Mobile Payments 2013 Changing Checkout

Mobile payments 2013 Changing checkout

Publisher: Innopay BV Editors: Chiel Liezenberg and Shikko Nijland (Innopay) Authors: Alessandro Longoni (Innopay) and Monica Gâza (The Paypers)

Preface

Innopay presents the new edition of the ‘Mobile payments 2013 – Changing checkout’, which aims to provide an overview of the main developments in the area of mobile payments worldwide. In 2012 we introduced a new format for the ‘Mobile payments’ report, with an overview of the global developments and chapters specifically aimed at covering regional trends. This year we tweaked the format to give, in the first part, an overview of the developments we see in Developed and Emerging markets; while the second part is still centred on the developments in the different regions. Though many things have changed last year, some of the identified trends and technologies in our previous report have not. Therefore some of the content might look familiar. We have also chosen to use the same analytical context framework since it has proven to be still valid and insightful. We believe all professionals active in the payments and transaction services industry can benefit from reading this document, including people employed at banks, policy makers, payment schemes organizations and payment service providers. This report, as every other publication by Innopay, is strictly independent and aims to give a comprehensive and unbiased overview of the market and its participants. For this reason we based our analysis on information available publicly at the moment of writing the document. This report has been written with the highest degree of care. In case you, despite our efforts, happen to find information which you deem unclear or perhaps not 100% correct, we appreciate your feedback. If you have any suggestion or questions regarding the text, please don’t hesitate to email us at [email protected] We hope you will enjoy reading this report and that you would be able to learn new aspects of this interesting area of transaction services.

Amsterdam, March 2013

Chiel Liezenberg – Founding Partner Shikko Nijland – Managing Partner

Innopay consulting

Innopay is an independent full service consultancy firm specialised in payments and related transaction services such as e-identity and e-business. It is our vision that:  Globalization increasingly leads to a network economy and electronic infrastructures enable industries to cooperate in networks, in real-time.  (Mobile) Internet is developing into true transaction channel, creating new transaction contexts. New contexts require new transaction services and new options emerge in existing contexts.  Transaction services are part of two-sided markets, with sophisticated network effects. Development of successful transaction services requires thorough understanding of the context. Innopay has been active in mobile payment since 1999. Several of our consultants have experienced the rise and fall of the first wave of mobile payment initiatives and the current upcoming second wave first hand. Based on our experience we have created the ‘Innopay Transaction Context Model’ to better understand the success factors for mobile payment services development. Our consultancy services address three domains: — Help you as a professional or regulator to ‘structure & understand’ the mobile payment services industry. — Help you as a provider to ‘develop & manage’ mobile payment business, services and products. — Help you as a corporation to ‘choose & use’ mobile payment solutions. Innopay’s other key consultancy practices include: online payments, e-invoicing, e-identity, cards and related regulation. For more information visit www.innopay.com or contact us directly at [email protected] or +31 20 6580651.

Contents

Preface ...... 3

Innopay consulting ...... 4

Management summary ...... 7

PART 1: GENERAL TRENDS AND DEVELOPMENTS

1 Changing checkout ...... 11 1.1 Payments are context dependant ...... 11 1.2 Mobile payment: more than a financial transaction ...... 15 1.3 Smarter technology is not always better ...... 17 1.4 Stakeholders determine speed of change ...... 20

2 Developed markets: lagging commercial adoption...... 22 2.1 Focus on Proximity, B2C payments ...... 22 2.2 Accelerating commercial adoption ...... 24 2.3 Cash is king? ...... 27

3 Emerging markets: beyond empowering the underbanked ...... 30 3.1 Reaching the underbanked ...... 31 3.2 Developing markets push global volume growth ...... 35 3.3 BRIC countries: great growth pace, blurring opportunities ...... 36 3.4 Rest of emerging countries is catching up quickly ...... 43 3.5 Leading the mobile banking revolution ...... 44

PART 2: TRENDS AND DEVELOPMENTS PER REGION

4 Europe: on the edge of convergence ...... 48 4.1 Coalitions of the willing ...... 49 4.2 United in Diversity ...... 51 4.3 Multi-stakeholder collaboration on implementing NFC ...... 55 4.4 CASE STUDY: iZettle, Mobile Point of Sale from the Nordics ...... 57 4.5 M-SEPA: piggybacking on standardization ...... 58

5 Mobile payments 2013 - Contents

5 North America: epic battle for consumer ownership ...... 60 5.1 Overview of the North American mobile payments landscape ...... 61 5.2 Smartphones taking over the US market ...... 65 5.3 Hoping for the “American dream” ...... 73 5.4 The mobile PoS revelation ...... 75

