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By Alexander Rolfe

At its most simple, mobile commerce is an anecdote told at conferences around the world: Indian fishermen empowered by mobile technology phoning each port in their region to see where their catch will make them the most money. This sort of story raised awareness of how customers were using their mobiles to help them make the most of their daily lives. It led to the concept of mobile payments – enabling commerce through the mobile channel – using existing payment instruments (like a bank account) or proprietary payment mechanisms (such as Safaricom’s hugely successful M-PESA, first rolled out in Kenya).

The communications industry is desperately trying to fend off the double pressure of falling average revenue per user and saturated penetration rates in developed markets, coupled with a lack of any new killer apps – as yet MMS, mobile TV, and mobile advertising have failed to live up to their promise. Users have simply rejected them.

“The theme we are experiencing within the Forum is revenue crunch,” says Steve Cotton, head of revenue assurance, TM Forum. “We are looking to get more from high margin information, and mpayments are now very much on the agenda.”

Mobile payments look to be the light at the end of the tunnel, although there is considerable disagreement among analysts over growth predictions, in part due to different definitions of mobile payments, starting with the method by which they are made. This may or may not include: using the mechanism of a payment made by debit or credit card via mobile, SMS, or MMS (for instance, for check validation); or the Unstructured Supplementary Service Data protocol (USSD); Near Field Communications (generally known as NFC); through communications service providers’ billing systems; or via an app.

These and other means involving mobile could be used to pay for physical goods or digital products such as ringtones and games, local and international remittances, banking, transport and other tickets, mobile top-ups, and healthcare vouchers. The list by no means covers all types of mobile transactions that are, could, or will be made via mobile.

The mobile money market in Western Europe is forecast to increase to between €4 billion and €5 billion by 2013, according to a report published at the end of 2010 by Frost & Sullivan. The same report reckons mobile payment transactions in the Asia-Pacific region will increase by more than 100 percent in five years to top $3.6 billion at a compound annual growth rate (CAGR) of 14.8 percent.

Yet Informa predicts that Asia-Pacific’s mobile commerce market for physical goods is expected to grow from $24 billion in 2009 (out of the global total of $30 billion that year) to $139 billion (out of $237 billion globally) in 2012, while Canada’s IE Market Research forecast in July 2010 that mobile payment transactions in Asia-Pacific will rise to $316 billion in 2014 – a CAGR of 94.1 percent.

U.S. mobile payments will skyrocket to $214 billion in gross dollar volume by 2015, representing a 68 percent CAGR over the next five years, predicts Aite Group's Gwenn Bezard in a new publication.

The same IE Market Research report as cited for Asia-Pacific above, reckons the U.S. and Canada will collectively account for mobile payments amounting to $288.4 billion in 2014 – a CAGR of 98.7 percent.

Whichever figures you believe, it is unquestionable that the take-up of mobile payments is accelerating the world over, but how will this rapid adoption be achieved after so many false starts? Skeptics say it will likely be many years before phone-based mobile payments become mainstream: for example, analyst Bob Egan expects several decades to pass before consumers migrate from paying for major purchases with credit cards to cell phones.

Analyst Jack Gold notes that there is a wealth of established payment options for U.S. consumers, and questions whether there is any benefit to consumers using their phones to make payments. Skepticism of carriers' ability to handle mobile payments is seen as perhaps the single largest barrier to mobile payment adoption, with Egan noting, “Compared to banks, mobile operators are clearly the Wild, Wild West.”

There is no doubt that the largest and most celebrated mobile operator-driven mobile payment system is still Safaricom´s M-PESA in Kenya with 12.6 million users – a base that has grown in just three years. The service moves $400 million per month in person to person (P2P) transfers and $650 million per month in cash deposits and withdrawal transactions at M-PESA stores. It accounts for just short of 50 percent of the Vodafone subsidiary’s total revenue.

M-PESA style initiatives are now commonplace across Africa and the Middle East, with renewed interest being shown from Asia in countries such as Indonesia, Malaysia, Nepal, Vietnam, and many others. The types of services that are being offered have also increased from P2P and deposit/withdrawal to bill payment, micro finance, and salary disbursements directly linked to mobile money transfer platforms.

“The problem we had,” explains Julian Philips, head of mobile commerce, Commercial Bank of Qatar, “is that on a Friday afternoon all of the migrant workers who are paid on salary cards would descend on the ATM network. In many cases they would ask passersby to take their card and PIN and withdraw the money, as they were illiterate or unfamiliar with an ATM. They would then walk 100 meters down the road to Western Union and send the money home.”

