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White Paper | The future of the payments market

White Paper | Mobile Money

Mobile Money The future of thepayments market


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The future of the payments market | White Paper2

Table of Contents

1. Executive summary 4

2. Current scenario 52.1 Growth of mobile adoption 5

2.2 The German market 6

2.3 What is mobile money? 8

2.3.1 Mobile banking 8

2.3.2 Mobile payments 8

2.4 Status quo of banks 9

2.4.1 Status quo of German banks in comparison to international banks 10

2.4.2 Lessons to be learned from other economies/markets 11

2.5 First mover advantages for banks that are already adopting mobile banking

services 14

3. Mobile payments value chain 153.1 Value-chain players 16

3.2 Changing value chains 18

3.3 Value chain components Revenue/benets

Costs/risks in Germany 20

4. Potential business models

in Germany 224.1 Operator-centric model 23

4.2 Bank-centric model 25

4.3 Collaborative model 27

4.4 Disintermediation model 29

5. Implications of mobile money 315.1 General implications of mobile money on banking 31

5.2 Compliance perspective 33

5.2.1 Compliance implications on banks 33

5.2.2 Compliance implication for non-banks 33

5.3 The payments perspective 36

5.3.1 General aspects 36

5.3.2 The SEPA initiative 39


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The future of the payments market | White Paper 3

6. Approach to developing

such a capability 416.1 Market and drivers: From a banks perspective 42

6.2 Dene customer experience vision 44

6.3 Dene capabilities 45

6.4 Business case and roadmap 47

6.5 People change 49

6.6 Target operating model 50

6.7 Strategic framework for implementation in Germany 51

7. Summary and outlook 55


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1. Executive summaryMotivated by the success of mobile payment initiatives in other regions, slowly and

steadily the German payment market is inclining towards the mobile channel. Although

the market is still in its infancy, it promises a splendid future return due to the high adop-

tion rate of smartphones and the availability of several technology options. Many newinitiatives, with innovative services and different business models, are testing the waters

and have so far received a positive response from the market. Nevertheless, uncertain-

ties remain for this new market, especially when it comes to consumer acceptance.

Mobile payments are ready with the potential to offer an innovative differentiation

channel to nancial institutions, new revenue sources to network operators, a conveni-

ent experience to consumers and loyal customers to merchants. But all the players are

facing a challenge in developing a vibrant M-payment ecosystem which can orchestrate

all the value-chain players and catalyse consumer adoption. This challenge becomes

more difcult due to the conservative outlook of German nancial institutions. German

banks are still analysing the situation for a business case and have shown little interest.

As a result, non-traditional players are entering into the mobile payment market.

The M-payment ecosystem has become very dynamic through these new entrants.

Moreover, the passive participation of banks is encouraging other players to exclude the

banks from the M-payment value chain. However, in the present scenario, the disinter-

mediation of banks who are the preferred providers of nancial services in the perspec-

tive of consumers doesnt seem viable. As the market adoption of M-payment services

is still in its infancy and banks have a rm grip on payment services, it will be very dif-

cult for non-traditional players to attract customers in mass at once. Furthermore, from

a compliance perspective the entrance barrier to this nancial ecosystem is substantial

and recent developments in Germany such as the updating of AML regulations will affect

non-banks in particular. Nevertheless, the desire of regular players to capture a substan-

tial share of revenues remains strong. Although nancial institutions have to take steps

now, delaying may risk the loss of market share and revenues to new entrants.

With all the recent successes around the world, banks have no doubt about the benets

of this new channel and that these benets coincide with their business objectives.

But in order to deliver better customer service, retain market share and generate extra

revenues, banks will need to develop certain capabilities internally as well as externally.

Among others, there is a need to develop mobile strategies based on the customer base,

to show thought leadership in product offerings, to coordinate all the value-chain players

and to establish a customer-centric approach.


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2. Current scenario

2.1 Growth of mobile adoptionGoing mobile can be considered as one of the main global trends of the 21st century.

Having started with the sale of mobile content (ringtones, in 1998) and the introduction

of mobile email services (R.I.M. in 1999), the ongoing augmentation of services in the

mobile channel is stepping forward to the next stage: the offer of mobile money to a

constantly growing audience. The technical improvements (e.g. the introduction of the

Apple iPhone and iPad) and service enhancements enable todays mobile device user

(i.e. smartphone, tablet PC) to:

Use ones phone as a business device (creating documents, presentations etc.)

Listen to music, play games, take pictures and record videos or memos

Check emails and access the Internet

Communicate with friends through web applications

Access target-orientated information through installed applications

Trigger nancial events

Mobile devices have become central to the private and especially the business life

of todays society. These days, more than ninety per cent of the worlds population

(5.3 billion) has access to a mobile network via laptop, mobile phone or tablet and about

950 million mobile service subscribers use third-generation services. The growth in recent

years has specically been spurred by the growth of the mobile markets in developing

countries, which already represent 73 per cent of global mobile subscriptions (up from

53 per cent in 2005).1 Particularly in Africa, mobile phones imply more than just the

possibility to access telecommunication services; they are a means to do business and

transfer money.

Besides the need to be available 24/7 and the desire to centralise solutions on one device,

the increasing divulgence of smartphones, laptops and tablet PCs (see Table 1) also corre-lates with their trait being perceived as lifestyle products in western economies.

Table 1: Statistics on the development o the quantity o mobile devices with

High Usage Profles (source: Cisco)

Device Millions in Use 2009 Millions in Use 2010

Smartphones 399 526

iOS and Android 45 121

Mobile-connected tablets 0.3 3

Mobile-connected laptops 58 94

1 Cisco Visual Networking Index: Global Mobile Data Trafc Forecast Update, 2010 2015


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As a consequence of the growing global user base and increased network capabilities,

data trafc on mobile networks has increased heavily in recent years:2

Global mobile data trafc nearly tripled for the third year in a row in 2010

The average smartphone data trafc was 79 MB per month (doubled in 2010)

Smartphones represent 13 per cent of total global handsets in use today, but theyaccount for an overwhelming 78 per cent of total global handset trafc

The average mobile network connection speed was 215 kilobits per second (kbps)(doubled in 2010)

The average mobile network connection speed for smartphones in 2010 was 1040 kbps

The growth of mobile adoption has been signicant so far; nevertheless, prospects

suggest that the big leap is still to come, converting the mobile phone into a central

device that caters to the needs for communication, entertainment, information gather-

ing and payment services. The improved accessibility of the Internet through mobile

devices as well as the continued improvements in the near eld communication tech-

nology and the continued surge in mobile-ready devices are deemed to further change

our current lifestyles and consumer behaviour. A study conducted by Cisco predicts thatin 2015:

More than 5.6 billion personal devices will be connected to mobile networks

There will be a mobile connected device for nearly every member of the worldspopulation

There will be about 788 million mobile-only Internet users (in 2010: 14 million)

Mobile content consumption (e.g. videos, music) will heavily increase: it is estimatedthat an average mobile connection will generate about 1,118 MB trafc per month

In addition, the introduction of Long Term Evolution (LTE), a new technology that will

facilitate Internet access for data uploads and downloads, will improve the way we are

able to experience Internet and mobile services by enhancing application innovationsand offering new business opportunities.

2.2 The German market

With respect to the German mobile market, it can be assumed that this market is highly

developed in terms of mobile phone and mobile subscription coverage and also with

regard to the offerings of mobile services. Consequently, the number of mobile devices

and mobile subscriptions hasnt increased signicantly in recent years, as there are

already more than 109 million mobile subscribers.3

Although there are no signicant upsurges in mobile subscriptions, the German mobile

market and especially the prole of the German mobile subscriber is changing. A main

driver of that change has been the introduction of the iPhone, which has for the rst

2 Cisco Visual Networking Index: Global Mobile Data Trafc Forecast Update, 2010 2015

3 http://www.tagesschau.de/wirtschaft/mobilfunk110.html


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time enabled its users to access the Internet through their mobile phone in an easy and

convenient way. Since then, data services over the mobile network have become a main

revenue stream for telecommunication companies (see Figure 1) and the prevalence and

market share of smartphones has increased constantly (see Figure 2).

