Evolution of Electronic Payments

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The Complex (Yet Simplified!) Payments Ecosystem[1]

Contents

Silk Road

Front Page of the Silk Road Website

History

Silk Road was launched on February 6th, 2011 by a man named Dread Pirate Roberts (real name William Ulbricht) [2]. The main use of the website was the facilitation of the purchase of illegal drugs by connecting consumers with suppliers [2]. It gained a large following because it offered a large amount of anonymity and thus protection from prosecution for both supplier and buyer [3]. In some markets, people also preferred it because it was cheaper, it had a wider range of drugs that the local market, it was more convenient than purchasing from a local dealer, users found it more comfortable to buy from user rated reputable dealers and that the home market was difficult to buy from [3]. The website was mostly for illegal and prescription drugs, but did offer other legal items like clothing. Off limits were stolen items, counterfeit currency, personal info, assassinations, pedophilia or weapons [2]. The website is estimated to have facilitated the purchasing of $1.2 billion USD of illegal drugs [4]. Out of this, $79.8 million USD was kept as commissions for the website owners [4].

Technology Utilized

The Silk Road website utilized the Tor network, a free piece of software that connects to a network of servers. These servers loop the traffic between themselves before directing to a website. The Tor network also has hosting abilities, allowing users access to website inside the deep web [5]. The deep web is the part of the web that is hidden, intentionally or by accident. People use Tor to peel away the layers of encryption and access the deep web [6]. This was combined with Bitcoin, the online crypto- currency. The whole system was set up to enable users with the ability to purchase items without the ability to trace the transaction back to either the buyer or seller [4]

The Silk Road Community

The success of the website helped fuel a loyal community. Buyer and sellers, not fearful of prosecution, were very active in community forums that had wide ranging discussions about the website [2]. Some community discussion was required. There was a feedback system akin to Amazon where buyers had to rate and comment on the suppliers [2]. This helped reduce the number of scammers and overall satisfaction (5/5, 4/5) was 97.8% [2]. A doctor even donated his time and answered questions regarding possible side effects and reactions with other drugs [7].

Recent Events

Dread Pirate Roberts was caught in September 2013 [4]. Silk Road was shut down and charged Ulbricht of one count of conspiracy to traffic narcotics, computer hacking conspiracy and conspiracy to launder money. Silk Road 2.0 was launched after the original was shut down [3]. In November of 2014, it too closed and the ring leaders arrested. There are reports of Silk Road 3.0 being launched, but reviews indicated that this is not a true successor [8].

The Evolution of Payments and Emerging Trends

Brief History of the Credit Card Model

The basic four-party payment model of credit cards.[9]

The introduction of credit cards was the most significant change to the way people make payments in the 20th century and perhaps since the beginning of a cash-based economy. Versions of a credit card have existed since the 1940s such as the Diners Club card and early versions of the American Express, American Express being the first company to issue a physical plastic card. The first widely available credit card was the BankAmericard issued in 1958 by the Bank of America[10]. While versions of Diners Club and American Express were available outside of the United States, the Barclays card was the first to be issued by a non-American company in the U.K. in 1966. That same year, the Eurocard became available in mainland Europe. MasterCard, another major player arose in the U.S., temporarily known as Master Charge from 1969-1979, and eventually merged with Eurocard in 1968 [10]. The BankAmericard eventually became known as Visa in 1976.

1966 was an important year in the history of credit cards as it marked the time when the largest players in the industry set the standard for the credit card model: co-opetition[10][11]. This meant that the banks and card companies cooperated in setting standards for the card systems while competing for cardholders and merchants that would use their service[10]. The two most notable networks that emerged from these years of changing payments players were Visa and MasterCard.

The existing framework that our credit card model works on today resulted from this competition, and we still use this credit card model for the majority of payments including credit card online purchases. The model works such that the major associations have merchant acquirers and card issuers both performed primarily by banks[12]. Then service providers provide merchants with the capability to connect to the appropriate networks and the cardholders use their cards to purchase from merchants.

Key payments innovations.[13]

Smart Cards

Smart cards with an integrated chip, known as Chip & PIN cards, have been around since 1994 when Europay, MasterCard, and Visa (EMV) began setting standards for the cards[14]. These cards require that the user input a PIN number for each transaction using the card. The technology for contactless cards has also been around for approximately 20 years[15]. However, the use of contactless cards for payments has been widely accepted since approximately 2008 with Australia leading the world[16][17].

While the technology with EMV specifically has been around for 20 years, the United States, with over half of the world's credit card fraud in 2012, has only recently begun widespread adoption[18]. Chip & PIN cards are widely used throughout the world, and with Obama's signing of the BuySecure Initiative in October 2014, merchants in the U.S. will finally be required to upgrade their systems by October 2015[19].

Card Consolidators

Coin

Coin Advertisement

In November 2013, the crowdfunded Coin was announced as a digital card capable of consolidating the information for up to eight existing cards including credit/debit cards, access cards, or loyalty cards[1]. Via a connection to the mobile application, limitless cards can be stored in the app while the physical card itself is limited to eight. The card is powered by Bluetooth Low Energy (BLE) and is expected to last approximately two years before replacement is required, however it does not require any charging[2]. Security features include the card syncing with your mobile device whereby the phone can indicate to you if the card is no longer within the appropriate radius, the card locks protecting its stored info, and it requires both physical card access (photo and swipe) and account access info before the physical Coin card can process payments.

