Mobile payments: the burning issue

Conceptually the mobile phone and the act of payment seem a natural match - their combination a good idea. But, as is the case with many of the good ideas this industry has had, material success on a grand scale remains elusive. The problems are familiar: the use case is difficult to define, there are various technological solutions, which generally lead the demand, and the industry is reaching beyond the bounds of its natural habitat.

The sector is fragmented, geographically, technically and in terms of the complex value chain that needs to link up in order to make things happen. It is so fragmented, in fact, that it's almost difficult to define it as a sector at all. Like almost every application, save voice, messaging and internet access, mobile payments will be all about taking a particular flavour of product to a particular flavour of market - there is no universal service.

There are some challenges which are peculiar to mobile payments. The history of financial transaction varies enormously from country to country. In Japan, credit card ownership is comparatively low for example. The Japanese have a history of using cash for big ticket items. In the West, card payment is widespread and cash is on the wane. In certain Middle Eastern markets the same people own the banks and the mobile operators, removing barriers to co-operation. In some developing countries many people are 'unbanked' and have little or no familiarity with the concept of electronic payment. Crucially, people take an awfully long time to modify their payment habits.

Terry Trench, senior vice president for commercial operations at m-payment solutions provider U-Paid: "When ATMs (automatic teller machines) came out 40 years ago, they couldn't get more than 30 per cent penetration." Despite the simplicity of the service, and the increased ease of use that the machines offered, people still preferred to queue up in a bank to access cash and account information. "What had to happen was that we had to wait 15 years," says Trench. "During that time you had a demographic shift. A lot of people died and a lot of young people grew up understanding that ATMs were the norm. These things take time to bed down and mature."

So, does the industry have no option but to sit around, waiting for a generation of consumers to die?

It's not that bleak, of course, and there are positive stories. Most readers will be familiar with the widespread use of prepaid mobile credit as a new currency in markets like the Philippines. Friends settle small debts by topping up one another's prepaid accounts, waiters are tipped in the same way. Finnish drivers have been paying for parking with their mobile phones for years and ever more users are buying content for their phones, from their phones.

But certainly the m-payments space has not developed at the pace or in the manner that might have been envisaged nine or ten years ago. Then, all the talk centred on mobile operators essentially becoming banks or credit companies. We'd all be using our phones to buy televisions or white goods, the charge would go on our mobile 'bill' and operators would cream in the interest as we paid off the sums over a period of months. The banks didn't like this idea at all, and were often on hand to talk it down. Popular opinion is that the banks were right.

"We know from our experience that operators don't understand payments and they don't understand risk management, which is a critical factor in terms of dealing with fraud, chargebacks, things like that," says Simon Cavill, chief technology officer at Mi-pay. "In the West, we have two very grown up industries, with their own rules and regulations, their own controllers and their own tight government intervention on a number of levels," he continues. "In Europe the EU has drawn a line in the sand and said to the mobile operators that they will not be banks. If a bank goes down, the government guarantees your money. If the mobile operator goes down, there are no guarantees."

It is perhaps because operators' ambitions in this direction have been effectively thwarted that m-payment has been so slow to develop in the West. As banking or credit institutions, the revenue streams would be clear and possibly rich. As just one part of the m-payment chain, these streams are not so apparent for the carriers. "The operators are used to high margins," says Alan Goode, an analyst at Juniper Research and author of the report Mobile Payment Strategies&Markets 2007 - 2011. "With m-payments, it's a case of 'why should we do it? What's in it for us?'"

You only have to look at how the value of the m-payment market is forecast. Not, as with mobile TV, or location based services, in terms of operator revenue. Rather it is expressed in terms of consumer spend. Juniper puts that spend at £22bn in transactions by 2011.

The banks do have some motivation, though. Cash is very expensive to distribute, handle and insure. In markets with high penetration of credit and debit cards, banks are doing all they can to wean their customers off their trusty banknotes. So they're downsizing their ATM networks, or selling the networks to third parties who charge substantial sums for each withdrawal or transaction.

