The rise of Mobile Payments

Welcome to Bitesize Payments, where we discuss their history, how they work and of course who does what… Today we are going to discuss mobile payments…. 

Remember when losing your wallet was the ultimate nightmare? These days, losing your phone feels like losing your entire life—and your wallet’s just a passenger on that ride!

Let’s take a quick journey through time. Once upon a time, cash was king. Coins and notes ruled the economy for centuries. Then came the 20th century, bringing us credit and debit cards—plastic that allowed us to leave cash at home. But now, in the 21st century, we’re witnessing another major shift. This time, it’s digital, and it’s happening right in the palm of your hand—through your smartphone.

So grab your phone, because it’s not just playing this podcast—it might just be the future of how you pay for everything!

Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education

Transcript

SPEAKER_00: 0:02

Welcome back to Bite Size Payments, where we discuss their history, how they work, and of course, well, who does what. Today we're going to discuss mobile payments, and I don't mean those things you put over a baby's crib to keep them occupied. Yeah, I know, bad joke. Losing your wallet used to be your worst nightmare. Now losing your phone feels like you've lost your entire life, frankly, and your wallet's just along for the ride. So grab your phone. After all, it might just do more than play this podcast for you. Here we go. Let's take a quick journey through time. Once upon a time in a far, far away land, cash was king. Coins and notes were the only way to pay for things. And that was the case, frankly, for many, many centuries. Fast forward to the 20th century, and we saw the advent of credit and debit cards, plastic that allowed us to leave cash at home. But here we are now in the 21st century, witnessing another major shift. This time, it's digital. And it all happens in the palm of your hand. through your smartphone. Did we say smartphone? I think I did. Is that an old person's phrase? I'm not sure. What I mean by a smartphone is a mobile phone that can do things, a cell phone or an Apple phone, if you like, or a Google phone, one of those sort of things. Personally, I hardly ever use a card per se. I hardly ever have cash unless I need to get my haircut, in which case it always seems to be the case that I need cash. Cash. Or, of course, I'm travelling in a cash-focused country. So, let's have a quick look into mobile history. The first mobile payment. As you may suspect, it's not very much history here. But before mobile payments became the norm, there was a first. Well, an original of sorts. The year was 1997, and the setting was Finland. A Coca-Cola vending machine... became the first stage for history's first mobile payment. Consumers could buy the drink by simply sending a text message, which charged the cost to their mobile bill. It was a small but significant moment, showing that our phones could be used for more than just calls and texts. This early innovation paved the way for today's more sophisticated mobile payment systems. From NFC, Near Field Communications, enabled Tap to pay solutions to fully fledged mobile wallets. So how does it actually work when you use your phone to pay for something in a store? Frankly, it often seems like magic, but let's break it down, work out how your phone takes your credit card details and directs them to the payment entry device, the pad at the checkout. When you use your phone for contactless payments, whether it's through Apple Pay or Google Pay or another mobile wallet, you're essentially using a virtual representation of your card. When you tap your phone at the pad, or you hold it near, frankly, the first thing that happens is authentication. Your phone uses biometric authentication, like face ID, touch ID, or a pin to verify that you're the one making the payment. Once you are in fact authenticated, it uses near-field communications, NFC, to communicate wirelessly with the PED. Your actual details aren't sent directly to the PED. Instead, your phone sends a token, a unique encrypted code generated specifically for the transaction. This is known as tokenization. and it's a key security feature. The token replaces your real card information so that your actual card details are never exposed to the merchant or transmitted over the network. The token, along with the transaction details like the amount, et cetera, is sent from your phone to the pad. The PED receives this data and begins the process of validating the transaction. It communicates with the payment processor and the card issuers network to verify that the token is valid and corresponds to the real account with sufficient funds. If everything checks out and transaction is authorized, the payment processor sends an approval code back to the PED and you receive a communication on your phone that the payment was successful. The PED prints or sends a receipt and your bank deducts the amount from your account or charges it to your credit card, etc. So, simples. So, in fact, it's pretty close to magic. Well, Arthur C. Clarke said something along the lines of any advanced firmware technology, etc. Anyway, it pretty much does seem like magic to me. Using payment feels like, though, you're kind of getting something for nothing, something for free. Well, until you check your bank statement and realize, nope, definitely not the case. But there is a key dependency here, and that is cell coverage and the Internet, of course. Now, if you're in a large store, then, et cetera, the Internet is a given. But if you're a small street trader, then maybe it gets a little bit hairy. Frankly, I've been in... taxis where they've taken a credit card, because it's not always the case, but you get in a taxi and sometimes their pet, the device that they have, they have to get outside of the car and wave it around like we used to do in the old days to