Business &Network Consulting

Mobile MoneyOpportunities for Mobile Operators

A Huawei White Paper by Atanu Debray, Hyejung Kwon, Richard Gill

February, 2014

CONTENTS

5 Key Operator Considerations & Recommendations.....................10

7 References....................................................................................17

1 Introduction.....................................................................................1

5.1 Access to traditional financial institutions.................................................................................................105.2 Security.....................................................................................................................................................11 5.2.1 Regulatory environment...................................................................................................................11 5.2.2 Data Protection................................................................................................................................125.3 Size of network.........................................................................................................................................13 5.3.1 Open or Closed Network.................................................................................................................13 5.3.2 Merchant Network...........................................................................................................................13 5.3.3 Agent Network..................................................................................................................................135.4 Recommendations for Operators..............................................................................................................13 5.4.1 Emerging Markets............................................................................................................................13 5.4.2 Mature Markets................................................................................................................................14

4 Case Studies .................................................................................5

8 About the Author............................................................................18

3 Mobile Payments............................................................................3

6 Summary.......................................................................................15

2 Mobile Money..................................................................................2

4.1 Japan: NTT DoCoMo’s Osaifu Keitai.........................................................................................................54.2 Kenya: Safaricom’s M-Pesa.......................................................................................................................74.3 USA: ISIS...................................................................................................................................................8

1

1 Introduction

Operators have seen a decline in revenue from traditional sources such as voice and SMS and are looking to compensate by creating new sources of revenue. With close to 5 billion mobile phone subscribers but only 1.5 billion credit cards worldwide[1], mobile money is believed to be one such revenue source. This presents an opportunity for mobile operators to add value to both people who do not have access to traditional financial institutions and the financial institutions themselves.

The following paper examines mobile money, and in particular mobile payments, looking at industry dynamics to determine whether there is an opportunity for mobile operators to provide a differentiated service. The paper looks at markets such as Kenya, Japan and USA to learn from existing services to determine key success factors and the implications for mobile operators.

2

The term mobile money is used in many different contexts. Our belief is that mobile money is an umbrella term, which defines an ecosystem, which includes various financial activities transacted via a mobile device. The ecosystem, as shown in Figure 1, consists of, Mobile Banking, Mobile Payments and Mobile Commerce.

2 Mobile Money

Through this paper, the following definitions will be used to describe the various activities within Mobile Money: • Mobile Banking: The management of one’s bank account in a mobile environment , such as access account information, setting up standing orders, paying bills, direct debits etc, • Mobile Payments: This is commonly referred to as mobile money transfer and refers to payment services operated under financial regulation and performed from or via a mobile device. This ranges from remittance type activities, both domestic and international, cash in /out, etc. • Mobile Commerce: The buying and selling of goods and services through a mobile device

Mobile banking is increasingly becoming the preferred method of interacting with banks for users, especially in more mature markets such as, South Korea and Hong Kong (Figure 2).

Convenience is widely believed to be the main driver for the adoption amongst consumers. The benefits for banks are also considerable, with the transaction cost on a mobile believed to be approximately 2% of the cost when the same transaction is made at a branch[2].

Figure 1: Mobile Money Ecosystem

3

Figure 2: Percentage respondents who had made a mobile banking transaction in the last 3 months

(Source: Bain & Company, 2012)

The mobile is becoming central to consumer retail behaviour, with product awareness and purchase consideration being driven by mobile devices (Figure 3). It is expected that by the end of 2013, 15% of all online retail sales in the US will be through the mobile phone. This figure is expected to grow to 25% or approximately $110 billion in 2017[3]. A recent survey revealed that users of LTE services have almost doubled their purchases using a mobile device compared to previous purchases on 3G access networks[4]. This provides an opportunity for mobile operators to partner with retail outlets to improve customer experience and profitability for the retail vendor, while creating new sources of revenue for themselves. Mobile operators have a large role to play in mobile payments. The following section presents an overview of the mobile payment value chain, and the various options available from a customer perspective.

