Power to the people

5 February 2012 • By Paul Bray

Banks, retailers, advertisers and mobile phone companies are all clamouring for a share of the digital money market – but the real winners could end up being consumers themselves

Digital money is becoming big business. But whose business will it be?

In outline the revenue model falls into three parts, says Dave Birch, chairman of the Digital Money Forum and director of secure electronic transaction specialist Consult Hyperion.

“You can charge for processing the transaction. You can charge retailers for driving customers through their door, managing loyalty points, coupons and so on. And because customers are using your system you get to find out a lot about them and their buying habits: there must be ways of monetising that.”

It is the non-transactional, value-added services that will make the lion’s share of the revenue, Birch believes. Pay for a meal via your Google Wallet and the credit card company’s commission may be less than 1 per cent. But the company that encouraged you to go to the restaurant may get 8-10 per cent.

“Banks are trapped inside that tiny fraction and they want to get out,” says Birch.

Competing at the transactional level will be difficult when added-value providers can afford to give transactional services away for nothing. Google Wallet, for example, is free to both consumers and retailers.

“That surprises many people, but at the core, Google is an advertising company,” says Dom Morea, senior vice president of First Data, which helped to develop Google Wallet. “The line between the online and offline worlds is beginning to blur as ads are moving to mobile, and that’s a huge untapped market for Google.”

Companies such as Google will deal in data, says Pete Daffern, CEO of mobile banking specialist Clairmail. They will get to know us and our buying habits so that retailers can target their marketing budgets much more effectively. This data will change hands in electronic marketplaces, provided consumers give their consent – which they will, Daffern believes, because they will benefit from relevant incentives and offers.

Any company with millions of loyal, committed customers – Facebook, eBay, Apple, Amazon – could also clean up. They know their customers’ habits and preferences, customers trust them, and they provide transactional websites. Many already act as trusted portals for lesser brands.

As more transactions go digital, authentication could become big business. Last October eBay subsidiary PayPal launched PayPal Access, a commerce identity system that lets retailers confirm who a potential customer is.

Another potential digital revenue stream is prepayment, says Chris Pickles, BT’s head of industry initiatives for banking and financial markets. Economists have suggested for decades that companies should, in effect, issue their own currency, since they then benefit from the “float” until the money is spent.

Google wallet terminal with NFC

Digital money could provide the mechanism. Companies such as Groupon already issue vouchers with a face value that is later redeemed with retailers or service providers. In the future digital credits could become a currency of their own.

“If schoolkids do Saturday jobs to pay for their mobile phone contracts, why not pay them in mobile phone credits instead of pounds?” says Pickles.

Mobile phone operators themselves are potential contenders in the digital money business. “Most people imagine the mobile phone is the natural replacement for the wallet,” says Birch. This should give phone companies an advantage, although whether this will translate into action is not clear.

What the banks’ role will be, nobody is sure. The EU Payment Services Directive has enabled non-banks to become licensed payment handlers, and Birch believes there would be a case for banks to abandon lowmargin, volume payment business in favour of more tightly regulated and higher-margin services.

But like social networking and commerce sites, banks know their customers well, and they retain one crucial advantage. “I trust my financial information with my bank and nobody else,” says Daffern. “There’s a real opportunity for banks to be the centre of all this, consolidating people’s finances under a single icon.”

Whoever comes out on top among the service providers, the real winners could be consumers and retailers. “One of the keys to successful mobile commerce will be ubiquity,” says Morea. “It needs to be something you can do at any department store, supermarket and corner shop.”

That requires competitive pricing to ensure retailers provide digital payment facilities and consumers use them. “In principle it should open up greater choice,” says Pickles. Retailers will be able to use any payment service via broadband internet instead of being tied to a bespoke service from their bank. Even small shops will become able to operate loyalty programmes and discount schemes.

Retailers themselves are well placed to provide digital payment services, says Birch. “I wouldn’t be surprised to see, say, a Tesco wallet on my mobile phone in a couple of years.”

In essence, as Morea points out, digital commerce is all about maintaining and extending a brand’s relationship with its customers. Who could say no to that?