Sunday, April 26, 2009

Mobile Payments Business Models

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Mobile payment is a part of the mobile transactions and is catching the imagination of a lot of people. This is clear evident from the number of comments I got on my last post “Mobile Payments – Will the Consumers Adopt it”. In the last post, I had discussed the consumer issues. Now I am going to talk about the emerging business models in the mobile payment space and the pros and cons of each of the model.
In any payment mechanism, the key entities of the value chain are
Merchants – accept payments from the consumers by reading the card at the Point of Sale (PoS) machine
Acquirers – hold merchant accounts and manage merchant payments
Payment networks - Connect and switch transactions between merchants & issuing banks
Issuers – manage consumer accounts and also take the associated risk
M-Wallet/Stored Value Account (SVA) – Issue and provisioning of the mobile wallet/SVA (only if case mobile payments)
There are essentially four models in mobile payments:
Carrier Dominance Model – In this model, the carrier is responsible for all the roles across the value chain, i.e. carrier is the acquirer, payment network as well as the issuer. The carrier provides the mobile payment application to the customer. The customer holds a prepaid or a postpaid account with the carrier. When the customer pays through his mobile, the bill is charged to his prepaid or postpaid account. The entire network and interchange is managed by the carriers themselves. The PoS is also provided to the merchants by the carrier. The payment to the merchant can be made using NFC or Peer-to-Peer SMS.
DoCoMo used this model by creating an e-wallet using Sony’s FeliCa technology for its NFC based proximity payments and GCash is another example of operator centric Peer-to-Peer SMS based payments. Mobipay in Spain is based on carrier dominance model as well.
However, it is unlikely for this model will succeed in the long run as the carriers need to behave like a bank here and carriers are not banks!!! The merchant and customer trust is missing in this case or to put it in other words, the level of trust for a carrier is not at the same level as that for a bank. Moreover, the cost of recruiting a merchant is too high and there are no synergies expected from the current carrier operations on this count unlike banks which already have business relationships with the merchants. The carrier carries the maximum risk and reward in this model. The risk appetite of carriers may vary across regions and geographies. It would be a significant change to operator business as operators would need to focus on new areas which are very different from their traditional core.
Bank Dominance Model – In this model, the financial institutions takes the center stage and is similar to current credit card system. The merchant acquiring banks and issuer banks could be different and the payment network could be managed by yet another financial institution like Visa or MasterCard. The only difference here is that instead of the credit card, the phone is waved in front of the PoS. This model leverages the existing card payment system. The mobile wallet is issued and provisioned by the banks just like the credit cards. The payment to the merchant can be made using NFC or Peer-to-Peer SMS. MasterCard Paypass based mobile payments is a prominent example of this model.
I do not think the banks are going to show interest in this model as the incremental commissions may not be large and the operators may not allow the banks to adopt this model. In markets where the handsets are subsidized, the operators may demand a disproportionate revenue share. Moreover, the carriers always have the option of blocking the service and in a way it is the carriers who decide what applications can be loaded on the subsidized handsets
Collaboration Model – This model is about collaboration between the carriers and the banks who can distribute the roles of the value chain amongst themselves. The carriers typically are responsible for providing and provisioning m-wallet on the consumer’s hand phone apart from the providing the POS equipment to the merchants. The roles of acquirer, payment network and issuer remain with the financial institutions; one or more financial institutions may collaborate together in assuming the roles of acquirer, payment network and issuer.
Collaboration Model is seen as most feasible because it allows the stakeholders to focus on their own core competencies, opens the door for new revenue from incremental services, drives customer retention and loyalty, and responds to fundamental demand from customers. All in all, this seems to be a good model. In a survey conducted by Smart Cards Alliance, 86% respondents supported this model as having the greatest potential for long term success. However, there are complicated relationships and hence complexity in negotiating deals amongst players. SK Telecom Moneta is an example of real-world rollout of collaboration model.
Peer-to-Peer Model – This model is has been made popular by new entrants in the payment industry like Paypal, Obopay, mChek, etc. The 3rd party company acts as a conduit between the customers, merchants and the bankers. The 3rd party service provider takes the payment from the customer, deducts its commission and passed on the payment to the merchant. It also pays the payment processing fee to the bank or the payment gateways like Visa/Master. The transaction is done Peer-to-Peer between the customer and the merchant. This model is significantly different from the other three models I have discussed and it threatens to eliminate the existing payment ecosystem as the role of the banks and the payment networks gets diminished. Moreover, the money can be transferred from one person to another in this way. Hence this model impacts the business of money transfer (international and domestic remittances). This model is particularly applicable in the emerging markets where the vast majority of individuals do not own a bank account.
Banks feel threatened by this model and so do the carriers. However, it is beneficial for the merchants as it promises to lower the transaction fee. To the 3rd party players, scale is going to be the critical success criteria and the number of merchants on the network is likely to define the customer acceptance. Paypal and Obopay are good examples of this model but none of them have been able to build the scale required to even threaten existing banks

