NFC Payments, will Stakeholders bite the bait?

Indian Landscape

Although 88% percent of India is connected through mobile telephony and even internet connectivity has risen to 8% of the population, but surprisingly the penetration of payment cards is still abysmal at only 2%.

India is a unique country, having all kind of phones, ranging from low cost basic mobile phones to high end smart phones, like I-phones, Samsung Galaxy, Nokia Windows, HTC smart to name a few. The penetration of smart phones in India is growing at around 20% with the usage limited only by one’s imagination - calling, texting, chatting, browsing, banking, payments, purchases, transfers, cash-in and cash-outs- with even the regulator taking a positive bias towards growth of m-payments and m-commerce. Mobiles today are being used for social interaction, mobility, location check-ins and now even payments.

The young, upwardly mobile, high income male is the segment, who seems to be more inclined towards m-payments, m-banking and P2P payments. From a consumer readiness perspective though, I am positive that the Digital and Mobile age generation would soon be responsible for making mobile the choice for everything.

The Big Question

In this context, I would like to examine if there is a need for contactless payment technologies, specifically NFC, if there is,

• why be part of it,
• who will pay for it and why,
• And finally, “would stakeholders bite the bait?”.

Payment Options

Today’s customer is spoilt for choice when it comes to choosing a transaction channel- be it ATMs, PoS, Internet, Mobile or IVR and now contactless payments are getting added to it. The payment methods, be it insert, swipe, login, call, or SMS and now even, “touch and pay”, are plenty.

So is the customer getting confused, as more or less, the channels and associated payment methods, meet the same need - Payments, Transfers, Purchases, Cash-in and Cash-outs? There is also a need to remember multiple user-name and passwords, if one chooses to opt for multiple channels and payment methods.

The question to be asked is - Are convenience and security, the only driving factor for choice of payment channel/method or does the ability to do everything safely, easily and conveniently, through a single channel/method reign supreme? The answer, in my mind, is “yes” and the right channel/payment method, possibly, is Contactless Payments/NFC.

What is NFC?

NFC is a near field communication technology which can affect data or information exchange in proximity, securely. NFC devices can function as credit cards, debit cards, badges or as tickers and in the card emulation mode, can enable the "mobile wallet." In reader mode it can read NFC tags, containing data or information and in P2P mode, NFC devices can exchange information with each other. It can act as a key for a car, a secure key for access to ant premise, enable low ticket payments through just ‘tap and pay”, and these are just a few examples.

To sum it up, there are 3 primary ways NFC can be used on mobile devices: Card Emulation Mode, Reader Mode and P2P Mode (peer-to-peer mode) and this gives NFC enabled devices the ability to do almost everything that a user may desire.

Opportunities in NFC

Having established the need for such a versatile technology/device let’s look at why one should be part of it.

From a user perspective, the most personal device for transactions of any kind (sharing, payments, purchases and transfers, cash-in and cash-outs), for anyone, will most likely be a mobile phone, for very simple, yet, very powerful reasons. One may forget one’s wallet, driving license, ID cards at home but not the mobile. It keeps one connected always, wherever one is, whatever time it is, with whomsoever one needs to be in touch with. And finally, like I mentioned above, it can almost do anything for anyone.

Once the communication method/transaction channel/device (proximity/wireless/mobile phone) is chosen, the choice of a payment method/technology will be determined by Ease, Convenience, Versatility, Safety and Security and that is where NFC scores above all.

The choice of mobile, as the device to do all financial transactions, and the technology, NFC, taking care of all points mentioned above, will dramatically alter the transaction mode from “insert/swipe/login/call/text” to “touch and there you go”.

The ease, convenience, versatility, safety and security of NFC effected payments will also drive the payment mode from cash to non-cash (electronic) and if the shift from cash takes place everyone will benefit – Merchants, Advertisers (brands), Technology and Infrastructure provider, Mobile companies, Banks, Government (financial inclusion) and finally, the “customer himself”.