6 Asia-Pacific: taking the lead in m-payments growth ...... 76 6.1 Differentiation based on market segmentation & the urban – rural divide ...... 77 6.2 Three main regional models ...... 79 6.3 Countries vary between sophisticated and simple services ...... 83

7 Africa: pace is slowing down ...... 87 7.1 GSMA: Africa poised to become world’s 2nd largest mobile market ...... 87 7.2 Untapped potential...... 88 7.3 Key players take decisive steps ...... 91 7.4 The success story of M-PESA ...... 93 7.5 West Africa on its way to becoming Africa’s hottest market ...... 93

8 Latin America: still in development stage ...... 96 8.1 Typical emerging markets outlook ...... 96 8.2 Economic and social context shape mobile financial services ...... 97 8.3 Brazil leading the way ...... 99 8.4 Various speeds of development ...... 100

PART 3: ANNEXES

Annex 1: Glossary ...... 103

Annex 2: References ...... 108

Annex 3: About the editors and publishers ...... 109

Management summary

Both online and offline checkout experiences are evolving: technological innovations allow for new services and solutions to be integrated at the payment, be it online or at the counter. The payment interaction is now becoming a point of contact with the client, where loyal customers are being recognized and rewarded for coming back, and new customers are offered come- back discounts. The checkout experience in this report can include payment and delivery in the case of an offline in-store transaction. Placing an order and completing the payment in the case of online transactions, is a process that is being affected by new paradigms in marketing campaigns, and enriched by the evolution of mobile payment technologies. These new technologies allow more services to be included in the checkout experience: coupons can be redeemed, loyalty points stacked, and everything is integrated in the payment procedure. Many merchants are also operating in both online and offline environments, thus making it more difficult to identify customers across channels. We aim at identifying the main trends and developments in the area of mobile payments, in any channel or environment that they may be used in. For this purpose, we use the Innopay context model that we already introduced in 2011. This model helps categorizing the mobile payment methods available according to the relationship between the two parties involved and their relative location. Different reports and analysis available in the market use different methods to analyze the same topic, and we believe that our model effectively allows to identify and describe the solutions currently available in the market but also allows us to be technology agnostic and therefore reuse it to describe future mobile payment solutions. We also make a distinction between mobile payments in developed markets and emerging markets. While in developed markets we argue that users have more sophisticated needs, which derives from the fact that there is a wider choice of payment instruments (cash, cards, cheques, e-wallets…), in emerging economies this choice is much narrow and the evolution of mobile technologies enable a leap forward for retail payments. Developed markets seem to struggle with commercial adoption. In those countries mobile payments are currently focused on creating more value at the point of sale, fueled by the developments around contactless technologies. In order for mobile payment methods to take over traditional ones, more value has to be added to the payment. Many initiatives have understood this and bundle loyalty offers, advertising platforms and other value added services to the payment transaction. Emerging markets are quickly moving beyond empowering the underbanked. Mobile payments are a striking success because they enable cashless transactions with technology which is becoming cheap and ubiquitous. The cost of owning and using a mobile phone is low enough even in those countries, enabling almost every individual to use one, even in rural areas. This has become an important factor for people who have for long been unable to get access to basic financial services, such as a bank account, let alone a payment card. By

7 Mobile payments 2013 - Management summary

transferring electronic money through cheap SMS messages, local shops and booths are able to accept payments and transfers without the need of expensive terminals. This also allows long distance money transfers, which has become an important trend over the past years for improving the life style of less affluent people often living outside cities. As an example, mobile payments are being deployed in rural areas to buy basic food such as bread and milk without the need of cash, which is often not as accessible as in more affluent cities. Mobile payments have therefore been playing an important role not only for the retail experience, but as an economic lifeline for disadvantaged areas In our analysis we cover the main trends we see in local regions around the world. Not only trends differ due to economic advancement of a particular country, but they are also influenced by the overall economic activity and cultural environment that they are bound to. In Europe we see movement towards convergence, also enabled by developments driven by the implementation of Single Euro Payment Area (SEPA). As SEPA is reducing the fragmentation of local payment methods, by requiring interoperability across the region, new occasions arise. One interesting aspect regarding this region is the increasingly collaboration- friendly mindset that the players in the financial sector seem to develop, which is a strong differentiating factor with the American region. In North America, unlike what happens in Europe, a wealth of initiatives have been launched by various different players (banks, startups, corporates…) and every single one of them shows a ‘winner takes it all’ attitude. This has an important consequence in the fact that mobile payments have been hyped for a long time, but they are still falling short the high expectations that analysts around the world had and keep on having. M-payments are still growing strongly across the region, but as surveys show, EMEA is already ahead in terms of total volumes. NFC is also what North American companies almost all are focused on. Card schemes have been placing big bets and big money on marketing campaigns around the benefits that NFC payments can bring to the market, but still they are failing to reach critical mass. New players are now focused on exploiting different technologies (such as the ubiquitous internet connection) to enable mobile payment methods, which because of this technological choice can enable payment methods across different contexts and channels. In Asia the head start of mobile payments is still helping the developed countries in the region to maintain the lead. The Asia-Pacific region is also home to a diverse range of countries in different economic states. Japan and South Korea, for example, show high modernization and newer technologies adoption, while areas in inner China or rural India show a much different picture. In India, similarly to what has happened in Africa, mobile payments enable entire villages to adopt basic financial services which have been unable to reach far-away locations. In Japan instead, mobile payments have been introduced in the market many more years ahead of what has happened in the Western world. M-payments have become successful in an era when card payments were still not as common as in the USA, therefore encountering less competition. Contactless payments have also found a facilitating factor in the compatibility with solutions for the transportation industry. By storing payment information and transport

