More competition in banking? There’s an app for that.

From 29 April 2014 the Payments Council has announced it will be possible to make payments using a mobile phone number as the reference rather than complicated account numbers and sort codes. Making a payment will become literally as simple as sending a text message.

That seems kind of cool, or it extends the tyranny of mobile phones in our lives, depending on how you look at it. But it could also be the start of some big changes in banking.

The first is that businesses can now potentially avoid the costs of taking card payments. Businesses incur a cost every time we present our cards to pay for stuff. This is why many won’t take cards for small payments. And even for larger companies these fees can rack up. Well, now businesses can just give us their phone number and we can pay them instantly using an app on our phones. The money goes straight into their account. They avoid the fees from card issuers.

And there’s a payback for consumers as well. What we will expect now from our banking apps is much better information about our spending, broken down by each number to which we make payments. Soon I should be able to know exactly how much I spend at my local coffee shop every month and what the trend is.

There’s more. If payments from a bank account become much easier, then convenience is no longer the reason to use a credit card. The only reason to use a credit card is either the rewards that the card issuer offers or the credit conditions. At their worst reward schemes are designed to stop us thinking about the credit conditions offered by the issuer. At their best they complement the offer. Either way credit card issuers may now have to become a lot more competitive in what they offer.

Equally the banks who have our current accounts will be thinking about credit conditions on overdrafts. If we’re going to use our current accounts more for making payments in place of credit cards, then we might see credit balances on cards decline and overdraft balances increase. Banks could make more money as a consequence. Or, if we’re canny as consumers, then we’ll get a better deal from banks on our overdrafts. The win-win for consumers will be if credit card issuers compete on credit conditions to keep our business and banks respond by dropping overdraft costs. Of course this raises wider questions about the sustainable level of consumer credit. If credit becomes cheaper then we might end up with more of it. This will require careful monitoring by regulators and policy makers.

One other impact may be an acceleration in the decline of cash. The median cash transaction these days is £3.50. Retailers are reluctant to take such small payments on a card due to the current transaction costs. If those now diminish due to the competition from mobile payments then we might expect cash usage to decline sharply.

This is significant because it breaks further the connection consumers and businesses have to bank branches. If we don’t need branches to take out cash and businesses don’t need them to deposit cash, then some of the changes we predicted in our Branching Out report may come more quickly.

Fundamentally what the new ease in mobile payments should mean is a reduction in the cost of banking infrastructure. Something might go wrong (and there is a risk, as we identified in our report, that the regulator may hedge the adoption of innovations like these with lots of conditions).  But broadly speaking that should be good for consumers, directly in lower costs of banking, and then more slowly through the effects of greater competition, due to the greater ease by which new entrants can emerge into the banking market.


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