Fig. 1: Revenue o the mobile communications market4

14.8

3.6

3.3

2.6

other (mobile devices, services)

Data communication

Messaging Services (SMS/MMS)

Telephony services

(2010 in billion Euro)

Fig. 2: Development o mobile phone sales5

5.47.2

10.1

20.5

20.3

18.9

0

5

10

15

20

25

30

35

2009 2010 2011

(in million devices)

mobile phones smartphones

The ongoing mobile trend has conquered the German mobile communication market,

leading to an increased desire and demand for mobile services that enrich our lives and

offer convenient solutions to everyday occurrences and situations.




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2.3 What is mobile money?

In general, mobile money can be dened as an alternative to the existing means of

payment (e.g. card payments, remittance, direct debit) that are the norm in western

countries. The idea behind mobile money is to give users access to nancial services

of any kind by simply using one central device the users mobile phone in order to

initiate nancial events.Mobile money encompasses the terms mobile banking and mobile payments. Both

categories of mobile money will be described more precisely in the following sections.

2.3.1 Mobile banking

Mobile banking describes a service offering of banks that enables customers to access

their bank account and use the nancial services of their nancial institution by simply

using an application on devices (e.g. mobile phone, tablet PC) without security stand-

ards. Mobile banking offers bank customers another access channel to traditional

banking services which is not bound to a specic location.

Mobile banking differs from mobile payments in the sense that with mobile banking only

a bank can act as a service provider, as the service requires an underlying customer-bank

relationship and, consequently, a banking license issued by an ofcial authority.

2.3.2 Mobile payments

The term mobile payments describes a payment process that is interrelated with a

purchase through a mobile channel at the same time. The initiation, conrmation,

authorisation or realisation of the nancial transaction requires a mobile, electronic

means of communication. In general, mobile payments are categorised by the tech-

nology used in the context of mobile payments:

Proximity payments: payments initiated by mobile phone where both parties involvedin the payment transaction are in the same location and communicate directly with

each other using contactless radio technologies6

Remote payments: mobile-phone-initiated payments where the transaction isconducted over telecommunication networks and can be initiated regardless of the

payers location7

Alternatively, the variety of mobile payment methods can be differentiated according to

the communication medium that ultimately initiates the payment:

Payment initiation using near eld communication devices

Payment initiation through the use of applications that are installed on the mobilephone

Payment initiation through scan of a picture (QR code as basis for the initiation of thepayment)

6 European Payments Council, EPC492-09 White Paper Mobile Payments version 2.0, p. 58

7 European Payments Council, EPC492-09 White Paper Mobile Payments version 2.0, p. 58


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Payment initiation through SMS (payment initiation model or payment conrmationonly model)

Payment initiation through telephone call

Another possibility is to categorise mobile payments according to the point in time when

the good or service is eventually paid for by the user of the mobile payments service:

Pre-paid model: the amount deducted by retailer or service provider has to beuploaded before the nancial transaction can be conducted

Post-paid model: the invoice amount is deducted from the bank account or settledwith the mobile phone/credit card invoice after the mobile payment process has been

initiated

Mobile payments are deemed to lower the cost and the time of the payment process at

the point-of-sale and by these means facilitate as well as improve the nancial transac-

tion between merchant and consumer. Furthermore, mobile payments enable users

to forego taking their wallet with them and, hence, can be assumed to improve the

convenience of the sales process.

2.4 Status quo of banksThe development of mobile payments can be characterised as extremely positive with

double-digit growth in volume. According to Gartner, mobile payments volume has the

potential to reach a total of $86.1 billion in 2011. This implies a growth of approximately

76 % compared to 2010 (Figure 3):

Figure 3: Mobile payment volume in billion $

37.4

48.9

86.131 %

76 %

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

90

100

2009 2010 2011

growthin%

inbillionDollar


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With regard to the future, recent predictions state that mobile payments volumes will

range between $500 and 600 billion in 20158. As a consequence, telecommunication

companies, smartphone manufacturers and nancial institutions want to participate in

this growing market. However, surprisingly, the driving forces in the mobile payments

market are currently non-nancial institutions such as Google, R.I.M. and Apple (tech-

nology vendors), Orange and AT&T (telecommunication companies) and solution vendors

such as YAPSTONE. Nevertheless, nancial institutions are trying to enter this market byforming strategic partnerships:

American Express and Verizon Wireless integrated the next-generation digital andcommercial payments platform Serve on Verizon mobile phones, which enables

customers to make payments from their mobile phones.9

Bank of Montreal launched a mobile payment solution by offering its customers anadapted tap-and-go technology for their mobile phones in collaboration with Master-

Card. Similar to MasterCards PayPass, the mobile phones will be outtted with a

special sticker. Purchases will be limited to $50.10

2.4.1 Status quo of German banks in comparison to international banks

Considering the German market, it is obvious that mobile payments seem to be takinglonger to be accepted when compared to other countries. As recent surveys and projects

in Germany demonstrate, mobile payment is still in the early stages of development.

Besides existing issues, such as security concerns and customer queries, nancial insti-

tutions remain passive in terms of mobile and contactless payments.

Due to the high research & development as well as infrastructure costs, banks in

Germany act cautiously. Additionally, the low acceptance of mobile payments by

consumers, retailers and banks in Germany intensies this situation. This may lead to a

so-called chicken-or-egg dilemma, meaning that banks and merchants refuse to invest

in that new payment method on the one hand, and potential clients hesitate unless

merchants offer mobile payments on the other. Furthermore, banks expect potential

revenues out of mobile payment to be insignicant.

A survey by the German Association of Electronic Commerce (eco) of experts high-

lighted that developers of smartphone operating systems and Internet service providers

currently play a more important role in the eld of mobile payments than banks.11 In

contrast, other European banks show more initiative:

Banxafe (Belgium): with m-banxafe, bank card and SIM card are connected to oneanother. This provides the opportunity of topping up, checking bank accounts and

making mobile payments. This service was developed in cooperation with Belgian

banks. About 0.25 may be charged per mobile payment process.

8

http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats9 http://www.marketwatch.com/story/verizon-to-integrate-american-express-serve-on-wireless-phones-

and-tablets-2011-08-01?reink=MW_news_stmp

10 http://business.nancialpost.com/2011/09/13/bmo-rst-big-bank-to-launch-mobile-payment

11 http://www.ibusiness.de/aktuell/db/773904SUR.html


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MiniTix (Netherlands): an advanced payment transaction system, which was initiatedby Rabobank. It offers its customers a mobile wallet to make payments online or by

mobile phone. Appropriate apps need to be downloaded. Customers of all Dutch banks

may utilise it. It is also integrated into the social network Hyves.