Beta versions of the device only began shipping mid-November 2014, so it is yet to be seen how functional and accepted this device will become[3]. While it does meet the minimum EMV requirements and continues to receive funding, Coin does not currently support the Chip & PIN technology that the U.S. has now made a requirement by October 2015[4].

Plastc

Seen as the first competition to the Coin card, Plastc launched their Plastc card in October 2014[5].

Plastc Advertisement

Features include[1][2]:

  • Up to 20 cards on card, unlimited in-app (phone wallet)
  • E-ink touchscreen
  • Photo ID
  • Chip & PIN enabled
  • NFC enabled
  • Uses Bluetooth Low Energy with a rechargeable 30-day battery
  • RFID/QR code capable

Slated for shipment Summer 2015, Plastc is intended to be capable for use at all existing payment terminal types: magnetic stripe, chip & PIN, bar codes, and contactless. Expected security is similar to the Coin with proximity security to your phone based on settings and PIN enabled access[3]. Additionally, the card can be completely wiped remotely by phone if it is lost or stolen [3]. The Plastc card launch next year may be interesting given its presale success[4].

Final

Final is a unique competitor to the straightforward card consolidators of Coin and Plastc. While it is a chip & PIN enabled card, Final provides users with one of two options[5]:

  • A unique card number for each place or vendor you shop at
  • A disposable, one-time use number

An idea borne when two of the founders simultaneously fell victim to the Target breach early 2014, Final is intended to allow users to avoid the hassle with credit card breaches by associating a unique number per merchant[5]. This way only the unique number associated with the merchant must be removed as opposed to the user. It also allows users to set maximum spending amounts per merchant[6].

Overall, very little is known about the security of the device apart from the few details released on the Final website or in the promo video. It has been announced for launch Q1 2015[7].

Coin, Plastc, and Final are all electronic physical cards intended to simplify and merge multiple traditional credit cards into one device. With varying features, they appear to be an ideal intermediary technology to take payments from the existing credit card model of the 1950s to the next generation of payments—completely cardless.

Mobile Growth & Mobile Payments Growth

Mobile Payments Index Growth per Region August 2013 - August 2014.[8]

In the U.K., contactless payments have grown by 1591% in the past two years alone, an indication of the type of growth that has been happening in the credit card industry[9]. With U.S. merchants now being mandated to upgrade their payments systems, it is the prime opportunity for the next generation of payments systems to be integrated by merchants in one of the largest markets in the world. For example, Poynt, created by the previous Google Wallet chief Osama Bedier, is intended to accept all forms of payment and will allow merchants to accept all forms of payment, old and new[10].

Ericsson's Mobility Report released November 2014 provides some staggering statistics on the global growth of mobile use[11]. By 2020:

  • 6.1 billion smartphone subscriptions --- there were 6.9 billion mobile only subscriptions in 2013
  • 90% of the world's population over 6 years old will have a mobile phone

Not surprisingly, the growth in India and China contribute to the Asia Pacific region showing the fastest growth globally[11]. The most recent Mobile Payments Index released October 2014 also reveals the consistent growth experienced in the mobile payments market (and is reflected in the chart to the right)[12]. Europe is the global leader in terms of mobile payment adoption while Asia shows the greatest growth which correlates to the growth in mobile[12]. Perhaps one surprising figure recently stated came from Accenture's head of Payment Services following the release of an October 2014 North America Consumer Payments Survey[13]: “By 2020, we anticipate the first decline in credit card usage in more than five decades."[14]. This statement and Accenture's findings indicate the same as Ericsson, Adyen, and so many other players involved in the mobile payments world. That is that the evolution of electronic payments to the present shows a market primed for transition to mobile, digital payments.

Worldwide use of Mobile Payments 2014.[15]

The Digital Wallet

Google Wallet

With Google Wallet’s introduction, the traditional, physical wallet was destined to become a thing of the past as all credit cards, debit cards, loyalty cards, gift cards and almost every other card imaginable[16] would be collected and securely managed in one place—the new digital wallet.

Created three years ago in 2011, Google Wallet was ground breaking in its design, and the first major development in the area of mobile payment systems through NFC technology[17]. Initially, it was only available on the Sprint Nexus S 4G, and Google Wallet only recognized Mastercard and Citibank affiliates in its app. However, as of 2012, Google Wallet has expanded their compatibility to include Visa, American Express and Discover[17].

Google Wallet: An easier way to pay
How the Secure Element works with NFC technology[1]

The Google Wallet proposed the following main functions[2]:

  • Shop in-stores through NFC tap
  • Purchase online through the Google Play store, select Android apps and sites with a ‘Buy with Google’ button
  • Send money to anyone in the U.S. with a Gmail account or the Google Wallet app account
  • Track online purchases, get shipping notifications, as well as a detailed order history

Although the Google Wallet is only available in the United Sates, it has yet to become a mainstream technology. There are several reasons for this, but the most significant is: Security. Despite society’s reservations, however, Google has made it clear that the app is very safe, and that all personal information is stored securely.

In the beginning, this was accomplished through an independent chip called the “Secure Element”[3] which stored the credit card information. This chip, to prevent any security breaches, was completely isolated from the rest of the phone and only accessed when payments were being made through the Google Wallet app. This is no longer the case, however.

