Empowering consumers, enabling business, driving commerce; protecting financial transactions for the evolving digital age

Edward Chandler, Group General Manager Business Development, Mastercard

---

We live in an 'evolving digital age', in which smartphones outsell PCs and “apps” constitute a $10 billion market. As such, UK Industrial Policy needs to embrace the benefits of freer, faster and more convenient mobile commercewhilst maintaining integrity and security in the digital age. MasterCard operates at the cutting edge of the digital payment revolution that is redefining the UK’s new commercial environment but policy must keep apace with innovation to maintain the UK’s competitive advantage.

Industrial policy must reflect the way we live now

In every aspect of social life, technological advances are rapidly changing the ways in which we interact. One example is the profound change to the ways in which we search for, choose and pay for things we want.

The growth and size of the opportunity is remarkable: according to Forrester Research, online retail sales in the USA alone will grow to $250 billion by 2014.[1] This opportunity is causing a digital explosion, particularly in the UK, with Juniper projecting CAGR of 17% across digital commerce in the UK.

Within this market, there are three main categories: proximity payments being driven by contactless technologies, remote commerce through digital devices, and person to person payments (money transfers).

Proximity Payments

The “second wave” driver of digital commerce is the creation – and proliferation – of smartphone devices, permitting people to shop on the move using a device they carry with them, a device they know and trust. Over half of all people in the UK now use a smartphone.  These devices operate in ways that let us “blend” the real world and the digital - GPS technology tells us what’s around us; devices capable of reading and interpreting bar codes and QR codes help us to know more about products than we’d ever have found out before – including, of course, comparable prices elsewhere: 65% of shoppers compare prices online before buying items costing over £100, a trend which may only become more frequent mobile technology improves and its usage increasingly becomes the norm. Permitting interaction in both the real and digital world simultaneously, this information empowerment can now never be taken away from consumers – and will only grow and become richer over time.

Remote Commerce

It is hard to overstate the importance of shopping online: the internet has fundamentally changed commerce, with not only digital (or “virtual”) goods being sold online in large quantities (at $153 billion), but also physical goods being purchased remotely. Consumers can interact with vendors in other towns – or timezones – without difficulty, largely eliminating the challenges of geography. As costs of access decline, the speed of accessing the internet has simultaneously tremendously increased, allowing increasingly rich content to be accessed and absorbed. The commercial world is now “always on” – and a 24 hour, global shopping environment necessitates a sensitive UK industrial policy environment.

Person to Person payments

The transfer of funds between two people,  by cash transfer, cheque or specialist networks like Western Union, is  already commonplace in the UK: but doing so using digital devices as forms of authentication (either domestically or internationally) is the next wave of the digital transformation; its potential is still to be realised. Combined, the UK market will see some $118 billion in these payments this year, with that amount projected to rise to $193 billion by 2016.

These numbers are staggering: but they may yet increase in ways we might find difficult to predict. Desktops, laptops and smartphones are far from the only ways to access the web. Tablets, games consoles and now televisions can take you online too: by 2015 Cisco predicts that there will be 15 billion internet-connected devices in the world.  This context is an important consideration for governments and policy makers.

Industrial policy must recognise the changing nature of consumers

The web doesn’t just help us with purchases: it influences what we purchase, how we purchase and our next purchase decision too –Platform giants like Google, Facebook, YouTube, Amazon and EBay provide web “hubs”, which act as centres for both social and commercial interactions. Facebook in the UK has over 30 million active users (that is, over half the country’s population). Permitting financial interactions in forums like that, in which users have volunteered their presence and data and feel comfortable, is plainly appealing for merchants and service providers of all kinds. The online media and content products desired or required for these interactions are new, and obtaining them (from games to music, applications and social platforms to film and mail) often requires micro-payment mechanisms, preferably without having to leave the relevant platform or app.  Policy makers need to be aware of the increasing complexity of this market and this should be reflected in future policy decisions.

These things matter. Consumers in the past were treated much more as passive recipients of information and offers from vendors: merchants would make an offer from the centre, and the recipient on the periphery could either accept it or reject it. Now, the consumer is the centre of the transaction. Their preferences, relayed through past purchases but also through customer-authored (and therefore more-trusted) reviews and reactions, are mounted on e-commerce platforms like Amazon offering instant mobile price comparison capabilities, ensuring that they hear about the pros and cons of every available option, not just the one in front of them. Peer reviews – from “real name” people and even people you know – are becoming ever-more important in the mindsets of consumers.