8 Mobile payments 2013 - Management summary

tickets under the same device, users adopted those methods as their preferred ones, leading to NFC becoming the de-facto standard method for mobile payments in the country. In the African continent, m-payments mostly come as m-banking solutions and though still large in transaction volume, the growth pace seem to cool off. Due to the poor economic performances of countries in this region, financial services have been often limited especially for inhabitants of rural areas. Enter the mobile devices, which represent a cost-effective way to reach almost an entire country, and smart solution providers have been quick to monetize on the opportunity. Where retail banks cannot arrive, mobile phones are a more-than- adequate solution to offer basic financial services. The lack of choice also makes an important factor for a solution’s success, as limited other options are available for users to choose from. No wonder, then, some of the most successful and famous mobile payment solutions come from this area, M-PESA above all. Latin America is overall still in development stage, but shows strong potential for growth. The region consists of large and fast growing economies such as Brazil, but also included, less quickly-growing countries, such as the Caribbean ones. The region shows an important trait common to a high number of emerging countries: mobile penetration being higher than fixed internet adoption. This important aspect has been a fueling factor for the development of mobile payment solutions in areas such as Africa and Asian economies, and it is expected to be an important one also for the development of the South American region. Latin America also hosts some of the friendliest legislations for mobile operators to take the lead in mobile payments. Large mobile number operators are expected to come out as leaders in this mobile payments game, as they carry a much higher number of users than what banks are able to tap into.

Part 1 General trends and developments

1 Changing checkout

The use of the mobile phone as a tool for financial transactions has had and will continue to have a disruptive effect on both the payments industry and the way commerce is done. This is increasingly showing in the way we deal with the checkout both online as offline. Examples of this can be found in developed economies: think of what Square has done in the POS market for small merchants as well as in emerging ones: M-Pesa solving liquidity problems of entire rural villages in Kenya. The mobile phone as a transaction channel means different things to consumers and merchants in different regions of the globe. For sophisticated consumers in developed markets, it is mainly an alternative tool whose benefits lie in its ability to provide access to value-added services. For consumers in developing economies, it is a channel for financial inclusion and oftentimes it means better quality of life. From a quick and accessible channel for banking and financial inclusion to a sophisticated tool for shopping, price comparison and ultimately buying, the saga of the mobile device is an on-going story. The main goal of this report is to create more insight in the way checkout is changing by:  Offering a clear analytical framework in which concept of ‘contexts’ is introduced to provide an solution for the confusion of tongues the debate is characterised by;  Revealing drivers for growth of mobile payments given the different contexts;  Providing an overview of the ‘state of play’ for the various regions. In the first paragraph we introduce our how our widely used Transaction Context Model is applied to segment ‘mobile payments’. This provides us with a comprehensive framework for analysing the great variety of payment solutions and making them comparable. Subsequently in paragraph 2, mobile payments are defined in terms of process steps and some adjacent areas. In the third paragraph, technologies that enable most mobile payments are covered. Finally, in paragraph 4, we present the relevant factors that determine the landscape.

1.1 Payments are context dependent

Mobile payments can be used at a supermarket to pay for the grocery, to split a bill with a friend at a restaurant, or to order products online. It’s obvious that these different situations pose different requirements on payment instruments. Transaction services are always subject to the context in which they are operated. ‘Mobile payments’ cover several types of payments that can be carried out in different contexts with different technologies. This context defines what people expect from a service, demand from technology and what business case can be applied. It will be clear that mobile payments have to be tailored to the context they are going to be used in.