As of 2014, this year, Google has shifted towards HCE (Host Card Emulation) which, in very simple terms, is taking the Secure Element and turning it into a cloud-based system[3]. Despite the recent controversy of the security regarding cloud systems, Google has assured users that their information is perfectly safe on their servers. Some have described the Google Wallet as being just as a dangerous as having your credit information stolen by a wireless card reader because of RDFID (Radio Frequency Identification) technology. The truth is, whenever it comes to technology, nothing will ever be certain or guaranteed. Because for every security measure created, there will always be a black-hat hacker out there who finds the loophole, and the cycle continues. The digital wallet is no exception to this arguably vicious cycle that seems to pervade the technology world.

Another change that was made in 2014, was the cancellation of Digital Goods through Google Wallet. An article by Sara Angeles from the Business News Daily discusses this matter in thorough detail and can be found at length here. In her article, Angeles summarizes that if you haven't heard of digital goods in regards to the Google Wallet, then it likely won't affect you at all. In essence, only businesses that used Google Wallet to process payments for products or services that were sold or downloaded from their self-hosted, self-run website or online store will be affected. Everything else about Google Wallet remains unchanged for the casual, day-to-day user.

In terms of how the Google Wallet transaction process occurs, it's rather straight forward and demonstrates the security that Google likes to talk about. Upon approaching the NFC radius area, the user will prompted on their phone screen to enter in a 4-digit pin number that then activates the process to complete the transaction.

Every Google Wallet account, upon creation, is assigned what Google likes to call a “Google Wallet Virtual Card” which acts as a prepaid card[3]. This prepaid card, upon initiating a transaction, will draw funds from the selected credit or debit card to pay for the purchase. The virtual card is then given a number that is immediately discarded after the transaction is completed, making it extremely difficult for a thief to steal the user’s credit information. The only way that a user’s information could be stolen is if someone were to breach Google’s servers—where the information is stored—which is highly unlikely given Google’s security.

However, as was mentioned earlier in this topic, nothing is for certain in technology and there will always be an element of risk involved regardless of anyone’s promises.

Apple Pay

Developed at a much later time than its predecessor, Google Wallet, Apple Pay comes into existence this year in 2014. Similar to the Google Wallet, it uses the Apple Passbook so users can view their stored credit, debit, gift and loyalty cards on the phone, and select from there what card they want to use to pay for their purchase.

Apple sells their new service as being fast, secure and private.

Apple Pay Presentation (Sept 2014)

Fast: The actual process of using Apple Pay stays very much in line with Apple’s philosophy when it comes to their products. It’s very intuitive, clean and simple. In the presentation for Apple Pay (video, left) Tim Cook, CEO of Apple, demonstrates how quick and easy Apple Pay is. He even goes so far as to jokingly say, “Maybe, would you like to see it one more time, just in case you may have blinked and missed it”, insinuating that the process is so easy and quick that it could happen within the blink of an eye. The NFC radio antenna built across the top of the iPhone 6, 6 Plus, iPad Mini 3 and iPad Air 2, allows for the quick and largely painless process: as the Apple product approaches an NFC radius, the user will prompted to hold their finger over the touch ID sensor for several seconds until the print is validated, and a melodic ding will alert the user when the transaction is completed.

Secure: The main reason why only Apple’s newest products (iPhon 6, 6 Plus, iPad Mini 3 and iPad Air 2) can use the Apple Pay system is because of one key component that has been discussed before: the Secure Element. The Secure Element is an isolated chip in the phone or device that stores an encrypted device card number, which is only accessed with a randomised 16-digit, one-time code during a transaction. Apple emphasizes that all the data and information stored on the SE chip never comes into contact with any other part of the phone. This means that even if someone were to hack into your phone’s OS, they would never be able to reach your financial information because it’s securely isolated in the SE chip[1]. In the event that the user loses their phone and the thief tries to physically tamper with the phone, the SE chip will immediately recognize the disturbance and shut down—wiping or destroying the data is holds within[1]. In this way, Apple seemingly covers all of its bases in regards to security and in a rather impressive way, appears to be rather secure.

Private: As the concept of the “filter bubble” slowly grows and becomes increasingly relevant in our day-to-day lives, the concept of privacy is something that everyone wants to be assured of. Apple, again, hits the mark by ensuring that Apple Pay doesn’t collect any of its user’s information. At the Apple Pay presentation this was clearly stated as: “Apple doesn’t know what you bought, where you bought it, or how much you paid for it”. For user’s worried about Google’s seemingly insatiable hunger to document everything we do with its Big Data processes, Apple is going in the opposite direction and directly saying that they aren’t interested in any of that information.

Currently, Apple Pay is supported (like Google Wallet) only in the United States, and not much discussion has occurred about it expanding beyond the American borders. This is largely disappointing to countries that are more than ready to take the next step in digital payments, and seems rather foolish in terms of growth and getting people to adopt the technology since restriction highly prevents that. However, despite the lack of international expansion, Apple Pay is still doing extremely well relative to their competitors in the digital and mobile payment market.

They are supported by the Bank of America, Capital One, Chase, Citibank, Wells Fargo and American Express. Apple expects that in 2015, they will have the support of more than 500 banks in total[1]. Even though this seems like an unrealistic number, considering that they are only supported by six institutions so far, there is one thing that seems convincing enough for this to be a realistic goal.

