The race to the digital wallet
Which Greater Des Moines companies have a head start in the unfolding mobile payments market?
Friday, January 25, 2013 7:00 AM
SHAZAM’S PENTAGON APP: HOW IT WORKS
Once a retailer has the application loaded onto his or her smartphone, it takes a few simple steps to complete a transaction.
The retailer first opens the application and selects the “purchase” button, swipes the customer’s card through the iMag card reader and then enters the purchase amount and the customer’s cell phone number.
For a debit transaction, customers receive an automated call prompting them to enter their personal identification number (PIN) for the card, using their own smartphone. An automated voice confirms approval and the customer ends the call. Pentagon then sends a transaction confirmation to the merchant and within minutes, the customer receives a receipt via text message.
Fraud rates are significantly lower on PIN transactions (typically less than one-tenth of 1 percent) than on signature-based card transactions (up to 8 percent), which makes PIN debit transactions less costly and more popular with financial institutions, according to SHAZAM.
Will pulling out your smartphone to make a purchase or to pay for a meal become as automatic as reaching for a debit or credit card is today?
It seems a pretty safe bet that it will.
More than 87 percent of the U.S. population now owns a mobile phone, and more than half of those devices are smartphones, according to a study from the Federal Reserve. Nearly one-third of mobile phone users reported using their devices to make a purchase in 2012.
At the same time, retailers will have more ways to use their own smartphones to accept payments from their customers, as card-reader devices such as Square become more prevalent.
Financial institutions, meanwhile, must decide how they’ll compete among a growing number of companies jostling for position in the mobile payments race.
Concerns over the security of transactions will be one of the biggest hurdles the industry must clear before direct payments by mobile phone users become mainstream, experts say.
SHAZAM Inc., a Johnston-based electronic funds transfer network that serves more than 1,500 financial institutions across the country, is among the Greater Des Moines companies seeking to become a major hub within the emerging mobile payments market. A year ago, SHAZAM launched Adaptive Payments Pentagon, a mobile point-of-sale application for financial institutions and merchants.
The application is significant because it’s the only one that will allow retailers to accept “PIN” debit card transactions using iPhone and Android mobile phone and tablet devices, said Dan Kramer, senior vice president of marketing and merchant services for SHAZAM. Using a patented technology for authenticating the cardholder’s personal identification number (PIN), the application is well-suited for small businesses, particularly service companies with representatives who receive payments at customers’ homes or businesses.
Pentagon’s primary advantage for small businesses is the lower transaction cost inherent in processing PIN debit transactions as compared with signature or credit transactions, Kramer said. He declined to reveal usage data for the app. Developed in partnership with Florida-based Adaptive Payments Inc.., the app was a response to the competitive threat posed by the popular Square card reader, he noted.
“We’re not looking to drive huge transaction revenue, at least not immediately,” Kramer said. “We think it’s more of a requirement to keep customers first – specifically those who use the cards the most. I don’t want them going to my competitor.”
Earlier this month, SHAZAM announced the launch of a cardholder mobile app, SHAZAM BOLTS, which it is providing free to its member financial institutions. BOLTS enables holders of debit cards within the SHAZAM network to check balances and receive instant fraud alerts. Eventually, the app will also serve as a “mobile wallet” option for cardholders, Kramer said, providing an ability to store several debit and credit cards on a smartphone.
The technology to enable customers to make direct payments with their smartphones is not yet a must-have for financial institutions, Kramer said, largely because retailers aren’t yet clamoring for the capability.
“When the retailers start to adopt it more, then it will be more meaningful to the financial institutions,” he said.
Some large retailers, such as Hy-Vee Inc., are working to develop their own mobile payments network. In August 2012, Hy-Vee joined Target Corp., Wal-Mart Stores Inc. and a number of other major retailers in a merchant-based mobile payments system known as Merchant Customer Exchange. The initiative, which is expected to be rolled out sometime this year, is an effort to provide a consistent experience for customers while providing retailers with more control over the process and lower processing costs, say organizers.
What’s at stake
The number of Iowa banks that are offering mobile banking services to their customers is still probably less than 40 percent, and the percentage is far smaller for mobile payments, said Bob Steen, chairman and CEO of Bridge Community Bank in Mount Vernon. Steen is a member of the Iowa Bankers Association Payments Systems Task Force, which is studying how banks in the state can most effectively compete in the emerging mobile payments world.
“Our focus is trying to carry the message to our banks that we need to have a payment solution for our customers, both person-to-person as well as for merchant payments,” he said.
