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Partnerships: What can they bring to the party?

Mobile payments may never be very profitable

in their own right, as margins are too low. However, the ability to make a payment is critical to the growth of mobile commerce and mobile financial services, which gives mobile network operators a wider opportunity for revenue and profits growth.

“There is virtually no money to be made on payments themselves, but nobody

likes to talk about that,” says Paul Makin, Head of Mobile Money, Consult Hyperion. “The money that payments processors earn on transaction fees is tiny and that is not where the money is to be made. Organizations that build business models on a percentage of transactions are deluding themselves.”

Adam Kerr, Acting Head, Ericsson M-Commerce, says that at the heart of the industry

is the belief that access to global mobile financial services should be available seamlessly to everybody worldwide. However, there are many obstacles in the way, including entrenched consumer behavior; the need for operators, banks and merchants to share skills and revenue; agreeing standards and interfaces; and creating a global system based on business models that are

“The ability to make a payment is critical to the growth of mobile commerce and mobile financial services.”

Partnerships

Mobile payments only work as part of broader mobile financial services or mobile commerce offerings. Service providers have realized they can’t do everything on their own and one of the most effective and fastest times to market will be through partnerships, writes Rod Newing.

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unique to every single national market.

These problems are already manifesting themselves. Gartner, the analyst, has reduced its 2014 forecast for both users and transaction volumes by 17 percent each. It now expects the market to reach 349 million users and transactions of $429 billion in 2015.

Person-to-personMobile payments experienced initial success by providing person-to-person transactions for people who do not have bank accounts. This is in developing countries that have a national mobile network, but no widespread network of bank branches.

The most successful system is Vodafone’s M-PESA, operated by Safaricom in Kenya. Michel Combes, European Chief Executive, Vodafone, says that currently 27 million users are transferring over $670 million each month, representing 12 percent of Safaricom’s revenue. Although Vodafone does not comment on individual service profitability, Combes says that all services are expected to make a profit and Safaricom is meeting its overall profit targets.

Market Trends: Mobile Payment, Worldwide, 2011, Gartner, June 6, 2011, points out that favorable conditions in developing markets do not necessarily guarantee success. “Only in the best case scenario will service

providers see mobile payment revenue surpass SMS revenue in two years; in the average case, it will take much longer,” says Sandy Shen, the report’s author.

Person-to-person payments systems in developing countries are expected to expand, to include a full range of mobile financial services, such as savings, small loans and insurance (see below).

In developed countries people are well served by credit cards, debit cards and bank accounts. There is therefore less need for another payments mechanism to support a business case.

ContactlessFor many years people have been forecasting that contactless mobile payments will start to replace cash in the physical world.

Mobile handsets equipped with near field communications (NFC) allow consumers to tap it against a special terminal at a physical check-out. This is proving very popular in Japan, where NTT DoCoMo is driving it, especially at fast food and coffee shop chains.

One of the main issues is the way in which security is implemented on the handset. The simplest way is to add the payment card details to the handset’s existing subscriber identity module (SIM), with the network operator receiving a ‘rental’ payment. Handset manufacturers can also embed the security into the handset

during manufacture or add a slot for a MicroSD card.

Isis, a joint venture between AT&T Mobility, T-Mobile USA and Verizon Wireless, is building a U.S.-wide NFC mobile commerce network. It is open to all merchants, banks, payment networks and mobile carriers. Early partners are American Express, BarclayCard US, Discover Financial Services, MasterCard and Visa. Its mobile wallet will eliminate the need to carry cash, credit and debit cards, reward cards, coupons, tickets and transit passes.

“Isis is likely to use a combination of a SIM card and an embedded chip that carriers can control,” says Shen. “This indicates the fight for control by different service providers. Visa expects to collect the interchange fee. Isis was expecting to take a cut of the transaction fee, among other revenue, although its change in business model made this revenue stream less certain.”

As with person-to-person payments, there is little money to be made from contactless payments alone. The business driver is the ability to get users to ‘opt in’ to a range of mobile commerce applications, such as transportation tickets, coupons, loyalty schemes and special offers.

The main barrier seems to be consumer and merchant behavior. Physical cards work well, so incentives will be required to get the system widely adopted.

“There is little money to be made from contactless payments alone. The business driver is the ability to get users to ‘opt in’ to a range of mobile commerce applications.”

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Over the topPowerful new entrants are starting to make their presence felt, such as Amazon, Apple, Google and PayPal. They are looking for payments to become part of their mobile commerce business.

The initiative that attracts the most industry comment is Google Wallet, an open commerce ecosystem that includes NFS. It was launched with Citi, MasterCard, First Data and Sprint, but is open to additional banks, payment networks and mobile carriers. It initially uses PayPass-eligible Citi MasterCard and a virtual Google Prepaid card. Security is embedded in the handset, rather than on the SIM card. Google will take no share in transaction fees, but will gain from advertising and loyalty schemes.

“Google wants to make money through targeted advertising and offers,” says Samee Zafar, Director, Edgar Dunn & Company, a payments consultancy. “If you want to accept an offer you just need a familiar payment instrument, so payments are a necessary element in their overall mobile commerce value chain.”

PayPal is in negotiations with retailers to get them to accept payments from its mobile Internet service in stores. It is offering them a ‘one-stop shop’ including generating demand, location-based offers and making payments.

Apple is expected to add NFC to its mobile devices and has the opportunity to embed

it. Some people suggest that it could use its $72 billion cash reserve to buy a bank.

