The Green Sheet Online Edition
July 12, 2010 • Issue 10:07:01
Doing business in the mobile channel
Everything is mobile these days, and the business of payments is no exception: Juniper Research Ltd., a high-tech research firm based in the U.K., forecasts that nearly half of all mobile telephone users worldwide will be using mobile devices to initiate payments by 2014. Meanwhile, the online auction site eBay Inc. claims it handled $500 million in mobile payments in 2009; this year that number is expected to triple.
At present, the bulk of mobile payments occur outside the United States. In Kenya, for example, M-Pesa, a mobile banking and payments product provided by mobile operator Safaricom Ltd., managed to sign up 20 percent of Kenyans who just a few years ago were unbanked.
In Haiti, where 90 percent of adults had no bank accounts just last year, a project is underway to build a mobile money system for the entire nation. The U.S. Agency for International Development and the Bill & Melinda Gates Foundation kicked in money and expertise to create the system.
Among developed countries, Japan has been heralded for its inroads into the mobile payment sphere.
The Japanese experience
Champions of mobile payments often point to Japan as a country that has figured out how to make mobile payments work. Boston-based consultancy Celent LLC, however, suggests things may not be as they seem in Japan. Drawing on research involving banks, mobile carriers, technology vendors and other players, Celent estimates just 20 million mobile payments accounts are actively used in Japan, a nation of 128 million people, and such "active" accounts constitute just 17 percent of Japan's contactless accounts. According to Celent's report, Lessons from the Mobile Payments Leader: What the World Can Learn from the Japanese Market, there are plenty of differences between Japan and markets like the United States. Similarities exist, too. Drawing on these similarities, the report offers insights into mobile payment adoption. These include:
- Consumer adoption takes time, even among the tech-savvy.
- The payment component isn't what drives consumer usage; it's incentives.
- Merchants aren't as concerned with financial settlement as they are with the potential mobile payments offer in terms of promotions and sales lift.
- The underlying technology could potentially blow open the market for mobile payments and disintermediate banks.
According to Mobile Payments for Digital and Physical Goods, a new white paper from Juniper, more than 500 million mobile phone subscribers in the Indian subcontinent will be using their devices for payments by 2014. "[A] recent trend we're seeing is the launch of mobile storefronts and malls, as well as new smart-phone apps and mobile payments services from companies such as eBay, Amazon and Digby," said Howard Wilcox, author of the white paper.
Richard Crone, Chief Executive Officer of Crone Consulting LLC, estimates mobile payments have the potential to become a $6.2 trillion a year market.
Payments, not banking
The mobile payments arena is not the same as mobile banking, although experts agree mobile banking gives banks a leg up on getting account holders on board with mobile payments. The Federal Reserve Bank of Boston reported in its 2008 Survey of Consumer Payment Choice that 8.2 percent of bank account holders presently access the bank using mobile technologies.
Bank of America Corp., a leader in Internet banking, seems situated at the head of the mobile pack with its millions of mobile banking customers. BofA also boasts the largest checking account base in the nation, the largest check processing workload, and it's a top card acquirer, too.
According to Crone, mobile payment services require two sets of "credentials" to work: those that provide access to payment networks and those that support access to mobile networks. "Mobile banking helps banks get the mobile credentials piece," Crone said.
The mobile carrier advantage
Mobile carriers are already knowledgeable about payments, and most have the "payments credentials," since they routinely use automated clearing house (ACH) debit applications, Crone said. These and other telecommunications companies were among the first billers to adopt accounts receivable conversion (ARC), the transaction format used to support the conversion of consumer remittance checks to ACH debits, Crone added.
In 2009, more than 2.4 billion remittances were converted by billers to ARC transactions, representing more than 15 percent of all payments processed through the ACH, according to NACHA - The Electronic Payments Association. To date, however, most of the "mobile payments" initiated through mobile carriers have been billing-on-behalf-of situations, such as application downloads, games and donations, Crone noted.
In June 2010, NACHA introduced a new rules framework for clearing and settling consumer debit payments initiated using mobile telephone devices. Beginning in January 2011, mobile debit payments can be processed through the ACH using the WEB transaction format already being used to process Internet-initiated debits.This is a major accomplishment for NACHA. In the past it has taken years of research and testing before new types of electronic payments were sanctioned by the rules group. "The Mobile ACH Payments Rule introduces new opportunities for innovation in the ACH network, striking the appropriate balance between innovation and risk management," said Janet O. Estep, NACHA's President and CEO.
Additionally, hundreds of other financial institutions and bank service providers have been rolling out platforms, applications for smart phones and other products that support mobile payments. Montise Americas (part owned by banking services company Fidelity National Information Services Inc.) reported in June 2010 that more than 200 banks, credit unions and prepaid card issuers throughout the United States were using its Mobile Money Services.