see if you could get cell coverage. Well, that's especially true in my little English village. But, of course, that's exactly the issue. No cell coverage, no payment. And despite many governments and the UK government specifically here, they have great desire to have ubiquitous coverage or 99.95% or whatever the stats are. But frankly, having that level of digital mobile access is, well, let's be frank, a long way away. There are folks that are looking at this problem from a different point of view and trying to work out how to get offline payments. However, let's not dive down that rabbit hole just now, because that's a deep, Deep rabbit hole. Anyway, the adoption of contactless and of mobile payments became even more apparent. And frankly, depending upon which way you look at it, needed because of the global event that changed the way we interact with money. COVID-19. The pandemic didn't just affect our health and our daily routines. It also transformed how we handled money. And I mean literally handle money. As the virus spread, cash increased. long considered a physical symbol of transactions, suddenly became a potential vector for spreading the virus. Many businesses out of necessity stopped accepting cash and pushed customers towards contactless payments. Enter mobile payments, perfectly suited for this new reality that unfortunately we lived in. So with just a tap or a scan of your phone or the scan of a QR code, you could make a payment without even touching a keypad or exchanging physical money. This newfound safety and convenience led to a surge in mobile payment adoption, even in regions where cash was deeply entrenched. The pandemic also underscored the importance of digital financial inclusion as mobile payments became essential for accessing foods and services from the safety of our devices and, of course, from our homes. In North America and Europe, Visa and Mastercard dominate the retail payment space. But when we turn our attentions east, say to Asia, the landscape looks, frankly, very different. Here, platforms like Alipay and WeChat Pay are the dominant forces. This could lead to the question, could they take over retail payments entirely in America and in Europe? Asia's payment ecosystem is unique, largely due to its rapid embrace of mobile technology and digital innovation. Countries like China have frankly leapfrogged traditional banking infrastructure and moved directly to mobile payments. Alipay and WeChat Pay, with their massive user base and deep integration into everyday life, are at the forefront of this shift. While these platforms dominate in their home markets, expanding their influence outside of them may be a challenge. Clearly, there are players here. Cross-border payments, regulatory hurdles, and competition from global players, like, of course, the Visa and Mastercards, will play significant roles in determining whether they can maintain and expand their dominance. If you look at the use, however, of cards versus mobiles, it's still quite interesting to look at the fact that in the US, for instance, card payments are 4 to 1 in favor i.e. four times more likely to use a physical card than to use a mobile payment. In Europe, that's three to one. But in China, it's the other way around. It's two to one in favor of using your mobile to pay. Okay, so who are the big players? We've just been talking about the platform players like Alipay and WeChat Play. WeChat Pay even. And those guys are probably very different from everybody else. They are an entire platform in their own right. Then we have the device manufacturers. The Samsung pays, the Apple pays, the Google pays and what have you. And they're coming at it from the point of view of their device being the on-ramp to everything and therefore, of course, your wallet and payments, what have you. It's probably also worth thinking about people that are coming in from a probably a more retail platform point of view. So people like Square or Stripe and of course, PayPal. That's where they came from. And it's probably worth thinking about people like Zelle as well, an immediate payments player. But that's the same sort of context. And where there is immediate payments around the world, I suspect they will become mobile platform payments as well. And we'll discuss a little bit more about where that goes in a minute. Okay, so having said all this about mobile payments, it does kind of beg some interesting questions and they really emerge because of where we are in this moment in time. So I'm not trying to get into what's the future of payments. I'll have an episode on that later on. But for now, I just wanted to pose some questions and try and see if I can give some sort of answers to them. The first one, I guess, is what's more important today, your wallet or your phone? Well, for me, it's my phone. But in today's tech-driven world, there's a debate worth having. What's more important, your wallet, your phone? A few decades ago, it would have sounded absurd. But now it's a very real, real question. Traditionally, your wallet has been indispensable, holding everything from your cash to your ID, of course, loyalty codes and all those good things. But now your phone is becoming your digital wallet, your ID. It has all those loyalty cards. It even has the key to the online world. With mobile payment systems, for instance, like Apple Pay and, you know, with Google Wallets, your phone securely stores your payment cards, allowing you to make purchases without carrying anything physical, other than the phone, of course. And it doesn't stop there. Some places are even rolling out digital IDs, driver's license, et cetera, et cetera, on your phone. However, we are still in a transitional phase. Not every merchant accepts mobile payments. The traditional wallet still plays a role, at least for now. But the PED manufacturers, I think, have worked really, really quickly with merchants. And of course, it's in the best interests of the PED