Globally, 40% of payments are through cards and m-payments are expected to corner 15% of this share by 2013. The m-payments transactions are expected to grow from 4.6 billion transactions to 13.6 billion transactions in 2013 with the value growing from €62 billion to €223 billion. This growth is likely to be led by workers’ remittances, retail purchases, payments and transfers.

There is also an emergence of two specialist roles for Payment Service Providers namely; Wholesale Payments Provider (WPP) and the Retail Payment Services Provider (RPSP). The payment services providers, who will be able to fulfill both these roles in a cost and value effective manner, will eventually be the winners.

Players like NPCI are chipping in and so are mChek, Paymate, Airtel money and Movida to name a few but as of now they can only service a few needs and a few segments. But if NFC becomes the choice, with m-banking, m-wallet, m-Payments, Advertising, loyalty coupons, deals, checking in, P2P payments being the application universe, NFC enablers, are expected to rule the roost in the time to come.

Stakeholders

Now the next question is, who is going to fund the infrastructure needed to make NFC a success.  In my mind, all stakeholders - the mobile companies, the brands (advertisers), the switchers/acquirers, the merchants, the banks, the Telco’s and the government too, will contribute, to the idea- NFC, whose time has come.

The Mobile companies will fund, driven by the need to innovate, to make mobiles more useful and to sell their NFC enabled handsets. The Switcher/acquires will pay for NFC terminals (technology and infra), for marketing expense for Merchant & customer acceptance, due to higher transaction coming through NFC applications (read NFC payments) leading to higher switching fee income. The Merchants will pay for the transaction cost plus acquirer/issuer margin, provided NFC infra cost contribution is reasonable, customers adopt NFC quickly & increase spends too and also due to the resultant higher sales, which may come through NFC applications like m-advertising, couponing, deals push, customer purchase behavior knowledge (NFC taxation history), in addition to deep customer engagement, emerging from convenience, safety and security of transactions (oh yes, NFC payments are much secure).

The banks who adopt NFC will establish leadership presence in payments space and fund back-end integration cost with them, marketing expense for driving customer education, awareness and acceptance, given shift to electronic transactions and NFC payments take place, customer acquisition and retention grows and interchange earnings go up too.

The Telco’s, themselves, can take the lead in setting up the ecosystem, be the driver for the same and make others a part of the ecosystem, rather than themselves being the part of ecosystems, as they have the huge captive customer base, have deep customer engagement, command customer loyalty (at least in India), are merchants themselves and finally, possibly are the ones, who connect customer thru a common thread – the omnipresent, omniscient and omnipotent, mobile.

The government and regulator both are looking to push for safe, secure and convenient non-cash transactions (electronic payments) along with financial inclusion. Any technology, which can address both, would tilt them positively towards it and they can, by propagating smart cards and contactless payments, be big enablers for NFC.

Finally, the customer himself, by making the right choice, by choosing mobile as the preferred channel, making mobile the most personal and universal device and by quickly adopting the best technology, possibly to emerge in mobile space, NFC, will fund all.

The author can be contacted over email, rajnishkhare@gmail.com, for feedback and comments.

White Label ATMs – Glittering Gold or Solid Silver

White Label ATMs – Glittering Gold or Solid Silver

Reserve Bank of India has permitted Independent ATM Deployers (IADs) to set up and operate white label ATMs, earn revenue through acquiring fee (no free transactions, unlike in case of bank's own ATMs, where 1st five transactions are to be free) and by offering value added services, along with the permission to do 3^rd party advertising, to help recover cost of operations.

The ATM density in India is 70 ATMs per million with around 280 million debit cards issued, clocking 1.5 transactions per debit card per month (ATM Transactions), showing that there is a huge opportunity for ATM transactions to grow in India.