Figure 3: Consumer interaction with retail websites (EU5)

(Source: Al-Jehani, H., The Rise of the 3Ms, 2013)

4

There are many variations of mobile payments, with different parties trying to establish their foothold in this large projected market. These vary from financial institutions trying to leverage new technologies and channels to mobile operators looking to augment their revenue opportunities, and third party vendors attempting to take advantage of business opportunities presented by new technologies and changes in consumer behaviour.

As this paper focuses on the opportunities available to mobile operators, we limit the scope of the paper to the following three business models[7]:

• Financial Institution Led: Traditional institutes use the mobile phone as an extension of their existing channels. In this model, mobile operators would partner with a financial institution and leverage the institutes credibility and expertise

• Mobile Operator Led: The mobile operator develops and owns the necessary infrastructure for the new business. In extreme examples, operators could acquire banking licenses which would allow them to store the deposits made into the system

• Third-Party Led: Third party vendors create solutions which decouple mobile operators and financial institutions. This allows for cross operator and cross bank solutions to be launched in the market. These vendors may choose to partner with mobile operators to leverage the network and the existing customer base, for example Sprint USA partnering with Google Wallet and Digicel’s partnership with Terrapin

3 Mobile Payments

The combined mobile payment market for all types of mobile payments is expected to reach more than $600B globally by end 2013[5]. At the end of 2012, there were 480 million mobile payment users worldwide; this is expected to increase to nearly 1.5 billion users by end-2017, a compounded annual growth rate (CAGR) of approximately 26%[6].

5

Table 1 highlights examples of how the various actors in the value chain have implemented the various business models.

Business Model Technologies Used

Purchase Relationship Charged To Examples

Financial Institution Led

NFCInternet

External Device

Consumer to Business

Bank AccountDebit CardCredit Card

Prepaid Card

Barclaycard NFC Tag

Mobile Operator Led

SMSUSSD

InternetNFC

Consumer to Business

Business to BusinessPeer to Peer

Network BillDebit CardCredit Card

M-PesaFelica

Third Party LedInternet

NFCExternal Device

Consumer to Business

Business to BusinessPeer to Peer

Debit CardCredit Card

Prepaid Card

PaypalSquare

Google Wallet

Table 1: Mobile Payments Business Models

(Source: Anon., Mobile payments, 2013)

The following section details how NTT DoCoMo, Safaricom and a group of mobile operators in USA have implemented operator-led mobile payment initiatives. We then highlight our view of the key factors operators should address while implementing mobile payment solutions and then present strategic options based on country dynamics for operators.

4 Case Studies

4.1 Japan: NTT DoCoMo’s Osaifu Keitai

Launched in 2004, NTT DoCoMo, has established itself as a market leader in mobile payments, with its Osaifu Keitai (mobile wallet) proposition. The success can be attributed to DoCoMo making ear ly investments in the proposi t ion, establ ish ing strategic partnerships with Sony, Japan Rail and retail vendors, and by leveraging their leadership posit ion in the Japanese mobi le market. DoCoMo has made the proposit ion open to al l operators in Japan and col lects l icense fees from other mobile operators who choose to offer it to their customers.

6

To ensure maximum reach of the proposition, DoCoMo preloads the Osaifu Ketai application on all its phones, and either embeds the Felica chip into the phone or integrates the Felica application into the SIM, as shown in Figure 4.

Figure 4: Integration of the Felica Service with the Handset/SIM

(Source: NFC Times, 2013)

In the first half of 2013 fiscal year, DoCoMo customers with compatible phones used mobile payments at 560,000 points of sale that accept in Japan as well as at the nearly 500,000 merchant locations in 41 countries that accept MasterCard PayPass contactless payments[8]. In order to maximise the reach of the Osaifu Ketai, DoCoMo subsidises the cost incurred by small merchants while upgrading to NFC-enabled Point of Sale devices[9].

Japanese manufacturers such as Sharp and Toshiba have launched Android phones with Felica chip integrated into the device. The popularity of Osaifu Ketai has meant that consumers have physically inserted or attached the Felica chip into their phone when the pre-installed application is unavailable[10].

