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.

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