It’s expected that the banks will bring in another 45-50,000 ATMs in next 3 years but that will still be a drop in the ocean. The cost of ATM operations still continues to be high for most of the banks and further deployment will depend on how banks retail base increases, how financial inclusion takes shape, how the total cost of ATM operations decreases, how the cost of currency moves and how government and RBI, together, push for electronic transactions. The smaller and mid size banks continue to look for joining the existing shared networks and/or outsource their ATM deployment end to end to keep costs low, while continuing to look for their ATMs for branding or customer service perspective or to lower cost of transactions at branches .

Given these, RBI has been proactive in permitting IADs to come into this space and influence many of these factors positively, if not all.

Even today, 85% of transactions still continue to be cash transactions. Preference for cash than cards by small and medium sized merchants, paucity of other modes for payment at Toll counters, small value tickets (train, buses, movies) etc, cash being free for customers (no one pays directly for cost of currency) will continue driving cash to be a preferred mode of transactions for some good time to come. This will drive the need for more and more ATMs to be deployed.

From a customer angle, there are many reasons for an ATM to be adopted as a preferred channel for cash withdrawal.

• Availability - To be able to withdraw/deposit cash, customers need a bank branch and branches are not everywhere and not available all the time. Cash transactions are now getting charged by some and the modalities of cash withdrawal/deposit at PoS/franchise are still being finalized. Therefore, the need for the ATMs will be more important than ever. When there is a need for cash, the availability of the ATMs at the desired place, becomes very important, as more often than not, the need for cash, is urgent. Given a very low ATM density, the ATMs are not really available at all the places where customers want them to be, therefore, customers may be willing to pay for an ATM to be where they want it to be. 

• Convenience – The ease of transaction is profound and ATM by virtue of providing a simple way of transacting, providing relative privacy and being highly accurate and risk free (no counterfeit notes), provides a great convenience. Branches still want a cash withdrawal slip and bearer Cheques need someone to visit teller counters to withdraw money, where signature matching and long queues, are still the order of the day, with limits or condition on higher cash withdrawal amounts, not to mention charges. 

• Lower or no fee - With RBI making up to 5 transactions free and clarity now emerging on it, the number of ATM transaction per card have increased slightly and the overall volume is getting supported by growth in card issuance. Many banks are not charging their premium customers and for other customers, they are applying the charges beyond 5 transactions, selectively.

• Growth of Banking Transaction set on ATMs and Value added services – Many banks and shared networks have increased the transaction set available at ATMs (e.g. Time Deposit renewal) as well as are introducing value added services to ATM menu e.g. prepaid mobile top up, bill payments, dynamic currency conversion, Interbank fund transfer in real time (IMPS) etc., which is driving customer to ATMs and improving overall transactions volume. 

• Growth of Banked Population and Debit cards – The banked population though, still very low, compared to developed countries, is growing at a very fast pace and the issuance of cards is also increasing at a very fast pace. It’s estimated that there are 280 million debit cards already issued and growing at the rate of 38% per annum. This is helping in driving the ATM usage and bringing down overall cost of operations as threshold transaction levels are breached at ATMs. 

The point now is, can this potential be exploited better by banks or IADs, what can be the factors for successful ATM deployment strategy, what kind of business model would be making sense, what would be the cost and revenue drivers and finally, is white label ATM, a glittering gold mine or a solid silver proposition!

• Banks or IADs

The banks have traditionally used ATM channels for customer service. They moved on to ATM channels as an alternate channel strategy to divert traffic from branches to ATMs to lower cost of teller transactions, then used ATMs as a customer acquisition strategy and now are looking to use ATM channel to win customer mindshare to have a sustainable long team advantage. The Private Sector banks have deployed ATMs for all these reasons and also have started looking at ATMs as a significant interchange income earner.  The Public sector banks are possibly deploying ATMs for customer service and channel migration and in the process are also earning interchange income, which is helping them to lower, total cost of operations. The smaller and mid sized banks, are into selective ATM deployment, with switching being outsourced to shared networks and they are also joining shared ATM networks to expand the reach of ATMs for their customers at a lower cost, relative to what it would have cost them, had they gone for mass deployment on their own.

