Propensity Modelling-

Mobile wallet

Executive summaryIntroduction:
Mobile wallet is a service which is often confused with mobile banking. Mobile wallet
has a much broader concept which includes using a mobile phone as a mode of
payment, rather than depending on hard cash or debit/credit cards. In India, the
mobile wallet market is projected to witness double digit growth rate over the
coming five years. In mobile prepaid wallet, costumers do not require to follow the
three layers of security for payment which are required while using a debit/credit
card or through net banking. Wallets are one click payment solution. This leads to
more success rate of payments (around 95%) when compared to transactions
through debit/credit card. Most often mobile wallet is confused with mobile
payments which requires electronic device using nearfield communication (NFC)
chips inside smart phone and tablets to transmit information about payments. When
a customer uses its smart phone or other electronic device to make payments using
a mobile, they open an application and enter a PIN. Then according to their choice
they select an account from where transaction has to be made, along with any
special offers or reward programs they wish to apply. At the time of payment they
merely tap their device to an enabled payment terminal, and the information about
the payment is transmitted.

Type & Regulation

Mobile wallets are regulated by the Reserve Bank of India (RBI) except for those
which are used for transactions with one merchant. Wallets can be categorized into
two categories namely, open and semi closed. Open wallet has a bank as a
shareholder and on the other hand semi closed wallet is not linked with a bank. For
instance, M-pesa has both kind of accounts, an open as well as semi closed wallets.
A semi-closed wallet doesn't allow the consumer to withdraw cash, but an open
wallet linked to a bank does.

Applications
There is wide range of applications possibilities for mobile wallet in the Indian
market such as banking, communication, transport, ticketing and even paying at
petrol pumps. In terms of usage they are still at the evolving stage. But mobile
wallet is considered to be the next big thing in monetary transactions in the Indian
market. Mobile wallet market by applications includes services related to banking
transactions, transferring of money, and value added services such as ticketing,
recharge, shopping, and bill payments and others. Among all these applications
transferring of money accounted for major portion of the pie with more than 30%
share followed by recharge and bill payments and utilities areas.

Key Companies & Strategy

Paytm which was launched in January 2014, presently has 10 million users who
have already downloaded the paytm wallet and the company is expecting to reach
more than 50 million wallet downloads by 2015. Flipkart, India's largest eCommerce
firm is now looking to tie up with third party vendors to launch its semi closed
wallet. This move came after Flipkart payment gateway PayZippy was not granted a
wallet. QwikCilver which is a gift card and other stored value solutions provider in
India got its license in 2013. In the fiscal year 2014, the company did business
worth INR 400 crore and is estimated to deal with INR 1,000 crore of money loaded
on prepaid wallets by next year said by the co-founder of the company. Indian
eCommerce companies prefer to settle refunds to its customers through wallets.
Some of the companies refund the amount by crediting points or by crediting
money worth of that amount into customer's account which act as wallet on the
portal. For instance, PayU India presently runs PayuMoney Wallet a service which
has more than 30,000 merchants live and accepted more than 50 eCommerce sites
such as Jabong, RedBus, Groupon, Bookmyshow and many others. It is a service in
which users can store card data and get reward and money back points on using its
services.

Market Growth Rate

The Indian eCommerce market is projected to grow more than USD 100 billion over
the coming years. This growth is mainly attributed to the increasing use of smart
phones. With the rising use of mobile phones by the customers to shop online, eretailers and payment companies are planning to launch more digital wallets. This
will not only offer consumers a convenient and comparatively faster way to pay but
will also reduce their dependency on sales linked to cash on delivery (COD).

Drivers
High penetration of smart phones, greater accessibility and convenience; along with
numerous offers and reward points by the eCommerce companies is attributing
towards the growth of the wallet market. Virtual wallets will bring hopes to people
who do not have bank accounts such as students or homemakers. This means that
even a customer who does not have a bank account or who lacks access to banks
can use mobile wallet to make transactions. Restraints Consumer's concern related
to the mobile wallet such as what if the mobile battery is down the mobile wallet
will not be accessible and connectivity issues in some areas are the factors
restraining the growth of the market. Moreover, as per the guidelines by RBI the
transaction amount is restricted to INR 10,000 per day and the cumulative value of
INR 1 lakh in a month is another factor impacting upon the market growth.

