ABA Banking Journal
By Nicole Carroll
With consumer enthusiasm for mobile and digital payments on the rise, usage will continue to grow past the early adopter phase as the likes of Apple Pay and Samsung enter the market.From a consumer behavioral perspective based on mobile payments usage, what the industry is seeing now is much different compared to years past. More people are trying digital wallets, using payment apps, and experimenting with making payments using near-field communication (NFC) equipped mobile devices.
According to a recent Federal Reserve survey, “mobile phones are also changing the way consumers make payments. Twenty-two percent of all mobile phone owners reported having made a mobile payment in the 12 months prior the [March 2015] survey, up from 17 percent in 2013, and 15 percent in 2012.”
As the pieces come together, it’s important for banks to examine and understand the most important elements of mobile and digital payments. In particular, focusing on key security elements needed to protect consumers’ information during transactions, such as Tokenization, Host Card Emulation, and 3D-Secure. Not only does implementing these technologies within mobile payments help keep data protected, they also help to establish trust in mobile payments among consumers.
As best practices continue to form, banks can either adapt their own internal systems to support multiple wallets and the facilitation of tokenized transactions, or partner with organizations that can expertly provide these services. For instance, Discover will soon launch Discover Digital Exchange (DDX), a platform for Discover Debit and other Discover card issuers, designed to simplify management of digital payments and accelerate time to market.
Pieces Are in Place for Broad Adoption
Anyone who has seen a family at a restaurant staring at their respective smartphones understands the behaviors driving change. Consumers are deeply connected to their devices and apps. These electronic security blankets help navigate and enhance many aspects of our lives, and smart devices are becoming ubiquitous—crossing social and economic chasms in a way that only television has done in the past.
The Fed survey found the connectivity is reaching deeper than ever. Eighty-seven percent of Americans now have mobile phones and nearly three quarters of those devices are Internet-enabled, up from 61 percent just a year earlier.
Meanwhile, Walker Sands’ 2015 “Future of Retail” study illustrates how those mobile phone devices are becoming an optional payment vehicle. Forty percent of respondents said they used a mobile payment application in the past year—a five-fold increase from the previous year. Market research from PricewaterhouseCoopers predicts that by 2019, U.S. mobile payments will hit $142 billion, not including payments made on tablets or card payments made at the mobile POS or with a mobile card reader.
Drilling down further, the base of NFC-equipped devices is approaching 650 million and Deloitte predicts that 32.5 million of these devices will be used at least once a month to make contactless in-store payments by the end of 2015.
Enabling Mobile and Digital Payments
As merchants, issuers, and consumers look to the future of mobile payments, one thing is clear—the user experience needs to be seamless and subject to increased security.
For issuers to participate in the emerging mobile and digital payments ecosystem, access to the infrastructure to facilitate mobile payments is necessary. Banks must be equipped to participate in various mobile wallets, authorize tokenized transactions and manage tokens throughout their lifecycle. This is a major undertaking requiring changes to internal processes, operations and systems.
Recognizing that the mobile payments environment will continue to evolve rapidly, banks also need to be adaptable. They need to support tokenized transactions that comply with today’s global EMVCo Payment Token Standards as well as new requirements to account for needs that have yet to be imagined.
Similarly, banks must consider the broad range of devices and operating systems. Compatibility is a never-ending challenge as devices are retired and new generations of devices are released. Compatibility also applies across the spectrum of conceivable tokenized transactions, including NFC transactions, in-app mobile purchases, and ecommerce transactions. Regardless of whether a digital wallet uses a chip-based Secure Element (SE), such as Apple Pay, or cloud-based Host Card Emulation (HCE), banks need to consider how they will support it.
Overcoming Security Concerns
One component enabling the secure shift to new payment vehicles is tokenization, a technology for online and digital payments that helps to prevent exposure of sensitive consumer payment account information. A “token” can be safely stored on a mobile device or with a merchant, essentially serving as a surrogate digital account number for the primary account number (PAN)—the traditional 16-digit payment card number found on plastic cards.
By keeping the PAN a level removed from the transaction, tokens provide an extra layer of protection. If an account were to somehow be compromised, a new token can be assigned without the expense of issuing a new card.
As one might expect, provisioning and managing tokens in this new payment environment can be complex. As adoption advances, each consumer’s account is likely to be associated with many tokens across the spectrum of digital wallets, apps and online merchants.
Banks will need the ability to generate and provision tokens into the various wallets and payment apps in which they choose to participate. The ability to activate, revoke or suspend tokens is part of the equation. Overseeing token status and history is a key capability.
Roadmap for Digital Wallet Readiness
Banks are the traditional owners of consumers’ financial relationships. Yet, banks largely have been watching from the sidelines as digital wallets have evolved. Now that the pieces are in place and offerings are maturing, becoming a player is more important. With digital wallets gaining momentum, banks will want to ensure their place as the owner of the consumer relationship and data. As digital wallets go from early adopters to what Geoffrey Moore, author of Crossing the Chasm, famously described as the “early majority” mainstream market, banks should consider the following questions:
- What is overall consumer adoption in your market?
- How many merchants in your market are equipped to accept NFC payments?
- What is your road map to support digital wallets, and will you develop your own branded wallet?
- How will you retain your place as the trusted relationship with your cardholders in this new ecosystem?
Coming to conclusion on these questions will put your financial institution on the road to participation. However, few banks have the resources or the inclination to go it alone. Instead, for maximum simplicity, banks should know they don’t have to go at it alone, and that there are platforms that have been rolled out that offer a single, comprehensive and straightforward program to providing a secure environment to participate in mobile and digital payments. When assessing the various options, banks should look for the same characteristics that make a good partner in traditional payments: flexibility, customization, branding opportunities and personalized support services.
Nicole Carroll is vice president of emerging payments at Discover Financial Services.