PosteMobile (Italy): a mobile virtual network operator (MVNO), which belongs to

the Italian post bank. It gives the customer the opportunity of mobile payment andmobile banking.12

These examples show that in other European banks, mobile payments are already an

integrated part of the business strategy. Those banks have recognised the main benets

of this new means of payment:

A closer link to the customer, due to the rising importance of social media

Reduced processing costs due to the potential reduction in cash supply13

2.4.2 Lessons to be learned from other economies/markets

For the rst time since the mobile payments buzz began ve years ago, all the impor-

tant players, i.e. telecommunication and established payment companies, are trying to

tap the market with strategic partners. Around the world a multitude of consortiumshave aligned themselves to provide mobile payments, and it seems well positioned for

take-off. The key motivation of the partners is to enjoy rst-mover advantages. The most

important consortiums around the world are as follows:

Google Wallet is an NFC (Near Field Communication Technology)-based mobilepayment system which has been developed by Google. It allows users to store their

credit cards and gift cards on the mobile phone. Loyalty cards and location-based

sales promotional vouchers can also be stored on their phones. The Google Wallet

consortium consists of Citibank as the issuing bank, MasterCard as the initial payment

network and Sprint as the rst mobile carrier. Merchants who accept Google Wallet

include: American Eagle Outtters, Bloomingdales, Foot Locker, Jamba Juice, Macys,

RadioShack, Subway, The Container Store, Toys R Us and Walgreens. In addition,

Google Wallet works at other participating MasterCard PayPass merchants including7-Eleven, McDonalds, Dairy Queen, Best Buy, BP, Sports Authority, CVS Pharmacy,

Petco, The Home Depot, Ofce Depot and other retailers.

Isis is an NFC-based payment system which will provide services comparable to thoseof Google Wallet. It is a joint venture between AT&T, T-Mobile, Verizon Wireless, VISA,

MasterCard, Discover, Barclaycard US and American Express. The pilot programme will

be launched in early to mid-2012 in Salt Lake City.

Cityzi, also known as Nice Project, is a very important French consortium in termsof the cooperative approach of all the value-chain players. It is a perfect collaborative

model and all the players across the value chain move together toward rollouts of NFC

services, even if not all players launch at the same time. They are setting down rules

12 http://www.uni-protokolle.de/nachrichten/id/190292/

13 http://www.die-bank.de/it-und-kommunikation/markt-mit-wachstumsperspektive


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and standards on how to offer NFC services. Based on our research, Cityzi will have a

major inuence on standardising NFC-based payments in mainland Europe.

ClearXChange is a peer-to-peer mobile payments initiative, from the joint venture ofBank of America, JPMorgan Chase and Wells Fargo. They have already introduced the

payment service in Arizona, and it will be introduced in more markets in the coming

months. This is a bank-centric model and the motivation behind this consortium is tocompete with intermediaries like PayPal.

Payorit is a mobile-based payment service, supported by all licensed UK mobileoperators (Vodafone, Three mobile, T-Mobile, O2 and Orange) and designed to make

it easy to pay for low-cost services by mobile phone. Initially, Payforit supported

micropayments (generally


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Japan: Ahead of the restWhile the developments mentioned above may help in bringing the vision of mobile

contactless payments that little bit closer to reality in the West, they are insigni-

cant compared to the use of mobile contactless payments in Japan. Japan is an

intensely cash-focused society and credit services tend to be offered by companies

other than banks, so this was a natural potential area for a Telco.

NTT started the M-payments initiative with a very strategic and step-by-step

approach. It launched a mobile wallet service, Osaifu-Keitai (meaning wallet-mobile

phone), in July 2004. Osaifu-Keitai is a device-based mobile payments solution,

supporting both proximity payments in shops that have a FeliCa chip reader and

remote payments. Although the FeliCa-based wallet platform was developed by

DCM, since 2005 it has been supported by the two other major mobile phone opera-

tors in Japan, making it the de-facto mobile payment platform in Japan.

What sets Osaifu-Keitai apart from all the other initiatives is the sheer level of domi-

nance DCM exerts over the Japanese mobile market (with an impressive 80 million

customers) and the ecosystem around it. DCM is able to heavily inuence mobile

handset design because of its close relationship with mobile handset manufacturers,allowing it to streamline the customer experience. DCM purchased a bank and trans-

action processing company to drive economies of scale. It provided substantial funds

as an incentive to merchants to purchase the necessary PoS terminals, and through

its base of developers and development partners it was able to foster substantial

innovation around new platforms, such as Osaifu-Keitai. The lessons to be learned

from Japan are as follows:

Consumer adoption takes time, even among a tech-savvy population

Consumer adoption was driven by the incentives of usage of this channel

Merchants were interested in the ability to leverage the mobile channel to drivesales and reduce promotional costs

In the initial phase collaboration is a key success factor. As different industriesplay a crucial role in mobile contactless payments, no one industry can expect to

go it alone


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2.5 First mover advantages for banks that are already

adopting mobile banking servicesWhen it comes to competition, whether on the athletic eld or in the corporate world,

those who make the rst move have the opportunity to shape the future in their interest

and set standards. In the world of mobile payments, nancial institutions are uniquely

positioned while multiple players jockey for position. But the advantages of this uniqueposition can only be reaped by the banks that make the rst move. Once these rst

movers establish themselves in the M-payments market, they will be able to undertake

aggressive strategies and disintermediate other players.The development of mobile

payment solutions offers more than just a rst to market advantage for these rst

movers. It also offers the opportunity to work with partners across the value chain to

take a larger role in the development of standards, build early customer awareness and

adoption, gain critical experience within their organisations and in some cases even

capture new revenue streams. The advantages and disadvantages of the rst mover

strategy are as follows:

Fig. 4: Advantages and disadvantages or frst movers

Advantages Disadvantages

Play a bigger role in setting stan-dards. This will make the rst mover

more dominant and secure.

Ability to capture new revenuestreams.

Create an image of an innovativebrand.

Serve better to customers withtheir enhanced customer-centric

initiatives.

Increase market share by acquiringnew customers, especially young

people and early adopters.

Create Customer loyality.

Very high investments will berequired for the technology.

Lack of global standards may resultin disintermediation from main

stream later.

Acceptance from the merchants maybe low.

Low consumer adoption. Security and privacy have to be

resolved in order to not hinder the

adoption.


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3. Mobile payments value chainTraditional payments typically involve a merchant, acquirer, issuer and a consumer. But

the processing of payments has evolved drastically. The M-payment value chain involves

a larger number of players than traditional payment methods and introduces changes

in the role that each of them play. The value chain for mobile payments can be bestunderstood by comparing it with the established credit/debit card payment value chain

(Figure 5).

Fig. 5: Card-based credit/debit card payment value chain

Consumer Merchant AcquirerPayment

NetworkIssuer

Purchases goods

or Services from

Merchant

Provides payment

account informationto Merchant

Owns Credit/Debit

account

Owns/leases

software/hardware

to authenticate and

process payment

account information

Generates bill for

transaction and

sends to Acquirer

Merchants Bank

Contacts Payment

Network to check

on funds for bill

Provides bankingservices to

Merchant

Intermediary

between Acquirer

and Issuer that

handles

communications

between banks

Consumers Bank

Provides credit or

debit account to

consumers

Authorizes ordeclines payment of

bill from Merchant

Sends payment to

Acquirer if funds

available

The mobile payments value chain has similar stakeholders to the credit/debit card

payment value chain, apart from the use of the mobile device. The introduction of

payments with the mobile channel has attracted many new players into the M-payment

ecosystem. Most of these players originate from the mobile communication sector. The

inclusion of the mobile channel has changed the payment value chain as follows:

Fig. 6: Mobile payments value chain

Merchant

Acquirer

Payment

network Issuer

Consumer

M-payments

value chain

players

Provide a single place where multiple

payment instruments can be accessed

effectively

Will be more influencing with the rise

of Location based

Provides mobile services to consumers

Authorizes/declines bill from payment

provider

Pays payment provider with consumersmobile account funds

M-payments

value chain

players

M-Payment

agregator

Mobile Network

Operator

Card based Payment Value-Chain + New Players


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3.1 Value-chain players

Each primary stakeholder in the mobile payments ecosystem has its own interest in

participating in the mobile payments value chain. Subsequently, the main objectives of

those primary stakeholders are depicted on a high level:

1. Mobile network operators (MNOs) are new entrants in the payment value chain and

are the most active stakeholders at this point in time. They view mobile paymentsas an attractive proposition for achieving a return on the investments made in

infrastructure over the last two decades through reduction of churn, extra payment-

related revenues and associated increases in air time and data use. For MNOs,

mobile payments also hold the potential to allow for diversication into other areas

of the consumers needs and lifestyle. The most important MNOs in Germany are

T-Mobile, Vodafone, Telefnica Germany and E-Plus.

