Here comes the age of mobile payment
In early November the world’s first-ever Olympic Gold triathlete stood inside a Tim Hortons in downtown Toronto, ready to earn another “first.”
Simon Whitfield, the Canadian who catapulted to fame after his Sydney 2000 win, was about to make the country’s first in-store credit card payment using a specially-equipped smartphone.
It all happened in less than five seconds. First, Whitfield ordered three large coffees. Then, as cashiers hurriedly prepared his drinks, he set his BlackBerry above the PayPass terminal on the counter. In the blink of an eye, Whitfield’s credit card was charged $5.80. No plastic card required, no pin code necessary.
“That happened instantly,” he said with a smile. The technology was impressively fast, no doubt. But CIBC and Rogers, which together launched the “Suretap” mobile wallet that Whitfield was using, say their service will not only speed up checkout times, it will actually boost the average ticket size.
Welcome to the new, fast-emerging world of mobile payments.
Major players like Square (founded by Twitter’s Jack Dorsey), RBC, Google, Rogers, CIBC and others are already jockeying for position to handle transactions between customers and retailers. Excitement in the technology and payments industries is palpable.
But among retailers, worries abound. Will it mean higher fees? Will the mobile application default to credit card payment rather than debit? As Canada pushes to keep pace with the global payments industry, will merchants bear the brunt of the costs?
Deep inside sub-Saharan Africa thrives one of the world’s most robust mobile payments economies. In Kenya, a country that hovers near the bottom of the United Nations’ Human Development Index, residents have used sophisticated mobile technology to pay for goods since 2007. That’s when M-Pesa, the country’s most successful system, was launched. As of late 2009, 40 per cent of Kenya’s adult population was using M-Pesa, according to a World Bank report.
Canada, historically considered a leader in the global payments industry, was being outpaced by a developing country. Statistics on m-commerce in Canada are scarce, but MasterCard’s Mobile Payments Readiness Index puts the country’s total usage at around five per cent.
So a few years ago, Ottawa’s finance ministry assembled a task force. A lengthy report was compiled and the conclusion was unequivocal: Unless this country develops a modern digital payments system, “Canadians will be unable to fully engage in the digital economy of the 21st century.”
According to the report, the implications of not forcing change range from a lower standard of living to losses in productivity and international competitiveness. The question, wrote task force chair Pat Meredith, was not whether Canada should participate in mobile payments, but how. And with recent activity between the country’s telcos and banks, she says we may finally be catching up in point-of-sale mobile transactions.
CIBC and Roger’s Suretap uses near field communication (NFC) technology, which requires a specially enabled smartphone and SIM card. The application is “backwards compatible,” meaning it uses the same standard PayPass terminals rolled out across Canada since 2006.
Right now, transactions are capped at $50, after which retailers may require a customer’s signature. The average PayPass transaction with a smartphone takes about the same amount of time as slamming a cupboard door. The average ticket size also increases by up to 40 per cent when PayPass is used, according to research from MasterCard.
“Where speed through the line is important, this is a big deal–grocery, gas, drugstores, theatres, transit, sports arenas,” says Richard McLaughlin, senior VP of global products and solutions at MasterCard Canada.
Plus, consumers are ready for mobile payment. “People don’t like reaching into their wallets and pulling out credit cards or cash,” McLaughlin says. “Their phones are always with them, so there’s a heavy demand to do more and more with it.”
Retailers have heard the pitch from banks and telcos. They understand the appeal of mobile wallets. “Everybody wants faster, higher, quicker ability to pay, and as a retailer, you want to see that seamless transaction that’s convenient for the customer,” says Scott Mitchell, owner of Market Street Vulcan, an independent grocery store in Alberta. “But if the cost overrides benefits of convenience, it negates any progress that you might see.”
Mitchell, of course, is referring to payment fees. They’re the thorn in every grocer’s side, and the top concern around mobile payments.
Right now, retailers pay a flat fee of about five cents every time a customer uses their debit card at checkout. Credit cards are markedly higher: For the basic card, fees average about two per cent of the total basket. The higher-end the card, the higher the fees. On top of that, retailers spend about $30 a month to rent a payment terminal and $75 for a PayPass terminal.
All of this is according to Gary Sands at the Canadian Federation of Independent Grocers, who has become an industry expert on the subject of fees. Grocery has tighter margins than any other retail sector, Sands adds. “When you’re operating on margins of one and two per cent, and the credit card guy comes along and takes two per cent right out of the basket, that’s a big deal.”
