The FINANCIAL — If Georgia also wants to experience the innovations of the financial industry, Georgian banks should beat possible local solutions and have to partner with the major merchants, according to Dr. Bjorn Cumps, Professor at the Vlerick Business School in Belgium. “It is likely that the major platforms Apple Pay and Google Wallet will also come to emerging markets but will have to compete with other local platforms,” Cumps told The FINANCIAL.
“Reducing cash is a problem everywhere. The reason is a combination of things. First of all, indeed, people’s mentality. But electronic payments are not always a good substitute. Peer-to-peer payments are often only possible between clients of the same bank. Different banks each have their own payments app or solution, etc. Cash is still much more flexible at the moment. That is why it is important that we move towards one standard mobile payments solution.
I believe that Apple Pay can really be a catalyst if enough people start using it. Apple will surely expand its services and possibilities with Apple Pay. And they have a loyal “fan base” of users. So yes, banks will welcome this to further reduce cash transactions. But the main question is, will they be able to expand to all these different countries fast enough, beating possible local solutions? Don’t forget that they have to partner with the major merchants as well as local ones to reach a critical mass of point-of-sale terminals,” Cumps said.
“Whether banks like/embrace services like Apply Pay or any other technological improvements depends on whether they partner with them or compete against them. Some banks are afraid of the disruptive nature of some of these tech companies. Others welcome their move and hope to profit from their popular brand as long as it won’t cost them too much business and there is a win-win in there for them,” he added.
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PayPal launched its services in Georgia in 2013.
In October 2014 PayPal started offering merchant accounts to Georgian users.
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The main game changers in the finance industry are increased regulation, rise of technology and changing demographics, he says.
Q. How different is Apple Pay really from the already existing Google Wallet?
A. Timing is everything in comedy and business. The details are different, the principle is the same but Apple’s timing is impeccable. Whereas Google Wallet was a story for the early adopters, Apple is now pushing the gas pedal for the NFC payments car to accelerate and probably reach cruising speed in a few years. The timing is right. Now that many merchants in the U.S. are replacing their terminals to comply with security regulations. Many will make sure the new terminals are NFC-enabled. With the new iPhone owners NFC-ready the merchants’ potential user base will get an enormous boost (over 4 million pre-orders of the new iPhone model in the first day the new iPhone is available). With their well-timed move Apple will quickly help to establish the infrastructural foundation of a new payments platform. And platforms, well, that is what this game is all about.
The advantage of Apple Pay is that Apple has a very successful platform, is very good at embedding new services and has a huge user base. They might be the one player that is able to tip the market of mobile payments. Given their position they might build a powerful ecosystem around them. The main disadvantage is that it is a closed system, excluding non-iPhone users so they will never reach a very large part of mobile users.
Q. How does Apple Pay impact on retail banks?
A. Well, some seem relieved to be included as a partner in Apple’s business model. Others remain hesitant and suspicious of what is about to come. It is obvious that Apple wants a piece of the payments pie. And it is quite a sizeable pie with worldwide more than 300 billion non-cash payment transactions yearly. Different sources claim Apple gets 0.15% of each Apply Pay transaction which means their revenue stream will increase as both the amount per transaction or the number of transactions increases.
First estimates indicate this could evolve into a multi-billion dollar business for Apple. So yes, banks will get a smaller piece of the pie and see a sizeable part of the business go to tech companies. Why are banks relieved? First of all because Apple is the perfect ally to grow the payments business even further. And who doesn’t like an even bigger pie? Even if it is Apple pie! But more importantly, for years banks have been fighting a war on cash, trying to reduce the number of cash transactions; without great success. Apple can help reduce costly cash transactions for banks and could increase the size of the payments pie as the amount of transactions increases. Not all bad news for banks I would say.
Secondly, because banks are, for now, part of the payments ecosystem Apple is setting up, banks are still in the loop. Apple is not reinventing the payments business. They just did what they always do. They take an existing product, improve it, re-invent it, create a platform for it and embed it in the Apple experience and design. Banks know they cannot deliver this. They don’t know how to themselves. But by partnering with Apple Pay they don’t have to. Their customer can enjoy a new payment experience in a myriad of new apps which will embed Apply Pay. Apple has the platform and will further develop it in the future. This shows that both partners could be winners when partnering in an ecosystem rather than competing against each other. And yet, not everyone will join Apple’s platform.
Q. Does it mean that we will see a battle of the platforms in the years to come?
A. Also in this business, we will see a battle of platforms in the years to come. The platform war means that companies will group themselves around different payments solutions. Some will choose Apple Pay, others Google Wallet, others a local mobile payments solution and that for the coming years these solutions will exist next to each other and compete. Now is the moment that platforms emerge. In the coming years we will have to see which platform will reach tipping point and convince a majority of users to become the dominant platform of the payments industry.
Apple Pay will be a catalyst for the payments business. But they are not the only platform out there. In the U.S. some major merchants (Walmart, BestBuy, 7-eleven, Target, Shell, ExxonMobil and more than 50 others) combined forces to create MCX (Merchant Customer Exchange) a merchants-owned mobile commerce network that offers an app-based mobile payments solution. A similar initiative exists in Belgium with Sixdots, a platform supported by all the major banks which will enable in-app mobile payments combined with fidelity cards and couponing solutions. And many other solutions are out there. All platforms will have a different ecosystem of partners, services and technology. And let’s not forget the Android platform with Google Wallet. Who will win this fascinating battle? In the end it will come down to who creates the best perceived value for the customers. Where do we as customers/users get the best payments service and experience?
Tech companies do not want to become banks. They just want a sizeable part of the pie of certain banking services (payments, credits, …). They know how to optimize or even re-engineer certain parts of the banking processes in a way banks never did. Tech companies are in the payments value chain from now on. No doubt about that. We have crossed that bridge. How much of the payments pie they will be able to claim depends on how these new ecosystems will evolve. Which partners will find each other. How new value will be created with new services. And finally, which platform will come out as the winner. Is Apple Pay the right services at the right time? Time will tell.
Q. You said that tech companies already know how to optimize certain parts of the banking process in a way banks never did. If tech companies are in the payment value chain from now on, what impact will it have on retail banks? How do tech companies and banks work together now and how do you see them working together in the coming years?
A. Now they often do not work together at all. There are two scenarios. Some tech companies will partner with banks, like Apple seems to be doing at the moment. They take over parts of the value chain they can do better, faster, more qualitative than the banks themselves. Others will compete with the banks as they feel they can do it better and don’t need to partner with the banks (ratesetter, zopa, fundingcircle, Paypal, … are some nice examples).
Q. Ok, so the tech companies do not want to become banks. But how has it happened that tech companies know how to optimize or even re-engineer certain parts of banking processes in a way banks never did?
A. The processes themselves are not that difficult. Banks just never felt the need to innovate before. Furthermore, a company like Apple builds part of the solution into the devices (iPhone) they sell. Banks cannot do this. And people are tied to their devices.
Q. Asides from Apple Pay what are the other innovations that could have a significant impact on the financial industry?
A. The major other ones are crowdfunding, peer-to-peer lending and money transfer solutions. There is an entire new industry developing around this called fintech (Companies like Zopa, ratesetter, funding circle, prosper, lending club, clear2pay are some nice examples of fintech ventures that will challenge the traditional financial services business.
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