The future of transactions

January 28, 2011

Service design has a lot to do with future scenarios. A few months ago we developed the initial identity for ParkNOW!, a pay-by-cell phone parking payment operator in the US. During that project we talked a lot with them about different payment methods, and NFC (near-field communication) got mentioned too. In fact, all major mobile phone manufacturers have white papers on it and are working on making the technology usable.

NFC enables devices to talk to each other when they’re close enough. It can let you share contacts, pictures or whatever data you want. The killer app though, is payments. Using your mobile phone (cell phone in the US) as wallet. In short, this will revolutionize monetary transactions in near future. And as always, for existing industries (banks) it will happen faster they can say “return on investment”.

A few days ago, Financial Times published an article saying that Apple would incorporate NFC technology in their iPhone 5, which is due this fall. Surfing around the web seemed to confirm the story, because this week has seen a flurry of articles about the iPhone 5 and iPad 2 incorporating NFC. The really big deal is this, however: Apple has through iTunes credit card information on over 100 million people. This makes NFC not only a cool technology, but for Apple customers also an immediately available payment system with enough people tied to it, that for retail operations this can represent critical mass. Retail outlets therefore, will be highly incentivized to install NFC payment terminals in store. (Starbucks has, in fact, aldready developed an app for the iPhone to enable their customers to pay faster using their phone.)

The real impact of NFC payments, digital wallets and eventually peer-to-peer transactions using NFC will be felt in the bank. Banking relies on charging incremental fees from customers who are moving their own money around. Additionally banks earn interest lending out people’s money. Purely digital money, manipulated directly by customers themselves, without a third party being involved, can represent a paradigm shift in transaction infrastructure.

Money, after all, was invented to facilitate trading. It was more effective than barter, because the relative value of each item was difficult to gauge. Money provided an independently assessable equivalent that was a lot cheaper to manage than barter trades. Today, money is everywhere. However, in reality money is like fixed line telephony. Developing nations don’t bother to install telephone lines – they go directly to mobile phones. Similarly, the internet is not really being accessed by computers in developing nations but is used on smart phones, which are cheaper and simpler to use and need less fancy software. What if money, like fixed line telephones, is a legacy system that can be skipped?

In Africa, a mobile operator enabled their customers to send and receive money via an SMS system. There were few banks, with even fewer branches in rural areas making it difficult for people to trade with each other except by using cash. Credit cards aren’t available and even if you’ve got one there is no guarantee that the store will accept it. This lead Safaricom to develop MPESA, a micro-payments system and Wizzit to provide mobile banking. From being on the fringes of the banking business, they have now effectively changed consumer’s understanding of what banking is, and are leading the debate for the whole industry.

For early adopters, PayPal has introduced the mobile-to-mobile payments app. The talk of “can it be done” is already yesterday’s news. With Apple’s client base we are also over the “are there enough people to use it” question. So banks, thanks for all the fish.