From a mobile perspective, the expected adoption of the EMV chip & PIN standard, as well as heightened use of prepaid cards, will play significant roles, too.
The EMV discussion is not new. Some industry experts, including Randy Vanderhoof, executive director of the Smart Card Alliance, say mobile and EMV-like chip payments go hand in hand.
"By 2011, we can expect to see more NFC (near-field communications) enabled devices," Vanderhoof says. Once that happens, the connection between mobile and contactless chip payments will be bridged. With an estimated 75 million contactless chip cards already in use in the United Sates, Vanderhoof says it's time for the payments industry to have serious discussions about linking contactless and mobile.
From the prepaid angle, the link to mobile has already been established, and competition is closing in, says Cindy Merritt, assistant director of the Federal Reserve Bank of Atlanta's Retail Payments Risk Forum. "We're seeing a lot more activity on the part of telecoms, which are starting to provide services on a prepaid basis via the mobile channel," she says. "They are allowing consumers to make payments and have those payments appear on their phone bills."
Most banks and credit unions are aware of EMV and prepaid trends in mobile. What financial institutions do not seem prepared for, however, are innovations in social-network payments and advances in ACH.
Here's a look at 2011's top projected trends:
1. Payments via Social Networks
Richard Oliver, who heads up the Retail Payments Risk Forum, says, "I think you will see more and more innovation from entrepreneurs who are coming up with new things, and a lot of that will revolve around payments." 2010 saw the birth of payments innovations; 2011 will see the fruition of those innovations, he says - particularly via the use of social networks such as Facebook.
"It may be virtual currencies, like Facebook credits," Oliver says. “It has everybody looking around, saying, 'Is this real money?' And, if it is, 'What should we be worried about?'"
As payments convergence takes place, Merritt says, mobile is at the center. Beyond mobile banking, mobile access to social networks has been a natural evolution -- one that has introduced new and unanticipated risks. "Payments are quickly migrating from paper to electronic format," she says.
That electronification has made payments more efficient and more risky. "How are we going to follow the money when the trail is in a digital versus paper format, or is going over the airwaves, and we're worried about gaps in regulatory oversight," Merritt says. "As telecoms in the US partner with financial institutions, there are questions about how they'll share the revenue, as well as responsibility for consumer protection."
2. Partnerships for Innovation
But partnerships with telecoms comprise a fraction of the concerns banks and credit unions will have to worry about in the year ahead, says Avivah Litan, a distinguished analyst and vice president of Gartner. "The emerging mobile channel is going to catch them off guard," she says. "Where mobile payments are concerned, I don't want to say banks will be taken to the cleaners, but I think that's where their biggest threat is."
Pointing to emerging payments providers such as Bling Nation, an innovator in mobile NFC payments, and the connection those providers are making with social networks, Litan says banking institutions might get bypassed. "I think the banks are very threatened by NFC mobile payments," she says. "What Bling Nation is doing sounds to me like what PayPal was doing a few years ago. They have a lot of energy and they have a revolutionary concept. There's not much the banks can do without Visa and MasterCard to combat that innovation."
Catering to the "Facebook generation," Litan says, will give payments innovators such as Bling Nation a leg up. With a flat 1.5 percent transaction fee, Bling Nation's platform is a win for the merchant and a win for PayPal, since Bling Nation brings PayPal to the point of sale. "They really get it," Litan says. "They've negotiated (interchange) rates down for the merchants, and they are working with PayPal, who rides along with the credit cards."
3. ACH Advances
Traditional players such as NACHA - The Electronic Payments Association also are taking stabs at payments innovations. George Throckmorton, the managing director of NACHA's Advanced Payments Solutions, says NACHA's new payments service, Secure Vault Payments, relies on Automated Clearing House rails for one-time payment transactions. The most interesting innovation on the part of NACHA: Secure Vault takes debit and credit out of the equation.
"For one-time payments over the Internet, typically, debit and credit cards are used," Throckmorton says. "But some consumers felt unsafe, so some billers have made a decision to offer an alternative way for consumers to pay."
Secure Vault works like a one-time online payment a consumer might make to his financial institution. But instead of going to the institution, the payment goes to the online merchant. It's a direct payment, facilitated through the financial institution, so the merchant has no need to request or capture any of the consumer's personal financial information. The merchant merely collects the payment, which is routed through the bank.
"We believe that the ACH network is strong enough to provide these types of payments," Throckmorton says. "The ACH network could expand. And our role at NACHA is not going to change."
As ACH and wire fraud incidents grow, more secure ACH payments options will catch on, says Adam Dolby of Gemalto, a security company that focuses on smart-card and chip-card technology. "The security challenge has been around ACH, because you typically have a batch of transactions," he says, "and there is no way to really go in and check all of those transactions individually."
Tokenization could help, but financial institutions need to invest in protecting the entire transaction chain. "We need to look at it from a security perspective, to defend against technology-based attacks," he says. What NACHA is doing through Secure Vault responds to part of that problem. "Protecting the entire transaction, to me, has been a very big challenge for banks," Dolby says. "If you look at what's been deployed for cash management today, it has no tie back to what you're trying to move, and that's the problem."
