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How Can Cloud-Based Payment Impact the Payment Ecosystem?

  • July 2014
  • -
  • Frost & Sullivan
  • -
  • 14 pages

Summary

Table of Contents

Service Providers are Taking Control of the Mobile Payment Ecosystem

Recent announcements have increased the interest to think about a cloud-based alternative solution. Many service providers (SPs) have forced the payment industry to rethink payment mechanisms from a technical point of view. Indeed, the complexity of most of the new innovative payment solutions has delayed massive deployments and generated negative perception among potential consumers. As a result, interest in Host Card Emulation (HCE) has increased as this alternative solution provides a greater flexibility and a better time to market. This research service covers hot topics regarding cloud-based payment, shows the market trend, provides threat analysis and offers alternative forecasts for the market.

Summary
In the third quarter of 2013, Android announced the release of the latest Android Operating System named KitKat. This new version of the operating system proposes a set of functionalities that allow software developers to emulate a smartcard. However, it was only during the Mobile World Congress (MWC) 2014 in Barcelona that Visa and MasterCard decided to officially support this initiative. The message was clear. Both financial institutions were stating that supporting the Android initiative would open the closed near field communication (NFC) ecosystem to applications developers. At the same time, it would boost the uptake of NFC. However, the two firms also claimed that they would continue to support and recommend the use of hardware secure element (embedded or SIM-based).

This announcement came as a real shocker for the telecommunication industry. The expected value chain: mobile network operators (MNOs), trusted service managers (TSMs), banks and financial institutions were threatened by software vendors. Definitively, the mobile payment ecosystem became a fragmented market.
The payment industry is constantly evolving as traditional business models, consumer habits, and pricing models appear on a monthly basis. As a result, alliances and standardization organisation are trying to keep their existing business by addressing messages that are only polluting a possible “single industry voice”. Unfortunately, the result is devastating, as mobile payment adoption is really low as compared to market expectations. This is not a surprise as the key target, consumer, is not (or poorly) addressed.

Background
This analysis will answer the following questions for a global audience:
Could the recent cloud-based payment announcement influence the payment industry?
Is there a specific need for the payment industry to use cloud-based services?

Financial services are investing in ICT (Information and Communication Technology) to adapt their existing development strategy to innovation. The concept is to optimize the spending by adapting technology innovation to specific industry requirements. Frost & Sullivan estimates that the ICT spending on financial services in Europe will expand at a % compound annual growth rate (CAGR) from 2013 to 2017. These investments are driven by IT services and hardware spending with a likely total of € billion in 2017.

Aligning innovative technologies to industry requirements allows the market to reduce total investments. This is particularly true when the innovation is based on mobile and new mobility usages. The initial investment for adapting IT services to mobile needs is significant but the return on investment (ROI) is quick and consumer’s feedback is particularly positive. Finally, this is a win-win approach where the financial institution could minimize the spending based on client account management while proposing a technology approach with mobile banking and associated services.

A similar vision could be expanded to the payment ecosystem. Indeed, a cloud-based solution offers great opportunity to create a bigger portfolio while significantly reducing associated costs regarding communication, hosting, or access to the services or software. Cloud-based solutions generated a new range of opportunities for the payment industry.

Recent announcements have increased the interest to consider a cloud-based alternative solution. Many service providers have forced the payment industry to rethink payment mechanisms from a technical point of view. Indeed, the complexity of most of new innovative payment solutions has delayed massive deployments and generated negative perception to potential consumers.

As a result, alternative payment solutions appeared with two major roles:
To reduce time to market and implementation cost
To offer convenience and flexibility with a security level that fits usage requirements
There are many different stakeholders involved in a cloud-based proposition. They can come from a variety of industries, such as:

Smart Card Manufacturers: Companies that traditionally provide services for smart cards personalization. These participants used their SE (Secured Element) capabilities as well as NFC, TSM, payment scheme capabilities.

Software Solution Providers: These companies handle software that was impacted by the mobile evolution (financial services, provisioning, personalization, and security). Many have expanded their portfolios to enter the security market with appropriated cloud-based solutions such as host card emulation (HCE) or tokenization.
Payment Processor: Traditionally, these companies process any type of payment. The emergence of mobile payments gave them an opportunity to increase their footprint in the mobile ecosystem.

Service Providers: Banks and financial institutions were reluctant in the past to compromise with the security level during the payment process. The slow near field communication (NFC) adoption has forced these market participants to adapt their strategy and to find a mix between security, convenience, and adoption.

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