WHITE PAPER

Mobile Wallets in the USA

Christopher Backeberg MforMobile

Mobile Wallets in the USA 2012 Introduction

The United States market for smartphones which can be used as mobile wallets is likely to increase by a factor of 17.8 from 2012 to 2016. That would mean the market would more than double in size every year. The smart money appears to back Near Field Communication (NFC) as the dominant technology for mobile wallets. The US is by no means the world leader in percentage use of mobile wallets. In fact the entire North American region trails behind the Asia/Pacific region and Africa in this market sector. The reason for this is that North America has an extremely well-banked population. By contrast, Asia and Africa are under-banked. Many inhabitants of those regions have neither banking accounts nor easy access to nearby branches of banks. For them, paying by mobile may be not merely a convenience but a necessity. In the US, however, the ease and utility of mobile payments are becoming a rapidly growing attraction which is too good to resist. Consumers know that. So do many merchants, although not nearly enough of them... yet. The US mobile market is ripe for an explosion of demand for mobile wallets but there is still much to be done to ensure that enough merchants offer fully satisfying consumer experiences with mobile wallets, and also to market the new service effectively. As the Smart Card Alliance (2012) has stated in its publications on smart wallets: Solutions improve employee productivity and effectiveness and customer service, and extend the ability to accept payment cards to many new small merchants. The Alliance does however describe one of the biggest challenges to the new technology: The main stakeholders mobile operators, merchants, bank issuers, and, most importantly, consumers must benefit sufficiently to overcome any barriers to adoption. Consumers will want assurances that it is safe to use mobile wallets without compromising their banking security. It is known within the mobile industry that electronic payments are as secure as payments made physically with plastic cards. The industry needs to do more to educate consumers in this regard. In addition to the matter of security, the industry itself seeks reassurance on key issues. These include the type of technology likely to be adopted on the widest scale if not universally and how much commonality there will be in the different types of service offerings. On the technology side, NFC is expected to win favour over its biggest recent rival, Radio Frequency Identification (RFID). NFC is being built into most new smartphones; RFID isnt. NFC-enabled smartphones can communicate directly with an electronic check-out till; RFID has to go through a Wi-Fi or Bluetooth connection. Jarvis (2012a) has quoted Nicholas Maguire, Senior Mobile Consultant at 2Ergo, who stated that RFID had lost its momentum in mobile payments. Maguire also observed that it is easier and quicker to simply point a smartphone at a QR code than it is to interface with an RFID scanner. According to a Berg Insight study, sales of NFC-enabled smartphones increased by a factor of 10 during 2011 compared with 2010 (Jarvis 2012a), with about 30 million units being shipped globally. Berg predicted unit sales of 700 million by 2016.

MforMobile

Page 1

Mobile Wallets in the USA 2012 The US mobile wallet market in perspective
Roy Vella (MforMobile 2012b), Managing Director of Vella Ventures, included the following chart in a webinar presentation for MforMobile. In 2012 the total number of mobile subscriptions reached 6 billion out of a world population of 7 billion. Almost everyone has a mobile phone of some sort. Jarvis (2012a) reported that 1.2 million people had mobile Internet access in 2011. As Vellas chart shows, this number passed the 2 billon mark in 2012, and it is forecast to reach 2.9 billion by 2016. That is a massive target market for mobile wallets.

Source: Roy Vella, Managing Director, Vella Ventures An infographic published by Statista yields the following numbers of mobile payment users in various regions (Felix 2012). Number of mobile payment users by region, 2012 Africa North America Europe Latin America 57.8m 32.8m 26.7m 8.5m

Asia/Pacific 85.0m

Middle East 1.5m

Felixs numbers predate those compiled by Vella. Felix reported that there were more than 5 billion active mobile phone accounts in the world, but only 1.3 billion active debit and credit accounts. One of Felixs predictions is that the number of proximity mobile payment users in the US in other words, users of mobile wallets will soar from 2.7 million in 2012 to 48.1 million in 2016. That would equate to a compound annual growth rate (CAGR) of more than 100%.

MforMobile

Page 2

Mobile Wallets in the USA 2012

A chart included in the MforMobile webinar by Michael Dooijes, Executive Director, Head of Strategy and Innovation at Rabobank, reflects the startling rate of growth described by Felix (MforMobile 2012b). In the two successive years 2011-2012, the growth in mobile services at Rabobank more than doubled each year.