2. Financial institutions (banks) have a proven expertise in handling payments in a

secure way. This has put banks in a very important position but other players are

trying to disintermediate the banks with the help of third parties who have exper-

tise in mobile micropayments. Hence, banks are considering mobile payments as a

defensive tactic. M-payments are also used as a tool for streamlining their opera-

tions and reducing their operating costs. Moreover, mobile payments also have the

appeal to nancial institutions of assisting in the ongoing battle to reduce the use of

cash and its associated costs. Furthermore, in developing markets mobile payments

offer nancial institutions the opportunity to cost-effectively capture and service

unbanked and under-banked communities.

Fig. 7: Potential objectives in implementing mobile payment services

Customer Loyalty

Customer Acquisition

Brand Extension

Efficiency in operation

Cross Channel

revenues

A service like M-Banking would retain the customers, if they get used to these service.

As new customer evaluate banks, especially the upwardly mobile services of this sort

will enable banks to acquire more customers.

As more customers come online, banks could acquire more corporate accounts.

Extends the association of the brand: from a core banking service provider to a corebanking service provider that caters for the use of innovative channels; Can create a

market differentiator.

Help in streamlining operations and reduce the operation costs.

Revenues share with payment networks, mobile advertising etc. could improve banks

revenues.


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3. Payment networks Although M-payments are deemed to cannibalise credit

and debit payment products, payment networks such as MasterCard and Visa are

nevertheless very actively participating in M-payment consortiums. The main reason

behind their activeness in these initiatives like Google Wallet and ISIS is their

fear of being disintermediated. Therefore, they are using their current expertise and

investing in the development of the M-payments know-how as a defensive tactic.

4. Intermediaries As M-payments are being introduced in the market, the value

chain is also attracting new entrants who are substituting the big players in various

business models. The strength of these specialised intermediaries is that their core

competency is M-payments. The different types of intermediaries are as follows:

Technology providers provide a variety of technological support solutions tocreate a value for M-payment consumers. They are the most important stake-

holders among the intermediaries, as they are pioneers in technology-led devel-

opment.

Aggregators are service providers that enable e-commerce merchants to processtheir payment transactions. Aggregators allow merchants to accept credit cards

and bank transfers without having to set up a merchant account with a bank or

card association. PayPal is the most popular aggregator in Germany.

Independent service providers provide infrastructure to carry out M-payments,especially micropayments.

All these market participants are positioning themselves as infrastructure providers

and are trying to create a brand image of a trusted intermediary between the banks

and the mobile network operators.

5. Merchants For merchants, Point of Sale (PoS) mobile payments may provide faster

throughput at the checkout and the ability to send real-time marketing messages to

the consumer. However, faster throughput could also be achieved through contact-

less cards and it is yet unclear whether consumers actually want or appreciate

real-time marketing messages from the merchant on their mobile phones. However,

unmanned or remote PoS locations may benet from mobile payments by allowing

a reduction in servicing costs. Remote mobile payments provide another channel for

merchants. Remote M-payments can provide an attractive proposition if their usage

gains wide-scale adoption, due to the lower costs in comparison to other existing

channels.

6. Consumers From the perspective of the end consumer, the mobile phone

has achieved the status of permanent share of pocket, i.e. comparable to the

consumers wallet and keys, it is the object that is most l ikely to be constantly with

the consumer. Furthermore, consumers are increasingly more comfortable with

the mobile phone fullling more than one function, with mobile devices slowly

morphing into multimedia and multi-application devices. However, does this imply

that end consumers are ready to abandon the wallet and rely primarily on their

mobile phone, being more a lifestyle or leisure tool, for the important task of

handling their payments?


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3.2 Changing value chains

Every stakeholder has a different relative strength, which makes them inevitable in

the M-payments value chain. The rise of the mobile channel is pushing the traditional

payment stakeholders to reconsider their traditional business models. Figure 8 shows

the competencies of the players in various M-payment value chain operations. None of

the stakeholders have expertise in performing all the operations across the value chain.But intermediaries and payment networks are gaining expertise in other operations,

especially in payment processing and account management, which can present a threat

to banks in the future.

Fig. 8: Core competencies o the value chain participants

Mobile

Network

Operations

Account

Management

MerchantPayment

NetworkBanks MNO Intermediaries

Infrastructural Support

Activation & Distributionof Services

Product LifeCycle

Management

Order

Processing

Initiation

Delivery of product

Aggregation

Payment

Processing

Payment Acquisition

Routing Transaction

TransactionManagement

Account Management

Other Financial Services

Technology

Providers

Independent

Service

Providers

E-Money

Institutions

Aggregators

Apart from the key players, new intermediaries are entering into the mobile payments

value chain, based on the market dynamics and need of consumers in a particular region.

In the absence of key players, these intermediaries are playing a role of substitutes, with

different business models. These intermediaries are quickly moving to reinforce their

position and capture larger parts of the revenue stream.

Due to a contravention of interests and the entry of new intermediaries, the mobile

payments value chain has become very dynamic. In the pursuit to capture market share

and outcompete the other market participants, each player is strategising new partner-

ships.


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Fig. 9: Changing roles in the mobile payments value chain

Consumer Merchant Acquirer PaymentNetwork

Issuer Aggregator MNO

Banks (FI) Banks (FI) Banks (FI) MNO

Banks (FI) MNO MNO

Banks(FI) MNOFIMNO FIMNO

FIMNO

Banks(FI) MNOFI3rd Party

3rd Party 3rd Party 3rd Party MNO

3rd Party

MNO MNO MNO MNO

Bank Dominated

Collaborations

Without Banks

PaymentNetwork

PaymentNetwork

PaymentNetwork

PaymentNetwork

PaymentNetwork

PaymentNetwork

As shown in Figure 9, apart from nancial institutions, every participant of the mobile

payments value chain is stepping out of its core competencies and is trying to gain

market share from competitors. Especially Mobile Network Operators (MNOs) have

become increasingly active and important, as banks work to deploy their applications

and test their functionality across multiple devices and networks. In Germany, MNOs are

actively participating in consortiums and trying to create various business models, e.g.

Mpass and Touch & Travel. As MNOs have already strengthened their position in the

value chain, they are trying to exclude other players by substituting them with interme-

diaries.

The dynamic nature of M-payments is pushing the nancial services institutions to

reconsider their traditional business models and avoid the disintermediation from other

stakeholder in the M-payment value chain. In order to translate the market potential

into success at the institutional level, banks and other nancial institutions will need to

carefully calibrate their mobile propositions and platforms. We will discuss the banks

mitigating actions in the coming sections.


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3.3 Value chain components Revenue/benets

Costs/risks in GermanyIn the M-payments ecosystem, each player has its own objectives and challenges.

Moreover, each and every player is considering forming partnerships and, consequently,

different business models result. These business models are yet to be tested in the

German environment. We can only imagine what an ideal business model would look likeand which players will be able to create the perfect business model and which factors

will they consider when forming strategic partnerships.

Despite the fact that M-payments are still at an infant stage, all the key players are

experts in their core business. Due to the presence of various key players, the revenue-

sharing arrangements associated with any of the potential business models represent

both a point of great potential competitive friction and ultimately the key to a break-

through for the rapid deployment of mobile payments. When addressing the ques-

tion of the appropriate revenue split for each of the models, a risk-based allocation of

revenue streams should be implemented, with the highest margin to be earned by the

entity that assumes the greatest share of risk. In order to arrive at an optimal revenue

sharing model, it is important to take a closer look at the value chain and analyse the

costs and benets for all the participants. Figure 10 shows which players will enjoy the

benets and incur the costs in each of the value chain components. After analysing the

costs and benets of all the participants in the value chain, we can recommend that the

participants consider the following guidelines to form the ideal partnerships or business

models.