11 Mobile payments 2013 - Changing checkout

Of course there are endless alternative ways to slice and dice the mobile payments landscape. We could have started from technology making NFC, SMS, WiFi and other communication technology the dominant discriminators or list the various channels that commonly fall under ‘mobile’. Instead we have decided to use our proven Transaction Context Model to structure this report. Contexts are expressed in terms of the parties involved in the transaction and their relative location. This discrimination allows to clearly distinguishing four context quadrants where to easily and clearly place different mobile payment scenarios. The figure below highlights those four contexts.

P2P B2C

Mobile money transfer Mobile online payment (remittances, …) (m-commerce, bills, …) E T O M E R 1 2

Contactless transfer a. Contactless payment (in store, ...)

Y (peer to peer, …) b. Mobile card payment (on site, …) T I M I X O R P 3 4 a b

Figure 1: Mobile payment categories. Source: Innopay Transaction Context Model, 2010.

In this part we aim to categorise the various contexts. In the Innopay context model payments can either be executed in proximity, for example at the counter in a shop, or remotely, for example paying online via a mobile phone. Please note that most models only distinguish Remote and Proximity while we believe that also recognizing the difference between consumers (P2P or C2C) or between consumers and companies (B2C) is even more insightful. The rise of omni-channel and wallets may eventually require adding an additional context to the model. However considering the current speed of development and volume of omni- channel transactions we have decided to keep the model as crisp as possible for now and thus not to explicitly include it, yet.

12 Mobile payments 2013 - Changing checkout

1.1.1 Remote P2P payment

For a long time, when private people wanted to send each other money, the dominant payment methods have been cash, bank transfers and remittances. Recently the mobile phone has found its way into this context also. We particularly deal with mobile remittances and mobile banking.

Mobile money transfers Mobile money transfers include services to transfer money from one account to another. These services can transfer money stored directly in bank accounts or in other virtual wallets (e.g.: currency stored on a prepaid simcard). Examples of such services include both international money transfers (remittances) and local mobile transfers, which have become very successful in countries suffering from low financial inclusion. Mobile money transfers can be used to transfer money between cities and rural areas of a country, allowing consumers to easily transfer money to relatives living in areas hardly served by bank branches. An important aspect of mobile money transfers is that they can be used for both long distance remittances and to pay for a service or product in-store. As they are location independent, they represent a very flexible payment instrument.

BelCash is a mobile wallet software solution developed in Ethiopia for the domestic market, which enables consumers to transfer money between mobile phones and agents. Currently BelCash has partnership agreements with major financial institutions in Ethiopia.

More information on remittances can be found in chapter on Asia.

1.1.2 Remote B2C payment

Mobile online payment (‘m-commerce’) Mobile online payments are payments initiated through the mobile device. They can be used to purchase goods to be delivered at a later moment or to pay for digital goods that will then become available for the user to consume. The first example is what we call m-commerce. Due to its really similar nature to online commerce, companies active in the online payment arena developed specific propositions for the smaller screens. Digital goods represent a fast growing sector for mobile purchases. This includes purchasing apps, music, books or magazines through a mobile device like a smartphone or tablet device.

13 Mobile payments 2013 - Changing checkout

Because of the smaller screen sizes and different interaction method required, solution providers tend to enable transactions by storing credit card details or by linking prepaid vouchers and cards to users’ accounts. M-commerce is by nature an extension of what has started as online commerce. This is also highlighted in the fact that many of the leading players and enablers of m-commerce payments are the same players that became successful in the online commerce arena. What separate online commerce from mobile commerce are screen size and the interaction method with the device, therefore the interfaces have to be redefined.

Clicks-in-bricks Clicks in Bricks provides interactive kiosks which enable in store mobile commerce. By using tablet devices and unattended POS terminals, consumers are able to shop the merchant’s virtual store, which could include a wider range of products, other merchant’s items, or simply enable new electronic payment methods for physical checkout

For more insights about online commerce and the opportunities that mobile channels are unlocking, please refer to our Online Payments 2012 – Moving beyond the web report1

Mobile banking Mobile banking is a recent trend of people using their internet enabled phone to operate their bank account. Through mobile banking, the whole suit of contexts ‘traditionally’ serviced in the customer’s online banking environment is transposed to the mobile channel. Mobile banking is an important trend that has been unlocked by the availability of smartphones and ubiquitous internet connection, it enabled users to have a better overview of their balance and expenditure, but we see this trend to be, once again, a natural extension of online banking. Moreover, initiating a mobile banking payment will result in transaction carried out via the same payment instruments that and online banking payment would use. For more information about this topic, please refer to our Online Payments 2012 – Moving beyond the web report

1.1.3 Proximity P2P payment

The term ‘proximity payments’ refers to all payments where payer and payee have to be near each other, i.e. in the same room or at arm’s length. A small group of payment methods available for P2P payments actually require the actors to be close to each other. An example for this category is Bitcoin or Bump2.