Source: Michael Dooijes, Executive Director, Head of Strategy and Innovation, Rabobank Zooming in on the US, the recent Mobile Payment Acceptance Survey by ControlScan and TransFirst (2012) revealed a number of illuminating facts on the adoption of mobile payments by small merchants. To borrow from the summary of the survey: Those who have relied on a credit card machine for face-to-face payments and a standard website for online consumers are now faced with a rapidly growing customer base that utilizes smartphones to make online purchases as well as comparison-shop from in-store locations. With approximately 50% of US mobile phone users now owning a smartphone and about 19% owning a tablet, the average American is empowered to seek out and purchase a product or service anywhere, any time. In fact, responses from a recent IDC Financial Insights survey show that 34% of people have made a purchase via a mobile device. Small business owners may be slow to recognize key indicators of changing consumer preference. These missed signals can lead to a sudden loss in market share as long-time customers are lured away by the competition. The majority (55%) of respondents reported that their websites are not currently optimized for mobile users (an additional 20% were unsure). Of the 55% acknowledging this lack in functionality, only 36% have plans to optimize within the next year.

MforMobile

Page 3

Mobile Wallets in the USA 2012

Of the respondents whose websites are not optimized for mobile, 35% say customers are not asking for the service and 26% have no compelling reason to make the investment. Most respondents (70%) are not tracking online purchases from a mobile device and are consequently not tracking shopping cart abandonment rates between mobile and PC/laptop users. Of the 18% who are tracking online purchases from a mobile device, 63% say these purchases account for less than 10% of online sales, yet 42% of these respondents admit they do not know how shopping cart abandonment rates differ for mobile users. Only a small number of respondents (10%) are currently utilizing a mobile device to process card-present (CP) payments; however, those who are indicate they are satisfied with current mobile hand-held technology and the mobile payment technologies supporting them. Just 3% of respondents currently employ technology for accepting mobile wallet payments at the POS. One-third of those not currently accepting mobile wallets expect to do so within the next two years. Factors deterring other respondents near-term adoption include low CP transaction volumes, cost concerns and a need for additional education.

MforMobile recognized that the future of mobile wallets more than warranted a conference on the topic in the US, the 2nd Annual NFC Payments USA 2012 (MforMobile 2012a). The programme for the conference, set for Boston on December 10-11, was designed to cover many vital areas of this market sector: To examine competing payment technologies, ensure mass adoption and discover the next move for NFC to maximize revenue strategy. To bring together more than 150 senior-level industry experts in a direct response to the crucial, business-halting questions which banks, MNOs and payment providers are asking. To gain a financial perspective on NFC payments from leading banks and financial institutions. To discover how leading retailers are approaching mobile payments, and how MNOs are preparing for mass adoption and building successful relationships for future NFC initiatives.

Against all of this background, Greg Stuart, global CEO of the Mobile Marketing Association (MMA), has observed: If I were to sum up the value of mobile to marketers it would be this: Nothing gets a marketer closer to consumers than mobile. Nothing. (The Where Business 2012) Yet many businesses and agencies have not yet strategized how to take advantage of the coming mobile ecommerce wave. Simply put, many marketers are unsure how to harness the power of mobile, Stuart says. They know they need mobile. But the concept of mobile leading marketing efforts is still too unnerving and unfamiliar.

MforMobile

Page 4

Mobile Wallets in the USA 2012 Mobile payment issues to be addressed

In the words of Vella (MforMobile 2012b), the challenges associated with mobile ecommerce have produced the most deeply and broadly penetrated technology ever. Vella has identified five trends which are driving the move towards mobile payments: The massive, rapid and global penetration of mobile. The evolution of money from virtualisation of value from barter to bits. The personalisation of mobile payments, which has reduced the proximity of banking from city to town to home to pocket. The convergence of user interface and experience, which has led to a merging of devices and functionality. The hyperconnectivity of global markets.

Mike McDonnell, Vice President, Product Market & Client Solutions at Affinion Loyalty Group, has noted the following influences on adoption of mobile wallets (2012): Smartphone ownership is growing but is not yet at critical mass. The mobile wallet environment is extremely fragmented. There are great opportunities for merchants to run loyalty programmes to drive engagement with mobile wallets. Mobile security issues must be resolved.