Convergence o objectivesEach of the value chain participants has different corporate objectives and these

differences create hindrances in pursuing a consumer-centric approach, which is

inevitable in the present situation because M-payments are still facing adoption

challenges. Hence, the convergence of objectives, at least for the initial phase, will

be the most recommended step for creating value for customers.

Partnerships based on cost-/risk-sharingPartnerships should be set up between those players who can share both costs and

risks. In this scenario, partners will rely on the commercial success of the business to

receive their share of nancial benet from the enterprise while reducing the risk of

loss involved if the enterprise loses money. Moreover, they will eliminate redundant

operating costs. For example, banks and MNOs both verify their customers when

opening an account, but they can reduce the operation costs if the verication is done

only once.


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Use o existing investment and inrastructureM-payment is still in its infant stage, and creating new infrastructure will take a

signicant amount of time and capital. So, it is advisable for M-payment value-chain

players to rst identify potential partners, strategise their partnerships based on the

existing investment and infrastructure of other players and share the initial invest-

ments across the members of the consortium. Use of available infrastructure will

deliver a consistent user experience, reduce the cost of the project and maintenanceand improve the return on investment.

Fig. 10: Value chain component benefts & cost

Value Chain

ComponentPlayer Revenue/Beneft Cost

Mobile Network

Management

MNO Network Fee, Data

Service charges

Channel Creation

and maintainence

Account Opening Banks Customeracquisition

KYC Regulation

Payment Processing

Management

Banks Transaction fee Liquidity

Management

Account Access

Management

Banks Processing fee Investment on

Technology

Marketing/

CRM Services

MNO, Banks,

Independent Service

Provider

Branding Differences in

objective will create

market risk

Value added

Services

MNO, Banks,

Independent Service

Provider

Fee based income,

Branding

Account

management costs,

service delivery

costs

Order Processing

Management

Merchants Sales Service Delivery

costs


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4. Potential business models

in Germany

The German mobile payments market is still in its infancy and the facts, statistics andpredictions are still attempting to pinpoint when mobile payments will be the subject of

mass adoption. However, German MNOs are trying to take the lead in the German mobile

payments market and initiate many uptakes in M-payments, especially in the NFC tech-

nology. Vodafone, Telefnica O2 Germany and Deutsche Telekom are among the pioneers

who are testing the waters with their joint ventures mpass and Touch & Travel. These

initiatives are creating ripples across the M-payments value chain and attracting other

market participants to this active arena. As a result, the mobile payments landscape is

continuing to evolve with various business models. Based on our research, we will high-

light a few business models that have the potential to succeed in Germany.

The business models have been categorised according to the critical roles played by

the participants under different scenarios. The rst role to consider is who is legally

responsible for the deposits and second who bears the reputational risk (i.e. whosebrand is more exposed to the public). The third role to consider is whether deposits can

be accessed through agents or only through bank branches fourth who carries out the

payment instruction (Figure 11).

Fig. 11: Business models

Bank-centric

Model

Collaborative

Model

Disintermedia-

tion Model

Operator-

centric Model

Who holds

accounts

deposits?

Bank Bank Independent

Service Provider

or MNO

MNO,

Intermediaries

Whose brand

is dominant?

Bank Joint-Non Bank

Or MNO

Usually

non Bank

Or Telco

dominant

MNO

Where can cash

be accessed?

Bank Bank+

Intermediaries

Intermediaries

(Aggregator)

Telco network

+ Other

Who carries

the payment

instruction?

MNO Usually Specic

to one MNO

Usually many

MNO

MNO


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4.1 Operator-centric model

In this model, the mobile network operator (MNO) offers the technology, operates

the transactions and compensates the system. The MNO will reap the benets of its

customer base and already established billing relationships. Mobile network operators

will also benet from additional service fees as well as increased value-added services to

the consumer who would be able to conduct quick, convenient payment transactions.This benet may lead to improved customer loyalty, increased revenues and a potential

reduction in customer turnover. However, strong partnerships with merchants are essen-

tial for this model.

The operator-centric model has played an important role in bringing M-payments to its

current stage. NTT DoCoMo (Japan), Mobipay (Spain) and Mobikom (Austria) are some

of the international examples of operator-centric models. The most important operator-

centric initiative in Germany is mpass, which is a joint venture of Vodafone Germany,

Deutsche Telekom and Telefnica (O2) Germany. Mpass is a free of charge mobile

payments service that allows subscribers to pay for their online shopping using their

mobile phone. Instead of a credit card or direct debit payment, users provide their mobile

phone number and reply to a conrmation SMS. Telefnica Germany has also tied up

with independent service provider Boku for providing M-payments.

Although many MNO-centric initiatives are taking off, this model will face some chal-

lenges in Germany. First of all, it will be very difcult for this model to offer the right

set of products and services to pay for and to offer a solution which is perceived as

secure and reliable. The second challenge will be the mass adoption by merchants and

consumers, which will be difcult due to:

Concerns about risk, privacy and fraud

Deployment of additional point-of-sale equipment at merchants

Billing and customer service requirement challenges for mobile operators

Lack of business relationships between merchants and operators

Table 12 summarises the pros and cons for the stakeholders in the value chain in the

operator-centric model.


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Fig. 12: Eects o operator-centric model on other stakeholders

Stakeholder Positives Negatives

Bank Nothing Can be excluded fromM-payments value chain

MNO Advantage from the existinginfrastructure and expertise in

billing customers and paying

merchants

Control over majority of therevenue stream

Can build a new reliable imageand hence high Customer

loyalty and reduced customer

turnover

Low adoption from theMerchant side due to

investment into new POS

system.

Not able to focus on theircore-competencies.

Risk of additional credit fromcustomers.

Management of integration andmanaging multiple issuers

Merchant Reduced cash-handling costs,including theft, shrinkage and

cash deposit charges

Increased efciency,through-put, and convenience

Potential for additional salesdue to consumers impulse

spending

Have to pay for transaction feefor low value payments

Reimbursement dependent onoperators payment cycle (delay

in payment)

Exposure to mobile operatorwith limited payments

processing experience

Investment required for newpayment system

Customer Improved Convenience Billing Complexity Security Risk


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4.2 Bank-centric model

Banks are obviously a leading player when it comes to the implementation of mobile

payments. They are in an excellent position to offer a wide variety of mobile payment

solutions, due to their competence in nancial transactions with regard to security,

efciency and speed. This competency gives them an upper hand on other value-chain

players and it would take other players a long time and a signicant amount of effort tocompete with this positioning.

The bank-centric model can be considered an evolution of the credit-card model.

Customers continue the same relationship with their bank, which provide them with the

same services in a more convenient way, i.e. by using their mobile phone. A bank-driven

model implies that one or more banks establish a mobile payments service based on

already existing payment processes. Payments will be processed over mobile networks

(remote payments for example via SMS for electronic goods or directly at the PoS (e.g.

via NFC)). Besides the need to encourage their customers mainly consumers and

merchants to utilise the service, banks will further have to partner with mobile opera-

tors and agree on an attractive revenue-sharing system.

Due to the conservative attitude of German banks, the German M-payment sector is not

developing as fast as in other European countries. Nonetheless, some bank-initiated

partnerships are starting to evolve, which indicates the growing interest of banks in

M-payments. For example, Deutsche Bank partnered with LUUP and Commerzbank

with Cronto in order to provide M-payment services to their customers. There are some

bank-centric models evolving on a global level as well, like ClearXChange and Cash Edge.

ClearXChange, a joint venture of Wells Fargo, Bank of America and JPMorgan Chase, is a

stepping stone to achieve bank dominance in the M-payments value chain.