1 Innopay – ‘Online Payment 2012 Moving beyond the web’, 2012

2 http://bu.mp/company/labs

14 Mobile payments 2013 - Changing checkout

1.1.4 Proximity B2C payment

This is a larger group of payment methods that comprise the extremely visible category of contactless. Although the division of roles is totally different, we also fit the mobile POS into this category.

Contactless payments Some examples are paying at PoS by holding your mobile phone in proximity or by paying your metro ride by holding your phone at the reader. In the coverage of mobile payments, a lot of attention is now put on contactless technologies.

LevelUp offers an iPhone and Android QR code mobile pay app for consumers and a terminal system for merchants to process payments. By holding the user’s phone screen in front of the LevelUp terminal, users are able to pay, accumulate loyalty points and redeem offers all at once. LevelUp is also offering merchants ‘zero interchange fees’ for payments, enabling free credit card transactions.

Mobile card payment: Mobile phone used as a PoS device Over the past years, smart engineering allowed companies to develop products to accept credit card payments by swiping cards into dongles attached to internet-connected smartphones. This development paved the way for various companies to lower the prices that banks usually charged to accept credit card payments. By providing ‘just’ a piece of plastic to be attached to the merchant’s smartphone, there is no need to rent an expensive terminal. This means that more merchants, such as micro-businesses and single individuals, can now accept credit and debit card payments, increasing the total size of the served market.

PayLeven is a Mobile POS company offering a solution for SMEs to accept credit and debit cards payments on the merchant’s smartphone. PayLeven offers a dongle to swipe the client’s credit card and a wireless terminal with dedicated pinpad to accept chip and pin transactions. Unlike other players, PayLeven routes debit card transactions in Direct Debits into users’ accounts, effectively reducing the cost of the transaction. Interesting show case in The Netherlands is the implementation of Payleven mobile PoS solution by the Rotterdam Taxi cooperation.

1.2 Mobile payment: more than a financial transaction

Related to the problem of categorising the vast terrain we call ‘mobile payments’, is the lack of clear definitions. This adds to the confusion and hinders the better understanding of the issues which drive the change of checkout. Therefore, this chapter aims to clarify the various aspects

15 Mobile payments 2013 - Changing checkout

of mobile payments and classify the services, methods and stakeholders. Together with the distinction between the four quadrants from paragraph 1.1, this will help readers to get a better understanding of the mobile payments ecosystem, and enable readers to put the developments described in the rest of this report into perspective. Mobile devices can be used for multiple processes in financial transactions. In this report we distinguish between different processes, which we categorise as follows:

— Mobile payment: a payment, defined as a transfer of funds in return for a good or service, where the mobile device is involved in both the initiation and confirmation of the payment. The location of the payer and supporting infrastructure is not important: he may or may not be ‘mobile’ or ‘on the move’ or at a Point of Sale (PoS); the payment may be processed by credit cards or by a prepaid wallet. Example: funds are transferred and deducted from the prepaid amount or billed by the MNO.

— Mobile ordering: transactions where the mobile phone is used to initiate the order but not to make the payment. Example: food ordered online via the mobile phone and paid at delivery. — Mobile delivery: transactions where the mobile phone is used to receive delivery of goods or services without making the payment. Example: an event ticket is issued on the mobile phone.

— Mobile authentication: use of the mobile device to authenticate the user either as part of a payment transaction or to give access to some information or functionality. Example: a code is sent to a mobile phone which the user types in online to verify his identity.

— Mobile banking: access to banking functionality via the mobile phone. This includes the provision of part or all of the banking functionality already provided by banks over the internet in the form of online banking but also other methods of telephone banking. Example: view account balance and transaction history via the mobile browser or app. Note that a mobile payment can also be executed within the mobile banking environment. — Mobile loyalty: a mobile device could be used to store and redeem loyalty points, but not to make the payment. — Mobile RoPo: mobile devices are ever more used in store to find relevant information regarding a product the user is looking to buy. This has been dubbed as ‘Research Online, Purchase Offline’. Since the advent of smartphones and mobile internet, mobile phones enabled this practice anywhere, anytime. The applications shown above often use the mobile phone to initiate the payment. Only a few of them include the mobile as a payment instrument. Most of the applications for mobile payments make use of mobile devices to authenticate the consumer, identify the payee and delivery the service/content.

16 Mobile payments 2013 - Changing checkout

The term ‘mobile payment’ is often used in an array of circumstances, including mobile banking, ordering and authenticating. This one label oftentimes causes confusion as per what it is truly meant and what is required. Even in our specific industry, by using one single term we usually blur the lines of specific needs of each function and process.

1.3 Smarter technology is not always better

Figure 2: Mobile payment enabling technologies.