Apple Pay is the only digital wallet system that exists currently, where the middle-man (which in this case is Apple) gets a cut out of the transactions being made through their system. According to an article on the Financial Times, Apple will pocket $0.15 out of every $100 spent by someone who pays using Apple Pay.

The Dark Wallet

The Dark Wallet, Information referenced from[2]

The Dark Wallet is a rather fascinating concept, very much in the same way that Silk Road is interesting. Both were created as a means of conducting transactions anonymously across the internet, without the interference of government monetary regulation. While Silk Road is liken to an underground drug ring, just hidden within the endless pages of the internet, the Dark Wallet is a direct attack against the government and all its regulations. Lead coders Cody Wilson and Amir Taaki[2] both believe that they are doing their community and society a service in creating the Dark Wallet.

Coders Cody Wilson and Amir Taaki[2]

In theory, the Dark Wallet isn’t such a bad thing. At the very basic level, it’s a bitcoin application designed to protect users’ identities more strongly than the partial privacy protection that bitcoin currently offers its users[2]. Since bitcoin owners’ information is stored on public servers that does little to protect your personal information, the idea of the Dark Wallet is oddly appealing. Without a doubt, it offers the privacy and protection that is largely lacking in the bitcoin industry right now, but the ethics of it is something that leaves much to be discussed.

One of the most appealing facets of the Dark Wallet created by Cody Wilson and Amir Taaki is their “Stealth Address” feature, which allows a user to “generate a stealth address along with a secret key”[2]. The stealth address that is generated is then published as the bitcoin receiving address.

When payments are made to the stealth address, the Dark Wallet redirects the payment to another address that “represents a random encryption of the stealth address”[2], making it nearly impossible to track where the bitcoin is going exactly. The recipient’s Dark Wallet, upon receiving the payment after its randomized journey, will scan the “blockchain” for any address it can decrypt with the user’s generated secret key, locates the stealth payment and then claims it for the user[2].

The existence of the Dark Wallet, Silk Road, and other systems/programs like them are cause for worry. While it appears that these darker, hidden, sides of the internet is where all the early adoption of technology is, it leaves a rather sour taste in one’s mouth. The internet, as it already is, is a large and untameable existence where regulations and strict rules are looked down upon with disdain.

Whether the government wants to admit it or not, it isn’t so much a question of “When should we start regulating the internet?” as it is “Can we regulate the internet, and all of its activities?” The answer at this time is uncomfortable unclear, and makes one wonder what the world, in all of its technology induced craziness, will look like in the years to come.

Other Wallets

In addition to the Google Wallet and Apple Pay—the two largest names in the digital payment and mobile payment system industry to date, there are other options available.

At the start of the list is the Lemon Wallet which was founded on July 2011 and was a cloud based digital wallet that stored debit, credit, ID, insurance number and loyalty cards[3]. It was protected with a 4-pin passcode that prompted the user upon initiating the transaction, and then turned all credit/debit information into barcodes that would be scanned by merchants at the checkout. The Lemon Wallet was a market favourite, and a strong player in the industry of digital and mobile payments. However, after its acquisition by Lifelock Inc. on December 12, 2013 for $42.6 million[4], the app was temporarily disabled due to an acclaimed security flaw and hasn’t been reactivated since.

Another wallet that consumers can consider is Softcard. Previously called ISIS Softcard, this digital wallet was a joint venture between AT&T and Verizon as a competitor for Google Wallet and Apple Pay. It functions similarly to both the Google Wallet and Apple Pay, utilizing NFC technology and the ‘Tap’. However, some users have complained that the set-up process, unlike its competitors, is a little more complicated to go through[5]. You can find a straightforward video of how it works here.

The last digital wallet we will discuss is CurrentC, which is directly linked to the MCX (Market Customer Exchange). CurrentC was built around one notion: “…limiting credit card fees retailers are forced to pay”[6]. By skipping the credit card companies altogether, retailers save roughly 2% in processing fees. CurrentC connects directly to a customer’s bank account by connecting your debit card or the retailer-specific card to the app, which can be used to purchase goods from any of the retailers part of the MCX. The payment process is very simple. The user would unlock their phone, open the app, and then a QR code is scanned to validate the purchase. You can find a picture that displays all of the retailers currently participating in the MCX here.

In Canada, the RBC Wallet and the Rogers suretap wallet are already on the market, and the UGO Wallet is now being rolled out for TD and PC Financial users.

Dwolla

Dwolla was launched in 2009 as a software payments platform to eliminate the need for credit cards[7]. By creating their own network, known as FiSync, Dwolla provides real-time payments and removes the credit card costs[8]. It allows users free transactions up to $10 and a 25 cent fee for any amount above $10. While limited to the U.S. only, it has had slow growth. However, it has kept banks and competitors intrigued and has been incrementally infringing on financial industry territory. The most recent development has been the partnership with BBVA Compass to speed up money transfers[9].

While a seemingly simple way to view the concept of digital wallets, Dwolla has done something unique with their real-time payments network. All credit card and bank transactions require updating or consolidating that, at some level, has a lag. The elimination of this lag is what has so many in the financial industry keeping an eye on their movements.

