Unit 5 Emerging Technology
Table of Contents
Trends in the Technology5
II.SWOT Analysis of Industry/Business10
IV.Cost Benefit Analysis16
Total Cost of Ownership (TCO) – Capital Investment, Hidden Costs16 Direct and Indirect Strategic Benefits16
I. Technology Description
In today's fast-paced and ultra-competitive consumer retail market, running a business can seem like an eternal struggle to stay ahead of the competition for customers. Naturally, every business starts with a fundamental goal to sell a good or service; however, commercial success goes beyond than just a good idea. It is also dependent on the business’ ability to reach customers and meet their ever expanding needs more effectively than the “other guys”. 
One of the things that customers and the other parties of the payment network qualify is how they pay for the goods and services. Payment systems should add value and convenience to their lives and their businesses while addressing issues of key importance.  Moreover, they must see the incremental value of the method offered that should exceed the effort needed to change from their existing methods.  The success of these retail payment methods is driven by four factors: reliability, cost, convenience, and speed. However, in terms of the preferences of the critical parties (consumers, merchants, and payment processors), the key drivers are technological advances, convenience, and lower transaction costs. 
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New and innovative technology is the underpinning for the evolution of payment systems.  This evolution is facilitated by traditional financial institution relationships and established payments networks and infrastructure.  While financial services corporations lead the change in the way business is conducted around the world by harnessing technology and leveraging on its benefits, it is still consumer and market driven. Technology only adds value when it provides solutions and products that consumers want and need. Financial institutions develop products and services that work for their customers and merchants based on innovative technologies. 
Beyond the key drivers, there are other factors in the technology that impact business operations. These crucial factors need to be considered in the development of payment products and services. Questions on security, risk and privacy need to be addressed before a business solution is implemented -- Does this product offer security to consumers and merchants alike? Will it protect financial institutions and their customers from risk? Does it offer protection of data and privacy for its users? These factors, along with the consumer and market drivers are the core objectives of financial institutions as they move toward the technology-driven payment systems of the future. 
Overall, the environment for payment technologies is extremely dynamic; the mode in which customers pay for goods and services is continuously evolving. Even with establishment of key payments such as stored-value instruments, remote banking, and “smart cards”, and the launch of emerging payments such as Electronic Bills Payment and Presentment (EBPP), Person-to-Person (P2P), Account-to-Account (A2A); more payment technologies can be found on the horizon.  In the succeeding section, the different trends in payment technology will be discussed.
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Trends in the Technology
The payment landscape has seen a significant change in the last decade. New innovations are being introduced at a dizzying rate. While the value of payments has increased in that time, no longer are we using the same instruments to make those payments. And as customers find new and innovative ways to pay for goods and services, business owners who take advantage of the opportunities created by new technologies reap the benefits.  
Emerging payment mechanisms such as contactless payments, proximity payments, network technologies, biometrics, and mobile payment acceptance will be discussed in the proceeding paragraphs.
Contactless Payment Cards and Proximity Payments
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Contactless Payment Cards
Contactless cards and key fobs have an embedded computer chip which stores financial and personal information used for payment transactions. For payment transmission, these devices use RFID technology which enables them to transact quickly and conveniently from a short distance. The contactless cards include a microcontroller (or equivalent intelligence) which not only can secure, store, and provide access to data on the card, but can also provide support on the use of improved security features such as authenticated information access and information privacy. 
A related application is the EMV (Europay, MasterCard, Visa) technology which uses the EMV standard for the inter-operation of integrated circuit cards (“IC Cards” or “Chip Cards”) for authenticating credit and debit card transactions. EMV cards are also implanted with microchips that make the card less vulnerable to counterfeit and extremely difficult to replicate since the encrypted chip enables safer processing and storage of data. Merchants that accept EMV-chip cards can also expect fewer charge backs and may have little to no liability for the cost of card fraud. 