In addition to the memorandum of understanding (MOU) with China Telecom and Korea Telecom signed in 2011 for NFC roaming services[11], DoCoMo is also targeting the launch of Osaifu Ketai in Europe and the US.

7

To expand their business nationwide DoCoMo has opened up the platform to third party applications and increased business partners with retail shops and convenient stores like 7Eleven (Figure 5).

Figure 5: NTT DoCoMo’s Invoice Payment System at Convenient Stores

4.2 Kenya: Safaricom’s M-Pesa

M-Pesa was originally designed as a system to allow microfinance-loan repayments to be made by phone. This reduced the costs associated with handling cash and thus made lower interest rates a possibility. After a successful pilot test the service was broadened to become a general money-transfer scheme.

The service launched in 2007, and by the end of 2012 there were 17 million M-Pesa accounts[12]. This is in spite the fact that the service is only available to Safaricom customers.

M-Pesa uses SMS technology allowing for all mobile phones to be capable of delivering the service, as shown in Figure 6. The initial popularity of M-Pesa can be attributed to the young male urban migrant workers. These early adopters used the service to send money to their families in rural areas. The continued success of M-Pesa is due to the large network of merchants who act as agents for consumers to deposit and withdraw cash.

The charge structure was another driver for the success, with no charge for depositing money and a sliding tariff is levied on e-cash sent and withdrawn.

(Source: NTT DoCoMo, Nov. 2013)

8

Figure 6: Process Flow of M-Pesa using SMS to complete transactions

Figure 7 shows the virtuous cycle, driven by a supportive government, regulator, and strong consumer demand, which led to the success of M-Pesa.

Figure 7: M-Pesa’s ecosystem under Kenyan government support

(Source: Heeks, R., Why M-Pesa Outperforms Other Emerging Country Mobile Schemes, ICTS for development, Nov 2012)

Safaricom is further improving the scope of M-Pesa by partnering with vendors such as Western Union and extending the service offering to rent payment and fund collection, etc[13].

4.3 USA: ISIS

ISIS is a joint venture created by three of the largest mobile operators in the United States, AT&T Mobility, Verizon Wireless and T-Mobile[14]. ISIS is a mobile wallet which allows consumers to access their current payment cards, loyalty cards, while being able to avail coupons and

9

offers from partner retailers. Sprint choose not to participate in the joint-venture as it views Isis wallet as a direct competitor to existing financial networks such as Visa and Mastercard[15].

Following a successful trial in Austin, Texas and Salt Lake City, Utah the service was launched across USA in the latter part of 2013. Currently AT&T support 191 Isis-enabled Smartphones, Verizon supports 15 models and T-Mobile has 8 models[16]. The service requires an ISIS enabled SIM card from the operator and an NFC capable phone with the Isis Mobile Wallet. Users must associate their bank details (currently limited to American Express or Chase credit cards) to avail the service. Users can optionally add merchants

from whom they wish to receive offers and vouchers[17]. (See Figure 8)

Figure 8: Isis Mobile Wallet Process Flow

Isis provided several promotions to encourage uptake during the trial, with over 60% of users opting to receive offers and messages from their favourite brands[18]. Consumer brands have been impressed with the results of the trials and the potential of NFC technology to boost customer loyalty programs. However, the lack of NFC-enabled Point of Sales terminals is seen as a limiting factor of the adoption of ISIS. Moreover, Capital One and Barclays have chosen not to support the nation-wide launch of ISIS even though they participated in the initial trial[19].

10

5 Key Operator Considerations & Recommendations

Figure 9: Key Success Factors for Mobile Payments

Given the size of the opportunity, many operators have attempted to launch mobile payment solutions, with varied levels of success. It is believed that the following factors must be considered when deciding to implement a mobile payment solution (Figure 9): • Access to financial institutions • Size of the network • Security

As with all product launches, local market dynamics will also have an impact on the success of the solution.

