Peter Keenan hails the upcoming arrival of Zapp as the biggest change in UK payments since the introduction of the Switch card in the mid-1980s. Mr Keenan is hardly neutral – he’s the Zapp chief executive after all – but the service he enthuses about may indeed rank alongside Switch (which ushered in the debit card revolution) as one of the major retail breakthroughs in recent decades.
Unlike other mobile payment services that have struggled to take off, Zapp has managed to get a number of big-name retailers on board. Two of the UK’s biggest grocers – Asda and Sainsbury’s – were unveiled as Zapp partners last month, as were other well-known brands, including House of Fraser, Thomas Cook and Shop Direct. They join a slew of other outlets that have committed to accepting payments from smartphones carrying the Zapp app, which is slated to go live next year. Mr Keenan says it’s the largest coalition of retailer support for a new payment method ever announced in the UK.
One reason for the enthusiasm is that Zapp has the support of some big UK banks. HSBC, first direct, Nationwide, Santander and Metro Bank – which have a combined total of 18 million current-account holders in the UK – are backing the new mobile payments service (when customers pay using Zapp, money is taken directly from their accounts). It’s easier to persuade retailers to make changes to their IT systems to accommodate a new service if there’s a large addressable market to go at.
They’re also spared the expense of installing new hardware. When an in-store payment is made, checkout staff simply scan the smartphone – with the Zapp application open – in much the same way they scan goods.
Another Zapp advantage is it doesn’t rely on customers finding the app, downloading it and taking the time to type in their details. Instead, Zapp plans to ride the UK’s tidal wave of mobile banking growth. On service launch, customers who already have a mobile banking app (from one of Zapp’s bank partners) will simply be asked if they want to add the new mobile payment service. They’re spared the ordeal of having to input again all their personal and bank account information.
It’s a smart route to market as mobile banking is booming in the UK. According to a report published by the British Banking Association in March, four million users of the RBS/NatWest banking app are expected by the end of 2014, up one third in a year. Barclays, in September, said that its apps for mobile banking and Pingit, a money transfer service, had been downloaded five million times since they were launched in 2012. Mobile banking customers, too, are less likely to have misgivings about security when making transactions than those not used to banking with their mobile devices. They are an ideal (and large) target market.
What’s in it for retailers?
In a Zapp-commissioned report by the Centre of Economics and Business Research, published this year, various benefits of mobile payments are highlighted for both shoppers and retailers. One of them is shorter queues. Survey research showed almost 60% of shoppers would give up on making a purchase when faced with a long queue.
Using a smartphone to pay for a basketful of groceries at the till, however, is unlikely to be any quicker than using a contactless card. Mr Keenan points out transactions can be speeded up if the app automatically takes care of vouchers and loyalty cards, as well as payment – something which Zapp is working on – but even then it’s hard to imagine queues will be dramatically shortened. The time-consuming bit of the transaction is scanning each item.
More innovation is needed if Zapp is to excite retailers, something which Mr Keenan acknowledges. He points to the Sainsbury’s scan-and-go app, downloaded on a smartphone, which is being trialled in some UK stores. It allows customers to scan their own items and then pay at a self-checkout till. Mr Keenan says work is being done with Sainsbury’s and other retailers on how to integrate scan-and-go apps with Zapp so customers can simply press ‘pay’ after they’ve finished shopping, wherever they happen to be in the store, without having to go to a checkout point. “There are still issues about how this would work operationally within a store, such as where customers would go and how to make sure they have paid, but these problems are all solvable,” says Mr Keenan.
Zapp says it has already cracked the problem of dramatically shortening checkout times when paying for goods online, which promises to boost merchant sales. By using so-called ‘digital tokens’, Zapp cuts down on the number of security checks needed (which reduces customers’ time) while simultaneously making fraud less likely. Rather than sending bank account information over the internet, which fraudsters might be able to de-encrypt should they capture it, Zapp uses digital tokens. They carry information only about the basket of goods purchased, not bank details, which has no value in itself. “Only when the digital token arrives at our server do we then match customer, payment and merchant,” says Mr Keenan. “We’ve built from the ground up and engineered out some of the inherent flaws in the card model, particularly for online payments.”
Retailers and businesses under cash-flow pressure can also benefit from Zapp’s instant settlement service. Zapp is backed by VocaLink, a consortium of banks which operate a national payments structure in the UK, including the support of some 65,000 ATMs. VocaLink also provides a ‘faster payments’ infrastructure which Zapp is using to transfer payment immediately from the consumer’s bank account and into the retailer’s.
Cheaper transaction fees than those charged by the likes of Visa and MasterCard are another lure for retailers, although Mr Keenan doesn’t reveal what those charges might be other than to say they would be competitive.
Delivery time
For all of Zapp’s promise it’s still got much to prove. It originally intended to launch at the end of 2013, so the time needed to get the first batch of partners on board – and do the necessary integration work – has taken longer than expected. That’s not a bad thing if it means Zapp gets off to a better start, but it’ll help if new partners can be added without too much integration pain. Mr Keenan insists the IT effort needed to upgrade retailers’ systems is neither huge nor expensive and will typically require only a few weeks work, but adds that Zapp is working with software vendors and hardware manufacturers to make upgrades as easy as possible. It suggests there’s still room for improvement.
More partners will also be needed to make Zapp truly large-scale, which seems essential for a successful mobile payments business. Barclays, Lloyds and RBS are big omissions on the banking side, while Tesco – still the largest UK grocer – along with Morrisons and Waitrose are noticeable absences from retail. But Zapp has to start somewhere and has managed to attract an impressive line-up of partners. Mr Keenan anticipates there’ll be a continuous stream of partnership announcements in the coming months.
The arrival of Apple Pay in the US, and the likelihood it will arrive in the UK sometime next year, should give added momentum to the mobile payments market. Using near-field communication (NFC) technology, which links smartphones with merchant terminals, retailers will nonetheless need to have NFC terminals (and users the latest iPhones) if they are to use Apple Pay. Yet Zapp, while lacking Apple’s cachet, doesn’t require retailers to have specialised hardware or restrict use to certain smartphones. Mr Keenan’s claims of a UK payments revolution may not be wide off the mark if Zapp can deliver.
I wrote this article for the EIU Industy Briefing service, published 20 October.
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