Target Audience

Mobile Wallet target audience is mainly young tech savvy people. It could be an
existing banking customer or an aspirational rural consumer who wants to transact
digitally.
Udit Sharma, Vice President, Oxigen said, Users can be classified into four
categories. First category is of people who have credit/debit cards and are at ease
using that mode of payment. Second category people who have cards but still
prefer using COD. Third category is people who do not have cards, so they have to
use COD. And the fourth category is of people who want to use COD but merchants
do not deliver products to their pin codes. Mobile wallets addresses issues of all four
categories of people. It caters to users convenience over using cards. Availability of
a person to make COD is mandatory, however with the wallet this problem also gets
solved. It a tough pull for the industry to get all COD users to mobile wallet but
ultimately it holds an immense scope.

Roadblocks in mobile wallet adoption?

RBI has been a pro-active thinker to drive adoption and has been very liberal in
issuing licenses. Policies are decided and implemented by the The Reserve Bank Of
India (RBI). The RBI has been very responsive over the past 2-3 years, bringing in
key changes such as increasing the limit of how much money a user can park in the
wallet, allowing wallet to wallet money transfers, and direct fund transfer to bank
accounts.

How are customers benefiting from this?

Convenience and speed of doing the transaction are the key benefits. Mobile wallet
users enjoy greater flexibility in making secure payments. The convenience of
making payments on the go and easy accessibility of this new mode of payment
makes it a logical and natural choice. Additionally, those who dont have a credit
card or a debit card can go to their nearest wallet recharge kiosk and get their
wallets loaded against cash.

What is mobile wallets future?

Mobile wallet will play a significant role in day to day life as an increase in use of
smartphone can be seen and people are relying on digital lifestyle to make things
convenient and fast.
During 9th India Digital Summit 2015, IAMAI, Udit Sharma, Vice President, Oxigen
said There is no doubt that mobile wallets will take off. Coming from Oxigen our
philosophy is that we dont hold the right to call ourselves a mobile wallet unless we
replicate all the functionality of a real physical wallet. A mobile wallet should
address its users as well as merchants needs (such as convenience, security
concerns and a merchant-user end to end relationship), only then will there be a
true adoption of wallet in this country.

Bipin Preet Singh, Founder and CEO, Mobikwik, during the same summit said,
There are two primary factors for mobile wallet adoption. First is that banks have
not done a great job in terms of technology or premium infrastructure so there is a
need and space for alternative systems like mobile wallet to emerge. Second factor
is that India is a cash majority country and there is huge scope in getting the cash
converted into digital money.

Scope & Objective:

The Market
Digital Payments Industry including net banking, credit/debit card transactions,
prepaid cash cards, mobile wallet and IMPS was estimated at $14.51 Billion in 2013.

Out of 800 million online transactions made in 2013, 53% were made using
credit (21%) and debit cards (32%), while 44% came from Internet banking. The rest
were attributed to Mobile Wallet, Pre-Paid Cash cards and Immediate Payment
systems (IMPS). The current size of m-commerce 4% of the market, is significantly
low.
At present, mobile payments form a miniscule part of the overall digital payments
industry in India. However, contribution from phones and tablets is expected to
increase to 30% by 2020. Mobile Payments in India is estimated to grow from $86
million in 2011 to $1.15 billion in 2016, with a compound annual growth rate (CAGR)
of 68%.
The M-wallet market is projected to grow at a CAGR of around 30% in the next five
years from 2015-2019. Market of m-wallet segment includes transferring of money,
services related to banking transactions, value added services such as shopping,
ticketing, recharging, and bill payments
In this segment, the highest 38% market share is captured by money transfer
businesses, followed by recharge and bill payments, and utility areas by 30% and
12% respectively. Others enjoy 20% market share.

Some of the major m-wallet players are Airtel Money, mRupee, Vodafone m-Pesa,
Oxigen Wallet, Paytm, Mobikwik and Idea Money (VMSI).