5.1 Access to traditional financial institutions

For emerging economies, mobile operators have the ability to provide access to financial services for the large unbanked and under-banked population, while leveraging the almost 100% mobile penetration. The key objective for mobile operators in mature economies is to provide value added services and new methods of payment for its customers.

11

One of the critical factors in the success of m-Paisa, in Afghanistan was that it allowed policemen direct access to the payroll and eliminated the corrupt middlemen[20]. Introduced in 2009, through a partnership between Roshan, the largest mobile operator in Afghanistan and Vodafone, m-Paisa already has 1.2 million subscribers.

In more mature markets, operators will find it difficult to bypass financial institutions as consumers already have an existing relationship with financial institutions. The role therefore is to enhance the experience and increase convenience. This can done by working in partnership with banks (Telefonica with Santander & Caixa[21]) or with financial services (Vodafone with Visa[22]).

5.2 Security

Security can be divided into two main areas, the regulatory environment and the customers and financial institutions concerns about the data protection of the transactions.

5.2.1 Regulatory environmentThe support of the regulatory body is vital for the success of mobile payments. The main concerns that regulators may have regarding mobile operators creating mobile payment systems are as follows: • Legal Status – will the mobile operator be acting as a bank? • Money Laundering – could the system be used to launder money? • Security – is the system secure for the customers?

In the case of Safaricom, the regulator, the Central Bank of Kenya, decided that m-Pesa was not acting as a bank as the customer was always in control of their money, and that Safaricom did not have access to the money to fund its business. In order to provide more flexibility in the offerings that they can provide, Rogers Canada is in the process of acquiring a banking license .

In order to make sure mobile payments solutions are not used by consumers to launder money both nationally and internationally, mobile operators need to ensure consumer registration procedures follow guidelines set by local regulatory bodies.

12

5.2.2 Data Protection

Over 50% of respondents in a recent survey conducted by ICM Group raised security (protection of their money) as a concern and issue that needed to be addressed before they would use mobile payments. Recognising this as an issue, the European Central Bank has set out five guiding principles which mobile payment solutions should implement . The principles include strong customer authentication and secure data handling to the implementation of robust data protection mechanisms to protect sensitive data whenever it is transmitted, processed or stored.

Mobile operators have a unique ability to providing this service considering their experience in protecting consumer information regarding mobile usage. Operators also have the opportunity to leverage the SIM, which can host the encryption algorithms that are normally present in credit and debit cards.

5.3 Size of network

Success of mobile payment solutions are reliant on the size of the network where the solution can be used. The network size has many dimensions: • Open or Closed Network • Merchant Network

• Agent Network

5.3.1 Open or Closed Network

In an attempt to gain market advantage, operators may be tempted to create closed networks where only consumers of their network are allowed to access the solution.

This may be viable in emerging economies where a mobile operator has a significant market share, such as Safaricom in Kenya. However it is unlikely to be successful in more mature markets. In markets with number portability consumers are more likely to change mobile provider than bank accounts. Moreover, creating partnerships with individual banks may limit the service to a percentage of the mobile operator’s customer base that has accounts with that bank.

13

5.3.2 Merchant NetworkOperators need to ensure that consumers have the ability to use the solution in multiple locations and retail outlets. This can be a challenge for operators as traditionally operators do not have relationships with merchants. As mentioned in a previous section, both DoCoMo and ISIS have attempted to mitigate this by actively pursuing partnerships with retails outlets.

5.3.3 Agent NetworkIn markets where mobile payments are used as an alternative to cash, it is essential to ensure wide availability of places where consumers can both deposit and withdraw cash. This was one of the critical factors behind the success of M-Pesa in Kenya, when compared to similar

solutions in other markets.

5.4 Recommendations for Operators Due to the differences in market demands and opportunities operators

need to address the mature markets and emerging markets differently.

5.4.1 Emerging MarketsIn emerging markets where, the percentage of people with bank accounts is significantly lower than those with mobile phones, mobile operators have a significant opportunity for creating value for their customers. Figure 10 highlights how emerging markets lead the market

in terms of mobile money adoption.

