Mobile Payments Business Models
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
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Merchants – accept payments from the consumers by reading the card at the Point of Sale (PoS) machine
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Acquirers – hold merchant accounts and manage merchant payments
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Payment networks – Connect and switch transactions between merchants & issuing banks
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Issuers – manage consumer accounts and also take the associated risk
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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 (also read case study on how can carriers earn 40% EBIDTA margins with 2 cents per min of voice). 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.
Read the last post – Mobile Payments – Will Consumers Adopt?
Below are videos on Mobile Payments which could be of interest to the readers
GCash Payment System Video
Mobile phones and banks, banking transactions future trends
The views expressed in the blog are my own views and do not reflect the views of my employer
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I think each model has a specific place in the industry and my company approaches from a different aspect: as a system integrator. All of these models require the same technological challenges be overcome at their core and this is a need that system integrators fill well. Using the standards established by the GSMA the parties involved should be able to change their business models as needed (though in practice this can prove quite difficult for non-technical reasons or poor implementation of technical standards: read tight coupling). I suppose only time will tell which business model will win out or if several will continue to exist, but I believe the SI’s are certain to make money along the way.
I can’t agree more with what Dan has commented above. The fact will vary market to market. The ecosystem includes consumer- who have weird behaviors when it comes to money which is related even to the economy of a country. Also, there is huge dependence on regulations.
Saying this, I believe that we will find collaborative model getting into a stronger position against others. I don’t find any reason for which Carriers will get into developing their own strength for mobile payments- unless they are sitting at saturation of revenues from the core business for voice and vas (as I believe Docomo is). We still see enough potential for carriers in their core business and which only they can absorb; carriers won’t be willing to digress from the core business unless the money kitty for them is good enough for them.
Banks , as right pointed out will have least interest in the marginal money involved for them.
For Peer 2 peer model- distribution is going to be the key challenge long with the trust in the consumers. They can find a place only the time till collaborative model doesn’t exist in the market. Once the collaboration happens in marketing the mobile payment solution, Peer 2 peer model will have its own issues in struggling against team of players- with each playing at its core strength.
Collaborative will have initial turbulence for forming the team but once formed they will be strong against others.
With system integrators offerings to build and maintain the necessary infrastructure, deploy the mobile applications AND offer it as a pay-as-you-go model, it will tempt a lot of banks and retail chains to opt for such a model. A model that does not involve an operator is definitely attractive to a bank! To substitute an operator you would require high capital costs and the competence to manage and maintain the infrastructure – now that will be taken care by the system integrator.
However, how attractive will the pricing of the pay-as-you-go model be? Will they be able to match/beat the costs of a carrier who has the advantage of sharing the infrastructure for providing other services? Will the system integrator share the infrastructure across a number of banks/retailers to achieve the same or lower costs? Thoughts?
Interesting points here – both in this article and “Will Consumers Adopt”. I don’t think we’ve yet squared the circle between creating the environment that will persuade consumers to adopt (security, trust, convenience and most of all pervasiveness) and persuade the necessary players to invest to build this environment (or at least, not to block these developments)
Currently, I don’t think there is enough short-term return for the operators in (most ?) mature markets to encourage the necessary technology, channel development and marketing investments needed for kick-starting this business. Likewise, the banks make very attractive margins from phone line-based merchant services : while there are several m-payments trials underway, the inbuilt barriers to change are considerable
Re Pandith’s point above : I don’t think an infrastructure risk-share model from an SI is sufficient for success in mature markets (developing markets could work though) : most of the necessary spend here is in marketing and channel development rather than the back end (transaction volumes will be low for a long initial period).
What is needed is a disrupter – a bit like the peer-to-peer model : someone with a technology which can operate ‘over the top’ of the networks (or at least which won’t need significant initial operator investment) and a business model which can thrive even in a sparse network of merchants and consumers. I look forward to seeing some emerge shortly !
Great overview of mobile payment business models by Mohit. I represent P2P model myself and can admit that for such systems building merchant and customer network is a very (and the most) challenging task.
The largest drawback of bank/carrier dominated model is that the use of mobile payments is limited to one bank/carrier.
Collaborative model involves too many players and thus the fee grows too big – not interesting to the merchants.
I somewhat agree to Steve, that we need a disrupter, because existing business models have been on the market for a long time and much money has been “burned” in developing/sustaining these models.
Hi Alex,
Thanks for giving your comments.
I write on this blog in my personal capacity and the views expressed here are not reflective of the views of my employer. I am not in a position to comment on my employer’s position.
Hi Mohit
Excellent articles written by you especially Business case. Keep it up !!
