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Mobile Payments
Mobile Payments
Contents
Mobile Payments ......................................................................................................................5
Introduction .......................................................................................................................................... 5 Payments An Overview..................................................................................................................... 5 Mobile Payments ................................................................................................................................. 5 Mobile Payments Value chain........................................................................................................... 6 Mobile Payments Types.................................................................................................................... 8 Mobile Payments Implementation Models ...................................................................................... 14 Mobile Payments Key Concerns ..................................................................................................... 18 Mobile Payments Market Scenario ................................................................................................. 19 Case Study 1: NTT DoCoMo Mobile Wallet.................................................................................... 20 Case Study 2: Globe Telecom GCash ............................................................................................ 21 Case Study 3: Mobile Banking (M-PESA) Vodafone and Safaricom (Kenya) ............................... 22 Conclusion ......................................................................................................................................... 23 Also available from Portio Research Limited ..................................................................................... 24
Mobile Payments
List of Figures
Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure 9: Figure 10: Figure 11: Figure 12: Payment methods Generic .............................................................................................. 5 Typical Payment Value Chain............................................................................................. 6 Mobile Payment Value chain ........................................................................................... 7 SMS-based Payment Model ............................................................................................... 8 NFC-enabled Handset........................................................................................................ 9 SMS/NFC/WAP-based model comparison ........................................................................10 Payments Based on Value ................................................................................................11 Examples Remote and Proximity Payments...................................................................12 An example to distinguish between B2B and B2C models ................................................13 Mobile Payment Operator Dominated Model..................................................................14 Mobile Payment Financial Institution/Bank Dominated Model ........................................15 Mobile Payment Collaboration Model .............................................................................16
List of Tables
Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Payment Value chain Description of Entities ....................................................................... 6 Pros and Cons of SMS-based Mobile Payment System ......................................................... 8 Pros and Cons of NFC-based Mobile Payment System ......................................................... 9 Payments based on Charging Methods .................................................................................12 Pros and Cons of Operator Dominated Model .......................................................................15 Pros and Cons of Financial Institution Dominated Model.......................................................16 Pros and Cons of Collaboration Model ..................................................................................17
Mobile Payments
Mobile Payments
Introduction
As non-voice revenues of mobile operators continue to grow, mobile payment services, along with mobile entertainment services, are among the most exciting growth sectors. This report aims to explore the various aspects of mobile payments, and begins by explaining the mobile payments value chain and the roles played by the various stakeholders involved. This is followed by an analysis of the types and modes of mobile payments, as well as the various implementation models that can be adopted by operators to successfully implement mobile payments in their respective markets. Finally, this report details the key concern areas that need to be addressed in order to spur the growth of these services.
Payments An Overview
A payment can be defined as a monetary transfer for the purpose of obtaining goods or services. Figure 1 provides a generic view of the existing payment methods.
Payments
Cash
Paper Cheque
Credit Card
Mobile Payment
Paper Transaction
Mobile Payments
When a payment is made through mobile devices, such as mobile phones, smart phones or Personal Digital Assistants (PDAs), it falls under the category of mobile payments. With mobile phones now being such a widespread consumer device, mobile operators worldwide are looking for ways to establish themselves in the payments segment, which has to date been largely dominated by financial institutions.
Mobile Payments
The payment value chain, as depicted in Figure 2, involves four major entities the functionality of each is briefly described in Table 1.
Table 1: Entity Payment Value chain Description of Entities Description Purchases goods/services from the merchant Gives validation of his/her credentials to the issuer Makes the final payment direct cash, cheque, credit, debit or through m-payment Merchant generates bill as per the goods/services purchased by the customer Sends bill to the acquirer Registered with the acquirer/issuer Receives final payment directly from customer as cash, or else from issuer This can be a financial institution, a card association or mobile network operator Acts as an intermediary between the Issuer and the merchant The party that authorises the payment as per the generated bill against select customers Has details of users credentials in its database Performs authentication and authorisation of the transaction parties customer and merchant Can be a financial institution (bank), bank cards or third party card issuer
Source: Portio Research Ltd
Customer
Merchant
Acquirer/Service Provider
Issuer
Mobile Payments
The value chain for a typical mobile payment-based system is shown in Figure 3. Figure 3: Mobile Payment Value chain
Step 1: Customer purchases goods; bill gets generated; shows handset to the installed Mpayment reader or traditional POS device in order to make payment. Merchant accepts the payment through the reader, which is connected to the acquirer. Step 2: Acquirer has merchants account. It handles merchant information and transaction details; the network used for switching transactions is either the operators network or an existing traditional payment network. Step 3: Issuer authorises the amount and manages mobile accounts; after validating the customers credentials, the issuer approves the generated bill Step 4: Acquirer notifies the merchant regarding the same and the merchant issues purchased goods/services to the customer. Customer pays bills and gets his account recharged
Source: Portio Research Ltd.