As we discussed in the previous paragraph, mobile payments come in different forms. In order to enable them, various technologies could be used. In this paragraph, we provide an overview of the main enabling technologies for mobile payment services. Different contexts require different propositions for a payment method to succeed and ‘win’ the market. For example, remote P2P transactions require a completely different technical solution than a proximity B2C payment.

1.3.1 Text messaging via SMS & USSD

Short Message Service (SMS) is a communication protocol allowing for the interchange of short text messages between mobile telephony devices. SMS is available on almost all modern mobile phones. Most SMS messages are mobile-to-mobile text messages, though the standard also supports other types of broadcast messaging as well, for instance mobile to landline or mobile to computer.

17 Mobile payments 2013 - Changing checkout

A similar method to SMS is Unstructured Supplementary Service Data (USSD). USSD is a capability of all modern GSM phones. It is generally associated with real-time or instant messaging type phone services. USSD is a standard for transmitting information over GSM signaling channels. It is mostly used as a method to query the available balance and other similar information in pre-paid GSM services. The function that is triggered when sending USSD is network dependent and depends on what kind of services the operator has made available. Some operators have not activated this possibility.

1.3.2 Mobile internet

High speed broadband internet is increasingly available on mobile devices. In parallel, mobile devices are becoming increasingly like laptop computers in terms of the functionality they offer. Figures about mobile internet show how quickly this access method is being adopted and growing. Reports show that in 2011, mobile internet has been adopted by more than 1.2B users worldwide3. Moreover, in May 2012, mobile internet accounted for 1 in 10 of all Web page views, according to StatCounter4.

Mobile Vs. Desktop Internet

100%

80%

60%

Desktop 40% Mobile

20%

Figure 3: Internet access from Desktop vs Mobile devices. Source: StatCounter, 2011.

Because of their particular cultural aspects, Africa and Asia’s mobile internet penetration is growing at a much higher pace, as users have access to mobile devices, but not to PCs, as the

3 ITU – ‘ICT Facts and Figures’, 2011

4 Statcounter – ‘Mobile Vs. Desktop Internet’, 2012

18 Mobile payments 2013 - Changing checkout

costs are much higher. In a country like India mobile internet accounts for almost 50% of all internet use! It is widely believed that the emerging convergence among the internet and mobile technologies will lead to the emergence of a wireless broadband internet platform. Such a platform will provide ubiquitous access and a wide range of new value-added services, many of which would be settled via payment systems based on the platform. Future developments could lead to real time online banking with your mobile phone, which would be an enabler for point of sale payments.

1.3.3 Near Field Communication

Near Field Communication (NFC) is a radio frequency technology that allows different devices to communicate with each other wirelessly in a short radius. It has its origin in the Radio Frequency Identification (RFID), which is an application of contactless technology for both proximity and vicinity communication. RFID is used extensively in areas such as product tracking, passports, animal identification, libraries, etc. However, the restriction of RFID has always been that it is a one-way communication standard; from the code to the reader. Critical developments of two-way communications have made contactless technology ripe for use in payments: by allowing faster data transfer speed and increased data security, communications between NFC-enabled devices are now being used to transfer confidential payment information. These developments have been the catalyst for an explosive growth in the use of contactless technology for payments with the volume of contactless cards growing to hundreds of millions helped in part by strong marketing pushes from the major card schemes.

1.3.4 Barcodes & QR Codes

QR (Quick Response) codes are a two-dimensional codes initially developed for manufacturing purposes, which can carry a larger storage capacity than a regular UPC barcode. Only in recent years have QR codes become common as a result of the widespread adoption of smartphones. Consequently, QR codes are now being used over a much wider range of applications, including commercial tracking, entertainment and transport ticketing, product/loyalty marketing, in-store product labeling and even as enablers of payment transactions. Over the past years, QR codes have also emerged to have an unusual and yet interesting applicability in the mobile payments ecosystem. They have literally acquired the ability to transform consumers’ mobile devices into virtual wallets, allowing them to pay for products and services, transfer money and take part in loyalty programs.

19 Mobile payments 2013 - Changing checkout

1.3.5 Mobile POS

Mobile POS-enabling technologies could come in the form of magnetic stripe readers, that transform the information stored in the magnetic stripe in audio signal (similar to what used to happen with cassette tapes) to be sent to a mobile device. Other enabling technologies include chip-reading devices that can be connected to a mobile device to acquire data included in the credit card chip.