Regarding Mobil epayment, can you pl let us know about India regulatory concurrence on this?
Great article Mohit!
The Smart Card Alliance conducted a research study recently which indicated that North American stakeholders agreed that the collaboration model is most appropriate. I believe this applies to mature markets with mature POS infrastructures. See http://www.smartcardalliance.org/pages/download
We are waiting for the major brands, issuers and mobile operators to agree on a ubiquitous standard based on NFC.
For developing marketings without mature POS instrastructures, like Kenya and Philippines, a mobile operator-lead model is gaining traction. This is because 1) banks did not typically pursue the unbanked segment, 2) texting money P2P and to payment merchants and billers is a dramatic improvement over traditional alternatives. Now that it’s become a success, the Kenyan banks are demanding regulatory intervention. “Too late, sour grapes” I say!
In countries like India and Bangladesh, texting to pay recurring bills could be a great improvement for the average person who queues at a bank with a coupon/giro to pay utility bills and the like. The error-prone manual nature of this process required people to hang on to paper proofs-of-payment. Offering a text-to-pay with an automated electronic proof-of-payment on the cell phone would save hours per month spent queing.
Regarding the special case of DoCoMo – although at 1st blush it’s a carrier driven model, under the covers DoCoMo has created an ecosystem, in the same say that Apple has done with iPhone. Their open platform “takes all comers” including banks to deploy their applications on the DoCoMo platform. DoCoMo is not greedy about collecting a lot of revenue from this activity; they just aim to drive more traffic onto their network. This strategy has resulted in daily usage of the NFC capability – in fact 20% of their customers use it 2-3 times per day, a much higher take-up than seen with any other implementation.
Good evening Mohit, The business model and players will defer from country to country. Displacing Payment Card Service Providers in North America will be difficult for Mobile Carriers. As for Asia, you know the market much more then I do. The market is growing at a much quicker pace and much remains to be done. If Banks are slow, Mobile Carriers and Peer-to-Peer Service Providers stand to gain a very significant portion of the market. The problem with peer-to-peer is money laundring. There is currently no way to prevent it with what Paypal and its competitors are offering. As laws among G20 countries will become stiffer regarding that matter, Paypal and others will have to adapt, be more secure by authenticating its users or stand the risk of staying marginal.
Daniel
My assumption here is that you are talking about debit or pre-paid, not credit. Given that, in the “banked” world the real question is who has the money to market these services to the point of ubiquity? And one of the biggest marketing expenses in “alternative/mobile payments”, and one that’s invariably left out of all of these discussions, are those borne by the message chain. Communications providers must incorporate this new payment into their systems and retailers must place receiving hardware in their locations. The retailer’s place in this is often overlooked. The retailer is the one who must implement, clear space for, keep up to date, service and deal with system failures of the hardware in their stores that receive these payments.
Until I can go nearly anywhere and be confident that my payment method will be accepted you’ve created a debit version of Discover Card. Without that confidence I will require a large incentive to constantly try and fail to use my payment method or specifically seek out locations that accept that method.
So who is positioned the best? Well, IMHO, it’s the carriers. They have the current customer base to entice other players (banks and retailers) to play along by dangling access to a huge number of current users. They have the hard cash from selling “air” to help retailers pay for the hardware needed to receive the payments and comm. providers to change their systems. Likewise, and this I think is key, they have something with which to entice customers to use the system without costing them too greatly: minutes and services. If they can convince customers to accept minutes or services as their loyalty payment for using the payment service rather than cash (in the form of actual cash, like Discover pays, or cash they use to purchase points or miles), they would be in great shape.
I’d guess that the unbanked world would have the same issues except receipt of money into an account and paying other people with it would have a larger benefit thereby lessening the importance of the retailer. And for banks, I’d guess the “branch-in-a-pocket” argument works better in Mali than Manhattan. Still, who better than the carrier to provide the service? I’d guess if they could provide access to an account and bill from that account, they could sign monthly accounts rather than providing access for prepaid phones.
If I have to choose a winner that could actually make change happen rather than simply benefit from an eventual (if ever*) consumer shift to mobile payments I’ll take the carriers.
I’m not a professional in the industry – either banking or mobile. But there is one point to consider. First, mobile payments, once standards are clear, is likely to be simple, convenient and cheap. That means there will be people who will adopt it. Second, as payment streams move over to a mobile platform and thus away from the traditional banking sphere – or, as is also likely, as new streams appear completely divorced from banks – then the banks will want to get in on the act.
