Once upon a time, major financial institutions reigned over virtually every piece of the payment kingdom. However, according to a recent Gartner Group report, new wireless technology operators have begun to threaten the banking industry’s hold on the payment market with innovations that give better value to customers.
The report, entitled The Check is in the Air: The Future of Payment, touts companies like PayPal, an online payment service, as already having begun pioneering peer-to-peer payment transactions through wireless devices that electronically transfer funds from one user’s account to another’s.
Still, according to the study, “The future of payment… will likely reach far beyond the relatively simple transaction application of PayPal and its numerous competitors.”
Ken Kerr, senior research analyst with Stamford, Conn.-based Gartner said that payments in the wireless space will initially begin as micropayments – items of $10 or less.
“The reason banks are threatened is that they don’t have effective micropayment solutions,” Kerr said. “Credit cards are just not profitable at those 99-cent levels.”
Kerr says that for the most part, banks are going to do nothing in terms of micropayments. He suggests that banks will likely partner with carriers to bring their credit cards to the wireless space to allow consumers to purchase items that are at a higher value.
Mark Dickelman, vice-president of m-commerce and wireless for the Bank of Montreal in Toronto, said that whenever there is a change in technology, there is a corresponding set of questions around how banks plan to compete.
“Carriers are in a very specific business of meeting consumers’ needs for airtime, access, phone calls,” Dickelman says. “Banks are about maintaining financial records, facilitating payments and providing adjudication in the case of fraud. Fundamentally, we are about risk management and we are about trust for our customers. I think the technology for payment still requires that at the end of the day, you have to be trusted in executing the payment and you have to provide efficiency and access to the payment system.”
Dickelman noted that the Bank of Montreal recognizes the need to continue to be innovative and competitive. The bank recently announced work it is doing in the peer-to-peer space.
“The little startups may generate a lot of interesting ideas, but perfecting them, implementing them and doing them in a secure manner is still something that banks excel at,” he said.
However, in terms of the online world, businesses like PayPal are experiencing an exponential growth in customers. PayPal counts its customers in the eight million range.
Vincent Sollitto, vice-president of corporate communications for the Palo Alto, Calif.-based company said that before the PayPal system, small businesses had few options but to request checks or money orders, or to apply for a credit card merchant account through a major financial institution.
“If you are a small business, first of all you may not even qualify for a merchant account because you don’t have a track record,” Sollitto said. “Then you have to pay very expensive account initiation fees and you have to lease equipment.”
Add on top of that a monthly maintenance fee and typically a high rate, and small merchants are left with little profit, Sollitto said. He explained that with PayPal there are no account-creation fees, no setup fees and no time wasted. He added that PayPal customers can set up an account by filling in a Web page; they then instantly begin receiving payments on the Web. PayPal charges customers a flat per-transaction fee of 2.2 per cent plus US30 cents.
“It is incredibly easy, incredibly convenient and much less expensive (than major financial institutions),” he said. “The bottom line is that small individual sellers have been traditionally over-charged and under-served by the traditional payment industry.”
Gartner’s Kerr said that although this market is still relatively young in North America, the trend is in effect and will progress over the next two to three years.
The study suggested that “Enterprises ‘owning’ the connection to wireless consumers, such as telephone companies, wireless carriers and ISPs, should begin deploying prepayment systems immediately for low-value micropayments and launch them into their customer base as soon as possible.”