The banks are also experimenting with end to end outsourcing of their ATM networks, where ATM deployment and managed services is outsourced end to end (assets are lease financed) and bank pays to manages services provider a fixed or fixed plus variable cost. This avoids capital expenditure and staff cost and gives bank flexibility to expand network as business grows. In the bargain Bank may pick some quality issues with the network, unless deliverables are clearly defined and recourses are built in and quantified to the extent possible with Service Level Agreement and Relationship properly managed.

They have also experimented with cost sharing models, where the ATM service providers, have come up with cost and revenue sharing formula, called Brown Label ATMs. The banks extend license to managed service providers or OEM/Managed services provider combine and provide for cash and settlement services but keep branding with them. The managed service providers or IADs build, own and operate the network and get transaction fee and acquiring interchange. The sponsoring banks gets some benefit in terms of lower transaction cost for Bank’s on-us customers and cut of acquiring interchange for Bank’s off-us customers.

In some cases, banks have outsourced their existing owned ATM network to a managed service provider, who then, operates the network with branding of bank and charges the bank per transaction at a given rate lower than prevailing interchange for. This helps banks to lower their cost of operations and pay on a per transaction basis and still own ATMs, from a brand perspective.

Many banks are realizing that expanding networks on their own or through partnerships with managed services provider is not something they would look at as core business as upper limits are capped by regulator or through shared networks members themselves. But they would still need their customer to be serviced and that is where IADs are going to step in. 

Having derived experience, existing managed services providers/IADs are shifting gears and are looking at owning and operating the networks themselves (in the mean time, acquiring initial scale, by getting into arrangements as described above) to maximize revenue opportunities for themselves.

IADs are going to fill the gap in ATM demand and they would have the freedom to price the transactions basis what market is willing to pay and they would also have the advantage of accumulated experience, specialized work force and the economies of scale to run a White Label ATM profitably as their core business.  In this sense, going forward, banks would continue to deploy ATMs, albeit more selectively, though, some may go for higher pace, given, they still lack the network needed to service their customers. The IADs will be much more aggressive, as they have the opportunity to set up a network, which has the potential to grow exponentially and this is going to attract many a players, both existing ones and the new entities

• Factors for successful white label ATM deployment

A successful white label ATM will derive its strategy from a fast food chain or a specialty restaurant chain business model.

• USP - The ATMs will need to have a USP to not only utilize availability and convenience as the prime factors but in the long run also have sustainable advantage over competitor’s network and Bank’s owned network. It will need to decide on its core function - cash dispensation and balance inquiry and on what it will have, what others won’t offer or can’t replicate easily in short or medium term. In terms of peripheral proposition, a high demand, easy operation and a quick fulfillment transaction can be integrated around core proposition. E.g. a mobile recharge or a one time bill payment facility or education fee (school) or insurance premium or a card to card transfer can work, not that it can not be replicated. A fast food chain offers a core product for what it is known and also integrates a few other things, which a customer needs but which don’t tax the chain too much e.g. beverages. 

• Location - The second most important parameter is going to be location, location and location.  It will need to be deployed at places, where others (bank or competition) don’t have a presence, where there is a big need for ATMs and where customers live, shop and work. It has to be deployed, where high foot falls exist, which can lead to high no of transactions, being acquired by the ATM.  Example could be, staying away form already crowded ATM places to avoid low volumes, going onto tier 3-5 cities, high end residential and commercial locations, SEZs, Popular café’s, petrol pumps, motels, hospitals, tourist locations, multiplexes, shopping malls, bus station, metro stations, etc having potential to generate transaction by virtue of great latent need being already present or a captive footfall already guaranteed. The ease of accessing ATMs and the visibility of the ATMs needs to be accounted for, in deciding the location strategy. 

• Differentiation, Standardization and Brand Building - Then, to build a presence in the mind of customer, the white label ATMs need to be differentiated, in terms of look and feel too and consistency needs to be highly present, be it drive-in ATMs, through the wall ATMs, free standing Kiosk ATMs or in some cases semi-enclosed or full function lobby ATMs. 

