I’ve been advocating lately for faster adoption of Contactless payments. It seems so much more convenient to tap or wave rather than entering in a PIN. Contactless payments can be delightful and contribute to creating a ‘digital advanced’ brand for cities when widely adopted.
In New Zealand, with a relatively small number of banks, we have an outstanding electronic payment system known as EFTPOS or Electronic Funds Transfer at Point of Sale. The great thing about EFTPOS is it is bank to bank. So no fees for the consumer or transaction fees for retailer or merchant.
As in many countries, ‘Contactless’ payments have arrived in New Zealand. We have Paypass from MasterCard and Paywave from Visa. What I didn’t understand was these are credit and debit card schemes, not a direct bank to bank scheme like EFTPOS. Bankers use the term ‘Scheme‘ to collectively describe the card providers like Visa and Mastercard.
Bank versus Scheme
Recently I received a new Visa card from my bank with Paywave on it. It was a combined card which accesses Credit, Cheque and Savings accounts. I had assumed I’d be able to configure my Paywave feature to access my Cheque, Savings or Credit Card but there was no configuration option. I only got to use Paywave the first time when I was in taxi in Sydney (tapping was so much easier than doing the print, sign, print receipt routine on my AMEX) and I realised then that Paywave is a credit card product. It does not provide direct access to my cheque and savings accounts.
That means, in New Zealand, Merchants pay the card fee – say 2.5%. If Merchants take a tap rather then their customers entering a PIN, the credit card Merchant fee is deducted. This is a very real cost to businesses, especially retailers. This is a big deal. You’ve probably noticed many Merchants are now adding Credit Card Surcharges. As an example paying for flights with a credit card costs me another $8. Recently paying for a hotel I was asked to pay a surcharge on top of the bill.
As we’ve seen with Online Invoicing in Xero, paying by credit card scales up only to certain size of transaction. Above say $1000 people would rather just pay directly with their bank and not occur a transaction fee. The Accounts Payable module in Xero manages that process and we’re doing a lot of works with banks in that area.
For small payments at retail, Merchants love EFTPOS. They pay a fixed monthly fee and don’t have to clip each transaction with the Credit Card fee.
Credit Cards have a place, especially as the issuing bank commits to pay the moment the transaction is authorized and give consumers more money to spend. However to provide this service the Merchant pays 1% to 4%.
We think it’s vitally important that Credit Cards aren’t the only way to pay at Point of Sale. If you have the money in your account both the Customer and Merchant benefit if EFTPOS is presented as a choice and that should also have the convenience of being Contactless.
You can imagine the costs of providing terminals at each Merchant, the payments network and security mechanisms. The Credit Card schemes understand the longer term benefit of garnering the transaction fees so are often underwriting the costs of these new technologies. The schemes are very clever and in some markets they have become the dominant way to pay. In order for EFTPOS to be available not only do the banks need to invest but they need to work together. Something banks often may struggle with.
EFTPOS has a different risk framework. I assume the reason we enter a PIN for EFTPOS is to ensure the card holder is legitimate. As funds transfer immediately with no transaction buffer for fraud insurance I think the banks would struggle to do contactless EFTPOS on its own. Of course that is where mobile phones come in and why the mobile becomes the cataylst for setting the model for the next generation of payments.
From what we can see total billings on credit cards for New Zealand issued cards domestically was $29 billion over the last year. So, assuming merchant rates of 2-3%, $580 – 870 million dollars would be taken out of the small business economy and paid to schemes annually. If the schemes displace EFTPOS – that’ll go up to between $1.3 – $2.0 billion dollars.
If a meaningful percentage of transactions move from EFTPOS to scheme the Merchants will have to recover that fee. That morning coffee, paid for by cash or EFTPOS now, will go up. Across an economy that is inflationary.
Schemes do provide value. They allow people to spend now and therefore stimulate retail. Schemes do need to be compensated for risk. But the back of the envelope calculations show there is a lot of money at stake.
The mobile phone will be a key enabler for next generation payments. With mobile payments the contactless features are hosted on a phone. Importantly, the user is identified/authenticated on the phone before the payment is made – providing the speed and convenience of a contactless payment while still secure. Quite interesting as essentially the entering of the PIN (or mobile equivalent) is done off the critical path of the transaction. I.e. in the queue while you’re waiting to pay. Quite a nice process improvement.
The banks are of course terrified about Apple, Samsung and local Telcos as they play in mobile payments. These new players naturally see gaining a slice of the Payments pie as the prize. Merchants should be watching closely as the deal that shapes up will have a big impact on their costs.
Merchants should be sending a clear message to their banks that they should be working together to ensure the phone is a convenient security token for payments and not necessitate payments touched by mobile be subject to transaction fees.
Getting mobile payments right is foundation infrastructure and reduces payments friction in an economy. It’s too important to get wrong.
Banks, Handset providers, Telco’s and the Credit Card Scheme’s are hammering these issues out right now.
Banking on change
Payments New Zealand is the industry entity, owned by the banks, that manages the banking payments fabric in NZ.
In a complex and fast moving environment our goal is to get ahead of the curve and make sure our payment system is ready for the changes when they arrive. By including the groups and individuals that drive our industry on this journey we will ultimately make participation easier and reduce costs for all.
The banking industry is making progress on mobile payments. The objectives of the project include:
- Achieve a minimum level of security, interoperability, reliability and usability
- Ensure the on-going integrity of the domestic payment system
- Ensure that all stakeholders and participants continue to maintain trust and confidence in the system
- Establish a sustainable rules, standards and principles framework for the Mobile Payments eco-system to enable on-going evolution and innovation.
In addition to these objectives we believe the outcomes to Merchants need to be considered. For example …
- There be a way to pay and be paid with no percentage of a transaction fee, as EFTPOS works now.
- Fees are levied on the right party. When should the Consumer or Merchant pay?
- Consumers should benefit from deciding to pay directly (bank to bank) versus paying with credit.
This is a complex area so we’re not sure we have all this completely right (please let us know in the comments). But at this vital time we think it’s worth shining a light on the importance of mobile in payments and encourage the banks to work together.
We think having the benefits of EFTPOS in a mobile payments world is compelling.
If, with our small number of banks, we can develop a world class mobile payments mechanism. We’re uniquely positioned to get it right and become a test lab or case study for modern banking globally.
Update October 6 2013
Says it all really …