Figure 10: Global Adoption of Mobile Money

(Source: GSMA 2013 & Bill and Melinda Gates Foundation

14

When launching mobile money services in emerging markets, operators need to address a specific need in the market, in the case of M-Pesa, in Kenya, it was the a micro-finance solution for cottage industries and for M-Paisa, in Afghanistan, it was to ensure the police force received their salaries without middle-men taking a percentage.

The success of these services is based on the ease in which customers can deposit and access their money as and when required. This requires a distribution network that reflects the customer locations. Leveraging existing retail channels used for airtime top-ups by customers allows operators to quickly expand the number of agents.

For emerging markets, mobile transfers from international markets are an important contributor for the economy. As a result, creating partnerships with international money transfer companies such as Western Union’s partnership with Safaricom, Roshan, Maxis and XL[25] creates a valuable proposition for customers. Partnerships with local companies, to allow customers to pay bills are a further way to

strengthen the ecosystem, as MTN in Ghana[26].

5.4.2 Mature MarketsMobile operators have a different role to play in markets where majority of the population have access to traditional financial institutions. The role is that of convenience, for both the customers and for financial institutions.

For customers this will mean creating solutions such as Direct Carrier Billing, where the customer is no longer required to enter their credit card details for each transaction with the amount simply added to the monthly bill. Nokia’s CEO, Stephen Elop, has stated that consumers were 5x more likely to complete an app store purchase than if the app store only offered credit card purchasing[27].

This has the additional benefit of reducing the time between purchase intention and decision, which is widely believed to improve conversion rates. This provides operators the opportunity to not only have partnerships with content stores such as Google Play & Singtel[28], but with other retail chains with an m-commerce site. This is especially valuable to global retailers partnering with operators with large geographic reach. This could be done on a license fee basis or by

extending the model of revenue share.

15

The main challenge for operators is to balance the desire to monetise the growing m-commerce market, with creating a proposition compelling for retailers to use. This means there is a need to reduce the percentage requested as revenue share (currently believed to be between 10-20%[29], compared with an average of 2% by payment systems such as Visa & Mastercard[30]). Further revenue can be made if additional value is created for merchants by providing customer insights.

In order to be a successful partner for financial institutions, operators need to either enhance the existing value chain or replace another player. Operators are likely to enable the replacement of the physical cards as the payment method, with the mobile phone enabled with NFC being used instead. The operators can leverage the SIM to provide the security demanded by both financial institutes and regulators. This can be done by leasing memory on the SIM to embed the security algorithms for a fee.

Availability of sufficient memory in existing SIMs is not guaranteed, and would require initiating SIM replacement initiatives. This is traditionally seen as an impediment for mass adoption, and may require incentives to be provided to encourage customers to swap SIMs. Additionally the availability of Point of Sale (PoS) terminals at the merchant’s side, remains a challenge for the adoption of NFC, however this is expected to grow at a CAGR of 46.1% between 2012 and 2017[31]. ISIS have aimed to accelerate this by subsidising the replacement of PoS terminals in Salt Lake City and Atlanta[32].

Finally, in order to ensure that reach is not compromised, it is believed that national joint ventures between mobile operators and banks have a higher chance of success over individual initiatives.

6 SummaryMobile money and in particular mobile payments has the potential to create additional revenue for operators. Successful implementations have relied on localised strategies where specific needs of customers have been addressed.

16

Based on this paper we would recommend operators clearly define their goals and the advantage, differentiation they can offer in launching a service. A key element will be in defining the terms and definitions used and trying not to do everything. The solution needs to be based on the market and whether it is emerging or mature and the strength of the financial ecosystem also identifies areas where operators can clearly satisfy a customer need, which is currently not satisfied, the perfect example is the lack of a geographically distributed banking channel.

To conclude, mobile payment has the opportunity to create a new revenue stream for mobile operators. The success of the solution is dependent on market conditions and how the operator chooses to insert itself in the value chain.