Mobile Payments
Step 1: The customer purchases goods and the bill gets generated Step 2: Bill is sent to the datacentre through the Internet, mobile device or a wireline Step 3: The datacentre contacts the person through an automated call or SMS Step 4: The customer sends back the approval with the Personal Identification Number (PIN) and unique short code Step 5: The datacentre issues the bill to customers issuer for releasing the required funds Step 6: The issuer credits the required amount to the merchant and debits the same amount (plus a processing fee) from the customers credit card/phone bill/pre-paid account
Solution/Network Provider
Customer
Merchant
Issuer
Note: There can be alterations based on the implementation model (Operator dominated, bank dominated, or collaborative or third party models) Source: Portio Research Ltd.
There are a few vendors who actively deal in providing the Premium SMS-based model, such as US-based mBlox and France-based Netsize. These vendors act as mobile transaction networks that provide connectivity with operators and the facility for mobile billing. They are therefore the intermediate link between enterprises (merchants) and mobile operators. Pros and Cons The pros and cons of using the SMS-based payment model are discussed in Table 2:
Table 2: Pros The security is greater than other options like Near Field Communication (NFC) payments. The inconvenience caused by keeping cash or plastic cards can be avoided. Pros and Cons of SMS-based Mobile Payment System Cons Text messages can get lost if the connection/network is poor, hence lowering the reliability of the system. The speed may not be good; delay in a merchant receiving a receipt may lead to long waiting times for the customer.
Source: Portio Research Ltd.
Mobile Payments
Near Field Communication (NFC)-Based Payments NFC-based payments involve a mobile phone with an embedded chip, which acts as the mode of payment. The technology involves contactless communication between two devices over a range of 10 cm. It enables the handset to act as a smart contact credit/debit card, which can be read by any smart card reader and NFC device.
One example of an operator dominated model for this kind of payment system is NTT Docomos FeliCa embedded phone, which features contactless integrated chip based 1 technology developed by Sony. Pros and Cons The pros and cons of using the NFC-based payment model are discussed in Table 3:
Table 3: Pros Speedy: the process is similar to swiping of credit and debit cards, but without any contact with the machine. Since there is no need to type a message, this method is more convenient than the SMS based payment method.
Source: Portio Research Ltd.
Pros and Cons of NFC-based Mobile Payment System Cons NFC- based payment is generally considered less secure than the SMS-based model.
NFC-based mobile payment systems represent the family of contactless mobile payment methods. The other members of the group are RFID (radio-frequency identification), Bluetooth and IrDA-based (infrared wireless communication) payment models; the methodology remains the same across all members but there are slight changes in the implementation technology. Mobile Web Payments (WAP) This type of payment involves the customer using online pages on the handset in order to purchase goods or services, and is considered more secure than SMS based payments.
Source: http://www.nttdocomo.com/glossary/f/FeliCa.html
Mobile Payments
Using the web-based payment system on handsets provides the following key advantages: 1. Reliability: The transaction is reliable, which adds to customer satisfaction. 2. After sales proceedings: Consumers can bookmark the pages that they wish to access at a later stage and wish to share with friends. The actual payment mechanisms behind the web pages may differ, as per the following techniques: Direct Operator Billing This involves a direct connection between the customer and the billing operator. Credit Card This involves the usual web-based credit card transaction, in which users are directed to a credit card payment page where they are required to fill in their credit card details. The filling of details can act as a barrier, as it causes inconvenience to the end customer Online Billing through Third Party Players This involves mobile payment through companies such as PayPal, Amazon Payments and Google Checkout that offer the option for making payments through mobile devices. Figure 6 provides a comparison between the SMS, NFC and WAP-based payment models.