At the moment, especially in Europe and North America, banks do not enjoy the best reputation possible. This extends to well-run banks as well: look at the way HSBC’s results were treated. Unlike all the other majors, they reported a lower profit – not a loss. Yet the bank was still penalised, despite outperforming the market. In this situation, you may find some banks seeking to ride on the reputation of untarnished network operators.
Hi Mohit,
One thing is the most “intelligent and feasable” business model, another is what the industry and interests involved want. In my opinion the collaboration model will be the best solution. Each one takes care of its own core competences.
In the 80s (at the begining of on-line payments, POS and ATM) I participated and implemented a national network of POS and ATMs using the Collaboration model, in Brazil. It worked fine (and still does..). It is called 24 Hours Bank (and has, nowadays, more than 30,000 ATMs, 20 banks and financial institutions, and deals with more than 2 million transactions/month).
You can see them at: http://www.tecban.com.br (unfortunately in Portuguese,
obs: but google translation solve that issue).
Cheers,
Mario Luis Tavares Ferreira
In Bangladesh the mobile payment cant take off because of lack of trust between Banking sectors and Mobile operators. Everytime mobile operators take up the issue with regulator (which is Bangladesh bank), the association of bankers objects to this idea since they fear that mobile operators will take away their businesses.
But consumers are ready to adopt this technology since its secure, fast and easy to use. It will open up a new window for e-commerce to grow in this country.
As a person who is currently working on something near to MMT, I would like to share the below points/concerns for MMT to be successful. Some of them may be trivial, but still would like to mention them.
[1] The end user/subscriber experience has to be really simple & intuitive.
[2] Though you mention that for the end user it may look simple, in reality I am not aware of any real MMT systems/deployment.
[3] It has to be made secure as well as simple for the end user to have confidence to start using it & do large transfers.
[4] As always, the regulatory bodies will start rearing their heads with unnecessary issues which should not affect the end user experience.
[5] MMT has to be made available for B2B, B2C, C2C & C2B transactions.
[6] Those who would be promoting/launching MMT need to have hell lot of patience for the technology to catch on & later on be prepared to handle the huge transactions that will be made. I dont feel MMT to be a big hit in the market as soon as its launched as the subscribers will be very apprehensive about the security, that too in conventional markets. Once the same is popular with people, the transactions will be huge as is the case with internet banking.
[7] There should be no major restrictions in the transactions based on their operator or bank accounts. It has to be very similar to normal banking. This will be a major roadblock for its success.
[8] The billing systems (post & prepaid) systems should be revamped to support MMT.
[9] Last but not least in markets like India, where churn is very high, it needs to be seen how operators ensure revenue loss after a MMT is done by a subscriber but simply throws away his sim card after the transaction.
Let me know your thoughts on this.
Niranjan Srinivasan
Wataniya, Kuwait
There are various target/destination combinations for transferring funds.
One method for me to accept payment from you would be if my mobile could physically accept your chip+PIN card with the funds routed to either my mobile account or my configured bank account.
I’d appreciate any views held on this as a strategy for business. Target markets for such a device for example ?
Dear all,
I’ve read the article and liked it very much. In complement to mentions about the great market’s consultant firms, we should remember that emerging markets have a big challenge to be won: Informal business as “formal” multipliers of capture network.
In these emerging markets the most part of business and users have not formal sources of income and they can’t enter to formal banking model we are used to see. Even with Government and ONG’s efforts to help them, the traditional models of banking credit are still closed to older models of economic activity’s segmentation.
In these countries (emerging) the rule is: If you need to reach lower classes you must bring informal business up to the formal economy and the formula shows us the number so not match.
In other words, Banking and credit ecosystems are always capable to influence the market they built but they are still reluctant in terms of surpassing and grow from the current market’s size because they only accept to work with and within formal models of economic activities.
Also in my opinion, a collaborative model is supposed to be the most powerful of them because it uses the strengths from mobile carriers on reaching users and business wherever they are, no matter they are inserted on formal economy or not. They only need to have cell phone and they have.
With this model you can see and control both the user accounting and capture network accounting, influence the balance within ecosystem and indeed transfer the most part of investments (in access devices, communications and maintenance) to them, what accelerates the break even and rises profits for all from value chain.
Here is the difference between traditional models of electronic payments and a collaborative model of mobile payment.
If somebody wants to talk more about it, I would be honored by stretching the subject.
Kind regards,
Americo
I suggest you check out Beam – simple money service http://www.beam.co.in launched in India focussed on the unbanked and recently got notimated to GSMA Global Mobile Awards 2010. It’s already a hugely successful with nearly 1 million subscribers.