Factors that would influence the consumer adoption and prevalence of the business model
Regulatory is going to define which business model would be ultimately adopted in most of the emerging markets. The central banks across the world are reluctant to allow outsiders (read non-banks) to run the mobile payment service. The insistence on having a bank as collaboration partner ensures a significant role to the banks.
Standardization in the product and processes could be another factor that would determine the consumer adoption. Major handset vendors are yet to come out with their NFC handsets. Broader alliance between the banks and carriers is required to develop an open platform and a common mobile payment platform. The common platform should develop in a way that the cost of handset should not be a deterrent for consumer adoption

What’s in it for the ecosystem players?
The opportunity is big for all the players and what is needed is collaboration between them so that the opportunity can be profitably exploited. According to Mckinsey in its latest report titled “Making Mobile Payments Pay”, the small transactions (< Euro 20) value in Europe is $ 200 billion per year and for mid size (Euro 20-40) transactions, the value is $2.5 trillion per year. On top of this, the annual international remittance is to the tune of $250 billion. Even 0.5% transaction fee on the above gives a huge potential for the mobile payments.

The need of the hour is to work out a ”Just & Fair” collaboration amongst the different players. This opportunity would not only help reduce the risk of marginalization of carriers but would also help the carriers increase their EBIDTA. The players need to understand that the consumers value simplicity and security which can only be provided if all the players collaborate to arrive at the common platform and build enough trust in the minds of the consumers towards this service.

Tuesday, April 7, 2009

Mobile Payments - Will the Consumers Adopt?

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paymentsHave you ever wished that you need not carry a fat wallet in your pocket? You wallet typically has paper bills, a few coins and loads of cards (credit, debit and loyalty cards). It is a real pain carrying this fat wallet around. For small payments, the credit card still cannot be used as the cost of transaction to the merchant is a minimum of 20 cents and hence the merchants refuse to accept the cards for low value transactions. Mobile payments promises to provide an alternate payment mechanism that would not only lower the cost of transactions but also will be more secure. Also, the adoption is likely to be higher as there are more subscribers of mobile phones than the credit or debit cards especially in emerging economies. I have already predicted in one of my earlier posts that that Mobile Money Transfer would gain traction in 2009/2010 (My Predictions for Telecom Industry in 2009/2010).

mobile-transactionsMobile payments are a subset of broader term “Mobile Transactions”. Mobile transactions could be of various types like the mobile payments, mobile ticketing, mobile banking and mobile loyalty. Mobile payments are remote or in-store payment transactions that are conducted on the mobile phones. There are various methods of making the payment from SMS to contactless Near Field Communications (NFC).

There are many benefits of mobile payments. In the emerging markets, over 75-80% of the transactions are cash based with no accountability for a large part of it. We call this parallel economy. This parallel economy is essentially created to avoid taxes but now there are concerns of terrorists getting money through money laundering which is an off-shoot of the parallel economy. To reduce the size of parallel economy, it is important to maximize payments through credit cards, debit cards and other forms of electronic transactions where there is money trail. Mobile payments are one significant step in that direction. Mobile payments would not only bring small transactions within its scope but also would have a higher reach as more people have mobile phones than other forms of electronic payments. Other benefits of mobile payments are convenience and speed of transactions.

There are three types of mobile payments: Remote payments, proximity payments and peer-to-peer payments (including remittances).