Social Media Payments

Snapcash

Snapcash was announced November 17th, 2014 as a way to sent payments directly within Snapchat[10]. This essentially functions as a way to send money P2P without the need to leave the Snapchat app. It functions similar to Venmo (below) and other social media apps. Likely to remain only appealing to Shapchat adopters, it is an indication of the integration of payments to come within existing mass social media[10]. The most interesting aspect of the launch of Snapcash has been the persistent rumour of Facebook's unannounced-but-anticipated forthcoming payment service within Facebook Messenger[11][12].

Venmo

Millennials Payments Choices - Accenture October 2014.[13]

Venmo is a PayPal subsidiary that essentially works as a mobile, social version of PayPal. It functions on a P2P model to transfer payments and, as one Business Insider journalist stated, is "viral by design" leading to its growing popularity[14]. Venmo has been growing rapidly largely in part to its similar nature to social media apps such as Facebook and Twitter[15]. Venmo has been extremely successful (2014 Q3 earnings $700 million, $560 million over 2013[16]) growing faster than Starbucks in-app payments which has been the sort-of unofficial standard[15].

The Venmo Line

The recently (October 8th, 2014) coined term the "Venmo Line" identifies the distinction between the two types of users of social media and, in particular, payments[17][18]. As Pando's Michael Carney so eloquently puts it: "One one side of the line are millennials and their elders who value privacy and view digital services that threaten it with suspicion. On the other side are youthful, digital natives who view public sharing as foundational an element of their lives as breathing. Judging by Quartz’s unscientific data, this line appears to fall right around 30 years old."[18]

This concept has been explored quite significantly in recent weeks and was included as part of Accenture's April 2014 North America Consumer Digital Banking Survey and October 2014 North America Consumer Payments Survey[19][13]. The surveys both highlight the distinction between the two types of users that the Venmo Line identifies. Reverting to earlier discussion of the rapid growth of mobile and mobile payments, the interesting developments with Venmo and this "Venmo Line" indicate how significant millennial behaviour is and its effects on the way payments evolve[20][21]. The Millennial Disruption Index highlights this further by stating that the banking industry is most at risk of disruption due to millennials[22].

Tencent's WeChat

A screenshot of a WeChat dessert store

Tencent Holdings, one of the most popular Internet websites and gaming giant in China, launches a payment service to its messaging app WeChat. WeChat claims to have more than 438 million users worldwide [23], and it is the most popular massaging app in China. Now it is moving toward to become the de facto social media in China. Leveraging on its huge user base, WeChat has launched an in-app payment system to allow consumers to make payments inside the messaging app.

  • An O2O Model

What is innovative about WeChat is that it brings in an O2O business model to China. O2O stands for Online to Offline, finding consumers online and brings them into offline stores. In the O2O model, WeChat first provides verified merchant accounts for businesses to promote their product or service to subscribers through their messaging app. Second, WeChat incorporated a payment system for businesses to receive payments online via the app or in offline real world stores [24].

In terms of offline payments, WeChat enable the users to scan QR codes of a product and the app will generate a payment page in the app so that shoppers can make a payment online. In September 2014, WeChat’s in-store payments using QR codes was launched for nine retailers including Dairy Queen [25].WeChat's payment service also works for P2P (pear to peer payment). Users can scan QR codes that represent a certain amount to make payments [26].

  • Expansion to Mobile Commerce

Such in-app payment system makes it natural that WeChat will expand to Chinese Mobile retailing market. In fact, WeChat users can subscribe or follow merchant’s verify accounts, like some of big brand retail companies Jack Jones or McDonald’s are among the first to set up merchant’s account in WeChat [27]. Users will receive promotion messages and links to purchase products from these verify accounts.

WeChat even take a step further than Facebook and Twitter, opening its Mini Mobile shopping Mall, which is called Little WeChat Stores. Shoppers now can buy directly from these little WeChat stores. Early adopters of Little WeChat Sores include companies from local pharmaceutical chains to organic tea shops [28].

WeChat is also promoting itself as lifestyle. What it means is that WeChat want to be more than messaging and shopping app in China. It wants to be a Swiss knife app that facilities any daily activities. One of the service it provides looks very much like Uber. But only traditional taxi driver of registered taxi company can participate. Users can even receive financial service through WeChat. Apparently, TenCent and its Wechat are on the hunt for the Chinese E-commerce and M-commerce market share. WeChat is also teaming up with the second largest e-commerce giant JD.com [29]. This makes it more obvious that Tencent and WeChat is taking on Alibaba.

Alibaba and Weibo Payment

Early in 2014, Alibaba started to team up with Weibo, a Chinese Twitter-like microblogging platform with 50 million daily active users[30]. They launch a new mobile payment app called Weibo Payment as a counterattack against WeChat. Their partnership aims at the offline payments market that is currently dominated by WeChat. Weibo Payment also processes offline payments by scanning QR codes. The app can also use sound waves to connect with vending machines, which can complete payment transfers when the devices are offline[30]. In addition, Alibaba’s merchants can utilize Weibo as CRM platform, which help them conduct marketing campaigns and receive payments[30]. As for the customers, a social experience is created for them. Users can share links of goods sold on Alibaba’s e-commerce websites on Weibo and a buy button is automatically generated to connect to Alipay[30]. The strategic partnership benefits Weibo by adding a layer of convenience, which encourages more people to stay in Weibo or create new accounts[30]. Alibaba can increase its presence in Chinese social networking while gaining more users to adopt its online and offline payments service.

