Tomorrow’s smartest way to pay

January 6, 2010
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Credit cards used to be branded as the high-flyer’s way to pay, partly because they originally targeted the business jet set. Paying by credit card was smart. It was promoted as a sophisticated hint that you have a neat income at your disposal. Needless to say, this has fundamentally changed. In the US alone, there are five times more credit cards than consumers, not least because they are often used as an easy way to get short-term credit. In Europe, market penetration may not be that deep, as many consumers have alternatives that they prefer (e.g. debit cards, overdraft agreements and so on). Nevertheless, credit cards have become widely used and accepted. It has simply taken a bit longer for consumers to start valuing the comfort entailed with their usage.

Comfort? If you are looking for a new, easy and therefore “smart” way to make transactions, payment by mobile phones would be the obvious thing. The trouble is that you haven’t always got the option…

Credit cards used to be branded as the high-flyer’s way to pay, partly because they originally targeted the business jet set. Paying by credit card was smart. It was promoted as a sophisticated hint that you have a neat income at your disposal. Needless to say, this has fundamentally changed. In the US alone, there are five times more credit cards than consumers, not least because they are often used as an easy way to get short-term credit. In Europe, market penetration may not be that deep, as many consumers have alternatives that they prefer (e.g. debit cards, overdraft agreements and so on). Nevertheless, credit cards have become widely used and accepted. It has simply taken a bit longer for consumers to start valuing the comfort entailed with their usage.

Comfort? If you are looking for a new, easy and therefore “smart” way to make transactions, payment by mobile phones would be the obvious thing. The trouble is that you haven’t always got the option. You can, for example, buy railway or local transport tickets in some countries, and there are cities that have established similar systems for their parking fees. There is a variety of payment systems, but some of them have already disappeared due to lack of consumer demand. Why? I think the history of credit cards teaches us why – they were not widely used until they were universally accepted (some of them originally bought you dinner at only a handful of restaurants) and the same applies to mobile payment systems.

Sooner or later, this obstacle will be overcome. But who will take the initiative? Network operators might take their chances and make such an offering by themselves, shaking up the financial services market by leveraging their gatekeeper power over the channel. It could be interesting to explore this idea but I think that a different scenario is more realistic: Eventually, banks, credit card companies and network operators will cooperate to establish a common standard, along with retail, transport and other businesses that would wish to offer this new means of payment. I think it will take a broad alliance to get mobile payment to take-off in the first place. Only then will customers experience the extra comfort that will motivate them to accept the surcharge that inevitably comes along with new payment systems.

Customer insight and fraud detection
From a data warehousing perspective, there would be two relevant side-effects: If network operators play their cards well, they could gain insight into their customers’ transactions just like banks already have. Financial institutions, on the other hand, could get to know their customers even better if they received geospatial data along with the transactional details. Smart applications might also enhance mobile phones as a communication channel – few customers would want to decide on their loans or investments en route, but some may like to study a bank’s offering on their way home.

There is still the question of safety, as with any other transaction that is carried out electronically. Consumers don’t bear the risk of stolen credit card data, so they would hardly accept mobile payment service unless they get the same guarantees. At this point, highly reliable fraud detection capabilities, which have been pioneered by credit card companies in recent decades, will be indispensible. The backbone of these capabilities is active data warehousing that helps the companies to identify suspicious transactions in near-real time and seek confirmation before they process them any further. In the end, smart payment systems will require smart organizations that know how to leverage their data.

Simon Doherty