Security
Mobile Payments based on Value Micro-Payments When the payment involves a transaction of a very small amount, it can be called a Micropayment. This kind of payment system plays a vital role in situations where the transaction involves a very small money transfer, which is practically impossible through the usual payment systems, or is very expensive. Micro-payments can also be payments that are easily/affordably processed through the electronic transaction processing mechanism. The present range of Micro-payments is approximated to lie between fractions of a cent to USD 2 1. Vodafones m-pay bill is a perfect example of micro-payments. The service was launched by Vodafone UK in 2002 for the purpose of collecting micro-payments and achieved success
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Mobile Payments
within two years. In part through this service, Vodafone was able to attract more than one 3 million buyers to its online mobile portal Vodafone Live! Micro-Payments can be payments made for purchase of mobile content such as logos, ringtones, tunes, games, etc. It can be also payment for parking or payment made at a vending machine Macro-Payments When the payment involves a transaction of a substantial amount, it can be called a macro payment. Macro-payments involve transactions higher than USD 10. Macro-Payments are payments made for paying bills or funds transfer. Payment made at a retail shop using a mobile handset can also be classified as Macro payment Figure 7 shows the typical value range for micro, mini and macro payments. The payment classifications vary with various markets and their specifications, and are subject to change.
Micro-Payment
< USD 1*
Macro-Payment
Payment for purchase of mobile content such as logos, ringtones, tunes, games, etc. Payment for parking or payment made at a vending machine
* The classifications are market specific and change as per the market specifications Source: Portio Research Ltd.
Mobile Payments based on location Remote Transactions This type of transaction involves money transactions irrespective of the customers location. Remote payment is used for applications such as pre-paid top-up, online payment, electronic bill payment, digital cash and international fund transfer. An example could be the transaction of goods/services between customers and the merchant done through phone (voice call), SMS, or online payment techniques from a remote place. Proximity/Local Transactions These types of transactions require a mobile device to be in the local vicinity in order to make payments. Proximity Transactions are used for applications such as making payment at unattended/traditional points of sale (POS) and payment through mobile parking. The technology platform for this type of payment includes Bluetooth, RFID and NFC.
Source: http://www.nccmembership.co.uk/POOLED/articles/bf_webart/view.asp?Q=bf_webart_113353
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Mobile Payments
Remote Payments
Proximity Payments
Prepaid Top-Up Electronic Bill mCheck Peer-to-Peer Electronic cash/fund transfer mPOS
mParking ATM transaction RFID-based payment IrDA-based payment NFC-based payment Bluetooth-based payments
Mobile Payments based on Charging Methods Based on charging methods, three types of payments have been identified post-paid, prepaid and real-time payment and these are discussed in Table 4:
Table 4: Payments based on Charging Methods Description In this method, the user pays after the bill is generated. This is the most common method used for paying through mcommerce and e-commerce This user can opt for one of the following payment methods: o Phone bill based: Internal phone bill charged by the operator o Account based: payment done through banks/credit cards In this method, the services and goods are paid for in advance It is the most common method for evaluating a customers potential. Customers potential is determined on the basis of frequency of recharge, amount recharged, etc. and this sometimes forms the basis for migrating the customer to the postpaid method The user also has the flexibility to monitor usage in advance In this method, the user pays the amount in real time or almost real time Example: Electronic Wallet
Source: Portio Research Ltd.
Charging Method
Post-paid
Pre-paid
Real-time
Mobile Payments based on Relationship Models Business to Consumer (B2C) Mobile Payments The B2C mobile payment model provides an alternative to the usual cash transaction and is therefore one of the most popular models. Both the operator-centric and bank-centric models play an important role in the successful implementation of B2C m-payments. Consumers pay for all types of day-to-day items, monthly bills, insurance premiums and taxes using this kind of a payment model. The models success is therefore dependent upon the capability of the handset and its user interface. The supply chain generally
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Mobile Payments
involves the purchase of finished products by the end consumer. Yeepay and Octopus card are perfect examples of B2C mobile transactions. Business to Business (B2B) Mobile Payments This type of payment structure involves transactions between businesses or enterprises through mobile phones. The supply chain generally involves the purchase of specific industry solutions between industries. A prominent example of B2B mobile transactions would include Safetrader.
Consumer to Consumer (C2C) Mobile Payments This involves end-to-end transactions between two consumers through a third party business platform. A typical example of this model is an online auction, in which the first consumer places an article for sale while the second consumer bids to purchase it. The involved business platform charges a commission on every sale completed and usually does not take any responsibility for the quality of the offered product. A typical example is the mobile based transaction of virtual goods such as gaming features. Person to Person (P2P) Mobile Payments Person-to-person mobile payments involve private mobile transactions between two people either directly or through a third party. The transaction is generally SMS-based and may involve top-up credits, m-banking and digital goods exchanged between two individuals. One of the biggest examples of this kind of mobile payments system is Paypal Mobile.