Through social media, new players are entering the commerce ecosystem (at dizzying speed: whilst it took AOL 9 years to accumulate a million users, it only took Facebook nine months – and Draw Something did it in nine days). PayPal has become established as a trusted broker very quickly, interacting with many merchants whilst retaining a loyal “base” with EBay. Instagram can boast over 25 million users with only 13 employees - and a valuation on sale of $10 billion. Facebook and other social platforms are generating their own “currency”, with closed-loop commerce environments in fields like gaming and gambling, as well as social media commerce (the biggest example being Facebook Credits).  Industrial policy must be flexible, future proofed and, importantly, open to constant evolution.

Industrial Policy must recognise the value of ‘social commerce’

For consumers, social digital is delivering increased buying power (more choice, reviews and feedback), convenience and security. It also drives much better service, since it’s just as easy to drop an app as it is to use or join it. Location-aware devices help consumers identify what’s available geographically, but also combine with their spending data and recorded preferences (from Facebook “likes” to Amazon ratings to loyalty schemes) to point to new routes and desired outcomes in the payment journey. For merchants, digital is enabling businesses to reach a larger customer base and complete transactions more easily. Digital doesn’t simply make existing commerce easier:  it has generated real value for businesses, and will go on doing so in very significant ways.

Whilst his vested interest in the prediction being realised is obvious, it seems that Mark Zuckerberg was right when he said that “if I had to guess, social commerce is the next area to really blow up.”

Industrial Policy should reflect the changing nature of how we pay

Whilst there are many examples in and outside of the UK of new payment types changing the ecosystem, they can be broadly broken down into these categories:

Proximity: mobile as a point of sale

Using a mobile device as a point of sale is increasingly common, with players like Square operating innovative systems allowing microvendors to accept electronic payments. Small businesses, sole traders and individuals benefit from this model, with devices handed out for free and the costs kept low by a small percentage being collected on sales or with a small monthly subscription. Far from the preserve of “big business”, these transactions are empowering across the commerce chain: over 50% of SMEs already use smart-phones for email, contacts and business tools and enabling the mobile as a point of sale is becoming increasingly popular.

iZettle is one such innovative system aimed at individuals, sole traders and microbusinesses, provided by a MasterCard partner: a chip micro reader plugs into a standard iPhone or iPad, which hosts a simple, free application; the recipient merchant or individual enters the amount of the transaction onto the device and the purchaser e-signs on the face of the device. Making the sharing of purchases with friends on platforms like Facebook easy, it has already been successfully trialled in Sweden in 2011, is being rolled out across Scandanavia and is highly likely to expand to other European countries in the near future, including the UK where a three month trial has already begun

Contactless payments

Users pre-store their credit card (or loyalty card) data on their phones, and Near Field Communication (NFC) payment systems like Google Wallet and MasterCard’s PayPass permit the purchase of items in store via entering a pincode (on the user’s own phone) and then simply “tapping” the store’s device. These systems permit combining one’s stored details with voucher codes and discount or loyalty schemes, permitting “two way” communication in a much more sophisticated way than contactless smart cards, which are one-way only. NFC devices can also read one-way applications through unpowered “tags”, so even one-way communications are improved (and not in a small way: Germany has trialled a NFC ticketing system for public transport and China already uses it for public buses). One variant system, “Quick Tap”, has excited the UK market, where it launched on a new Samsung phone in 2011. Quick Tap, developed by Orange and Barclaycard, lets users use their phone like a contactless credit card, with an app on the phone permitting consumers to top up a “wave and pay” account with a constant running list of transactions and a tally of expenditure – more than a million transactions took place in the first year. The system has a SIM card-based security model, offering greater security as transactions can therefore be checked in real time. The infrastructure required for Quick Tap is already in place across the country and similar system developments from other networks and providers are very likely.

