Ten things you need to know to understand the value chains involved in mobile money services and what’s going on, with whom, where

By Annie Turner

1. Should mobile payments be regulated as part of banking?

Opinion is deeply divided on this issue. Mobile payments are treated as an inherent function of banking in the U.S., Australia, Canada, Japan and India, for example, but not in Kenya and the European Union (EU). Obtaining a license so you can offer mobile payment services (as Rogers Communications is doing in Canada) is an onerous undertaking. In the U.S. it would involve applying for 50 state licenses.

Canada and Australia are reviewing their regulatory options, and looking at the European Union model where organizations haven’t needed to be a bank to offer payments services since the introduction of the Directive on Payments Services in November 2009. The idea is to provide more competition in payments in the 30 countries of the EU and European Economic Area, plus Switzerland.

Those wishing to provide a payments service can apply for either Payments Institution (PI) and Electronic Money Institution (EMI) status – Orange has already applied for a license and Telefónica is in the process of doing so. Once a license has been obtained in one country, it can be ‘passported’ to other countries so license holders can offer payments services in other countries.

2. Could operators use their charging and billing systems for physical goods?

It’s hard to see how this would work in most places. Charging a ringtone company 30 percent for delivering its products to consumers is one thing – the consumer isn’t even aware of how the money is divided. Charging a merchant or consumer 30 percent extra for the privilege of accepting payment for a consumer buying a candy bar by mobile is a different matter.

Put another way, in the U.S. if you buy something for $5 by mobile, the bank gets between 2.75 and 2.8 percent of that in merchant service charges, which is fixed by the Durbin Amendment [the controversial addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010]. There simply isn’t enough margin to go round. As we have seen above, the U.S. model isn’t universal, but dividing a tiny margin for low value goods is unworkable in many places.

3. Will closed loop systems prosper in the long term?

M-PESA is a classic example of a closed loop payments service in which the service provider controls every stage of the process, only using the banks as depositories, in effect. In most other countries, though, as operators are finding, it's only possible to make money from payments if you are an established part of the payments ecosystem already (see question 2), which means involving partners, such as banks and the credit card schemes.

4. Who will own the mobile wallet?

It’s probably fair to say that where open loop systems (involving partnerships with banks and card payments networks, among others) predominate, which will probably be most places, communications service providers have mostly accepted that they will not be in control of the payment mechanisms – the established payments ecosystem already has the scale and expertise.

However, this does not mean that service providers have given up on owning the mobile wallet (see question 10). The next two years will be telling. Google Wallet was launched in the U.S. in September 2011 with Sprint, Citibank and MasterCard – the name tells you who owns what. Next year Isis will be rolled out in the U.S., which is the joint venture initiated by AT&T Mobility, T-Mobile USA and Verizon Wireless, with partners MasterCard, Visa, Discover and American Express. 

ABI Research reckons mobile operators will own 75 percent of electronic wallets next year, but predicts this will fall to 63 per cent by 2016, if Google Wallet makes an impact and Apple joins the near field communications (NFC) fray next year (see question 9), as is widely expected.

5. Can mobile payments influence the pricing of physical goods?

Yes. A good example is that people in Hong Kong can now pay for items at the news stall and coffee stand, in convenience stores and leisure centers with their contactless travel card, Octopus. Since this innovation, all newspapers in Hong Kong cost the same in the interests of providing a fast, simple transaction for the consumer (for how important this is, see the next question).

Newspapers sellers only need cheap, basic, low maintenance payment stations without the complexity of presenting a list of titles and having to update the price of individual publications. A win-win situation, and one that is likely to occur elsewhere, for newspapers and other kinds of low value products as mobile payments gather pace.

6. Why do e-payments, including via mobile, seem to be falling in Japan?

Consult Hyperion* investigated this and found that mobile proximity payments in Japan apparently fell in 2010 (with about 10 percent of all mobile subscribers, or about 9.8 million users, making a mobile proximity payment during December 2010). It seems that consumers found they involve pressing too many buttons on their phone and having to wait for software to load – a poor customer experience.  This appears to explain why e-payments are dominated by proximity prepaid cards – except that this type of payment appears to be falling too.

It turns out that prepaid cards are generally only used for public transport and convenience stores. All the other shops also accept payments from the credit facility embedded in the card’s integrated circuit. Most of these stores offer more reward points for paying by credit than prepaid transactions, and usually don’t request a PIN, making them fast and easy.