Remittance Mobile Payments Remittance mobile payments can be interpreted as a part of P2P mobile payments as it also involves the exchange of money between two people; the only difference being that, in this model, the transaction is carried out in a single direction only. Examples of the remittance model include the transfer of money by a working member to his family in another country, or payment by a parent of their childs cab fare.
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Mobile Payments
Network Operator
The largest part of the value chain, from primary acquirer to issuing of funds, is dominated
by the operator.
There is no involvement of financial institutions and banks. This model allows operators to take advantage of their existing customer base by
positioning it as a Value Added Service to its customers.
Some of the advantages and disadvantages of the operator-centric model are mentioned in Table 5 below:
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Mobile Payments
Table 5:
Allows the operators to take advantage of their existing customer base by positioning mobile payments as a Value Added Service to its customers.
Operators need to obtain a banking license which might result in delays or regulatory issues.
Since there is no hopping between acquirers, networks and issuers, the transaction fee is reduced considerably. The operator has the flexibility in determining the transaction fees.
Operators have little/no exposure and expertise in handling complex transactions and related risks.
During roaming, transaction-based issues might arise across different operators. Initial investment is high. This investment might include the following: Installation of new POS readers Supporting software/applications Network allocation Banking license Banking resources/experts and infrastructure
Source: Portio Research Ltd.
Financial Institution Dominated Model The financial institution/bank dominated model is as shown in Figure 11:
The largest part of the value chain, from primary acquirer to issuing of funds, is dominated
by the card operator/financial service providers.
There is preliminary operator involvement only till the initiation of request (over-the air
activation, provision of mobile banking services, etc.)
The payment system works on existing networks like those used by credit/debit cards
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Mobile Payments
Some of the positives and negatives of the financial-centric model, as implemented by Visa or MasterCard, are listed in Table 6.
Table 6: Pros and Cons of Financial Institution Dominated Model Pros Traditional payment techniques (existing methods used by credit/debit cards) are leveraged; therefore there is no setup cost involved. Financial institutions have expertise in managing payments and related risks. Customers share a historical relationship with banks and thus consider services to be more reliable.
Source: Portio Research Ltd.
Cons There is hardly any involvement of the mobile operator; their distance may lead to poor service.
Collaboration Model The Collaboration Model - a mix of the operator and financial institution dominated model - is explained in Figure 12:
The mobile operator is the primary acquirer; hence the POS machines are rolled out by the
mobile operators to the merchants.
Financial institutions/banks are issuers and sanction the final payments. The model works on the existing networks used by card associations.
Source: Portio Research Ltd.
Some of the pros and cons of the collaboration model are examined in Table 7 below:
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Mobile Payments
Table 7:
Pros and Cons of Collaboration Model Pros Cons There is a lot of hopping involved between operator and banks network; transaction charge thus increases, cost is borne by the customer.
Account-and risk management is handled by the financial institutions experts for the job. Primary acquiring done by the operator experts for the job. This also helps the operator in leveraging its existing customer base. Operator does not need to acquire a banking license.
SK Telecoms Moneta mobile payment service is based on a collaboration model. While the primary acquisition is done by the South Korean operator itself, the processing of payments is done through the existing networks from either Visa or MasterCard, and issuance is done by 4 the partnering banks.
Source: http://www.mobileeurope.co.uk/features/113334/M_BANKING_&_M_PAYMENTS_-_From_Mpayments_to_M-banking.html
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Mobile Payments
Demand Side Concerns Reluctance in Adoption of Technology by Users Owing to supply side constraint of no universal standards of mobile payments to date, users are reluctant to switch from existing card-based payments (credit/debit cards) to mobile-based payments Cautious Mindset of the Consumer Security is the major concern in a users mind while making a financial transaction. The perception by users that m-payments are a less secure transaction method may hinder its growth.
Regulatory Concerns Lack of Government Authorization Mobile payments methods do not enjoy the legal status of other payment methods, such as cash and cheque. It is not sanctioned, accepted and assured by the Government. Mobile Payment Abuse5 While there are around 1 billion bank accounts and approximately 3 billion handsets worldwide, at the same time there is a growing trend towards online payment or paperless banking. This might increase the possibility of system abuse by money launderers who can bypass regulatory requirements to exchange dirty money for terrorist and related activities. Currently, law enforcement and Intelligence agencies may not have adequate expertise over the technology. Arguably, most of the security features implemented by m-payment networks hinder the ability of law enforcement and Intelligence agencies to detect suspect transactions.
