By Richard K. Crone
Crone Consulting LLC
The most meaningful opportunity in mobile payments is the $20 to $30 trillion spent at the physical POS worldwide; all other mobile payment segments, be they person-to-person, carrier billing or international remittances, are very small compared to the opportunity at the physical POS.
Payment is a powerful way to reinforce a financial institution's (FI's), retailer's or any other issuer's brand. A mobile wallet makes the payment branding point interactive and magnifies both the risk and opportunity in mobile payments.
Because payment is the primary touch point for reinforcing account issuers' relationships with customers and the most important utility provided to account holders, mobile wallets will play a pivotal role in financial services.
Given this, the mobile wallet, just as the paper check, ATM, and credit and debit card before it, will become the way to differentiate the account access/convenience quotient for payment accounts. Thus, FIs and retailers must define their "protect" and "extend" strategies for mobile wallets, and mobile payments in particular.
The issue for FIs and retailers is that new, nonbank, third-party intermediaries are trying to come between them and their customers. This is true not only for credit, debit and prepaid accounts issued by FIs but also for retailers and other program managers that sponsor their own tenders such as private-label credit cards, prepaid gift cards and the like.
As FIs and retailers evaluate their options for mobile wallets, they have a choice: to aggregate or be aggregated. In other words, will retailer and bank mobile cross-channel strategies allow them to collect and aggregate customer payment accounts in advance of third-party intermediaries?
Or will banks and retailers be too slow to mobilize, and in doing so, be at risk of being aggregated by third-party intermediaries? Crone's Rule applies here, namely, the one who enrolls is the one who controls.
Retailer and bank mobile platform strategies must address the "control," "time-to-market" and "future-proof" trifecta of their cross-channel, self-service plans. This is not to say third-party intermediaries won't also play a role, but savvy banks and retailers understand they will need to control their own mobile payment offerings if they are to preserve and grow their hard-won customer relationships.
One key goal for retailers and banks should be to leverage their own mobile apps and the authentication tokens they own and control (for example, user name, password, PIN, phone hardware, fingerprint, etc.) for payment. If they don't, third-party intermediaries will enroll the customers and broker back the connection - for a fee.
If third-party intermediaries do not broker back the connection, FIs, retailers and their mobile banking and shopping app infrastructure may become a funding source for the intermediaries' preferred tender type, such as the prepaid mobile "payment" offering featured inside Google Inc.'s Google Wallet - potentially marginalizing retailers' private-label credit and prepaid gift cards and banks' payment-based accounts.
Sophisticated retailers and FIs are evaluating the potential income from rendering mobile advertising and offers to their customers through their own mobile apps and the real cost of surrendering this revenue stream to third-party intermediaries.
Key questions for retailers and banks to ask themselves are:
Another consideration for the mobile wallet is mobile cash access (MCA). A smart phone serves as a more secure token for user authentication than a card and enables users to prescreen transactions in the privacy of their own phones before using an ATM.
ATM transaction activity is in the saturation stage of the product life cycle. And many ATMs are unprofitable because they lack the transaction volume around fee- and interchange-based services, the primary sources of revenue for ATM deployers or owners. MCA is a new way to provide premium-based offerings that easily justify charging higher value-added fees.
Cash access through ATMs has been limited to network-registered cards using magnetic stripes and PINs. With MCA, it is now possible to use a smart phone app/mobile wallet to activate and access traditional and advanced functionality at ATMs - without equipping the ATM with any new hardware.
The issuer of the smart phone app/mobile wallet can control authentication credentials without participation by the card brands. This could dramatically disrupt the existing value chain and provide new branding and product development opportunities.
MCA provides a differentiated, "plus one" feature for traditional funding accounts and opens up new markets for accounts that don't typically issue debit, credit and prepaid cards.
MCA can leverage the same strong multifactor user authentication credentials (user name, password, device fingerprint, etc.) that funding account processors control today for online and mobile applications, thus eliminating the dependencies and limitations of card company-controlled account number schemes, authentication credentials and their associated interchange costs and royalties for both magnetic stripe and near field communication (NFC) chips, etc.
In such applications, the registration of mobile credentials and customer communications preferences is vital to enhancing the issuer's customer relationships and cross-sell/up-sell opportunities. Again, Crone's Rule applies: the one who enrolls is the one who controls.
MCA and ATM advanced functionality leverage the connection to the mobile phone as a new way to not only authenticate customers but also to make them easy to contact before, during and after every mobile purchase or ATM transaction. This "contactability" opens up new opportunities for services and attendant revenues.
Following are two examples of how a mobile wallet can enable new revenue streams beyond payment:
However the highest advertising rates go to those with both an enrolled user base and a known geography. Mobile initiated payment and MCA activated ATM transactions provide both, which positions mobile wallet issuers for a new stream of advertising revenue. The e-receipt advertising medium extends beyond the POS payment and ATM experience, expanding the sphere of influence and thus the revenue potential.
Making customers contactable before, during and after every payment is the big new opportunity in mobile payments. Mobile wallets make an advertising sponsored mobile payment network possible. In fact, by the end of 2012, about 75 percent of in-store sales will be mobile-influenced in some way, setting the stage for integrating mobile payments and opt-in, user-defined self-marketing and loyalty programs at the physical POS.
Major retailers are already scrambling to integrate mobile self-marketing and mobile payments into their in-store footprints. Combining mobile registration credentials with payment and opt-in offers and promotions can open up the local advertising market, which accounts for about half of all the promotional spend by businesses.
While banks may be tempted to wait for Europay/MasterCard/Visa (EMV) and NFC deployment for mobile payments, retailers will fight to protect their "friendly tenders" and will be reluctant to bear the cost of new EMV and NFC hardware at the POS. It is likely disruptive new technologies slated for release in the next year or so could essentially render the EMV issue moot and NFC obsolete.
Banks and retailers seeking a role in the unfolding mobile commerce ecosystem must deploy solutions that leverage the computing power and full capabilities of the smart-phone apps they control today.
Solutions exist that require no new hardware for merchant participation; enable strong authentication, not only for payments but also for mobile cash access; and create a closer bond between banks, retailers and their respective enrolled customers. Those who stand on the sidelines risk disintermediation by new entrants to the payments system.
Richard K. Crone is the Chief Executive Officer and founder of Crone Consulting LLC, an advisory firm for FIs, merchants, billers, processors and investors on channel optimization, electronic payment and mobile commerce strategies. Located in San Carlos, Calif., Crone Consulting has done an exhaustive review of more than 100 companies, both domestic and abroad, and detailed due diligence on many of the largest investments, mergers and acquisitions in the mobile commerce space. To reach Richard, email firstname.lastname@example.org.
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