manufacturers, but they have worked really, really quickly to make sure that mobile payments can be taken. And it's increasingly so. It's quite rare that you can't use your mobile anymore, especially in and around Europe anyway. Clearly, some merchants, as we've discussed in episodes before, don't really want to, and that's either because of the fees or, frankly, because of tax avoidance. But by and large, merchants have got on board really, really quickly. Okay, so perhaps to balance some of this out, we have to say, hey, look, ATMs don't accept mobile devices as a methodology to take money out. Least we forget, when we travel... Not everywhere, except mobile payments, and many regions, as we've discussed before, still consider cash to be king. However, frankly, taking a physical card is probably a very wise backup. So what about the tech giants? Could the giants like Apple and Google eventually dethrone the traditional payment giants like Visa and MasterCard? This has been a long debate. But context and time can really help us here. I can remember the phone companies saying, oh, we're going to take over these networks. You know, payments is just a simple use case of our network. And frankly, a lack of understanding between how the technology works and, of course, the business rules meant that that didn't happen. Apple and Google have key advantages. But becoming the new kings of payments isn't just about that. Technology. It's about scale. It's about trust and navigating complex regulations. Visa and MasterCard have had decades of experience managing global networks and are deeply entrenched in the banking systems of nearly every country. They've also established relationships with millions and millions of merchants. And we trust them. For Apple and Google to overtake them, they'd really need to build their networks out in a very different way. And I think it's more likely that we'll see a hybrid approach with Apple and Google expanding their current relationships and their payment ecosystems and taking on roles sort of similar to how we see banks, but ultimately working with rather than against the established players like Visa and MasterCard. It's also worth saying that, of course, Apple and Google are extremely large, if not the largest companies in the world. And of course, they are very, very profitable. Visa and MasterCard, of course, are also very profitable, but they're only, and I say only lightly, 20% of their size. But of course, they are about three times more profitable. And of course, that profitability makes them big targets for regulators and for competitors. Anyway, we'll see how that transpires. So as the third of my ponderable questions, I think we really need to ask, what will be the underlying rails of mobile payments? We have the near ubiquitous now instant payment rails in the US, Europe, UK, all across Asia. And of course, we have the potential for central bank digital currencies. And we'll see about that. The question is very profound. and really, I think, gets to the head of the issue. With these new digital natives, which immediate payments and, of course, CBDCs are, they have the potential of replacing traditional card networks. We've already seen this type of shift, as we've discussed, in Asia, where the new rails have effectively supplanted the Western card networks. And, of course, pressure is now mounting in the US and Europe on these established card networks, either through the introduction of digital technologies or, of course, through active engagement by the regulators. Indeed, one of the use cases for the digital euro in conjunction with the EPI wallet is exactly this. However, if instant payments prove to be cheaper than traditional card payments, it stands to reason that merchants might favour them. Governments also might prefer that option for their own reasons. And perhaps we might too, if they are indeed cheaper. So these forces might indeed start to see a transition away from the card networks. We'll see. We have seen in India with the rise of UPI that the IP rails are overtaking cards. But I guess this will be played out geo by geo. Those areas who have less historic dependence on analog payments will move very, very quickly to these newer technologies. But I do expect these new systems to start challenging the card networks. They have had a longstanding dominance in the Western world, and I think being digital native is probably what will push them over. However, I think it's really worth noting that despite everything that I've said and despite all the changes that have been made, brought in despite the regulatory pressures, from a Western world point of view, the card networks have somehow managed to prevail. So don't go cutting up those cards just yet. Well, there we go. Mobile payments. As we've been exploring today, The rise of mobile payments is frankly reshaping the consumer landscape in ways that we could hardly imagine a few years ago. Whether it's the impact of COVID-19, the shift from wallets to phones, or the potential for tech giants to challenge traditional financial institutions. One thing is clear, mobile payments are here to stay and their influence is probably only going to grow. Moreover, your device, the phone does seem to trivialize it a little bit, I suspect will become the focal point of consumer payments, just as it has with cameras. And well, frankly, those devices are taking over our lives. But who will be the partners and what will be the rails underneath it all? So thanks for joining me today in the world of mobile payments. I do hope you found this episode insightful and useful. Please don't forget to subscribe. And if you could give me a rating on the various platforms, that would be great. It seems to be the way that the algorithms work and gets the message out. But please do share bite-sized payments with somebody you might find it interesting. Until next time, keep your phones close or probably your wallet too. Cheers.