However, there are some hindrances with regard to the implementation of a successful

bank-centric model. First of all, banks may be forced to support various operator-specic

standards, due to their dependence on mobile operators. Second, banks are hesitating

investing in mobile payments, given the fact that they are rolling out contactless credit

and debit cards. Figure 13 summarises the pros and cons for stakeholders of the value

chain with the bank-centric model.


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Fig. 13: Eects o bank-centric model on other stakeholders

Stakeholder Pros Cons

Bank Revenue stream capture formicro-payments

Reduced cash/check handling

Potential to include value-added advertising to retailers

for a fee

Potential for new customeracquisition (including

unbanked)

Enhanced security features

Increased value of customerrelationships and retention

Limited experience inapplication distribution or

phone accessories

Added cost of installationand maintenance of mobile

applications for multiple

operators, each with unique

platforms

Potential for paying rentalfees to operators. Operators can

block usage.

Cannibalizing their card-basedproducts

MNO Possible increase in datatransaction volumes and

revenues

Potential incentive fees forintroducing new customers

Operators bypassed in mobilepayments value chain

Merchant Reduced cash-handling costs,including theft, shrinkage and

cash deposit charges

Increased cashier efciency andthroughput and shorter queues

Reduced counterfeit exposure

Increased impulse spending

Faster payment directly intomerchants account

Commissions/transaction feesfor low-value transactions

Merchant resistance toincreasing card-based

transactions due to interchange

Customer Speed and convenience

Less disruptive -- providesaccess to transaction history for

low-value purchases

Alternative to costly white-label ATM fees

Limited to specic bankoffering a service may not

be permitted to add other

applications


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4.3 Collaborative model

The collaborative model involves the collaboration between banks, mobile operators and

other stakeholders in the mobile payments value chain, including a potential new stake-

holder a trusted third party to manage the deployment of mobile applications. The

collaborative model is the most feasible mobile payments business model, as the stake-

holders are able to focus on their core competencies and it also opens the door for newrevenue streams from incremental services, improves customer retention and loyalty,

and responds to the fundamental demand of customers for new payment models.

The German mobile payment market is also showing some interesting collaborations,

although none of these collaborations can be regarded as a perfect example of the

collaborative model. Deutsche Bahn, RMV, O2, Vodafone and Deutsche Telekom have

introduced Touch and travel, which is based on the collaborative model. In addition,

Deutsche Post has partnered with Vodafone, E-Plus and Deutsche Telekom for their

Handyporto postage, a code-based postage stamp service. On a global level, Google

Wallet, Cityzi and ISIS are some examples of implemented collaborative models.

However, collaborative models have to resolve some issues before they can be widely

used. First of all, the issue of revenue sharing has to be resolved, as revenue is the

major attraction for the players to participate in M-payment services. Due to the fact

that all the players have different objectives in these consortiums, this model loses the

customer-centric vision. Moreover, at this initial stage, a customer-centric approach is

considered to be necessary for a rapid mass adoption of mobile payments. It is very hard

to develop value-added services due to the lack of coordination between other stake-

holders. Figure 14 summarises the pros and cons for the stakeholders of the value chain

in the collaborative model.


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Fig. 14: Eects o collaborative model on other stakeholders


Bank Alternative channel

Additional revenue fromtransactions

Potential for new customeracquisition if partnering with

MNO

Less need for customers towithdraw cash from ATMs

resulting in lowered ATM

revenue

Investments creatingapplications, setting standards

MNO Focus on core competency

Potential for new customeracquisition

Revenue from transactions anddata transmission

Complexity (cost/time) ofnegotiating with banks/

association

Merchant Faster transaction times

Reduced cash handling costsand queues

Customer satisfaction

Targeted marketing and loyaltyprograms

Transaction fees in place of cash

Customer Improved Convenience

Banking services available frompreferred bank

Reduced wait time

Need to obtain and activatebank-specic application on

device


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4.4 Disintermediation model

In the disintermediation model, banks will be excluded from the value chain and their

place will be taken by new intermediaries. Basically this models key strength is the inno-

vation created by these intermediaries, who are trying to nd ways to process payments

without using existing wire transfer and bank card processing networks. Their innova-

tive model is capable of excluding the nancial institutions and catalysing the adoptionprocess. It is signicantly different from the other mobile payment models in terms of

payment processing, as the other models are designed to bring contactless payments

and mobile loyalty to the marketplace. In contrast, the disintermediation model uses

the mobile phone to eliminate the existing payments ecosystem, which consists of PoS

terminals and acquirers deploying them as well as the processors and payment networks

that route and settle the transactions.

Currently, a few initiatives based on the disintermediation model are appearing in the

German market. PayPal is the most trusted independent service provider in the German

payments landscape. On a global level this model has created a high level of awareness

among customers.

The disintermediation model is attractive to merchants who are looking to decrease

their costs of processing credit and debit payments. It is also attracting the under-

banked customers who cannot obtain a traditional bank card, and the customers who

make cross-border transactions and remittances. Wizzit, Obopay and Paymate are a few

successful examples of active disintermediation models in the mobile payments area.

Currently, banks are not disintermediated from the value chain in this model but this

model will reduce their potential revenue streams from M-payments. However, there are

some challenges that have to be resolved in order to make this model successful. First of

all, the intermediaries need to establish a big merchant network so that customers are

able to realise the usefulness of mobile payment services. Merchant networks will play

an important role in catalysing the adoption and developing a robust infrastructure to

properly facilitate PoS-based M-payments. Second, the intermediaries need to build a

reputation of a reliable and trusted payment service provider to overcome the negative

reports on money laundering and security issues. Figure 15 summarises the pros and

cons for the stakeholders of the value chain in the disintermediation models.


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Fig. 15: Eects o disintermediation model on other stakeholders


Bank Nothing Potential disintermediationif the service provider utilises

another bank as the payment

processor

Lack of visibility to customerstransactions

MNO Possible increase in datatransaction volumes

Potential to partner withpeer-to-peer provider

Customer service issues:customers may call with peer-

to-peer issues or inquiries

Inter-

mediaries

Revenue capture fromtransaction fees and potential

commissions

Marketing revenues

Cross-sell opportunities forother offerings or products

Signicant entry costs to gainwide acceptance by merchants

and customers

Assumption of risk for theft/fraud

Need for new competency formarketing/loyalty

Merchant Reduced cost of cash handlingand increased processing speed

Potential for increasedtransactions

Faster payments

Access to loyalty programs

Commissions to peer-to-peerservice provider for low value

purchases

New service provider withlimited equity in reputation

Risk of loss in case of disputeor fraud

Customer Improved Convenience

Potential for less expensiveremittance/payment option

Inexpensive or free

Need to transfer funds topeer-to-peer provider (tying up

funds)

Potential fees charged by theservice provider

Not Reliable Service Providers


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5. Implications of mobile money

5.1 General implications of mobile money on bankingThe astounding success of mobile money in early adopter countries (e.g. Japan, Africa)

and their unprecedented rates of adoption clearly indicate a tremendous unlled need

for mobile payment solutions and the potential for great benets for all stakeholders.

Based on our research, we believe that mobile money will fundamentally change

consumer behaviour and hence the role of banks in payment processing in the next three

to ve years.

Mobile payments will have profound implications on the banking industry and banks

will need to enhance their product catalogues with this innovation in order to stay

competitive. Mobile technology has fundamentally changed the way banks will conduct

business in the future, and altered the way consumers will deal with their accounts. It is

enhancing convenience for bank customers and banks that do not offer or keep pace with

this channel may lose their customers to competitors. Therefore, M-payments will drive

the banking sector to adopt a more consumer-centric approach.