Source: http://www.state.gov/p/inl/rls/nrcrpt/2008/vol2/html/101346.htm
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Mobile Payments
This passage is quoted from our report Mobile Data Services Markets 2008
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Mobile Payments
7 8
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Mobile Payments
GCash is also providing a facility for wholesale payment in addition to the transactions stated above. Subscriber Base 12 GCash totalled more than 1.2 million users by December 2005. However, the registered GCash customer base stood at 469,349 as of end-June 2006. This reduction in the number of GCash registered customers is due to a change in the way the company counts the number of subscribers using GCash, starting May 2006. Until May 2006, a registered GCash user was considered as a GCash user until such a time as he or she voluntarily suspends or stops his or her GCash service. After May 2006, registered GCash customers were reported on the basis of cumulative registrations, reduced by the number of voluntary suspensions net of 13 reactivations during each month. By the end of year 2007, GCash registered users reached 14 15 1.2 million. The GCash registered user base touched 1.9 million by September 2008. GXchange, a wholly-owned Globe Telecom subsidiary, manages the m-commerce initiatives of Globe Telecom, including the GCash service. Factors that Influenced the Success of GCash Service The key success factors of Globe Telecoms GCash service include the high volume, lowprice model and the presence of strong distribution networks by establishing partnerships with various industries present in and outside the Philippines.
11 12
Source: http://www1.globe.com.ph/about.aspx?artid=11 (SEC Reports Q3, 2008) Source: http://www1.globe.com.ph/uploads/GlobeTelecom2005AnnualReport.pdf 13 Source: http://www1.globe.com.ph/uploads/GT17Q2Q2006.pdf 14 Source: http://www1.globe.com.ph/img/documents/Globe_Annual_Report_2007.pdf 15 Source: http://www1.globe.com.ph/about.aspx?artid=11 (SEC Reports Q3, 2008)
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Mobile Payments
Factors that Influenced the Success of M-PESA Service M-PESAs success can be attributed to several factors; first and foremost, it is based on the most widely used data service in KenyaSMS. Secondly, M-PESA is offered to Kenyan mobile subscribers for a negligible fee. While keeping the charges low, Vodafone and Safaricom worked out an innovative business model for creating revenue streams from MPESA. Therefore, M-PESA is a brilliant example of how operators in fast-growing, but low ARPU markets can capitalise on popular data services, think beyond the normal mode of delivering data services, and break technical and regulatory bottlenecks to finally create an innovative business opportunity.
16 17
Source: http://www.mefeedia.com/tags/ndege/ Source: http://www.reuters.com/article/pressRelease/idUS44198+11-Feb-2008+RNS20080211 18 Source: http://innovationcafe.blogspot.com/2007/06/safaricom-m-pesa-in-kenya-sms-text-news.html 19 NOTE: Conversion rate used :1 KES = USD 0.01339 for November 2008 20 Source: http://www.vodafone.com/mobile_world/announcements/m-pesa_reaches_1_6.html 21 Source: http://allafrica.com/stories/200804072077.html; http://www.eastandard.net/InsidePage.php?id=1143992228&cid=457 22 Source: http://wirelessfederation.com/news/category/m-pesa/
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Mobile Payments
Conclusion
Mobile Payments represent an opportunity for operators that they can ill afford to ignore. However, when assessing whether to enter this segment, MNOs need to very carefully consider which mode of payment they would like to implement, be it NFC/RFID based, SMSbased or WAP-based. At the same time they need to look at the markets for the various relationship models and then decide whether they would like to enter the B2B, B2C, C2C or P2P segment. While reviewing the kinds of payment to target micro or macro - operators need to keep in mind that while customers might be willing to embrace micro mobile payments much faster than they would in the case of macro payments, it might result in a low value-large volume scenario. Such a situation might place a strain on network resources but not bring in the anticipated revenues. However, in the case of macro payments, while the potential revenue might be high, users might not be as willing to switch to mobile payments, hence resulting in slow uptake of the technology. In addition to the above, while deciding on whether to implement remote or in-store mobile payment methods, the investment involved needs to be kept weighed against the potential gains that a particular implementation method can bring in. Also, while deciding on the implementation models, operators need to keep in mind the relative position of the telecom operators and financial institutions in the particular market before opting for a particular implementation model. Finally, to ensure that mobile payments live up to expectations worldwide, operators need to make mobile payments widely accepted by merchants so as to speed up user uptake of these services.
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Mobile Payments
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