Fundamentally, apps on my phone that are consigned to the second (or worse, the third!) screen are rarely used, even though I thought they were useful enough to be worth downloading. While single merchant apps such as Starbucks display many of the hallmarks of a successful digital wallet, imagine if every individual merchant developed their own successful wallet! On the flip side, a wallet that is able to integrate itself both into a varying scale of omni-channel merchandising and into a multitude of POS terminals is likely to be too vanilla to drive adoption; to achieve this would require a very long value chain and a huge number of partnerships, and, as a result, the compelling user experience – which is what drives consumer adoption – will be weak. Hence, I suspect the answer lies somewhere like my physical wallet, where I have two or three cards for different purposes.

I’d like to take this opportunity to warmly thank any of your readership focusing on cross-product integration which, in my opinion, is the Holy Grail. Imagine a real-time platform that housed my digital wallet, my checking account, and any other financial service products I have in one application…now that would be a value proposition!

With all this in mind, providers are better served focusing their development resources on factors that will drive differentiation – such as answering the consumer question “What’s in it for me?” and optimizing the user experience – as opposed to being overly concerned with developing reach, as this will come in time, mark my words, and when it does you want to be at the head of the pack.

FICO: Let’s talk about wallet security for a moment.  Are there misconceptions out in the marketplace today that inhibit the proliferation of Apple Pay and other mobile wallet offerings? 

Carson: I think misconceptions always exist when a new way of doing things is introduced, particularly something that involves personal data in the wake of the high number of data breaches over the last couple of years.

Across our global consumer studies we find that security is a dominant factor for payment tool choice. This is hardly surprising in itself, but when there are mutterings around the topic, it tends to resonate stronger in the minds of the consumer than the actual threat is. So yes, misconceptions around this topic will hinder the drive for adoption from a consumer perspective beyond the usual early adopters.

Merchants may also be hesitant for this same reason, not least in ensuring their brand and product is not tarnished by entering the market without sufficient due diligence and safeguards. However, forward steps in payment authentication tools, coupled with elements such as tokenization, suggest an increasing sophistication on the part of the industry, which I believe will help mitigate the risk to a sufficiently acceptable level for merchants in time.

Combined, this may suggest providers dial down investment in the space, but actually, taking a step back, that risk has always been there, except that nowadays that risk is digitized. The banking system itself was partly born out of a need to store wealth and a need to move that wealth to other locations. When your purpose is to store or transfer value, be it monetary or data, you are painting a large target on yourselves, one that is attractive to thieves. In the same breath, on the whole banks as we know them today have proved adept in that aspect, and I suspect the same will prove true here in time (this happens to be one of the levers that I believe retail banks should be seriously considering in their bid to remain relevant in the digital payments landscape of the future).

The longer this holds true — i.e. we don’t suffer a major crime directly attributable to this space — and the more consumers become familiar with the technology, the quicker the momentum will grow. I believe that what are currently understandable concerns will soon become recognized as misconceptions when the relevant players in the chain prove themselves up to the challenge of protecting their customers.

FICO: Have bankers fully realized the importance of applying behavioral analytics to their mobile payment offerings?  Let’s face it — anything that is worth achieving in this new realm needs to have a robust fraud management tool behind it, right?

Carson: Absolutely. I was at the Digital Banking Club debate earlier this year and the benefits of layering security features was absolutely recognized – pleasingly, it was discussed almost as a hygienic factor, one that was almost universally accepted already, and the focus was beyond security and into the user experience.

And this is such a rich space for fintech in itself, overarching many facets of the industry. I’ve come across some really exciting start-ups both here in London and abroad that are developing new propositions and tools based around behavioral analytics – from highlighting bias in capital market divisions at one end to authenticating the user when opening an app at the other. I can’t help but feel it will play a growing importance in shaping how financial services evolve over the next five years.

Interestingly there was a side discussion around the risks of allowing competitive advantage to become overly self-serving, at the expense of agreeing and implementing universal standards among all those involved in the system. There was a consensus that everyone is best served as a whole and that a certain parity should be achieved – whether that happens remains to be seen, but certainly Citi talked a good game.

Ultimately, the answer is a multi-layered, risk-based approach – and the players that get into a room together now and devise ways to optimize each other’s capabilities will steal a march on their competitors, even if it’s only a short-lived advantage.

FICO: Kit, you pointed out in your latest Payments International presentation that mobile wallet holding and usage rates remain highly variable between markets.  Can you sketch out some logical steps that should take place in the next year that will stabilize in our reader’s minds that mobile wallets— and particularly Apple Pay — are real contenders for success?

Carson: I think we will see a divergence in how different markets react in the next 12 months, for much the same reason we see a divergence in holding and usage rates, and these factors differ whether considering their use in-store vs online.

While all markets are in a state of flux, certain markets happen to be in an evolutionary cycle that is chiming with this exact point in time, and as such the structural upheaval is not as daunting – in fact it could be perceived as an opportunity. Those that have not fully adopted (if at all) a card payment system are not held back by the existing infrastructure, and as commerce further embraces digital trade they are more open to new processes. So I believe we will see markets such as Russia and China focused on developing a suitable infrastructure and laying the rails for digital wallets.

Those with incumbent systems should focus on developing for the omni-channel experience and designing multi-lifestyle tools to boost the consumer value proposition over cards. I believe those looking at Germany won’t see much difference at the POS; however, they should see mobile wallets differentiate beyond the facility to buy something in a shop or online.

In the online space I believe we will see a proliferation of domestic payment tools integrating with merchant APIs to provide “buy buttons” on the checkout page, hence markets forecast for strong growth in e-commerce (such as the UK) will find stronger take-up than those where consumer preference is for face-to-face interactions (such as India).

From a global perspective, I suspect we’ll see a tick up in consumer awareness, adoption and, hopefully, delight!

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Apple Pay:  Are Card Issuers Onboard?

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