Once they've got rid of cash, their next overhead is the creation, distribution and management of the cards. And if they can somehow put all the information they have on the cards that they issue onto some part of a mobile phone or SIM card, then they're cutting a big chunk out of their cost. Furthermore, credit card companies are interested in growing their share of the small transaction market, to which many people think m-payment is most suited.

Today's dream of the m-payment future remains fairly grand. Parties from both sides still believe that mobile phones will become central to payment in one way or another. One of the most popular scenarios involves Near Field Communications (NFC). NFC cards such as the Oyster used on London's transport network are becoming increasingly popular in transit applications. The thinking runs that if NFC capabilities were built into handsets, those handsets could be used for contactless, point of sale purchases.

Alan Goode suggests that operators could rent space on the SIM or handset to a financial organisation which would then use it for its NFC payment application. But it is not clear that the financial institutions would want to strike deals with every operator in every market. they could, after all, simply strike one-time deals with the handset vendors. With NFC, the problem of operator revenue stream remains. "The operators can't gain in this scenario," says Simon Cavill. "I haven't seen a single business case that works."

In any case, the widespread deployment of NFC on mobile phones remains, by consensus, several years away. Not least because operators and banks are not seeking one another out with any real energy, because they cannot seem to agree on the conditions of their relationships. "In terms of who gets what when it comes to revenues," says Goode, "It's still very much up for grabs. That, at the moment, is a definite constraint on the widescale adoption of any mobile payment scheme." The grand vision, in the West, remains exactly that. In the m-payment sector in these markets, "the mobile phone is subservient," says Simon Cavill.

"In the rest of the world," he says, "the mobile phone is the dominant device and it has a key part to play."

He continues: "You have to remember that, in the payment space, credit cards are unknown to the vast majority of the world's population. Payment cards in general are unknown. They are all largely cash-based economies. And the banking systems aren't sophisticated. Mobile payments will be fundamental to most people in Africa, for example. If electronic payment is going to be done at all in Africa, it will be through the mobile phone because the [banking] infrastructure just isn't there."

Alan Goode agrees. "In the developing world it's a totally different ball game. There is market that the operators can go out and grab. Look at Vodafone and M-Pesa (see box) They are able to use that in the developing world in partnership with someone like Citibank to offer banking services and payment services where there are not these services at the moment."

Simplicity is key when launching these services in developing markets, not least because many of the handsets being used have limited capabilities. This, says Jote Bassi, marketing director at SMS services outfit Anam, is why SMS - the mobile workhorse - is the ideal payment application.

Anam has developed a service that it recommends operators target at the world's vast migrant workforce. Users register their bank details with Anam and receive a PIN code in return. A simple text message relays to the service the amount of money the user wants to transfer and the person to whom they want to transfer it (who also has to be registered). Given that many migrant workers want to send money to unbanked relatives, the service can transfer the funds to prepaid charge cards that can be used in certain retailers, or the funds can be directed to a trusted party who does have a bank account. Operators, says Bassi, will likely charge a premium on the message to win their share of the revenue.

This service has yet to be deployed so proof of concept has yet to arrive. But it does highlight the need for simplicity and the fact that, as Simon Cavill says, "most people don't want a bank, they want a payment method."

NFC, says Cavill, will find successful implementations in these markets too. "What we're seeing is that there is a huge play to be made from merchants to have NFC terminals. Let's suppose I want to transfer money to someone in rural Africa. The only infrastructure there may be the guy who owns the local shop. If the person in the shop has a mobile phone and that phone is linked into a payment switch, which can be done securely, and that phone has a contactless reader, then the consumer can come up to that phone and treat it like a mobile ATM. The merchant can also act as a top up station using the same technology. Cash in and cash out. Those are the sorts of things we're working on at the moment."