In discussion with MforMobile, Matthew Mayo, Head of Business Development at MasterCard, and Steve Reynolds, President of the Mobile Data Association (MDA), offered this summing-up of the present situation (MforMobile 2012c): Standardising the mobile wallet technology has been and remains a major challenge. One recommended course for banks is to open their networks to third-party mobile wallets. Unfailing security in mobile wallets is paramount to ensure consumer confidence. Near Field Communication (NFC) will probably be the universal handset-to-till technology. The companies likely to benefit most from mobile wallets will be those that adopt a customer-first strategy.

In a detailed analysis, Perez (2012) discussed what he considered to be the five primary issues that must be addressed if mobile payments are to become the favoured method of payment.

MforMobile

Page 5

Mobile Wallets in the USA 2012

Commercial challenge:
Perez declares that there is a distinct need for all the businesses involved in mobile payments to reach consensus in shared goals and value propositions to participants and end-users alike, or confusion will reign in the market. In support of this opinion, Mas (2012) wrote: The proliferation of smartphones drives innovation because it allows more types of players to do more types of things on peoples phones. Application designers have more freedom to build appealing, easy-to-use and differentiated customer payment experiences. Its not just a matter of presentation; they can integrate payments data with other data streams such as check-out baskets, gaming, or budget visualization services. And, crucially, smartphones give developers the chance to deposit their own secure applications on mobile handsets without requiring the carriers permission. To this, Reynolds (MforMobile 2012c) adds: The long-time challenge has been to standardise and liberate the mobile wallet so its free from complication and understood by the mass market across all technologies.

Technical interoperability
The lack of technical interoperability is seen as a major barrier to mobile payments everywhere (Rotondo 2012). Fragmentation occurs because of lack of agreement among mobile network operators, payment service providers, phone manufacturers and mobile app developers. Johnson (2012) elaborates: Interoperability has emerged as the watchword for developers as they bring their new innovations to market.

Operational relationships
Just because a group of organizations come together to share something of great interest and importance doesn't mean that it fits into their operations or core businesses, says Perez (2012). Cellular-news (2012) reported that partnerships between telecom operators and major financial institutions had been an effective way to deploy payment offerings. Cellular-news quotes Jean-Noel Georges, Global Program Director for ICT in Financial Services at Frost & Sullivan: "The industry seems to be reaching a tipping point. A number of factors like more NFC-ready mobile devices and new market participants are favouring the development of the market especially NFC-based payments."

Regulatory clarity
Perez (2012) clarifies why there is so much uncertainty worldwide about the regulatory environment in which mobile payments are taking place: In fairness to the framers, no one could have imagined this world. It's time to understand the underlying technologies, new players, cash-in-cash-out models and safeguards, weigh the potential social and economic impact, and revisit the rules. Starcevich and Caro-del-Castillo (2012) enlarge: There are general principles that may apply to the mobile payment environment regardless of the differences in law from one country to another.

MforMobile

Page 6

Mobile Wallets in the USA 2012

Confidence, trust and security
It will require considerable efforts by everyone in the supply chain to ensure that the technologies behind mobile wallets are secure and unhackable, according to Reynolds (MforMobile 2012c). Reynolds warns: One major breach could significantly damage a brand or technology, and severely impact consumer confidence. Rotondo (2012) points out that the concern about payment security is an obstacle to the widespread adoption of ecommerce internationally. It would make sense for the industry to aim for a global, integrated market for secure Internet payments. On the much more encouraging side, consumer confidence in mobile payment security is increasing (Ogden 2012). KPMG has predicted a 97% annual growth in mobile payments over the next three years. Ogden comments, The forecasts allow us to assume that consumers will be won over in the battle between convenience and security. Its not hard to see why; the next generation of consumers coming through expect to be able to make real-time, cashless payments. Once the convenience factor is demonstrated, it wont be long before consumers start to leave behind their security worries and embrace mobile payments. Who will succeed in the race which is becoming more a sprint to become a leader in the mobile wallet market? Mayo (MforMobile 2012c) comments: Those that adopt open standards and networks to support their wallet. Those that focus on the customer experience. Those that can drive incremental revenue from the service while not having a detrimental impact on their partners.