Proximity Payments – The contactless NFC holds significant promise in proximity payments and is particularly appropriate for low value transactions in high volume retail points. Mobile payments are being pushed by Visa and Mastercard as the way to pay for the estimated worldwide total of US$724 billion transactions for less than US$25 (source: MasterCard International). Strategy Analytics estimates 1 in 5 handsets would be NFC enabled in 2012.

NFC has significant advantages in terms of speed of transaction as it is estimated that it is around 8-9 seconds faster than card payments and approximately 20-25 seconds faster than cash payments. This should add to the convenience of the consumer. NFC implementation should result in lower cost for the retailers as the requirement for staff gets reduced significantly not only at the cash counters but also in the purchase area where staff is needed to provide assistance and information. However, the key to success of this technology would be the price of NFC chip in the handset

Remote Payments – The remote payments using mobile phones is similar to that currently being done on the PCs through the web. However, the real benefit of the mobile phones would come from the location. The location information of the consumer can be used by the merchants to further provide value added services to the consumer or would help them cross-sell other products that are location specific

Peer-to-Peer Payments – This is a big opportunity as currently the international remittances is over $250 billion a year and add to this the domestic remittance, the value of such transactions is likely to cross $ 1 trillion. On top of this, think about a situation where your kid has run out of money while trekking in a remote location and you can transfer the money using your mobile. This is a huge opportunity to miss. In case of remittances, the commissions are as high as 15% plus the inconvenience of visiting the agent’s office to send or take money. The mobile remittances promise to remove the inconvenience as well as lower the transaction cost. GSMA (GSM Association) has taken up mobile money transfer as one of its major projects. A few successful examples of Peer-to-Peer transfers are M-Pesa of Safaricom in Kenya and GCash of Globe Telecom in Philippines.

Juniper estimates that for purchases via mobile devices of digital and physical goods, contactless NFC (Near Field Communications) transactions and money transfers will together generate transactions worth over $600bn globally by 2013 with over 1 billion people using mobiles for transactions. Half of the $600 billion is expected from the mobile payments and the other half from money transfers.

All these technologies are still in the pilot phase and their success would depend a lot on the consumer acceptance. Will the consumers accept mobile payments? I would say – CERTAINLY provided the following concerns of consumers are addressed

  1. Security – Consumers would like the most trusted brands within the ecosystem to be associated with mobile payments. They would want surety about the security of their money as the mobile transaction could be a significant portion of their salary for people in the emerging markets. Surety from a banking organization would go a long way in allaying the consumer fears. Also, the players would need to address concerns on lost mobiles
  2. Convenience – By convenience, I mean that the speed at which the transaction is completed should be less than that of the credit card or cash and it should be hassle free. I was reading somewhere that there was a suggestion that the consumers should carry their identity card while using their mobile for payments to establish identity. This is ridiculous!!! Any extra effort needed on part of the consumers would not help the cause of mobile payments. This system should indeed reduce the burden of carrying multiple cards and cash
  3. Easy to use – Many consumers have technology phobia. They would rather use complicated but manual processes rather than technology. Hence it is important to have transactions as easy has sending sms and should be completed with one press of button. Even better if no button needs to be pressed
  4. Acceptability at merchant points – This is a chicken and egg situation. Consumers would adopt if there are enough merchants accepting the payments and merchants would want enough consumer pull. In this situation, having a partner in the form of Visa, Master or Amex would certainly help
  5. Transaction costs – The transaction costs need to be limited in this form of payment to encourage wider acceptance for low value transactions. It should provide a clear monetary benefit over other existing payment and money transfer mechanisms
  6. Redemption points – In case of money transfer or store value accounts, there would be enough physical locations where consumers can cash out
  7. Training & education – The players need to be patient when it comes to the adoption of mobile transactions. Customer training and education is the key. Road shows and awareness programs can be held in malls and other high traffic locations. The success would come only when the rural areas have sufficient adoption. In emerging markets, the players can have rural vans that can be jointly run by service providers, handset vendors and the payment players to educate the customers on mobile transactions and at the same time provide customer care

Mobile payments have a great potential for all the players in the eco-system and it could be one of the ways by which carriers can prevent their marginalization. In the next few posts, I plan to cover other aspects of mobile transactions including ticketing and coupons. Till then do give me your feedback on what the different players in the ecosystem can do to increase mobile payments adoption