The Opportunities
In this backdrop, potential opportunity lies in consumer payments industry
(specifically wallets)

1. Tapping into the untapped market According to data from Reserve Bank of
India (RBI), India is the home to largest number of unbanked families (more than
145 million). Potentially one of the largest bases to capitalize on.
2. A Focus on providing merchants with Multichannel Payment Services.
3. Payment through wallets using NFC, tokenization, biometrics Because Mobile
devices will be a mainstream option for person-to-person or person-to-business
payments.
4. Cryptocurrencies. E.g. Bitcoin, Litecoin etc.(Total Market Cap : $3,880,950,327)
5. Developing solutions that are not payment solutions, but are touch payments
solutions for merchant, gift, loyalty, data analytics etc.
6. Financial Inclusion A wallet which can cater to this will definitely rule the Indian
market.
Parameters

2013

2014

250.5 million

328.6 million

$ 3.6 billion

$ 8.2 billion

40,837

46,126

Banking Outlets in Villages (Branchless Mode)

227,617

337,678

Banking Outlets in Villages (Total)

268,454

383

No of Transactions
Amount of Transactions
Banking Outlets in Villages (Branches)

7. Analytics solutions Payments Transaction Data Analytics will be a major source

of payments-related revenue.
8. Remittances Remittances to developing countries to grow by 5%.
(Annual domestic remittance stood at $13 billion in 2010 and was expected to reach
at $20.3 billion by 2014, growing at a compounded annual rate of 12 %.)

Mobile wallets
Let us talk about Mobile wallets. All these facts give a conclusion that the market of
mobile wallets is definitely a lucrative one, with investors ready to pump in money.
As e-commerce continues its rapid growth in the Asiatic region, mobile wallets have
become one of the most trusted and preferred ways to pay online. Most of these
wallets incorporate multiple payment methods, from bank transfers to credit cards,
debit cards, gift cards and more. That way, consumers with or without credit cards,
can use mobile wallets.
NFC is now available on nearly all high-end smartphones. The only issue with NFC
gaining popularity into the Indian market is the supporting hardware on the
merchants POS. In-store payments drive mobile wallets adoption to a large extent,
as more than 90% transactions occur in-store. The question here is, will NFC or app
based/barcode payment rule?
Some mobile wallet providers are giving facilities to unbanked consumers to deposit
money into their wallet through agents, but that is geographically very limited.
Mobile wallet providers have now become a kind of mini banking institutions
(Payments banks) and it would not be surprising if they will get their banking
licenses, and follow the path like Paytm, Airtel etc. This will be very lucrative if we
take into consideration the Governments agenda of financial inclusion. Paytm has
over 100 million wallet users, which is double that of Visa and Maestro penetration
together (in India). Over and above this, in a country such as India & BRIC nations
the remittance market is huge. These Payment banks can also leverage in this
landscape.
The financial institutions/e-commerce/lifestyle shops have realized the potential of
mobile wallets in terms of consumer experience and loyalty. That is why each one of
them is coming up with their own wallet which can be recently seen with the launch
of SBI Buddy, BookmyShows own wallet to name a few. It would be relatively easier
for banks vs a non-bank product, because they already have a trusting customer
base and their product is less likely to suffer from interoperability.

Essentials
A mobile wallet in todays world should encompass the following 3 features (Source
Euromonitor)

Pre-purchase:
Pre-purchase capabilities enable consumers to identify products or solutions that
they would like to buy and provide incentives. These capabilities include offers and
coupons that are driven by location, loyalty based services including gift cards and
rebates.

Purchase:
Existing payment technologies adequately cover the purchasing option. These
include NFC based and QR code based solutions.