M-payments will give nancial institutions the opportunity to look at specic customers

transactions in the context of their past and current activities and their relationship

with the institution as a whole. Hence, banks will be able to analyse consumer behav-

iour closely and can devise customised products. This will also change the marketing

approach of banks and they will need to spend a larger proportion of their revenues on

marketing initiatives.

Moreover, the implications of M-payments on banks in the German landscape will also be

dependent on the extent of their presence in the mobile payments value chain and their

innovation in products and services.

As we discussed earlier, the banks are currently not the most active players in the mobile

payments value chain and therefore new entrants are entering the market and strength-

ening their positions. But active participation by the banks will not on its own stop this

value chain dynamic. Banks will need a clear mobile strategy to be able to increase

their revenues and cut costs, if they successfully exploit the convenience of the mobile

channel and its potential to drive digital commerce. However, participation without a

clear strategy or truly differentiated service may result in increasing operational costs

and brand erosion.


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With regard to the German market, banks are the weakest player in the mobile payments

value chain in terms of innovation. As a consequence, new intermediaries are taking

advantage of the current hesitation of banks in terms of innovation and developing

innovative solutions, and thereby trying to replace banks. Figure 16 shows nine different

scenarios of the development of the M-payments market in terms of dominance and

innovation. It is clearly evident that even if banks actively participate in the supply of

mobile payment services, they will not be able to dominate the market with their presentlevel of innovation, i.e. incremental innovation.

Fig. 16: Market dominance matrix

Innovation

Dominance

Incremental Disruptive

Bank centric

Collaboration Model

MNO centric

Bank centric

Collaboration Model

MNO centric

Intermediaries willdominate or may result

in instability

Disintermediation

Model

Collaborative models

without banks

Banks

MNO

Intermediaries

However, banks are still the most preferred partners when it comes to the execution

of payments. Hence, banks have the opportunity to deter the new entrants. Banks will

need a proper strategy, a high level of innovation and a customer-centric approach to

slowly penetrate the value chain. Moreover, German banks have lessons to learn from

the success of existing M-payment solutions and strategic partnerships around the world

in different nancial and behavioural environments.

Challenges Consumer-centric approach will be the key to penetrate the market and catalyse

the adoption rate. Throughout the value chain, banks have to focus on consumer

behaviour and their lifestyle.

Banks will have to reconsider their business model and show thought leadershipin their product development. Innovation will help in differentiating themselves

from traditional banks.


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5.2 Compliance perspective

5.2.1 Compliance implications on banks

Generic

Considering mobile payments as a new product to German banks, best practice in nan-

cial institutions requires them to go through a New Product Approval (NPA) process. Thisreview includes aspects on market, credit, operational and reputational risk in order to

ensure that the product is embedded into the organisations business strategy, operating

model & technology platform, internal control system and overall corporate governance.

Specifc

Within the banking sector in Germany, standards for Anti Money Laundering (AML),

Fraud Prevention and Countering the Finance of Terrorism (CTF) are very high when

compared to world standards. The standards are documented in regulations such as the

German Banking Act (KWG, GWG) and further announcements of the German Regulator

(Bundeanstalt fr Finanzen (BaFin)).

Specic AML, CTF and fraud risks with regard to the specic mobile payments service

have to be analysed within the context of the above-mentioned NPA process and neces-sary safeguards have to be established to mitigate identied risks to an acceptable level.

For German banks it is not necessary to apply for an e-money institute license, as they

already meet the requirements with their European banking license.

From the compliance perspective German banks full all regulatory requirements with

regard to procedures, IT systems and supporting organisational structures to release

mobile payment services and products.

5.2.2 Compliance implication for non-banks

For non-banks like MNOs (mobile network operators), hardware manufacturers (e.g.

Nokia, R.I.M., Apple), software companies (e.g. Google) or payment service providers

(e.g. PayPal), the market entry into the mobile payments market is a signicant mile-stone in their strategic direction, which is consequently accompanied with compliance

regulations that have to be implemented.

A market entry into the mobile payments market does not necessarily imply the need

to obtain a banking license. Instead, it is possible to conduct business with an e-money

licence14, which has lower requirements and, hence, is easier to obtain. As a conse-

quence of the harmonisation within the European Union, the offering of mobile payment

services in Germany can be facilitated by obtaining a European e-money license, which

is called European Pass.15 This bypass rule enables a corporation that is eligible for an

e-money license to conduct business in all countries within the European Union using a

single approved e-money license issued in the home country of the parent company. As

14 According to Zahlungsdiensteaufsichtsgesetz (ZAG)

15 Banks are allowed to set up branches anywhere in the European Community on the basis of authorisa-

tion by the responsible authority of the state in which their parent bank is situated (effective since

1993).


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the standard requirements for an e-money institute vary between the member states,

requirements elsewhere can be lower compared to the standards in Germany.

Nevertheless, a licensed e-money institute has to comply with local regulations with

regard to its payment processes and standards. The Zahlungsdiensteaufsichtsgesetz

(ZAG), for example, states in 22 that processes, IT systems and organisational standards

have to be in place in order to full AML, Fraud Prevention and CTF requirements.The European regulator is closely watching the national regulators with regard to AML

regulation in order to minimise the risk that AML standards within the member states of

the European Union are diverging extensively, leading to gaps in fullling minimum AML

standards at an appropriate level in all European countries.

Regarding cash management, e-money institutes are subject to stricter regulations than

nancial institutes with a banking license: all procedures regarding the handling of cash

(deposit/disbursement) are subject to AML regulations without applicable thresholds.

The following standards of control have to be applied by an e-money institute:16

AML ofcer in place and empowered

IT system to monitor transactions Training procedures for all relevant employees

Know your Customer (KYC) procedures including identication of beneciaries andpolitically exposed persons

Fig. 17: Internal control ramework to prevent AML, CFT and raud

The Internal Control System

Control and

Monitoring

of Business

Operations

I

Ex-post

Assurance

of Control

and

Monitoring

of Business

Operations

II

Internal

and

External

Assessment

of Control

of First

and Second

Level

III

Safeguarding of the Internal Control Framework

Adoption of Robust Internal Control Governance Framework

The 3 Lines of Defense ensure together

a reliable control framework

First Level of Control

Integrated process of risk control as

a part of day-to-day operations

On-going review of risk profiles andearly earnings indicators as a

response to quick changes to thebusiness environment and

emerging risk changes allow to

identify, evaluate and response

changes quickly

Recognition of new opportunities

and chances

Second Level of Control

Implementation of control system

as independent oversight process of

control to ensure compliance withupdates and provide an assessment

of effectiveness, efficiency and

assurance of integrity with

integrated policies of control

workload of day-to-day operations

Third Level of Control

Internal and external independent

process of control/monitoring

measures

16 Enumeration is not exhaustive.


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Besides the regulations identied above, e-money institutes also have to be compliant

with EU Regulation 1781/2006 (Regulation on information on the payer accompanying

transfers of funds) as well as applicable sanctions and embargoes (including countries,

entities, individuals and vessels). The former regulation obliges the institute to ensure

completeness of all required data, whereas the latter is regarded as the main instrument

to counter terrorist nancing.

In addition to the above-described compliance matters, e-money institutes should be

aware of the following regulations that are in particular but not limited to:

Data security (regulation: federal data protection act)

IT security (regulation: ZAG 22)

Issue of credit to payee (regulations: standards of credit)

Challenges Stricter regulation for payment service providers (non-banks) e.g. not applying

thresholds can hinder innovation in creating new business models. This may

also have a negative effect on economic benets or customers due to reduced

competition and not facilitating convergence and reduction in process costs.

Prepaidforum Deutschland advisory opinion regarding new AML optimisation

legislation

Post-paid invoicing of payments processed by mobile operators can be regardedas a line of credit issued to customers. This could be comparable to overdraft

facilities issued by banks and, therefore, regulation regarding the issuance of

lines of credit should be applicable.

