Banks intent on becoming pioneers of mobile payment systems

Some day, Canadians will have the option to wave their smartphones over a cash register and be on their merry way, instead of swiping and punching into a credit or debit card terminal or fumbling for wayward coins and cash.

When that happens, it won’t likely be the pioneers of Internet payments such as PayPal providing consumers with mobile payment options, analysts say, but rather a group of old-timers — the country’s biggest banks and telecom companies.

The struggle to corner the so-called “digital wallet” market is pitting the Big Six against foreign-run alternatives like PayPal and Square in their quest to offer the best technology to transact contactless payments using smartphones and tablets.

In July, Royal Bank of Canada became the second bank in the last 12 months to launch a mobile payment solution — an application that enables clients to pay for goods and services by tapping their smartphone against a terminal.

The launch by Canada’s largest bank followed Canadian Imperial Bank of Commerce (CIBC) and Rogers Communications Inc.’s joint venture to replace credit cards with smartphones last November. RBC’s digital wallet prototype will debut on devices from Rogers’ rival BCE Inc. Toronto-Dominion Bank is also testing different mobile payment options, while Scotiabank is developing its own version called My Mobile Wallet.

Analysts and industry watchers, such as Info-Tech senior vice-president James Alexander, believe that banking institutions have the upper hand in the mobile wallet industry because of their traditional dominance in the electronic payments market, including online banking.

“We have a culture where we trust our banks above anything else in terms of their security, financial stability, and viability,” he said.

Aside from enjoying the public’s trust, banks have their fingers on the pulse of technological advances, according to Naveen Kumar, senior manager at KPMG. “Large financial institutions invest in new technology. Having that oversight definitely helps.”

Merchants and retailers also stand to gain from banks being in the driver’s seat of the mobile wallet sector, said Doug MacDonald, senior manager at Monitor Deloitte. “It makes things easier for [merchants], because all they have to do is roll out contactless terminals and they’ve got mobile payment acceptance.”

Canadians have long relied on electronic payment methods such as debit and credit card transactions, which has slowed down the switch to the digital wallet compared to countries in Asia and Africa. Mr. MacDonald said while emerging markets like Kenya lead the world in mobile payments due to inaccessibility of bank branches in rural areas, Canada enjoys a strong electronic payment infrastructure.

“In Canada, [mobile payments] will be seen as a matter of consumer choice, as opposed to necessity,” he said.

No one silver bullet solution has taken off in the Canadian mobile space, in which telecom providers, payment processors and credit card companies are also vying for consumer loyalty, said IDC Canada analyst Rob Burbach.

Both eBay’s Inc. PayPal, a digital payments pioneer that brokers online and mobile financial transactions, and upstart Square Inc., which was founded by Twitter co-creator Jack Dorsey, are expanding into Canada to become the default mobile payment engines. The San Francisco-based Square enables small business owners to accept credit card payments (for a 2.75% merchant fee) with its small credit card reader, which plugs into the headphone jack of a smartphone or tablet.

PayPal expects to process $20-billion from mobile payments globally this year, said Darrell MacMullin, managing director of PayPal Canada.

“[PayPal] has been the global leader and perhaps the most consistent innovator in mobile payments over many years. Where we have led, a lot of others have attempted to follow,” said Mr. MacMullin.

In Canada, PayPal offers PayPal Here, a thumb-sized card reader and app that becomes a mobile payment system on iPhones. Offered only to a handful of merchants across the country, it brings up another piece of the puzzle: how many retailers offer point of sale terminals that are enabled with contactless transaction options at check out? Contactless technology usually relies on near-field communication (NFC), or short-range wireless interaction, to initiate the transaction at the till. It eliminates iPhones, as they don’t include this technology, from the banks’ NFC-based offerings. They are only available on BlackBerry 10 and Android platforms. An alternative payment method that doesn’t force merchants to replace their point of sale system is available at Starbucks, where drinkers can scan a 2D barcode on their Android or iPhone devices to buy their brews.

But Mr. Alexander said it is “inevitable” these companies won’t get much traction in a battle against banking Goliaths. PayPal and Square don’t have the hundred-year-old history or accompanying bricks and mortar to succeed in Canada, he added. Last October, even EnStream, the brainchild of the three largest wireless companies, sold its experimental Zoompass mobile payment service — which eliminated banks from the equation — because of lacklustre consumer adoption.

“Canadian consumers want [mobile payment] to be convenient, safe, and ubiquitous,” Mr. Burbach said.

With no single universal platform for wholesale adoption, a surplus of fragmented options may lead to minimal adoption by confused consumers, Mr. Kumar warned.

“The more fragmented solutions you have, the less adoption you have. It’s harder to dig up a solution when you have so many different (mobile payment) platforms.”

Mr. Burbach said widespread adoption will depend on Canadian banks and telcos working together. “But we still have a long way to go before we get a touchdown.”

The Canadian Bankers Association unveiled their mobile payments guidelines last year, voluntary rules approved by all major banks in a move to capture the budding market. They agreed to a common set of open standards, including eventual inter-bank transactions that will circumvent the need to draft agreements with telecom companies.

Canadians are increasingly becoming comfortable with a cashless world, Mr. Kumar said. “The consumer appetite is strong.”

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