Alibaba's Alipay and Apple Pay

During an interview at the WSJD Live global technology conference on October 28, 2014, both Jack Ma and Tim Cook expressed their interests in working together [31]. One of the possible partnership between these two company are thinking about is the marriage of Alipay and Apple Pay. Alipay can act as a debit card or credit card that can be added to Apple Pay, while Apple Pay takes care of the offline payments using its NFC technology.

Obviously, with a large user base, Alibaba’s opponent WeChat is taking up a large share of offline payment market. And Alibaba is also using QR code to facilitate user’s offline payment, that doesn't make it really stand out a user’s first choice. What’s more, QR code is not the best in the market: scanning QR code is slower than paying with Apple Pay’s NFC payment service. And not all products in China carry QR code. And machines that work with QR codes and sound-wave technology aren't widely available at large retail stores in China yet. Working with Apple pay can be a long term solution for Alibaba to fight back.

A successful partnership will mean a great market opportunity for both companies. For Alibaba, incorporating Apple Pay into its payment service ecosystem help it target offline payments from high-end users, biting WeChat back in the offline payment market in China. On the other hand, Apple may be able to speed up its rollout of Apple Pay in China, and potentially build a strong foothold in the Chinese market. However,the marriage between Alibaba and Apple has a long way to go. There is a number of challenges ahead. The first obstacle comes in the way is China’s regulations. Chins’s recent regulatory actions on the payments service create uncertainties for the Chinese payments market. And allowing Apple access to Chinese largest e-commerce platform might make some of Chinese policy makers really nerve-racking.

Apple has alternative partners other than Alibaba or Tencent in China -- the China UnionPay (CUP), which has card readers across China that are compatible with the payment chips in Apple’s new iPhones[31]. Regulations may also lead to a partnership between Apple and CUP, leaving Alibaba alone.

Related Video: WSJD Live: Alibaba-Apple Partnership?

South Korea: Daum KaKao

Other Asian Messaging Apps also take a lead in mobile payment. Similar to its opponent WeChat, Daum Kakao’s KaKaoTalk is also marketing itself as a "global mobile lifestyle platform" [32]

In September 2014, it moves beyond being a messaging app by rolling out KakaoPay, which allows its users to pay for online products and services through the app [32]. Two months later, Daum KaKao’s own payment platform BankWalletKakao was launched. This new platform allows users connect their KaKaoTalk accounts with online bank account or Bank Money account, which is a virtual account operated by Korean domestic banks [32]. Bank transfers and online payments can now be made through BankWalletKakao [32]

Regulation

Discussion 1: Recent Regulatory Actions on Payment Service in China

Back in June 2010, People´s Bank of China (PBOC) attempted to regulate payment service provided by non-bank institutions by releasing the Administrative Measures on Payment Services Provided by Non-financial Institutions. This decree requires license for non-banks to provide service of prepaid card, acquisition of bankcards, and online payment, which includes mobile payments[33]. It was expected to have positive affects in consolidating the third party payment market and protecting individual users’ funds. As companies with foreign investors are not qualified for the license, this decree forced Alibaba Group to transfer ownership to its chairman.

News released in late 2012 indicated that PBOC would further establish standards to mobile payments specifically[34]. The announcement made by PBOC in December 2013 confirmed that China was drafting rules for mobile payment. Fan Shuangwen, deputy head of PBOC's Department of Payment and Settlement, recognized that government policies should encourage innovations in mobile payment[35]. It shed a light on innovative financial products and service like Alibaba’s Alipay and Tencent’s mobile payment platform for WeChat.

Not long after Alibaba and Tencent were allowed to participate in establishing private banks[36], which could grant them greater freedom in providing financial service, PBOC released its draft rules on March 14, 2014, dropping a bombshell on the payment market. Once these rules were enforced, third party payment companies would not be allowed to enter offline payment market. The new rules would suspend the use of P2P payment made by scanning QR codes, the launch of new virtual credit card, and imposed a spending limit of individual using third party payment platform[37]. Since QR code, virtual credit cards and online payment service are all critical products of Alibaba and Tencent, the new rules were casting a shadow on these two giants.

Anti-laundry and security concerns are the potential reasons for having an individual spending limit and suspending QR code payment service. However, the more likely explanation for these regulatory moves is that third party payment companies move the cheese of China UnionPay (CUP), the near-monopoly debit cards and credit cards system. Traditional offline payments transferring from card-issuing bank to acquiring bank have to go through CUP’s acquiring service, and CUP charges a certain amount of transaction fees. Allowing the third party payment platforms exist in the offline payment market, CUP will no longer be an essential component during payment transactions. It is equivalent to taking money out of CUP’s pocket. PBOC’s draft rules are clearly leaning toward the CUP.