Expenses for implementing the required customer due diligence, in order to becompliant with AML/CFT regulations, should be included in realistic business

cases of all payment service providers (non-banks).


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5.3 The payments perspective

5.3.1 General aspects

According to research by the German Federal Bank analysing the payment behaviour of

German consumers in 2009, cash is still the main means of payment for retail transac-

tions (see Figures 18 and 19). Cash combines the following traits desired by consumers:

high acceptance, low costs, high transactional speed, anonymity, familiarity, ability to

keep track of expenditures and possibility to deploy it in foreign countries. Its main short-

coming is its physicality, which makes it inapplicable for Internet purchases.

Fig. 18: Means o payments: revenue-based market shares17

Other Cashless

Other

Credit transfer

Direct Debit

Online Payment

Customer Card

Prepaid Card

Money Card

Credit Card

Girocard

Cash

25.5 %

8.9 %

57.9 %

Fig. 19: Means o payments: transaction-based market shares18

Other Cashless

Other

Credit transfer

Direct Debit

Online Payment

Customer Card

Prepaid Card

Money Card

Credit Card

Girocard

Cash

11.9 %

82.5 %

17 Bundesbank, Zahlungsverhalten in Deutschland



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The intention to introduce mobile payments to the German market, on the one hand, is

to alter the current payment behaviour (see Figure 18) as well as the means of payment

market share allocation and to supersede cash as the dominant means of payment

in German retail transactions. On the other hand, mobile payment services intend to

improve the purchasing process by making it faster and more convenient and eventful

as well as to satisfy the main objective of mobile payment service providers: revenue

generation. In this context, mobile payments are not only intended as a cash replace-ment, but as a payment transaction initiator and substitute to other means of payment.

As a consequence, nearly all market participants that have a stake in the realisation of

nancial transactions in retail purchases (i.e. credit card companies, banks, acquirers,

cash-in-transit companies, online payment service providers) are affected by the introduc-

tion of mobile payment solutions, as these will inuence the way we purchase goods and

services and how payment transactions will be conducted. However, how and to what

extent service providers will be impacted depends on the chosen mobile payments model

and retail channel.

Table 2: Means o payment depending on the actual amount o the transaction

(Source: Bundesbank)19

Means o

payment

Up to 5 5 20 20 50 50 100 100 500 From 500

Cash 96.6 % 93.7 % 73.2 % 48.4 % 32.2 % 38.6 %

Girocard 0.8 % 4.1 % 20.0 % 38.2 % 37.8 % 20.1 %

Credit card 0.1 % 0.1 % 2.0 % 5.6 % 6.0 % 3.8 %

Direct debit 0.1 % 0.3 % 0.7 % 1.1 % 4.7 % 2.3 %

Credit transer 0.1 % 0.6 % 2.1 % 4.2 % 15.1 % 34.8 %

Other types

o cashless

payment

2.3 % 1.1 % 2.0 % 2.5 % 4.2 % 0.5 %



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In general, the adoption of mobile payment solutions and its extensive use in retail

transactions will have the following implications on the payments market and payment

transactions:

Lowering the cash handling of customers, retailers and, consequently, retail banksand cash-in-transit companies

Lowering the margins on retail transactions conducted by cards, as mobile paymentterminals are deemed to charge lower fees in terms of transactions, revenue and

terminals

Leading to new standards (e.g. M-SEPA, E-SEPA, etc.) and regulations

Increasing the competition between the payment service providers in the Germanpayments market, as new service providers enter the market offering new solutions

Increasing the speed of the purchase process in retail stores (P2P)

Augmenting the service package being offered by the service providers in the market

Application of new security standards and processes within the payments process

Reduction in the quantity of transactions conducted by retail banks and clearinghouses

Putting pressure on retail banks to offer their own solutions, as retail banks are stillthe preferred service providers with regard to execution of payment transactions

Putting pressure on card terminal providers, credit card companies and girocardcompanies to improve their service package either by offering mobile payment solu-

tions and/or reducing their service costs

Leading to new business opportunities and business cases in the area of payments

In order to become a success, mobile payments, as a new means of payment, has to

accomplish the attributes that are valued with cash payments and reach a critical mass.

The latter requires the implementation of a single standard applicable to all mobile

payment transactions of one type (RFID payment, application-based payment, QR scan,

SMS payment or phone call) regardless of the service provider conducting the transac-

tion. It is not desirable to have a multitude of solutions based on different standards that

enables customers to undertake mobile payment transactions, as this impedes econo-

mies of scale. Furthermore, all three parties involved in a purchase transaction retailer,

customer and payment service provider have to be considered with their specic

requirements, so that they recognise and experience incentives in the use of this means

of payment:

Customer: security considerations, a comprehensive network of points of acceptance,augmented services (e.g. coupons, discounts or newsletters) as well as transferring

the transaction into a great experience are key features that will have to be imple-

mented to change his purchase behaviour


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Retailer: retailers have to be convinced by reducing the complexity at the point of saleand offering integrated payment solutions, reduced costs and special incentives

Service provider: realistic business case, implementation of an agreed-upon standardand the prospect of future, continuous and sufcient revenues as well as prots

5.3.2 The SEPA initiativeThe European Payments Council (EPC) is highly interested in developing the mobile

channel into an initiation channel for SEPA payments. As a consequence, the EPC works

on a single standard (as one additional optional service for banks) that shall be appli-

cable for contactless mobile payments within the SEPA region and outlines basic business

rules for the initiation and receipt of credit, debit and card payments through mobile

phones. In order to be successful the EPC collaborates with mobile operators and other

stakeholders in the mobile payments market. The cooperation aims at forming a basis for

interoperability and including potentially all stakeholders in the SEPA region and creating

a trusted and secure framework that caters for the business needs of all participants.

Therefore, the EPC members intend to create standards and business rules for mobile

payment transactions that build on existing SEPA and global standards to a high degree.

In contrast to the already circulating mobile payment solutions, the EPC focuses oncontactless and remote mobile payments based on the IBAN and BIC and, hence, may

hinder possible innovation. By collaborating with mobile operators and other stake-

holders the EPC takes the initiative to consider all stakeholders in the mobile payments

process at an early stage in order to lead the way to a European, and maybe even an

international standard. Nevertheless, the experiences made with regard to the SEPA card

payments framework may indicate that there is still a long way to go to a single agreed-

upon standard for mobile payments in the SEPA region.


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Challenges Agreeing on a single standard that caters for the needs of all participants in the

transactional process, as it involves companies from different countries and, even

more importantly, different industry sectors

Compliance with local regulations with regard to transactional services

Timing of market introduction and setting of agreed-upon standards

Balancing business, compliance and security needs, i.e. creating a business casethat allows the participants to prot from the introduction of mobile payments

Setting up of the required infrastructure for remote and proximity mobilepayments

Developing attractive service enhancements for retailers and consumers (e.g.reduced transactional costs, reduced prices, special offers)

Changing the behaviour of customers in conducting retail transactions, as cash isstill the preferred means of payment

Convincing customers of the security of undertaken transactions and adherenceto security and regulatory standards of comparable means of payments (e.g.

credit cards)

Compatibility of mobile phones and PoS terminals

Cooperation of all relevant stakeholders


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6. Approach to developing

such a capability

Since mobile banking and mobile payments rst appeared on the nancial serviceslandscape over a decade ago, there has been considerable attention given to consumer

demand and adoption of these services. The banking industry is one of the leading

sectors which are adapting the Internet and mobile channels for consumer markets.

Mobile payments are undeniably a growth market and an opportunity for nancial

institutions to reduce costs, retain revenue, win client loyalty and potentially attract new

customers and segments.

However, most of the German banks want to play the role of fast follower when it

comes to the use of the mobile channel and are waiting for market changes and initia-

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