Proximity payments are Point of Sale (POS) transactions performed with a mobile device like a cellular telephone, smart card, PDA, or virtually any device that can house a microchip. Compared to other traditional payment mechanisms such as cash or credit card transactions, proximity payments proved to be faster and easier to use; plus provide lower implementation costs to institutions and merchants.  With the current rise and popularity of smart phones, expect a significant growth in mobile payments.
The main similarity between contactless cards and proximity payments is that the consumer maintains physical control of the access device rather than surrendering it to a POS operator thereby increasing security. Multiple transmission types are currently in use while others are undergoing market test trials. 
Emerging Network Technologies
These are short-range wireless connectivity technologies that can be used to connect payment devices to POS devices. Currently, there are four types: Infrared, RFID, NFC, and Bluetooth.
Infrared communication technology functions similarly as a television remote control where information is sent from a device to a payment terminal via a frequency that is invisible to the naked eye. These devices can have signals that are stronger than other contactless technologies and can work from several yards away. Although there are security concerns on the susceptibility of the transmission to be compromised due to the strength of the signal, the issue is somewhat alleviated because of the condition that a direct line of sight must be established for the transmission to work. 
Radio Frequency Identification (RFID)
RFID is a process of remotely storing and accessing information on devices called RFID tags/transponders. An RFID tag holds antennas that allow them to communicate through radio frequency with an RFID transceiver. This tag can be integrated into plastic cards (as with contactless cards), fobs, or other devices. The most widely used protocol for this technology is the ISO 14443 standard which can be used for multiple types of media and a broad range of hardware. 
Near Field Communication (NFC)
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NFC is a technology similar to RFID but is based on the ISO 18092 standard. This technology uses chips that can be embedded in a mobile device enabling it to act as contactless payment card. Consumers can make payments by simply waving or tapping the phone against a reader. These chips can be also be integrated with other applications within the mobile device to permit transactions from multiple accounts. Another feature of this mechanism is that it can act as a reader of other NFC devices, allowing two consumer devices to share date or transact payments with one another.  The NFC technology has also been a contributor to the rise of mobile wallets, providing consumers with a payment alternative and merchants with the opportunity to increase customer loyalty through discounts and loyalty programs. These new platforms can help businesses reduce costs, increase customer traffic, and introduce new ways of doing business. 
RFID and NFC have become very flexible solutions for alternative payments at retail sites equipped with payment readers. Some applications already being implemented are incorporating of RFID tags in credit and debit cards, and linking of consumer accounts to mobile devices enabled with RFID and NFC technology. 
Bluetooth is a close-range wireless radio frequency communication protocol which uses a signal stronger than that of RFID or NFC and can be detected at greater distances. Although this method has been implemented in a wide range of technologies, there has been limited adoption of this protocol in the payment landscape. 
Biometrics for Payment Initiation and Authentication
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Biometric payment services enable consumers to make purchases using a biometric identifier for authentication. Biometric identifiers, which can be in the form of fingerprint, voice, or iris and retina, are linked to the consumer’s personal identification information, accounts at a financial institution, or loyalty programs. 
Mobile Payment Acceptance
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Mobile Payment Acceptance is a smartphone-based payments application that accepts debit and credit cards on the spot. Merchants can swipe cards using recommended card readers or manually enter card data into their smartphone. This solution provides merchants with a simple, reliable, and secure payment acceptance method, enabling them to focus on their business rather than chase payments.  This can benefit a business currently limited to accepting only traditional forms of payments. 
II. SWOT Analysis of Industry/Business
A SWOT analysis is carried out below to identify the external and internal factors that are favorable and unfavorable for the different types of payment technologies previously described.
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Speed and convenience. The immediate transfer of money took an advantage on the business in several ways. Buyers are generally more willing to purchase if the purchasing process is easy and immediate. Convenient and well-made electronic payment systems also show consumers that the business cares about its customers and act as a type of customer service. 