Despite Bridge Community Bank’s small size, its customers can make person-to-person payments electronically using their mobile devices through the bank’s core online banking system. “We’re trying to make the offering known to our customers, because for most of our customers it’s a big step,” Steen said.
It’s vital that banks don’t lose their relationships with customers in the wake of the mobile payment revolution, Steen said.
“Our base of relationship with folks is the checking account; if we lose that relationship even indirectly, it threatens what we do,” he said. “We simply cannot allow ourselves to be left behind. The regulatory burden has held us back, to the point where we’re struggling to stay relevant on the payments side.”
SHAZAM’s Kramer said banks must decide how important the younger demographic customer base is to them when deciding on their mobile payments strategy.
“We talk about the fact that those (younger) folks will leave if you don’t have mobile access,” he said. “But a financial institution may look at their demographic and say, ‘You know what, those are not the folks who make me money.’ The majority of my customers have that view – right, wrong or indifferent.”
Changing customer habits
The saturation of new mobile payment products by both startup companies and longtime players validates the demand that’s out there, said Jordan Lampe, communications director for Dwolla Inc. The Des Moines-based online payments company recently introduced several new applications in an effort to entice more merchants as the mobile wallet market unfolds.
“Right now, mobile payments are fighting 40 to 50 years of learned behavior,” Lampe said, referring to debit and credit card transactions. “For that to be deconstructed, a new value experience has to be introduced.”
Retailers pay a flat 25-cent fee for each transaction over $10 processed, which adds up to far less than the typical merchant card fees of 2 percent to 3 percent of the total transaction.
“Merchants are burned out; they’re tired of fees that don’t make sense to them,” Lampe said. “They’re looking at opportunities to double their net profits. An average restaurant’s net profit is 3 percent. If you can increase that, there is a significant incentive for merchant adoption.”
Among Dwolla’s newest applications is Dwolla Customer Checkout, an application that enables retailers to offer Dwolla as a payment option to customers who don’t have a Dwolla account. Another new merchant app, Dwolla Price, enables businesses to pass some of the transaction savings on to customers to entice them to pay using Dwolla.
National competitor: Visa
In November, The Members Group (TMG) announced it had entered into a partnership with Visa Inc. to offer Visa’s v.me digital wallet to the members payments network.
“We’ve seen about the adoption we expected,” said Brandon Kuehl, TMG’s product development architect, who declined to provide specific figures for its v.me enrollment. Among the features that Visa plans to roll out this year will be detailed reporting for institutions on where the cards are being used, as well as a feature to identify and market to smartphone users who aren’t using a card stored in the smartphone.
“So they’re really providing a lot of information to financial institutions to help market it, which is a lot different than some of the mobile products out there today,” Kuehl said. Visa is currently not charging financial institutions for the application during an initial 12-month rollout phase, but may do so in the future, he said.
“We think there’s a value in being the first card in the (digital) wallet,” he said. “The first card in the wallet, the user probably isn’t going to change that.”
The Clive-based payment services company is also an investor in Dwolla, and offers Dwolla as a person-to-person payment option to its member institutions.
Offering both Dwolla and v.me provides flexibility for TMG’s members, Kuehl said.
“We encourage financial institutions to give products like v.me or Dwolla and try to learn how they can help drive transactions,” Kuehl said. “This is all brand-new. I think there’s a lot for financial institutions to learn.”
“We want to enable that payment through whatever method that may be. These are all tools in the tool kit.”
Smartphone security worries
Smartphone security is a relatively new and nebulous topic, particularly for small businesses.
“I call it a ‘green and gray’ area,” said Marv Bosch, who heads the network services division for Combined Systems Technology Inc. in Clive. “Though smartphones don’t typically store sensitive data, they can access personal data, and given their size, it’s much easier to lose a smartphone than a laptop,” he said.
Bosch likes to refer business owners to the results of the “Honey Stick” study conducted by Symantec Corp., in which the Internet security company intentionally “lost” 50 smartphones with no security features enabled in five major North American cities and tracked what happened to each phone. Seventy percent of the phones were accessed by the finder for both business and personal apps and information; but only half the finders contacted the owner.
The best protection is to lock the phone with a password and to avoid storing other passwords in a Gmail or similar account, Bosch said. “Once I get your email account, I’m not too many steps away from getting your personal information,” he said.
Most phones have applications available that enable their owners to erase their data remotely if the device is lost. (For more information on smartphonesecurity, click here.)
“When we ask customers if they’d like to (enable the app), most say no,” Bosch said. “That tells me they don’t have the level of fear that maybe they should have. Oftentimes it has to happen to you once before you realize is a possibility.”