“This was a problem for us,” Philips continues. “There were the obvious security issues, our high net worth customers could not withdraw money in the evening as it had all been taken out, and we were completely bypassed on the money transfer. Now we deliver the workers an SMS telling them their salary has been paid and offer simple instructions via the phone to send money back home.”

This, M-PESA and numerous others are all showcase examples of successful mobile payment solutions – however, they are all deployed in developing markets. How can this success be replicated in developed markets? With difficulty is the short answer.

The truth is there are a number of successful mobile payment deployments around the developed world but they all rely on NFC – with the notable exception of the Austrian mobile payments initiative Paybox, which is being transitioned from SMS and interactive voice response to NFC.

The major issue surrounding NFC and the fact that these are developed nation deployments should not be glossed over. There is, in all developed nations, a flourishing payments industry where individuals can carry numerous payment instruments physically and online, such as debit, credit, transit, PayPal, and so on.

At a consumer level, all of these payment instruments work without a mobile telecoms network. Indeed, some of them are being used to perform mobile commerce transactions using credit or debit cards via the mobile phone. Entering all of the necessary credentials from a card on a phone is certainly cumbersome – yet people do it. Does this qualify as a mobile payment? Whatever the answer, the trend should greatly worry the telecoms providers – what value do they add in this sort of transaction and what are they getting from it?

It is perhaps the threat of exactly this type of interaction, which amounts to competition from the card networks and banks, which led to the highest profile announcement in the payments industry of 2010, when AT&T Mobility, T-Mobile USA, and Verizon Wireless announced the formation of a joint venture to build ISIS, a national mobile commerce network that aims to “fundamentally transform how U.S. users shop, pay and save.” The founding members collectively aim to provide wireless services to their combined 200 million consumers.

Is this the breakthrough the operators have been looking for? Perhaps. However, when one considers the other initiatives in Japan, South Korea, or Singapore it is a collection of cross-industry groups working together to provide benefit to the end consumer via the mobile phone. This means that the investment of the infrastructure is split between those parties, the marketing is competitive (as are other areas), but it is still for a common purpose – and it works.

Let us not forget that transit points for entry/exit that are upgraded to accept NFC are expensive, so too are point of sale (POS) devices. Merchants and retailers have to either order new POS terminals for their estate, or deploy less costly but consumer-unfriendly NFC via plug-ins. Naturally merchants are not too keen on making this investment unless they deem it absolutely necessary. If all the associated parties are working towards a common goal then these types of issues are easier to face and overcome – if you can bring the combined users of all the telcos and all the public transport users, the merchants will follow.

The European and U.S. obsession with a banks-versus-telcos scenario could, in the end, spell ruin for both parties. There are so many stakeholders who want to see this technology work (many of them for non-payment-related services) that they are already figuring out ways to bypass both bank and telco – a nightmare for both.

Then factor in the competition – Google, PayPal, and Apple are the highest profile, whose combined cash reserves are equal to $87.7 billion according to Yahoo! Finance. And they may be ready to start spending to gain a slice of the mobile payments market. Two facts we know. Apple is releasing NFC on the iPhone 5 and, combined with its iTunes platform, could create a closed loop payments system. Google is also building NFC into the next release of its Android operating system – now the fastest-selling smartphone sector in the market – and has also tied up a deal with PayPal to embed this as a payment mechanism on the phone.

Neither of these two Internet giants requires a bank or a mobile network to process payments. As Philippe Tartavull, CEO of POS manufacturer Hypercom, explained in a recent interview, “We [the dominant POS manufacturers] can already accept PayPal at our POS terminal, we just don’t advertise it.”

The reality of the situation is that the payments market is always changing and the fragmentation we are seeing, in part created by the power of the network operators and their undeniable consumer power, represents a massive opportunity for new players to enter the payments ecosystem.

There are undeniable opportunities for telcos in this space, provided they make sensible, reasonable decisions and partnerships – and take action quickly before others seize the initiative. If they do not, others most certainly will, just as Apple did in mobile music and apps, which changed the mobile landscape beyond recognition in a very short time, and not to the advantage of the operators.

To read many more thought leadership articles on subjects such as real-time billing, policy control, smart grid, customer experience, managed services and much more, read the latest edition of Perspectives, TM Forum’s flagship publication.

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