Putting your credit card into an app

Cash may be king, but when it comes to payments all manner of usurpers are gearing up to steal its crown.

“The world has changed,” says Richard Morrissey, associate director of Moneycorp Ireland, a foreign exchange specialist. If banks were animals, they might not be at risk of extinction, but they would be on a watch list, he says.

Hot on the heels – in European legislative terms that is – of PSD1, the payment services directive that gave us SEPA, the Single Euro Payments Area – PSD2 is due to become operational by the end of this year.

SEPA standardised the way banks make and process electronic payments in euro. PSD2 is designed to promote innovation in the payments sector, levelling the playing field for all sorts of new payment service providers, including mobile and online payments.

"Thanks to PSD2 non-banks can get licences to be part of the system, so you are seeing companies like Apple Pay, Facebook and Google all moving into this space. You only have to look at the success of Irish payments business Stripe to see the potential. Those guys made a business valued at €5 billion in just seven years, all as a result of bringing efficiencies to payments," says Morrissey.

The extent of the coming change cannot be overstated.

"In the old world central banks were the wholesalers and banks were the retailers, and between them they controlled payments through the Swift (Society for Worldwide Interbank Financial Telecommunication) pipeline. It was a closed shop. What PSD2 does is open that up so that other payments businesses can plug into that system," he says.

The recent launch of Apple Pay in Ireland is further evidence of the changes taking place from a consumer perspective.

"Mobile payments, where people use their mobile phone as a wallet, is now firmly established here," says Eric Horgan, Ireland country manager for Elavon, a merchant services provider.

It follows on from the launch of Android Pay in November, which he reckons now has an estimated 30,000 users. Android Pay is backed by KBC and Ulster Bank, with Apple Pay backed by KBC and AIB.

Details in the cloud

“What these do is put your credit card into an app that stores your details in the cloud, not on your phone. It uses Near Field Communication, similar to that used when you use a card to tap-and-go in a shop. It’s still your bank account, it’s just not a card anymore, it’s another iteration of it,” says Hogan.

For now Apple’s and Android’s strategy is to simply be a part of the payments ecosystem. However, this is likely to be just a staging post on the way to providing more services via mobile devices.

China is already leading the way in this respect. There 95 per cent of users access the internet via mobile devices, and mobile wallets are the payment mechanism of choice, whether ecommerce giant Alibaba’s Alipay, messaging company TenCent’s WeChat or search engine Baidu’s wallet.

Chinese apps have aggregated a range of functions still delivered separately here – including the making and processing of payments, and the transferring of funds between wallets.

Apple Pay and Android Pay are just step one in that evolution, says Horgan. “Putting a wallet in a smart phone is a logical feature they reckon phone-users want. Where it can go from here is potentially into loyalty solutions, or the use of geo-branding, whereby you walk around a shop and receive offers to your phone.”

The fact that payments companies will also be accruing vast amounts of data is also likely to drive innovations in the sector. “A lot of this data has been held by banks and used for things like loyalty affiliate schemes. What mobile payments can do is ratchet that up,” says Horgan.

Elavon is already providing restaurateurs a point-of-sale app, Talech, that provides rich added-value analytics about everything from transaction values to the popularity of menu items.

Biggest brand

“Banks are still going to be very central to our lives, but thanks to PSD2 what they do will be opened up and ‘disintermediated’, just as AirBnB did to hotels and Uber did to taxis. Disintermediation can occur in finance too, so the biggest bank in the future could be the biggest brand, not the one with the biggest infrastructure. The brand becomes the asset.”

The traction already gained by virtual bank N26, which is based in Germany and has an estimated 10,000 Irish customers, is a case in point.

While to date Ireland has been lagging international trends in our attachment to cash, that is likely to change, says Mark Gardiner head of products, services and logistics at Three Ireland. "You only have to look at the businesses that are taking Apple Pay – Dunnes, Centra, Aldi, Lidl, Harvey Norman – to see this is the way things are going."

Soon you won’t even need to be tapping your phone to pay, you’ll be tapping wearable devices, or making in-car payments for music and security services, or using Amazon’s Echo and Alexia, he says.

“The connectivity of devices will make things easier and more fluid within the next two years, with payments at the forefront. The bottom line is that people have choices now in relation to payment, and the banks will have to get on board.”

An appetite for payments innovation

The success of payments products such as Three’s 3Money has shown there is an appetite for payments innovation.

A prepayment credit card, there are currently over 70,000 in circulation, and that number is growing for a number of reasons, according to Mark Gardiner head of products, services and logistics at Three Ireland.

“It’s the largest pre-paid card in Ireland, and is used for all sorts of things. Part of its appeal is that it gives you peace of mind knowing that if you’re spending online, or anywhere, you can only lose what you put into it. A lot of people use it when going on their holidays, for example.

“It also has an app in it that allows users to divide up and compartmentalise their money so, for example, you can use it to save for Christmas, or for your holidays, so it’s an active savings tool too.”

Three’s research indicates that 72 per cent of usage is for online spending and 10 per cent is for contactless payments. “The average spend is a tenner, so it’s lunch really,” said Gardiner.

Some customers use it for online gambling to avoid having the bank see gambling activity in your card history. “Only around 8 per cent of usage is for that purpose; others use it for travelling and even for paying Revenue,” said Gardiner.

“You can top it up like a phone, transfer money in, and put money on it for your travelling kids, for example. And it’s a virtual card in so far as it sits inside your phone.”

Plastic lovers are also catered for. “If you want a physical card you can get one – for a tenner.”