Peer to Peer

As the more outmoded forms of money transfer decline, such as the cheque, mobile money innovations have emerged, improving the speed, efficiency and overall convenience of money transfer. The developing world sees individual, consumer and business benefits of mobile money transfers where, despite the lack of banking institutions, mobile phones reign supreme. In Kenya, for example, M-Pesa - a joint venture between Vodafone and Kenya's Safaricom - has taken off with over 50 per cent of the adult population using the service, both in doing business and to send funds to one another. This has improved the lives of businesses, with employees and contractors being paid through mobile money transfer, allowing workers to send funds back to their families. But it allows customers to load money onto their phone and send it to a third party via text message, with the recipient collecting the cash at their nearest vendor.  This clearly shows how social benefits are being realised through business evolution, driven by consumer needs and demands.

The digital payment environment is not only innovative; it is also an ultra-competitive field. Any new purchase time will be obliged to have convenience and simplicity at its heart, along with equal or greater security. That competition, the efficiency it obliges providers to demonstrate, and the results it yields, are all in the interests of consumers.

Industrial Policy needs to support infrastructure that ensures safety when people make payments

The expansion of the digital payment market is in all of our interests. This innovation-driven market space has attracted many dynamic entrepreneurs and companies and offers huge opportunities. It’s an exciting one for those operating in it: the barriers to entry are extremely low, and innovation and entrepreneurship are swiftly rewarded; however a certain capacity for ambiguity, confusion and a potential lack of transparency is created for consumers who don’t always understand or trust the transaction they’re being asked to conduct.

There is a vital need for reliable security protocols to protect this innovative space and set of systems. Without trust in the network of payment opportunities and systems, they will be used less and their development will stall. The maintenance of integrity, security and protection for consumers is perhaps the most important role we at MasterCard perceive for ourselves in the process as there is nothing more important than the safety of customers and their data.

Equally, all involved in the digital payment process need to ensure that that security comes combined with simplicity: as the online system has shown, one-click payments – avoiding the frustrating compulsory re-entry of credit card details which marked the initial online experience – have added greatly to the convenience of purchasing, and therefore the regularity of it. Reassuring rigour has to be delivered without effectively stymieing the process.

Security providers need constantly to innovate to protect these systems – and, just as we have seen a huge amount of innovation in and around how a payment is made, we will see remarkable change around how the payment is secured in the future. Time will tell how technology and new devices see ‘biometrics’ play a greater role, if geo-location will enable 3D and/or 4D factor authentication of individuals, and so on. 

Summary

The transformation of commerce by digital is far from complete. At each new stage it will benefit both consumers and business, by enabling more convenient ways to trade. From the above, we can draw out two key principles currently driving these new payment types in the market:

• Digital drives convenience, reward and simplicity for both the consumer and merchant. From purchases taking less time at the till to online shopping assisting both customers in buy things from the comfort of their own home and driving down business costs with straight-to-consumer product chains not requiring costly time on shop floors and in displays, buying and selling things is becoming easier and easier – and delivering better value – because of digital.
• Security within the payment ecosystem is highly desirable and digital technology is now a driver in improving it. In a remarkably short period, digital has gone beyond overcoming the initial fears about safety, successfully reassuring those responsible for security that it offers robust and measurably improved methods for protecting consumers. But the scale and capacity of these networks is about to increase tremendously: ensuring that that which has been delivered securely in initial, small stages is still safe when scaled up across the commercial marketplace is a challenge, but one which we embrace. 

UK Industrial Policy can further support the optimistic, innovative, and creative environment that is driving huge progress in digital transactions. The transformational nature of digital payments resoundingly shows that for both consumers and merchants, the outlook is not as negative as the broader global downturn may suggest.

Edward Chandler, Group General Manager Business Development, MasterCard 

Edward Chandler (Ed) is group head and general manager for Business Development in the UK & Ireland Division.  In this role, he is responsible for driving growth through innovation with existing and new traditional and transformational customers. 

Prior to joining MasterCard, Mr. Chandler spent 18 years working at various innovative, consumer-led companies, such as Marks and Spencer, Tesco, Johnson and Johnson and Barclaycard.  During his career, he led a team that developed and launched the Oyster Credit Card (UK’s first contactless mobile payments and transit proposition), and a new real-time retail rewards program designed to drive footfall, frequency, basket size and loyalty, while reducing costs in retail.  He then became general manager of a partnership business where he looked after a number of card portfolios, including Bhs and Orange.

Mr. Chandler has a first-class degree in Marketing and Business and an MBA from Cranfield School of Management.