Post-purchase:
Ability to manage payment details after a purchase is key for a compelling mobile
wallet solution. These capabilities include transferring of payment to another card
and expense management. Some innovative capabilities could include the ability to
purchase a warranty for large purchases, signing up for loyalty programs. Postpurchase is also a great time for providing cross sell/up sell features

Challenges
With a new mobile wallet coming up every month or so, the main thing to watch
would be how they market themselves, which exclusive alliances they can come up
with, like Uber and Paytm what effectively gave an entry to Paytm into the market
and use all of the Uber users on its platform. In addition to this, a wallet which can
better digitize the path-to-purchase and eliminate the friction tied to the payment
process over its rival, will capture the market.
With the advancement of technology, to create a unique selling proposition in term
of features would be extremely difficult for the new players. The only thing that they
can do, apart from making a good product is market in a way that touches every
consumer aspect (From excellent UI/UX to all basic wallet features to one touch
payment millennial generation to one to one customer engagement), exclusive
alliance with 1-2 service providers and most importantly partner with various ecommerce/traditional shops.
The value proposition of a mobile wallet is not about the payment, but instead
about the services that can be offered across a mobile-enabled environment. It is
interesting to see scenarios where the mobile wallet is funded over the lower-cost
EFT network in order to save money on card network fees. Wallet providers also
save money by bundling transactions to get high volume discounts.
No one wants to be left behind in this race of making CUSTOMER use their wallet
for their next transaction and in the process encourage them by rolling out n
numbers of offers. Is this much cost really justifiable in the name of customer
acquisition/retention etc.?

Conclusion
There is just too much money going into the mobile payments industry. The industry
of mobile wallet has too much to promise on the outside, which has caused many
public companies valuations to be inflated. Some companies are also actively
investing in mobile payment startups that could have strategic value for them.
Investors are also pumping huge amounts of money into startups that arent even

close to profitable. Putting money into something is easy but the tricky part is
getting it out. Is this the making of another bubble?
Compared to a decade earlier, 10 confusing cards have now been replaced by 10
confusing wallet apps, each working at a different merchant.
To any new entrant, who are thinking of venturing into this market, unless the
business model is strong enough, it would be a loss in the long run, even though
they will have customers, owing to such a large customer base in our country. But
the question remains,

1. With so many deep pocket players in the market, how will they lure in
customers?
2. And will the customers be loyal? Will they use your platform in absence of
offers/discounts?
3. How long will it take for the business to become from push to pull? During that
time will the business be sustainable?
Now, if we are able to solve these problems then it would be helpful in business and
definitely impact the bottom line. But the question is Is there any way to solve
these questions? If Yes then How?
Here the propensity modelling comes into the picture to solve these questions.

Analytical approach:
Tools & Techniques
Propensity score matching (PSM) is a statistical matching technique that attempts
to estimate the effect of a treatment, policy, or other intervention by accounting for
the covariates that predict receiving the treatment. PSM attempts to reduce
the bias due to confounding variables that could be found in an estimate of the
treatment effect obtained from simply comparing outcomes among units that received
the treatment versus those that did not . The technique was first published by Paul
Rosenbaum and Donald Rubin in 1983,[1] and implements the Rubin causal model for
observational studies.

To make the most of predictive marketing, you need a propensity model, a

statistical analysis of your consumers: who they are, what theyre buying, and how
theyre buying it. These models gather extensive information about customers,
factoring in demographics, location and purchase histories, to predict what theyre
likely to buy in the future. Depending on the depth of the analysis and the
sophistication of the algorithm, a propensity model can predict how likely a prospect
is to turn into a customer, how long you can likely retain them as a customer, how
much theyll spend on your services.
The use of data marketing has tripled since 2009, according to Accenture, and
thats no surprise: its easy, and there are big payoffs. A whopping 30 percent of
Amazons revenue comes from its recommendation engine, a great example of
predictive marketing in play. Propensity models give you better leads, better sales,
and a better sense of how to tailor your business. Plus, the more data you collect
over time, the better you can hone in on your target customer.
By using predictive marketing strategies, you can tailor your marketing tactics to
the people who are most likely to become consumers, before theyve even bought
something. From a sales perspective, its critical, since it allows you to zero in on
the leads who are most likely to bite. A propensity model can look at whom youve
earned sales from in the past and ask: Do these customers have something in
common? Were people more likely to buy when it was set at a certain price?
Propensity models are like having a weather forecast. You wouldnt go on a trip
without checking the weather so youll know what to pack. Predictive marketing
works the same way: If you know whos most likely to respond to your marketing
(and why) then you know exactly how to tailor your marketing strategy.