Although payments are an essential step in transactions, it’s apparent that the other benefits that can be built around proximity payments are the real attraction. For instance, one out of every eight Japanese are members of the McDonald’s Club, drawn by weekly vouchers for free items when they place an order.

So good customer experience is key, and rewards, loyalty programs and promotions are of great benefit to customers and businesses alike. In addition, banks make far more money from providing credit than through prepaid. Valuable lessons the world over.

7. Can banks benefit from closed loop systems?

Despite initial attempts to stop M-PESA in Kenya, the banks realized they could benefit from it. In the first instance, the money passing through the person-to-person service had to be deposited somewhere, and originally, Safaricom had, in effect, one big aggregated account with the Commonwealth Bank of Kenya, from which it makes money. Since then, regulation introduced in 2010 paved the way for banks to start using M-PESA outlets as a channel.

For example, M-KESHO, provided by the Equity Bank, allows customers to deposit small amounts and access them at will. Previously, it would have been impossible for the banks to make money out of such retail accounts, but in aggregate, a very attractive wholesale business is emerging.

8. Which is the world's most cashless country and why?

In Iceland, 94 percent of retail transactions don't involve cash changing hands, according to David Birch, Director, Consult Hyperion, and the outstanding 6 percent is mostly accounted for by tourists. Iceland's population is only around 250,000 and compared with most countries, there aren't many shops, so it was relatively quick and cheap to equip them with point of sale (PoS) terminals that could accept cashless payments.

This compares with about 60 percent of all U.K. transactions being paid for in cash, which rises to 75 to 80 percent in the U.S. and an even higher proportion in Japan, despite its leadership in mobile payments.

Hence a key factor in the success of cashless transactions, including mobile, is the density of appropriately equipped PoS terminals in a market, not just the number of payment cards or phones in circulation with NFC or other proximity technologies.

9. Where is NFC deployed commercially?

In June 2011, Juniper Research forecast that global NFC mobile contactless payment transactions will reach nearly $50 billion worldwide by 2014. Following on from the Orange Mobile Payments service launch in the U.K., the research house expects 2011 and 2012 will be landmark years for NFC rollouts, after many years of pilots and trials all over the world.

Juniper concluded NFC's prospects have improved markedly in the first half of 2011 and that by the end of 2012, commercial NFC services will have been launched in up to 20 countries. It forecasts that by the end of 2014, the value of NFC transactions in North America and Western Europe combined will exceed that in the Far East region.

However, it warned that despite a number of announcements by handset makers, we need more NFC-enabled models on the market as quickly as possible. Another potentially serious inhibitor to the take-up of the technology is poor user experience (see question 6).

Commercial NFC services are already deployed in countries including Austria, Poland, South Korea, Tanzania, Turkey, the U.K. and the U.S. Australia has said it will launch commercial NFC services in 2012, and so will the Buyster consortium of mobile phone operators in France, along with the Telefónica group in Europe. Japan's NTT DoCoMo will begin its transition from using its domestic proximity technology to NFC towards the end of 2012, with New Zealand introducing full NFC services in 2013.

For a regularly updated list of NFC activity worldwide, please go to http://www.nfcworld.com/list-of-nfc-trials-pilots-tests-and-commercial-services-around-the-world/

10. Is NFC the end of SMS transactions?

Not anytime soon. SMS traffic in general is showing no signs of slowing down; findings published by Portio Research in May 2011 showed the worldwide market was worth $179.2 billion in 2010 and should reach $334.7 billion by the end of 2015. Some 6.9 trillion messages were sent in 2010. Payments via SMS and USSD (Unstructured Supplementary Service Data, a protocol used by GSM mobile phones to communicate with the service provider's computers) have millions of users all over the world, but perhaps most notably in Turkey, the Philippines, Kenya and other parts of Africa. There are also many over the top SMS-based payments services. They are all facing competition from app- and online-based payments via mobile and NFC, but will be with us for a long time to come, and not just where they are established already. For example, in M-Payments in M-BRIC, How best to leverage the upcoming opportunity, published at the end of 2010, Arthur D. Little recommended that China should use SMS-based payments systems in rural areas because it "could be quickly and cheaply deployed".

* http://www.consult-hyperion.com/media/blog-entry/the-reality-of-the-japanese-retail-payments-sector