Cost-efficient. For banks, e-payments guarantee to be very cost efficient compared to existing paper-based payments systems. Switch from paper to electronic media is likely to cut deep inroads into bank costs, particularly labor costs, of routine processing currency and paper-based payment instruments. 
Payment System Collision. It is the danger of having e-payment. Since it is new and global in its perspective, a problem may occur in the process. Some payment types which the customer is used to may not be available in other countries.  Also, transaction made in different country may cause setback in e-payment because of the different currency that may apply on the transaction.
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Impulsive Buying. From consumer’s perspective, electronic payment encourages the buyer to purchase more, especially online.  Though their purchase is beyond their budget, they are attracted to buy online or swipe their payment cards because they would get rid from queuing.
Flexible payment arrangement. Payment schedules allow a later billing or payment installments using third-party vendor. It gives the customer an option to buy using credit card, debit card or even a direct transfer of fund from a bank account. 
Less susceptible to theft. E-payments is done cash-free. It will not require a customer to carry or handle physical sums of money. 
Impulsive Buying. Since e-payment encourages the buyer to purchase more, it will be an advantage on the business’ side. Many small businesses were unable to accept e-payments, such as credit card. They were on a cash-only basis making their sales decreased because customers without enough cash on hand were unable to buy their products. Thus, when a cash only business starts accepting credit card or other e-payments, they would immediately increase their customer-base and increase in sales. More products bought means more sales. 
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Security. It is difficult for businesses to guard against possible security risks especially when making an online payment. Malware and other hacking attempts can track keystrokes in order to copy account passwords and access payment information. Online databases can be hacked and important information can be stolen. A relatively modern invention is the electronic wallet which contains customer financial information in an offline database that can only be accessed when a purchase is made. 
Fraud. Electronic payment systems are prone to fraud. The payment is done usually after keying in a password and sometimes answering security questions for verification, but there is no way of identifying the genuine identity of the one making the transaction. So long as the password and security question-answers were correct, the system assumes that the maker of the transaction is the right person. If this information, password and security questions, fell into the hands of fraudsters, then they can defraud you of your money. 
III. Business Applications
Developments in payment technology have been shaping the way companies do their businesses. As technology greatly influence consumer preferences, consumers take a significant consideration on payment schemes that will provide the easiest, fastest, reliable, secure and flexible payment option. Thus, to gain competitive advantage, companies look into investing in payment collection solutions that will increase customer satisfaction and will result to customer loyalty.
Service and Merchandising Industry
In a service and merchandising industry, credit cards and debit cards are the most common payment system. However, the use of mobile payment has been rapidly increasing as well. One reason for the growing popularity of mobile payments is that it helps the business improve revenues through integrating loyalty programs in the mobile payment applications. Another is that mobile payment increase efficiency. Businesses can integrate an inventory system in the mobile payment system to automate tracking. Consumers also find mobile payment services faster than payment through credit cards. Another reason is that mobile payments have lower transaction cost than credit card payment. Consumers can also save from membership and annual fees that are being charged by credit card companies .
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For online shops and business with online processing such as airline companies, payment gateways are utilize to enable the costumers to pay via credit card, debit card or peer-to-peer payment system such as PayPal. The only crucial in this payment system is the security as payment gateway involves encoding of billing information and transfer of this information to the company. But payment gateway providers ensure the highest security measures are in place.
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The financial institutions have benefited the most from the developments in payment technology. New payment systems improve efficiency of financial institutions through streamlining processes. These payment systems also increase the bottom line figures of these institutions through cost-savings.
Banks have been continuously promoting the use of the various electronic channels such as internet, mobile phone, phone and Automated Teller Machines (ATMs) as a payment options. This is because the costs in these channels are significantly lower than the cost of processing of payment by bank tellers in branches. On the client side, these electronic channels are also far more convenient and efficient.