U-paid's Terry Trench backs simplicity as a starting point for m-payments, although in his world view the key function to enable is to let consumers use their phone to spend directly from their Visa card.

This month U-paid launched an SMS prepaid top-up service in Serbia that allows prepaid customers - 80 per cent of the Serbian market - to increase their balance with a single text message that initiates a charge onto their Visa card. It could just as easily be a bank account, says Trench, but Visa - which has 80 per cent of the Serbian credit card market - is a partner in the scheme.

Trench himself describes the service as "boring" - it's just a top-up application after all. But he is enthusiastic nonetheless, because he believes the service is setting a precedent. In one or two years, 'off-operator billing' could be used for more than just top-up. Mobile content, or utility bills (he hopes to persuade Serbian utility firms to participate) could become part of the service.

In what he reckons may be a world first, the service is launching with every operator in the country, some 16 banks and one credit card company (another is expected to join soon). It has taken U-paid three years to persuade all of these organisations into the consortium.

But launching with just one operator and one bank is largely pointless, says Trench, because the addressable market is so small. Users have to be customers of both institutions and are unlikely to change banks, or mobile providers, to access a slightly more convenient method of topping up their prepaid account. "To get the utilities you need to have a large number of users because you need the volume. To get the volume you need all the operators and to get all the operators you need to be able to prove that you can get the majority of the banks," he says.

While operators don't see any incremental revenue from the service - some are even offering the top-up text messages free of charge - they could stand to reap significant savings in terms of voucher generation and distribution and commission that they pay to distributors.

"The banks are getting a revenue stream, a modest one, it has to be said, because these are very low value transactions. But the fee that the bank will charge for a transaction of this size is lower than the commission an operator pays to a merchant. So there's the opportunity for them to put some extra margin on top of that and turn the bank into an m-commerce merchant. And that's the future we see: Recharge, bill payment, m-commerce purchases. But you have to have the critical mass of customers," he says.

The barrier to building that critical mass is registration. This is a headache for any project and persuading users to register their credit card details isn't going to be easy. Every member of the consortium, the banks, the credit card companies, the operators and U-Paid itself, is making a financial contribution to the marketing campaign. Users will receive text alerts about the new service when their balance runs out and the traditional advertising media will be hit over the coming months.

"When people look at new technologies, they tend to focus on the radical changes that new technologies can create," says Trench. "But the radical changes are always the consequence of something pretty boring and basic, like recharge." All of the players in the chain are hoping that users will become familiar with initiating transactions from their phone, which will lead to an easier run for subsequent m-payment service launches.

Whether it works or not, this service has already achieved a great deal - purely in terms of bringing so many different organisations together with a single goal in mind. It's difficult to imagine it happening in the UK, or the US. There's nothing unique about the structure of the financial and mobile industries in Serbia, says Trench, it's simply that the organisations are "hungry for change". Banks and operators have healthy businesses in general and aren't always motivated to innovate. Looking for a bank partner for a mobile banking project in Asia recently, Trench found that "the banks couldn't be bothered to get out of bed."

He stresses the complexity of the project: "If you want to do anything that's very large and very scaleable - effectively a consumer-level service - you are going to have to deal with multiple parties. And that makes the whole thing very complicated." It took months to sign up the first operator and bank. There's strength in numbers, though: the 14th bank was on board, says Trench, "after a 20-minute phone conversation".

It is the absence of this kind of universal buy-in that has restricted the development of m-payment services in Western markets. Because the services don't represent significant revenues in comparison to other projects, the banks and the operators lack motivation. If players in these markets don't shake off their lethargy - and they are showing few signs of doing so at the moment - then we will see the developing markets taking the lead in m-payments, where necessity really is the mother of invention. Developed mobile markets could be in for some useful schooling.

This feature first appeared in telecoms.com sister publication MCI

To comment on any articles, please contact us at chatback@telecoms.com or have your say on our blog.

Bookmark this page

• Back to Top
• Print