The Mobile Payment Conundrum

The ability for mobile phones to be used as payment devices has long been seen as the holy grail for both phone companies and banks. Google’s unqualified support to NFC (Near Field Communications) through integrated NFC in Android phone (version Gingerbread) has led to increased speculation on the potential uptake of mobile payments in the next few years. Mobile payments is one service that has caught attention of all the players of the ecosystem – banks, payment gateways, handset manufacturers, entrepreneurs and operators despite it being a low margin business. As tariffs for conventional calls fall and competition from cheap or free calls over the internet heats up, phone companies are increasingly looking to new applications to boost revenue.  However, there is more to mobile payments than the mere VAS service for mobile carriers. This article is an attempt to unravel the mobile payment puzzle.

Reasons for attractiveness of Mobile phones for payments

There are several reasons for this euphoria about mobile payments and some of them are listed below:

1. High penetration of mobiles: The mobile phone today is the most penetrated electronic device across all categories. There are over 4 billion mobile phone users in the world that hugely surpass the number of credit/debit card owners.

2. Ubiquitous: Every morning before leaving home, people check for keys, wallet and phones. People carry their phone wherever they go and hence there can be no better device than a mobile phone for payments

3. Personal Connected Devices: The mobile phones are personal, portable and connected devices which gives it an advantage that no other device can even get close to. Since the mobile phones are connected, the users can be contacted and instant offers can be given in a non-intrusive manner. NFC chips or stickers can be added to the mobile phones to make the payment simpler and faster.

Why is Mobile Payments increasing in importance?

The card industry is maturing and hence the financial sector players are looking for new channels. Telcos and device manufactures want to increase their revenues and they see high potential in mobile payments. In fact if there is convergence in views on potential of any mobile service, then it is mobile payments. As per a report from Arthur D. Little, the mobile payments are expected to grow at 68% annually as compared to 5-6% for credit/debit card users.

It is interesting to note that emerging markets especially Asia is like to grow much faster than the developed markets with the emerging markets capturing 76% of the mobile payment transaction revenues. Gartner predicts that by 2012, the number of people using mobile payments would reach 190 million which would still be less than 5% of mobile base. Another estimate from Juniper puts the potential of mobile payments at $680 billion by 2014. This implies that the potential is huge which is attracting all the industry players.

The current credit cards and debit cards are not suitable for micro payments. A micro payment is a financial transaction involving a very small sum of money usually less than $12 (as defined by PayPal). The transaction cost of micro payment is very high for traditional payment methods but the evolving business models in mobile value added services, digital goods and Internet require small ticket size transactions.  It is expected that mobile payments would ultimately reduce the cost of transaction making micro transactions viable. Even in the physical world, credit card companies see pay-by-mobile as a way of encouraging people to make small purchases that are currently made with cash, on credit. By volume, two-thirds of  payments in developed economies like UK, US, etc. are still made by cash, so “mobile wallet” would give credit card companies a slice of these cash transactions.

The use of mobile phones for payments is looking such an attractive proposition that companies like MasterCard and Visa are worried that if the consumer preference changes in favor of mobile payments, even the current business would be under threat. The problem of these companies is the fact that their business model evolved much before the arrival of Internet or mobile and they simply tried to apply the same model on the Internet. Paypal on the other hand was born out of necessity in the digital space and now the virtual currency (e.g. Facebook Credits) is expected to take over the digital world. In middle of all these changes, many traditional payment organization are at a loss when it comes to the challenges from the new companies.

Mobile Commerce Ecosystem

Now the game is moving to a completely different level. Payments is just a part of the overall game plan, the real catch is the lucrative mobile commerce and mobile coupons. Relationships with the merchant are likely to take the center stage and the mobile payment companies would be in the best situation to take advantage of the growing mobile commerce. The image alongside shows the key components of the mobile commerce ecosystem. Mobile coupons and loyalty would be big but not bigger than payments. The relationship between retailers and mobile payment players would be the key and hence the mobile coupon and loyalty players would need to tie up with the mobile payment players. In other words, mobile payment players would play a central role in the mobile commerce ecosystem. The potential of mobile commerce is huge and hence there is so much interest in mobile commerce as they see it as a gateway to success in mobile commerce.

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