During the dawn of O2O era, it doesn’t seem to be a wise move to limit the growth of third party payment platforms in both online and offline sectors, given the potential benefits to financial markets and the end users. Resistance from third party payment companies and the general public were reported. Later, even senior PBOC staff members said that with such a strong resistance, the likelihood of passing the rules is small[38]. As the draft rules are not being enforced, they are more likely to be exploratory instead of decisive. These rules can be a mean PBOC uses to see how the market and the public react and try to incorporate the collected opinions in their final draft. Although the draft rules seem to be negative at first, PBOC may use them to cool down the fast growing but chaotic third party payment market a bit before they can come up with some better regulations. PBOC would like to eliminate those teasers who only want to leverage on the booming market with no long term perspectives by giving them a harsh lesson. And looking at which companies survive under this great uncertainty, PBOC might switch their direction and help these strong survivors, establishing a healthier third party payment market. Besides, draft rules coming in the form of an opinion letter issued by PBOC’s Hangzhou branch instead of Beijing headquarter [38]might be also a signal that hammer does not fall. Possibility of PBOC listening to the market and the public is high. Reluctance to change will turn the Chinese payment market into ashes, which is not what PBOC wants.

Discussion 2: Regulatory Influences on the Future of Apple and Alipay's Partnership

The signals sent from the PBOC on the Chinese payment market are mixed. The alliance of Apple Pay and Alipay is facing a landscape of uncertain regulations. What it means for the partnership between Apple and Alibaba is further complicated by Apple’s recent deal with CUP. On November 17, Apple announced that users can now link CUP debit or credit cards with their Apple ID to purchase in the App Store[39].

On the one hand, even though such deal does not necessarily imply a full rollout of Apple Pay in China, China is clearly opening up its market to Apple -- good news for the partnership of Apple Pay and Alipay.

On the other hand, as PBOC is leaning toward CUP now, it makes sense to ask if Apple is going to strengthen its partnership with CUP to capture the offline NFC payment market, leaving Alibaba alone. To get the answer, another question has to be asked: why Apple needs Alibaba? Joseph Tsai, vice chairman of Alibaba Group, claimed that that they can help Apple navigate through Chinese regulations[40]. It makes people wonder if Alibaba does have the backing from the Chinese regulators. The relationship between Alibaba and the Chinese government can be explained by Jack Ma’s quote: loving but not marrying. In July 2014, the Chinese chairman visited South Korea, accompanied by a group of Chinese business executives including Jack Ma[41], showing the Chinese government’s intimacy and importance put on technology companies. Moreover, some of the investors of Alibaba have powerful political background. Alibaba might actually have priorities given by the Chinese regulators, which can pave a way for Apple.

In a long run, Apple and Alibaba will ultimately team up, given the benefits from partnership. But in the short run, CUP preempts. Is it possible that in the future Apple will work with both Alibaba and CUP in the offline market? When the regulations treat both traditional banks and third party payment companies equally, and the market has demand for both traditional and new financial products, there is a possibility. However, it requires a reform of the Chinese regulations on finance market. And coexistence of traditional and new financial products could be an unstable state. Additionally, Apple can work with CUP in one market sector while form alliance with Alibaba in another sector. Currently, however, it doesn't seem to be possible that CUP and the third party payment companies would like to give up any market opportunities to each other.

Future Considerations

Google's "The Physical Web" Project

Scott Jenson (Google Physical Web Project) Interview - OSCON 2014

It is nice to have all the functionalities in one app like Facebook, WeChat, or KakaoTalk. But there will be a day that these apps are not heavy duty enough to provide all the service you want. We might end up having one app for one service. Google has come up with the Physical Web to handle the problem of endless apps. The Physical Web project aims to establish a standard for everyone and every smart device and link them together[1]. The idea is that a smart device dispenses URLs to nearby devices[2], and a fully interactive webpage will be opened up to function like an app[3]. One of its practical applications is to offer app-less payments. A possible scenario in the future given by Google is that “People should be able to walk up to any smart device - a vending machine, a poster, a toy, a bus stop, a rental car - and not have to download an app first. Everything should be just a tap away [2]”.

The Future Evolution of Electronic Payments

The possible future evolution of electronic payments is illustrated in the graph below:

At stage 1 of the evolution, we need to use a device and install apps of certain services to make a payment. Then payment can only be transferred online. Now, we are more likely in stage 2, where an internet connection is not required but apps still need to be installed for purchasing some of the services or products.

Potentially in the near future, our devices will have all the electronic payment technologies in place. Then, we will move to stage 3 -- Interaction Payments. We will be able to use our devices to interact with the product directly to finish payment transactions. For example, after the payment function of the devices is activated, all we have to do to buy a product is to take a picture of it or put the device close to certain areas on the product. Such payment methods are very likely to be conducted with wearable devices when a small number of on-the-go goods are purchased (like buying a cup of coffee in the express line).

At stage 4 where the internet of things comes in, payment transactions will be completed appless without any devices. At that time, we will be able to buy sushi in front of an augmented vending machine, making only one gesture; the payment is completed without the help of any other devices. And then we can have sushi right away that is made by a food 3D printer or a robot sushi master.

Personal Thoughts and Opinions

  • Xiaoting (Judy) He: Additional Comments on Regulations in China and the Future Evolution of Payments

Apart from my opinions toward regulations on third party payment companies and potential influences above, I also want to add some comments about the regulations for protecting users' rights in China. Comparing the decree in 2010 and the most recent draft rules, I can tell that China has made some improvements in terms of protecting personal information and funds from theft or mismanagement. However, legislation for protecting personal information in China is almost empty, with only some rules included in the General Principles of the Civil Law and the Criminal Law of China. In fact, the Chinese government realizes this problem. One of the representatives of the National People’s Congress has urged the central government to fill in the gaps.