Aside from the electronic payment channels, banks and financial service providers also offer payment collection solutions to utility companies and merchants. One of which is the integrated billing and payment solutions. This payment solution allow the trading parties (i.e., company and customer) to present invoices or billing statement and settle transactions directly from bank account via electronic fund transfer. Aside from the savings of the companies for going into paperless billing, this payment solution also strengthen customer relationship by providing them flexible and reliable billing options .
Another payment collection solution that banks offer is a payment gateway that links the company’s online payment portal to the bank’s internet banking facility and authorizing transfer of funds from the customer’s account to the company’s designated collection account.
Other payment collections solutions offered by banks include automated debiting of the company account for batch crediting to the company’s suppliers and other third party accounts and automated batch debiting of enrolled company’s subscriber accounts for crediting to the company account.
IV. Cost Benefit Analysis
Total Cost of Ownership (TCO) – Capital Investment, Hidden Costs
In order to provide contactless payment solution, store owners needs to add a radio frequency (RF) terminal that supports contactless payment applications to their point of sale (POS) payment system. The RF terminal passes and receives financial data to/ from banks and other payment institutions and goes through the stores POS payment system .
Investment requirement for the upgrade of the POS payment system will be more or less Php 5,400. In addition, the installation and equipment cost of contactless reader ranges from Php 9,000- 14,000 per RF terminal .
Direct and Indirect Strategic Benefits
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There are a lot of debates about the best benefit of smart payment, for store owners it’s the time spent by a cashier on a single transaction; every second that is shaved off is a gain for the store. A report says that customer time at the POS is reduced by 30-40%, and that contactless transactions are 63% faster than cash and 53% faster than using a traditional credit card. A study conducted by MasterCard found the most significant time savings were realized in the drive-through environment where 12-18 seconds were shaved off the purchase time as compared to cash .
"The real motivation is speed, quicker transactions increase turnover for shops and can reduce the number of staff required. For consumers, shorter queues increase convenience” says David Black of Defaqto .
On the other hand, consumers also have a positive experience on contactless payment, the faster the transaction the more convenient it is for buyers. Other examples are the ease of use of unattended POS stations such as vending machine and ticket kiosks; there’s no worry for change or exact payments.
With the intangible benefits of smart payment technology, it is considered to be the future of payment system; however, there are costs that entail these benefits. Store owners are expected to invest in new hardware and applications, new POS equipment’s, installation of the whole system, staff training, marketing/ advertising costs, and charge backs are also in consideration.
|Contactless ROI Analysis | |Northwest Fast Food | |ROI Data Summary |First Year |Second Year |Third Year | |Total Sales |$50,000,000 |$51,500,000 |$54,075,000 | |Number of Stores | 500 | 600| 650 | |Cash Sales |$23,520,000 |$23,247,000 |$23,711,940 | |Card-based Sales |$26,480,000 |$28,253,000 |$30,363,060 | | | | | | |Total Transactions |5,000,000 |5,125,000 |5,278,750 | |Average Transaction | $ 10.00 | $ 10.05 | $ 10.24 | |Total Number of Cash Transactions |3,467,500 |3,423,625 |3,489,238 | |Contactless Transactions |50,000 |55,000 |60,500 | |Cash Transactions to Contactless |32,500 |35,750 |39,325 | |Average Card Transaction | $ 17.86 | $ 17.16 | $ 17.56 | |Cash to Contactless Sales Lift |$362,106 |$369,653 |$421,034 | | | | | | |Monthly Benefits | $ 37,657 | $ 40,342 | $ 45,422 | |Card Lift (Cash to Contactless) | $ 16,395 | $ 16,871 | $ 19,163 | |Chargeback Savings | $ 867 | $ 893 | $ 937 | |Reduction in Cash Handling | $ 3,101 | $ 3,463 | $ 3,885 | |Operational Efficiency | $ 17,294 | $ 19,116 |$21,436 | | | | | | |One-Time Costs | $ 330,000 | $ - | $ - | |Hardware | $ 187,500 | | | |Installation | $ 37,500 | | | |Marketing & Training | $ 30,000 | | | |Software Development | $ 75,000 | | | | | | | | |On-going Operations | $ 2,516 | $ 2,854 | $ 3,014 | |Terminal Support | $ 1,250 | $ 1,500 | $ 1,500 | |Conversion cost (Cash to Contactless) | $ 1,266 | $ 1,354 | $ 1,514 | | | | | |
Table 1. Sample contactless system ROI analysis
The data shows that the cost to implement a contactless payment system for this fast food chain is $ 330,000 which includes a one- time investment for: hardware, installation, marketing and training, and software development. The software maybe used for three years before renewing and free maintenance are given by the service provider as a part of their after- sales service. The financial benefit of contactless system for the first year of implementation totals to $ 451,884. It clearly shows that the benefits of the investment for contactless payment system can be realized during only its first year, imagine the financial growth it brings for two more years.