1.4 Stakeholders determine speed of change

1.4.1 Providers of mobile payment services

Mobile network operators (MNO’s) Mobile network operators are the, because of their nature, directly interested by mobile payment developments. MNOs are usually the first point of contact for mobile devices related issues for the consumer, and therefore an important player in the mobile payments game. By subsidizing mobile phones with mobile payments capabilities, MNOs can increase (or reduce) the chances of a mobile payment method to become successful, and therefore are one of the most important players in the value chain. MNOs are also interested in the mobile payments debate as they can enable direct carrier billing, becoming in fact a ‘creditor’ for the payee, therefore increasing the average revenue per user, one of the key performance indicators in the mobile industry Financial institutions Financial institutions are interested in mobile payments as a new channel for retail payments. From a retail banking point of view, financial institutions are primarily focused on protecting the current account and surrounding loan products. Mobile payments also hold the allure for financial institutions of assisting in the ongoing battle to reduce the use of cash and its associated costs. For this reason, credit card schemes are currently heavily involved in new payment solutions development, and often have high stakes in companies playing in this field. Furthermore in developing geographies mobile payments offer financial institutions the opportunity to cost-effectively capture and service unbanked and underbanked communities. Handset manufacturers (OEMs) Handset manufacturers (or Original Equipment Manufacturers, shortly OEMs) produce the mobile devices and thereby determine their capabilities and usability. The success of the use of the mobile device for payments has the potential for resulting in a substantial increase in both sales to new customers but also for the renewal of existing devices in the market to ones that are payment capable.

20 Mobile payments 2013 - Changing checkout

Technology providers Technology vendors are one of the enablers of mobile payments: chip manufacturers enable secure storage of payment information in the secure element, while the Trusted Services Manager (TSM) is the party involved in allowing access to the chip itself and managing the communication flow. All these organisations are positioning themselves to provide the infrastructure and messaging for mobile payments and in the process offering to act as a trusted intermediary between the banks and the mobile network operators. Startups & Corporations While financial institutions are probably some of the most important players in the chain, there also are other types of companies moving into the mobile payments space, such as startups (Square, Stripe…) and corporations (Google, Apple, Starbucks…). Startups are often creating innovative ways to enable mobile payments, and corporations are often investing in them: Paypal’s recent acquisition of Card.io.

1.4.2 Demand side

Merchants Merchants are one of the two key customers for mobile payment developers. By adopting new payment instruments at the Point of Sale, they enable clients (the second category of key customers) to use mobile payments.Merchants are interested in new payment methods that help them provide faster throughput at checkout, easier user experiences and to better serve customers via targeted marketing campaigns. Consumers Consumers are more and more adopting mobile devices as payment instruments, most of the times even without recognising it: the recent trend of purchasing music or apps via the mobile phone requires the user to pay via the mobile device, through a one-click experience. But consumers are also interested in using the mobile phone at the physical checkout, therefore eliminating the need to carry two separate objects: a wallet and a phone. For consumers, the mobile device is also a mean to get suggestions where to spend their money, or to receive coupons and discount codes that can be easily redeemed when making the purchase. However, does this mean that end consumers are ready to abandon the wallet and rely primarily on the phone, which is more a lifestyle or leisure tool, for the important task of handling their payments.

2 Developed markets: lagging commercial adoption

Mobile payments, as we already anticipated, come in different flavours. Some of those have specific affinities with developed countries and follow similar trends across those regions. In this chapter we will discuss the main trends in developed markets, highlighting what the drivers are that facilitate those trends and the factors that contribute to the adoption of mobile payment solutions, from a merchant as well as a consumer perspective. In developed markets, mobile payments are still not as commonly used as in emerging countries, as a lack of standardization is limiting their commercial adoption. One of the main reasons why mobile payments are still lagging behind in those countries has to do with the conflicting interests of the main stakeholders involved (e.g. Telecom operators, Banks, Financial Institutions)5 especially with regards to commercial decisions. This trend is also stronger in American markets than in European ones, as we will discuss later in this chapter. Even though these issues impede swift adoption of mobile payments, forecasts are still showing a positive outlook for the next years, mainly for three reasons: 1. Converging focus on proximity, B2C payment; 2. The value added that mobile payments could bring to merchants and consumers; 3. The ever going trend of consumers preferring cashless payments67.

2.1 Focus on Proximity, B2C payments

One of the most visible trends in mobile payments that can be identified when talking about developed countries is the focus on the interaction between the consumer and the merchant at the Point of Sale. Various initiatives have been launched to facilitate this interaction and to exploit the full potential of mobile devices in such a context, in fact, this is the context where the most initiatives are being represented, out of the four identified in our model. If in developed markets the focus is on the interaction at the POS, in emerging markets the attention is shifted towards enabling remittances between peers. The reasons behind this important difference have to be found in the level of access to financial services in the two cases: in our developed markets, financial services are readily available. Therefore mobile payment solutions should focus on creating additional value for users. For emerging markets the main proposition is to allow users to get access to these services, which are not as available.