Methodology:

In the world of customer relationship marketing, some of your customers will

inevitably be more profitable than others. Many companies use customer
retention modelling along with a loyalty programme to retain or re-activate
customers. If you can identify those customers most at risk of lapsing and
then offer them a suitable incentive to stay with your company, you can
significantly increase profits.
1. Prepare your data
Before undertaking any analysis or building a statistical model you will need
to audit your data. The most powerful data on your customer database will
usually be transactional information. With transactional data you can
segment and analyse your customers according to RFM - Recency, Frequency
and Monetary Value of purchase, quickly providing valuable customer insight.
Always isolate missing, under-populated or incorrectly coded data fields.
You may also want to clean or validate your customer name and address
information. A powerful model will not work if your customers are
goneaways, complainers or even deceased.
Many of the factors that determine customer retention are triggered by
events such as moving house, getting married, having children or changing
career. This data is often best gathered via third-party data selections such
as Census information, lifestyle data and geodemographic. External data
sources are also useful when trying to analyses and predict the behavior of
recently acquired customers. If, say, a customer has been with your
company for less than six months you may lack enough information to make
an informed decision about their future purchasing patterns.
Whatever data you use in your model, ensure that you will continue to have
access to that data in the future. A model cannot work if it is based on data
that you no longer capture.

2. Building the model

First consider who you want to analyse and pick the right customers:

Will you build a retention model for each of your products, services or
brands, or one that works across your entire portfolio?
The time frame for analysis is likely to vary according to product or market
sector, but typically analysts look at the lapse rate of customers recruited at
the beginning of a 12-month period.
Will you be trying to predict propensity to lapse (often used by companies
offering a subscription-based service such as book clubs or satellite/digital
television providers), or propensity to renew (often used by companies where
the customer is invited to renew on an annual basis eg insurance or loans).
It is important to identify at the outset which approach you will take and that
this matches the marketing programme you wish to implement. The model
here will target potential lapsers.
Customer retention models are usually built on representative samples of the
total customer base, as statistical software is more capable of handling these
smaller files.
Before building the model, a random validation sample is held back from the
modelling file (usually between 30 per cent to 50 per cent of the file). The
model is built on the remaining development sample and its robustness
subsequently checked by applying it to the validation sample.
The two main propensity-modelling methods used in CRM and database
marketing are regression and decision tree techniques (see jargon buster
below).
.
3. Interpreting the results
Generally you should look to gain the maximum predictive power from the
least number of variables. Too many variables in a model can lead to "noise
and "over-fitting". A simple non-statistical measure of your model's
performance is the classification table (see box, above right). The model is
applied to the validation sample to assess how many lapsers and non-lapsers
were correctly predicted.
A gains chart can offer savings by assessing how lapsers fall within the whole
database; by telling you if your model can identify 70 per cent of all potential

lapsers within only 30 per cent of the total database, you can achieve
significant potential mailing cost savings.
Always employ intuition as a final sanity check - look at the variables that
appear in your model and the composition of your predicted lapser
segments. Do they resemble your image of a customer who might be about
to stop buying your products or defect to one of your competitors?

4. Implementing the model

The customer retention model is best applied in conjunction with some
measure of value, be it revenue, profit or customer lifetime value. The
resulting risk/value matrix (see box, above left) can be used to identify
customers you need to incentivize.
You can assess how successful your retention incentive programme has been
by holding back a sample from the high score group who do not receive the
incentive: do you lose more of these people over the period of the campaign
than those who received the incentive? You can also test the model itself by
comparing the lapse or churn rate of those in the top 10 per cent of the
model compared to that of a control group.
Keep monitoring the performance of the model. The profile of your customer
base as a whole, and your lapsers in particular will change over time.
Seasonality or competitor activity may also affect the model's performance,
so be prepared to learn from new data and experience. It is particularly
valuable to gather information on why your customers are lapsing or
defecting.
By adding this data to your model you can develop a really powerful
retention programme.