MforMobile

Page 7

Mobile Wallets in the USA 2012 Conclusions

Per capita use of mobile payments is greater in developing regions than in the US because those regions are underbanked. People in the US have access to much more extensive and convenient traditional banking services. Even so, the use of mobile wallets in the US is expected to more than double every year from 2012 to 2016. Many US consumers are aware of the advantages of using mobile wallets but the technology has advanced so quickly that mobile wallets are still largely a novel concept. Many small businesses have yet to catch on to the power of mobile payments and mobile wallets to build a competitive business advantage. Concerns about banking security are holding back many from switching to mobile wallets, not only in the US but globally. However, consumer confidence in mobile financial security is increasing. Once the security concerns are out of the way, consumers will still have to be drawn into mobile payments by way of engaging and rewarding mobile wallet experiences. For mobile wallets to gain full traction, the mobile and associated industries must clear a number of hurdles. Technological fragmentation is currently an issue because of the lack of common standards. The lack of interoperability between mobile payment systems is also an obstacle. So is the tardiness of lawmakers in setting standard regulations for mobile payments. There is wide consensus in the mobile industry that NFC will be the technology of first choice for mobile wallets.

MforMobile

Page 8

Mobile Wallets in the USA 2012 References

Cellular-news. 2012. Partnerships to be part of successful strategy in mobile payment market. Available: http://www.cellular-news.com/story/55654.php ControlScan and TransFirst: Small merchants and mobile payments: a pulse check on technology awareness and adoption. Available: http://www.mformobile.com/mobile-walletsummit/pdf/SmallMerchantsMobilePayments.pdf Dooijes, Michael. 2012. Mobile wallets: the smart way to shop. Slide show. Available: http://www.mformobile.com/mobile-wallet-summit/pdf/WalletsWebinar.pdf Jarvis, Graham. 2012. Lessons in mobile engagement in retail: NFC, augmented reality and RFID. MforMobile white papers. Available: On request. Contact: Helen Raff, MforMobile: helen@mformobile.com Jarvis, Graham. 2012. Will Mobile and Digital Wallets really take off? MforMobile white papers. Available: On request. Contact: Helen Raff, MforMobile: helen@mformobile.com Johnson, Andrew. 2010. Interoperability issues emerge as mobile-payments initiatives grow. PaymentsSource. Available: http://www.paymentssource.com/news/interoperability-emerge-mobile-grow-3004251-1.html Mas, Ignacio. 2012. Smartphones and Mobile Payments. Stanford Social Innovation Review. Available: http://www.ssireview.org/blog/entry/smartphones_and_mobile_payments McDonnel, Mike. 2012. Slide show on mobile wallets. Available: http://www.mformobile.com/mobile-wallet-summit/pdf/MikeMcDonnell.pdf MforMobile. 2012. 2nd Annual NFC Payments USA 2012. Available: http://www.mformobile.com/paymentsusa/ MforMobile. 2012. Mobile Wallets Summit Europe: Webinar. Available: http://www.mformobile.com/mobile-wallet-summit/premium-content-dl.php MforMobile. 2012. Perspectives on mobile wallets. Available: On request. Contact: Chris Quaile, MforMobile: chris@mformobile.com Ogden, Nick. 2012. Mobile payments - is the public ready to trust yet? Finextra. Available: http://www.finextra.com/community/fullblog.aspx?blogid=6426 Richter, Felix. 2012. Mobile wallets infographic. Statista. Available: http://www.statista.com/topics/982/mobile-payments/chart/739/key-facts-about-mobilepayments/ Starcevich, Sarah and Caro-del-Castillo, Sharda. 2012. Mobile payments: time to consider the regulatory landscape. Pymnts.com: Lydian Journal. Available: http://www.pymnts.com/journal/2012/january/mobile-payments-time-to-consider-the-regulatorylandscape/

MforMobile

Page 9

Mobile Wallets in the USA 2012

Stuart, Greg. 2012. Why marketers need to get mobile. Available: http://www.fastcocreate.com/1681972/why-marketers-need-to-get-mobile-hint-because-mobile-isblowing-up-marketing TheWhereBusiness. Preparing the market for mobile wallets. 2012. Available: http://news.thewherebusiness.com/location-based-services/preparing-market-mobile-wallets Vella, Roy. 2012. The mobile wave: the future of money. Slide show. Available: http://www.mformobile.com/mobile-wallet-summit/pdf/MobileWave.pdf

MforMobile

Page 10