Aligning the financial benefits and the intangibles that it brings to businesses; smart payment technology, when maximized and put in good use, has the potential to generate huge amounts of extra revenue. Study shows that operational efficiency due to faster transaction not only results in savings per second, it also helps increase customer spending, frequency of buying and customer loyalty .
V. Ethical Implications
The first ethical issue that comes with any sort of e-payment system is that of trust. In a face-to-face transaction, assessment of trust can come from physically observed information. One can also base his or her assessment on the reputation of the person/company or previous successful transactions. However, existing e-payment systems are so new that it is still too early for most to establish a level of reputation that customers will be comfortable with. Horror stories of security and privacy issues, whether true or otherwise, also contributes to customer’s hesitation in using e-payment systems.
A way to alleviate trust issues is to leverage existing trust level of the company and extend it to the payment system. However, that would only be enough to entice clients to try it. The best way to promote continuous use of e-payment systems is to provide customers with an intuitive, easy to use, and reliable e-payment system. Horrible UI, buggy software and a generally bad experience will dissuade customers from repeat use, even with the considerable benefits of using e-payment systems. Each successful transaction will slowly build-up trust in the system until using it in lieu of other payment systems become a non-issue.
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One company that has successfully parlayed its reputation to e-payment is Apple. Apple already had built up a reputation for high quality computer hardware and software with the Mac, OS X and iPod. When it launched the iTunes music store, a lot of people got into it because of their prior experience with other Apple products and services. However, what sustained usage are its easy to use interface, reliable transactions and seamless integration to the iPod. The iTunes music store is currently the world’s largest retailer of music since February 2010 and all transactions are purely via online.
VI. Nation-Building Implications
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In conjunction with the online payment are electronic transaction receipts and the growing usage of an electronic billing statement (e-billing) system by financial institutions, utility companies and other biller companies. Through e-billing, companies no longer need to print and send hardcopies of the billing statement. This paperless receipts and billing promotes “green technology” as these are ways to conserve natural environment and resources.
Increase in Productivity
Payment technology improves efficiencies of businesses and individual consumers through automation and streamlining of settlement process and other financial transaction process. Increase in efficiency in these tasks would lead to increase in productivity as there will be more time that can be allotted in other significant activities that can improve the business, the consumer’s lifestyle or the society as a whole.
Easy Donation Scheme
Payment systems have also paved the way to make donations and contributions to foundations and other Non-Government Organizations (NGOs) easier. For example, Green Peace and World Vision aside from the usual donation through credit cards, offer an option for automatic debiting of the sponsor’s bank account monthly and online fund transfer.
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Payment systems are social infrastructures that support economic activities. A smooth and fast transfer and exchange of funds among businesses, government and individual consumers through these payment channels contributes to the economic development of a country. Thus, developments in payment technology through new payment channels and gateway, with a high security level and controls in place becomes the strength of a financial system that would lead to economic development.
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