Standardization will help in rapidly building presence and achieve economies of scale before others can, so as to keep costs low and also erect significant entry barriers, before others can react significantly.

A consistent approach will help build a great brand recall and pull customers, as they would know, where to look for, if needed, if ATM is already not present, where they are. From a trust and pull perspective, IADs will need to build on brand or work on successful brand extension, if they already have a strong brand name.

• Network Optimization - A clear review strategy, in terms of defined performance parameters, needs to be evolved to optimally utilize the ATM network and maximize the returns. The review strategy will help in rapid learning and will assist in re-deploying non performing ATMs or in getting rid of them altogether, to focus, where maximum advantage is. 

• Quality control - The other factor would be quality control and that means highly reliable and 24X7 available ATM network just like mobile networks are. If you are there, but not available, others will exploit and this will also have a direct revenue loss, in terms of lost transactions, not to mention, losing on customer goodwill. 

• Margin or Volume - The while label ATM will need to be a high volume, average margin game rather than high margin, average volume game, given that Indian customer is a value customer and clearly understands the benefits of tradeoff and will be willing to go extra miles at times, if needed. The perception that people will pay anything for convenience needs to be corrected, else in the long run, alternative payment channels like NFC, USSD or smart client based P2P application, with rapidly evolving infrastructure, may make a dent in the money, the ATMs will make. An example would be travel ticket agents, who have perished, because the alternatives brought down volumes and also reduced margins. 

• Fraud Control and Management - Finally, the money is involved and accuracy of transaction and a quick resolution of any dispute relative to others, competitors or banks, are going to be the key to build customer trust in white label ATMs as traditionally people trust banks much more with their money than any other entity. The fraud control and management will need to be of the highest order as the trust level initially will be lower and any bad experience can quickly snowball and send customer back to bank owned ATMs. 

• Business Model - There are two business models which can evolve. 

• Augmenting the ATM networks, where banks find it difficult either to catch up with pace of deployment to meet demand or find it beyond their service or acquisition area to set up ATMs but still want their customers to have access to cash all the time and, in turn, charging banks (acquiring interchange) rather than the customers for each cash withdrawal or balance transaction and thus earning interchange apart from revenue from value added services and advertising. Here the pricing power will depend on negotiations with banks and will also get capped by the interchange set by banks, shared networks, VISA/Master or NPCI or even by regulator in extreme cases to benefit small and medium sized banks. This is a model, which is not highly recommended, though, it has the advantage of captive customer base, higher productivity (read cost control, economies of scale and high availability) and banks owned networks not directly competing, as banks may not mind their customers transacting at ATMs other than their own, due to lower cost of transaction expected at white label ATMs. 

• The second model would be to charge customers a convenience fee, like Acquiring banks or IADS abroad do (this is still fuzzy, given Regulation clarity from RBI on charging customers directly), in addition to interchange earned from banks, for the transactions undertaken, earn money from value added services and advertising and have some arrangement with commercial entities e.g. retailers, who need an ATM at their premises to improve customers spends. The advantage would be pricing power, freedom to offer desired product/service mix and opportunity to earn, need based incremental revenue, from commercial entities. The cons will be that pricing power may get determined by customer acceptance of ATMs and price they are willing to pay, market dynamics and clear demonstration of used cases to sell ATMs to commercial entities, beforehand, in many cases. 

• Revenue and Cost Drivers – The white label ATMs will be able to earn from bank transactions (cash withdrawal, balance inquiry, fund transfer) fee, Value added services like mobile top up, one time bill payment etc, Display advertising opportunity at ATMs, interactive advertising and lead generation (if permitted) at ATMs, rental or percentage commission from commercial establishments like retailers where they have placed ATM on demand and by offering some unique services like coupon dispensation etc. The opportunity sizing will depend on the facilities offered at ATMs and that will depend on business strategy of going with “the in demand transaction set” or a “researched bouquet of services” offered. 