Although a regulation is lagging behind, at least China is trying to catch up. What concerns me most is the weak enforcement of regulations. Though stealing and selling personal information is already a criminal offense in China, some researchers found that over 60% of Chinese have encountered personal information theft. It is dreadful.

As for the model of the future evolution of electronic payments I proposed, it is based on the idea that the more advanced technology is, the less effort or resource an individual need to finish a task -- including payments. This model seems to be wild starting from the stage 3 interaction payments where people might use smart device to interact with objects in order to purchase. Though I am the one who come up the phrase “interaction payments” and the model, there are a lot of problems that I can’t figure out. For the example of buying a cup of coffee in an express line and paying by taking a photo, one question raised immediately in my mind is how the stores know if people have paid. It’s unlikely for businesses to hire someone to make sure everyone has taken a picture or scanned the code before they leave with the goods! Should business install some anti-theft detectors? Questions are also present in stage 4. For instance, as no smart device is required for payment transactions, how can we tell whose account balance is to be deducted?

The actual evolution may not go as what the model proposes at all. Nevertheless, I present my imagination and I am equally happy to be proven right or wrong.

  • Marissa Jean: Additional Comments on the Current Disruption

It seems apparent that the payments industry is going through a period of transition where the winners are yet to be determined. Card payments, digital wallets, and social media all play a part for those users it suits best. The payments industry itself is vast and our discussion has only covered the surface of the complexities involved. However, I see the changes of the last decade and those of the next decade being critical to the way payments are made in the not so immediate future. While a quick search will lead you to countless reports and articles of how mobile wallets and payments are disrupting industry, key markets such as that of Kenya are proof that it already has[4]. At the same time, it's clear to me that this is only the beginning. The discussion from Accenture's report on Consumer Payments that credit card usage will decline for the first time in the history of the credit card is the beginning of the real change to come. For further reference, a few additional articles not previously mentioned support this view[5][6][7]. For those of us without the foresight of Bill Gates, it is hard to imagine the future payments world, but how many really believed him when he first predicted the digital wallet?

  • Frederena Ho: Additional Comments and Thoughts

I have already expressed a personal opinion that within technology there exists a vicious cycle of the creator and the black-hat hacker where one is always trying to outdo or outsmart the other, at the expense of us; the users. The idea of digital wallets in its basic theory is very interesting, and if there weren't so many uncertainties surrounding it, I think it would be a very convenient method of payment. However, because reality is far from an ideal world, despite how interesting digital payments are, I personally don't think it will become a mainstream technology. There are too many what-if's and security holes that exist (or could be discovered) to make it worthwhile.

But all this uncertainty is what makes things like Silk Road and the Dark Wallet so fascinating, because even though society as a whole has yet to see the full merit of e-commerce and the digital wallet, the "underground" of the internet has embraced the digital payment system, its currency and the anonymity that it gives. By no means do I think what they're doing is right, or ethical, but their existence raises a rather alarming point. The internet, in its entirety, has gone unregulated for so long that it allows for illegal actions such as the Dark Wallet and Silk Road. But now, when legal and established bodies want to bring in their regulations and policies—into this space that has been unregulated for almost its entire existence—how successful are they going to be? Is it even possible anymore? It will be interesting, I think, to see how the government and other regulatory bodies handle the internet, technology and its ever-increasing prevalence in our lives.

  • Cole Cedar: Additional Thoughts

As long as there are profits to be made on the back market, sites like Silk Road will continue to exist. Now, with technology changing so rapidly, there is going to be an ever growing lag time between the time these sites start and the time the authorities shut them down. The longer this lag, the more profit for criminals. Silk Road, being multinational, was difficult enough to shut down. If these black market sites put more emphasis into decentralization, there will need to be international coordination to find the perpetrators. Sadly, this will probably not come to fruition and technologically advanced black market sites will continue to operate in disregard of the law.

References

  1. Etherington, D. (2014, October 2). Google Reveals ‘The Physical Web,’ A Project To Make Internet Of Things Interaction App-Less | TechCrunch. Retrieved from http://techcrunch.com/2014/10/02/google-the-physical-web/
  2. 2.0 2.1 The Physical Web: walk up and use anything. (n.d.). Retrieved from https://github.com/google/physical-web
  3. Tung, L. (2014, October 3). Google's 'Physical Web' project looks to inject Internet of Things with more search | ZDNet. Retrieved from http://www.zdnet.com/article/googles-physical-web-project-looks-to-inject-internet-of-things-with-more-search/
  4. di Castri, S. and Gidvani, L. (2013, July) The Kenyan Journey to Digital Financial Inclusion http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2013/07/MMU-Infographic-The-Kenyan-journey-to-digital-financial-inclusion.pdf
  5. Feldt, D. (2014, May 7) True disruptive innovation in the mobile payments space. Retrieved from http://jazlabs.com/mobile-payment-true-innovative-disruption-2/
  6. Flinders, K. (2014, October 29) Banks see technology firms as biggest threat, says Infosys. Retrieved from http://www.computerweekly.com/news/2240233617/Banks-see-technology-firms-as-biggest-threat-says-Infosys
  7. Bertrand, S. and Ahmad, K. (2014, February 5) Mobile payments: Finally ready to take off? Retrieved from http://www.bain.com/Images/BAIN_BRIEF_Mobile_payments_Finally_ready.pdf
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