MasterCard, CIBC and Rogers (which owns Canadian Grocer through its Rogers Media subsidiary) have all reassured merchants that the new technology will come with no additional costs to the merchant. It requires no technological upgrades.
“If you already, as a merchant, accept contactless payment cards, like MasterCard, PayPass, Visa Paywave and Interac Flash, as the phone starts to emulate plastic cards, you’re already ready to accept mobile payments. You don’t have to do anything to your payment terminal at all,” says David Robinson, VP of emerging business at Rogers.
And it will come with no additional fees: “The phone transaction will be the same as the plastic transaction,” adds McLaughlin.
But some experts worry about what may come next. Back in May, the Canadian Federation of Independent Business warned about the possibility of a “fee grab” by banks, credit card companies and others.
Corinne Pohlman, VP of national affairs for CFIB, says those fears remain, despite assurances that merchants won’t incur extra charges. Why? There are so many unknowns. New players will undoubtedly enter the Canadian market, and they will look for a cut of the transaction fee.
“We only see there’s more hands in the pot,” Pohlman says. “What happens five years down the road as things become more ingrained in the system and more people come into the game?”
McLaughlin says he understands merchants’ concerns around fees. They have told him, loud and clear, that they’re worried this “new cool technology” is going to cost them more.
“In the immediate term, there is no change to anything cost-related to the merchant,” he says. “We’re hoping that over time, if this becomes as efficient as we think it will, it will bring the cost of total acceptance down, not up.”
And merchants shouldn’t forget mobile payments’ incredible potential, notes McLaughlin. As mobile payments evolve, retailers will be able to tailor the technology to suit their needs.
“A future generation of smartphone wallets will have other services built in, like couponing, loyalty and geo-based offers,” he says.
Consider this scene: a customer passes a supermarket that has an excess of fresh, ready-made sushi. Using geo-location, the mobile payment service sends out 20-per- cent-off coupons. The customer buys the sushi using his phone, walks into the store and grabs the meal. No need for a checkout counter, no need to throw away the excess food. Of course, those added services would come with extra costs, McLaughlin says, “the same as putting out paper offers today.”
At the moment, mobile wallets have limited penetration in Canada. Rogers and CIBC’s Suretap, for example, is currently only avail- able on two NFC-enabled BlackBerry smart- phones: the 9900 and the 9360. To use the service, a customer must also own a CIBC credit card, have a data plan with Rogers, and have an NFC SIM card in their phone.
“It’s very limited,” McLaughlin cedes. “But in two years–and that’s all it’s going to take–you’re going to see all the telcos, all the banks, all the handsets will be working.”
Rogers’ Robinson adds that, as far as he can tell, all but one smartphone device currently being manufactured will be equipped with NFC radio and the required software. “Conspicuously absent is Apple’s iPhone 5,” he says. “They decided not to include NFC
Both men emphasize that each new mobile payment launch will capture more customers. Eventually nearly every smartphone user in Canada will be able to toss out their leather wallets.
It all sounds promising, but widespread adoption of mobile wallets gives rise to yet another problem: default settings. What if every time a customer launches a mobile payment application, it defaults to one particular payment form, like credit card (which carries higher fees for the retailer) instead of debit?
“What we’re concerned about is that there will be an opportunity to promote one payment type over another for self interest,” says David Wilkes, senior VP at the Retail Council of Canada.
So RCC is in talks with the federal government to ensure that payment types are not preset and preloaded onto mobile wallet applications. It’s one of five proposed amendments to the Code of Conduct for the Credit and Debit Card Industry in Canada, now under review.
Now that they’ve made their splashy debut, everyone seems to agree mobile wallets are here to stay. Robinson predicts mobile payments will be commonplace within about a year.
That may seem overly ambitious, but according to a recent CIBC poll, consumers are on board with the technology. Almost half of Canadians who own a smartphone said they would consider using their devices like a credit card.
It helps that Canadians are big cellphone users, says Pat Meredith, the federal task force chair. But she argues it will “take time” before mobile payments have a significant share of the country’s payment transactions.
“For mobile to take off, it needs to be bigger than payments,” Meredith explains. “Once I can empty the entire content of my wallet–not just my credit card, but also my health card, driver’s licence and my loyalty cards onto my phone–then it becomes a much more compelling value proposition.”
That, in fact, is the goal, say Robinson and McLaughlin. They expect the technology will eventually support every piece of personal documentation, perhaps even passports.
“Mobile wallets aren’t something to be fearful of,” Robinson says. “It’s something to learn about and embrace. And when