17

7 References[1] Anon., Fortumo Mobile Payments Overview, Fortumo, November 2013[2] Anon., Monetizing Mobile – How banks are preserving their place in the payment value chain, KPMG, July 2011[3] Anon., Smartphones, Tablet Drive Faster Growth in Ecommerce Sales, eMarketer.com, April 2013[4] Anon., 4GEE Mobile Living Index, EE, August 2013[5] Anon., Mobile Payments Markets: Strategies & Forecasts 2008-2013, Juniper Research, 2008[6] Anon., Mobile Payments: 2013-2017, Portio Research, May 2013[7] Anon, Mobile Financial Services - A competitive (and fragmented) landscape, Value Partners, December 2012[8] Clark, S., NTT Docomo to take Japanese mobile wallet global, [9] Anon., Dialing Up A Storm: How Mobile Payments Will Create The Most Significant Revenue Opportunities Of The Decade For Financial Institutions, PwC, October 2011[10] Anon., iPhone Lover - How to customize Smartphones to equip NFC chip?, Daily Keitaism[11] Anon., Transportation/E-Money NFC Service Roaming, NTT DoCoMo [12] Anon., CCK releases 2nd quarter ICT sector statistics for 2011/2012, Communications Commission of Kenya, 17 Apr 2012, [13] Anon., M-Pesa Timeline, Safaricom Website[14] Anon., About Us - Isis Mobile Wallet, Isis Website[15] Reedy, S., Why Sprint Doesn’t Put Money on ISIS, Light Reading, 7th November 2013, [16] Anon, Isis Mobile Wallet Case Study, GSMA[17] Goldstein, P., Isis mobile payments venture rolls out nationwide, Fierce Wireless, 14th November [18] Anon, Isis Mobile Wallet Case Study, GSMA[19] Rice, J., Android Police: Isis NFC Payments set to expand to the greater united states later in 2013[20] Heinrich, E., “How Afghanistan Is on the Leading Edge of a Tech Revolution”, Time.com [21] Anon., CaixaBank, Santander and Telefónica to create first joint venture between banks and telecom operators in Europe to develop new digital businesses, Santander Press Release, May 2013 [22] Anon., Vodafone and Visa announce world’s largest mobile payments partnership, Visa Press Release, February 2012[23] Dobby, C., Rogers gets closer to starting banking business, Financial Post, May 2013 [24] Solon, O., Mobile payments companies should inform regulators of 'security incidents', Wired Magazine, November 2013, [25] Anon, Western Union Mobile Money Transfer Deployments, Western Union Website[26] Anon, MTN Ghana Mobile Money, MTN Website, [27] Gohring, N., Nokia aims to appeal to developers, February 29, 2012 [28] Anon., Everything Android, Singtel Website[29] Abraham, J., & van der Lande, J., Direct carrier billing: giving CSPs a share of the mobile payments market, Analysys Mason, March 2013 [30] Zywicki, T., Set Visa, Master Card And Markets Free: Approve The Credit Card Interchange Fee Settlement, March 2013[31] Berg Insights – Mobile Wallet Services 2013, Subscription Required[32] Balaban, D., Isis Gears Up for National Launch Despite Challenges Ahead, May 2013

18

11 About the Authors

Richard Gill

Principle Business Consultant, Huawei Technologies

Richard is the head of the Traffic Operations team within the MBB Consulting practice in the UK. The team is involved in supporting mobile operators develop successful MBB monetisation projects across the world. He has had personal involvement in helping operators drive revenues and improve data service profitability across EMEA.

Atanu Debray

Principle Consultant, Huawei Technologies

Atanu is a senior business consultant of the Traffic Operations team within the MBB Consulting practice in the UK. He has been involved in projects for operators in Europe, Middle East and Asia, focussing on MBB data traffic monetisation & go-to-market strategies. He has had particular success identifying new revenue streams for mobile operators and understanding the relation between operators and OTT players.

Hyejung Kwon Senior Consultant, Huawei Technologies

Hyejung is a business consultant in Consumer & Enterprise practice in the UK LTE Business Consulting Competency Centre. She has supported projects for operators developing successful LTE business in Europe, Middles East and Asia. She has driven in depth research on pioneering cases in Korea and Japan.

www.huawei.com