The cost drivers can be; one time cost of switching infrastructure, ATM hardware - core and peripheral devices, air conditioning if needed, civil and legal work and set up cost. The variable cost will be technology and maintenance cost – ATM and peripheral devices, connectivity, power, air-conditioning if needed, NOC operations etc, managed services/operations cost – Network monitoring and management, First level maintenance, Cash operations, consumables etc, Facilities management cost if applicable – security, housekeeping etc.

The revenue drivers will determine the top line and the cost drivers will determine how competitively and profitably the business can be run.

In my view, white Label ATM is going to be a capital intensive business, at least initially, but once deployment model is perfected, the need for capital investment will come down to some extent, as cash flows generated by the network will start coming in from day one only, given cost control and quality control will be watertight. The business, if managed well, has the potential to become a cash cow in years to come and then the time will tell, given demand sustains, how good an opportunity waiting-in- the-wings, the white label ATM business, was.

Having written all, what is written above, how good a strategy is, how market dynamics functions, how competitive and regulatory environment evolve, how good the placement, positioning and marketing is and how well the business is managed, will determine, if the white label ATM business turns out to be – A glittering gold mine or a solid silver proposition.

The views expressed are personal views of author and for any feedback/comment he can be contacted at rajnishkhare@gmail.com

A Message to Dear Mr. President Obama…who visited and left a lot to be desired 

It could have been a visit, which could have discussed some great possibilities, like reverse migration, which in a global world, should happen, if we all are, anywhere near or moving close, to be a Global Economic Fraternity, which will spreads its wing all over the globe and conquer, worlds beyond, and not just limit itself to, a planet called, Earth.

America needs to recognize and partner India, which has a much better track record on all fronts, economic growth, wealth distribution parity (leading to relatively less social unrest unlike china where there is a real possibility of it) and peaceful use of its technology and military might.

US consumption credit driven consumption will not last forever as can be seen in many European countries faltering on mounting debt, both internal and external, and it needs to find ways to improve productivity (to some extent technology driven productivity helps), improve penetration in already accessible markets, find new markets, adopt some austerity measures itself rather than advising others and also export its entrepreneurship culture along with its manufacturing hubs to friendly or neutral countries.

US also need to recognize that it can not be parenting, policing or punishing the world, as and when it pleases to. It has to accommodate and make way for rising countries just like intelligent parents make way once their children grow up, stop interfering in all the matters and allow children to carve a path of their own, even if it is not, what they thought or wanted their children to pursue. A friend, in the long run, will turn out to be a far better resource, than a child being nurtured all the way.

Dollar as a currency still dominates and EURO, Yen or Yuan are still struggling to be the trade currency choice but the day is not far when economic leadership will become far more powerful than political, military or cultural leadership. Then, we may see formation of tightly knit “Global Economic Zones” where barter and not the currency will rule.

Having said that US has many positives, a resilient economy (and the largest still), highly advanced technological capabilities in many areas if not all, a very liberal culture, great entrepreneurship oriented workforce and a melting pot of intelligence, if not wisdom, from all over the world.

There were huge expectation from Obama - first Afro-American, Harvard educated, supposedly a no-nonsense reformist leader, when he became president, who had nothing to lose but had an opportunity to usher in a new era in the world and may be even take all into a new orbit, in the space – the final frontier. It turns out that he is just another colored politician, whose colors now have been washed away with heavy rains, marking him as just a black man and not the Martin Luther King, so many had expected, had reborn.

It will be wise of him, now that expectation from him have worn away, to bring in some dramatic changes in the world, while he still has a year left and walk the real talk than making promises he has not the capability to deliver anymore. If he can do so and adopt certain suggestion being advanced by well wishing friends, and I count as India one of them, he can still rise from the ashes, and make America once again what it stood for and the world a close community, he will go down in the pages of history, as the proverbial black gold and not just as the eagle ,which only once soared so high in the sky, that it burnt its feathers in the super shining Sun and fell back to from where it had once taken the flight to soar high, forever.

rajnishkhare@gmail.com