Jack Dorsey, founder of Twitter, co-founded Square Inc in 2009. The company provides free credit card readers that plug into the headphone jack of an iPhone, iPad, or Android device, allowing anyone to accept credit card payments. Entrepreneur Sir Richard Branson, founder of the Virgin Group, has become an investor.

Square, which is working with Chase bank, takes a 2.75 percent cut. iZettle in Sweden is a similar service for iPhone or iPad.

PartnershipsAlong with global mobile network operators, banks, card systems and merchants worldwide are involved in mobile payments. Some very big and powerful, with vested interests. “They are each dominant in their own market,” says Sophie Lubrano, Senior Consultant, IDATE, the analyst house. “It is hard for them to cooperate with each other because they don’t want to lose their market share.”

However, with such major opportunities and so many hurdles, no single industry can reasonably expect to succeed on its own. They need to work together to benefit from their different strengths.

One example of the gulf between them is their margins. According to Zafar, mobile operators experience

margins of 40 or 50 per cent on downloading ringtones or music, whereas banks make only a few basis points on a payment. “That is significantly less than 1 percent, but they make money elsewhere,” he says. “There is a disconnect about what each side expects from a payment transaction.”

One strength that network operators bring to the table is their internal systems, which are flexible enough to accommodate new payment applications and models very quickly. “If the banks try to do the same thing, they can’t compete,” says Makin. “The mobile operators are deploying newly developed systems, which can operate extremely efficiently with very low transaction costs. The banks’ systems date from the 1970s, with bits stuck on every decade or so, layer upon layer. They are very expensive to operate and changes are difficult.”

In France, the government has worked hard to facilitate the Cityzi NFC contactless payments system. It is being trialed in Nice and will extend to nine cities. It involves Bouygues Telecom, NRJ Mobile, Orange and SFR.

“It was hard for them to agree, because they are competitors,” says Lubrano. “If it is hard for national operators to agree, it is hard, country by country, to promote an application worldwide.”

The mobile payments industry will only thrive if all

“No single industry can reasonably expect to succeed on its own. They need to work together to benefit from their different strengths.”

Partnerships

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the different schemes connect with each other globally. The systems suppliers are working to agree standards and build connections between their products.

“M-commerce is not about working alone,” says Kerr. “To be successful, the industry must be based on all players, partnering, collaborating and operating, at scale and in a regulated way. The ability to connect between service providers and to scale at speed is crucial.”

One of the important strengths that banks bring to mobile payments is their appetite for risk. Mobile network operators do not want to carry the risk involved in financial services products.

Business modelsLow margins mean mobile payments must be part of a broader mobile financial services or mobile commerce offering. Zafar thinks that mobile financial services will be a huge area, possibly the biggest revenue and profit generator for mobile operators. “Some of them have been concentrating on SIM rental,” he says, “but there are so many huge opportunities if they look at a much broader picture.”

There is potential for person-to-person payments to expand into full mobile current accounts, with a bank partner providing back office banking systems and carrying the risks. Makin suggests operators should persuade government departments

and agencies to pay benefits into a mobile account. “Governments pay outrageous charges to distribute benefits to people without bank accounts and the mobile network operators could do it a lot cheaper,” he says.

He also points out that if local regulations allow, operators can encourage people to put money into a wallet and earn interest on the balance. “Mobile operators should be offering to distribute government benefits at absolutely rock bottom rates,” he says, “just to get the interest, which is the big prize.” He also suggests that these next generation mobile current accounts should be targeted at teenagers, who have no relationship with banks.

Lessons from the Mobile Payments Leader: What the World Can Learn from the Japanese Market, published by Celent, points out that for consumers, the actual payment component of mobile payments is irrelevant; incentives are what matter above all. Merchants feel the same as consumers; financial settlement matters little, whereas the ability to leverage mobile technology for promotions and sales lift is crucial.

This is backed up by Mobile Coupons: Ecosystem Analysis & Marketing Channel Strategy 2011-2016, from Juniper Research. It forecasts an eightfold increase in global redemption value from $5.4 billion this year to more than $43 billion by 2016.

There is debate about the role of network operators in contactless payments. Makin says that operators prefer SIM rental, but they could be excluded if the secure element is embedded in the phone, which is what Google does and he expects Apple to do.

“A bank would prefer to put its card application on an embedded chip for nothing, instead of paying money to put it on the SIM,” says Zafar. “Similarly, when the operators told Steve Jobs how much it would cost him to sell things from the iTunes store, he developed a system

to completely bypass them. It leaves the operators to provide a dumb pipe for data.”

He argues that North American and European operators are asking for too much money for SIM rental, still an untested proposition. Asian operators are more pragmatic, pricing it low to encourage use. If it adds value, people will be prepared to pay more.

With Sprint involved in Google Wallet, Rémi de Fouchier, Senior Vice President, Trusted Services Management Business, Gemalto, points out that the trend is not toward disruption. “If it turns into a fight, it will be a losing battle for the banks and the operators,” he says. “They have a strong interest in cooperating. We need an ecosystem that is open and interoperable, where everybody benefits.”

Conclusion“The trick for the operators is to add enough value that the other supply chain participants are willing to share some of the spoils,” says Steve Cotton, Head of Revenue Management, TM Forum. “I don’t think they appreciate the value of their own offering enough to earn a decent share of the pie.”

Mobile payments are a very low margin commodity. If the operators can overcome an array of obstacles, they will be the foundation for higher margin mobile financial services and mobile commerce offerings.

“Mobile financial services will be a huge area, possibly the biggest revenue and profits generator for mobile operators.”