Fiserv Inc., considered by many to be the largest provider of payment software and outsourcing services to financial institutions, also reported in June that it had commitments from more than 100 financial institutions to offer its mobile payment option ZashPay when it becomes available this summer.
ZashPay builds on Fiserv's online banking service, which serves an estimated 16 million customers at more than 3,100 banks and credit unions.
Debits initiated using ZashPay will typically settle on a next-day basis; consumers who don't bank with participating institutions will be able to access ZashPay through a special ZashPay website, Fiserv said.
In May 2010, California-based Obopay Inc., one of the first companies to come to market with mobile payment solutions, launched a new service that financial institutions can private-label and have up and running within 30 days. "Mobile Money for Banks includes the ability to send and transfer money as well as payment card acceptance available to everyone," the company noted in a statement about the new offering.
"Any bank that isn't looking at how to enter the mobile money market as quickly as possible is risking the loss of business to competitors, the carriers or PayPal," said Bob Hedges, Managing Partner at Mercatus Partners LLC, a private equity investment and strategy consulting firm based in Boston.
In describing the emerging mobile scenario, Crone said, "This is the year the mobile payments table gets set."
Valley National Bank in Lamar, Colo., is one of an army of community banks and back-office support shops pursuing a mobile payment strategy based on contactless technologies. Customers are given radio frequency identification-embedded stickers that they can affix to mobile phones and use for tap-and-go payments.
The bank teamed with Bling Nation to issue BlingTags, which can be used with any mobile phone capable of receiving short message service text messages, since customer receipts are sent via mobile text.
All major card brands, as well as processors like First Data Corp., have developed similar tap-and-go payment products. And there is ample data to suggest consumers and merchants are eager to take payments to this next level. First Data reported that over 100 million consumers use tap-and-go stickers and find the technology to be more secure than PIN and signature-authorized transactions. American Express Co. indicated that pilots of its ExpressPay contactless product showed customers will spend 20 to 30 percent more when paying with ExpressPay.
Merchants also benefit by being able to add additional programs, like loyalty, to these cards, experts have noted. Merchants also enjoy the speed of contactless technologies. Aite Group LLC estimates that tender times for contactless payments are a fraction of those for traditional credit and debit cards: 12.5 seconds compared to 48.4 seconds for traditional card payments.
Crone warned that there is a downside for merchants. Contactless payments typically clear as signature debit transactions, which carry higher interchange rates than swiped transactions.
Mobile terminal options vary
Mobile technologies could change not only the consumer payment experience, but merchant acceptance as well. All leading terminal manufacturers, for example, offer card readers, receipt printers and software platforms that support payment card acceptance in a mobile environment. Some even offer check scanner attachments.
ISOs are getting into the action, too. Merchant Warehouse, an ISO and hardware vendor, has a product called MerchantWARE Mobile that can be downloaded to any smart phone. Encryption-based card readers are available for MerchantWARE Mobile through MagTek Inc.
The newest addition to the mobile movement is Square Inc. Square looks like a telephone wall jack and plugs into the headphone jack of iPhones and similar devices to support mobile payments. Jack Dorsey, the inventor of Square and co-founder of the popular Twitter social networking website, said he's aiming to reach an estimated 6 million small merchants who either don't accept credit and debit cards, or do but are looking for a cheaper alternative. Square also facilitates person-to-person payments - typically small-dollar transactions involving family and friends.
Square could be described as a somewhat less expensive version of PayPal Inc., except for brick-and-mortar merchants. But Crone questions whether Square will make it long term, noting that the per-transaction fee Square charges (2.75 percent plus 15 cents) is less than Square would pay in fees for an AmEx card payment.
Perhaps more importantly, unlike PayPal, which offers users the ability to access multiple card and checking accounts, Square supports access to just one card account.
ROAM Data Inc., a mobile commerce firm based in Boston, offers a swipe device that works like Square, with the advantage of being compatible with all mobile phones, not just iPhones. The card acquirer iPayment Inc. has a deal with ROAM to market the ROAMpay product suite to iPayment merchants and prospects. ROAM, named the ETA's 2010 Innovator of the Year, has partnered with terminal manufacturer Ingenico as well.
Advice for ISOs and MLSs
With all this activity in the mobile space, and so many options to choose from, what's an ISO or merchant level salesperson (MLS) to do?
Sell. "There are new product opportunities with mobile that will allow them to drill down" and create even richer customer experiences, Crone said.
Sandy Shen, a Research Director at Gartner Inc., counsels payment services providers to think beyond basic mobile money services. Instead, "the service needs to be built on top of existing payment behavior and infrastructure so that users can choose any channel - retail, phone, online or mobile - that suits their context at the moment of payment," Shen said.
Are you positioned to exploit the mobile channel?
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