5 For an overview of players involved in the mobile payment ecosystem, please find more information in Chapter 1.

6 IBM – ‘Cashless self checkout’, 2011.

7 Aite Group Research – ‘Report Less-Cash Society’, 2011.

22 Mobile payments 2013 - Developed markets: lagging commercial adoption

P2P B2C

Mobile money transfer Mobile online payment (remittances, …) (m-commerce, bills, …) E T O M E R 1 2

Contactless transfer a. Contactless payment (in store, ...)

Y (peer to peer, …) b. Mobile card payment (on site, …) T I M I X O R P 3 4 a b

Figure 4: In developed markets, the focus is on Proximity B2C mobile payments

The drivers behind this focus on proximity B2C payments also rely on the availability of advanced technologies: contactless technologies, first implemented in the credit cards, and the availability of the same solutions embedded in mobile devices, created an opportunity which was identified by various different players (examples in this use case are: Google Wallet, UK’s QuickTap by Orange…). Unfortunately, despite the large investments in NFC-based solutions, this paradigm is still struggling to succeed. Another trend that has been developing over the past years is the use of mobile devices to acquire credit card based transactions at a fraction of the costs usually applied by traditional service providers. By using one’s own mobile device with a special designed dongle where to insert the customer’s credit card, there’s no need for merchants to sign costly and long-term contracts, therefore creating the opportunity also for smaller entrepreneurs or single individuals to finally accept credit card based payments. These two developments, both focused on the interaction at the POS system, suggest that mobile payments are considered to be a new channel where existing financial players can play a role in, by extending their current offers. The limited attention on other contexts of mobile payments, such as P2P remote payments is justified by the difficulty in creating a profitable business model around those use cases. In developed markets the need for a solution that covers those uncommon cases is limited; therefore such a payment solution will address a limited subset of the population (which, most of the times can get access to cheap, commoditised existing payment instruments like bank transfers). Last but not least, in developed economies, the high adoption of smartphones, the ubiquity of the internet connection, and the flexibility of digital banking channels, led most of retail banks

23 Mobile payments 2013 - Developed markets: lagging commercial adoption

to provide some form of mobile banking functionality to their customers. The conversion of these drivers enabled consumers to be closer to their money and have better access to their accounts, an offer that has been well received by the audience. Mobile banking adoption in Europe, for example now stands at 21% of the connected population8. As we anticipated in chapter 1, however, mobile banking is developing as a channel for users to access banking capabilities on the go, which in fact is ‘just’ an extension of the already available online banking capabilities, on a different device.9 The main drivers in those markets can be therefore identified in:  Cross-selling of marketing solutions: this enables merchants to gain more insights in consumers’ spending patterns and therefore getting access to more data about their customers;  Lowering credit card-transaction costs: by using new technologies to enable card-based payments, innovative companies are empowering individuals and small merchants that were put off by the high fees connected to those transactions.

2.2 Accelerating commercial adoption

Mobile payments enable merchants, and especially marketers, to better understand consumer behaviour, as they enable tracking of the process that leads to the purchase (i.e. process from advertising to checkout). As a result, merchants will be better able to analyse the results of their campaigns, promotions and loyalty bonus schemes, in such a way that would not be possible without the use of smartphones for the entire mobile commerce experience. This trend has been dubbed ‘closing the loop’ by marketeers and by solution providers and it refers to one of the biggest opportunities businesses have when integrating mobile advertising, loyalty measures, and payment programs. Put differently, closing the loop refers to enabling merchants to track and link advertisements to actual sales, through offer redemptions, loyalty points, check-ins, hence providing them with tools to target their marketing budget far more efficiently. This issue is growing ever bigger, as retail strategy is going more and more ‘multichannel’, with businesses offering their services and goods via online and offline channels, where the checkout processes are completely different, but the advertising strategy and the target audience might overlap easily. Some businesses already started including analysis tools and sophisticated CRM solutions in their POS, with the aim to get mobile commerce data from apps, about the interaction and experience from the consumer side, in order to have a more holistic view of the purchasing

8 Forrester – ‘The state of mobile banking in Europe’, 2012

9 For more insights in this aspect, please refer to our Online Payment 2012 report, available on our website

24 Mobile payments 2013 - Developed markets: lagging commercial adoption

process, rather than silos of data. Most of those businesses, however, have been big retailers so far, who can invest heavily the in-house development of such a solution. . Smaller merchants do not have the firepower that giants like Wal-Mart or Tesco might have, but they are also interested in getting some high-level information on the ROI of their campaigns. Small-Medium Enterprises (SMEs) are particularly concerned about correctly evaluating relevant KPIs of advertisement campaigns and promotions, to better manage risk and fraud that negatively affect their return on investment. This includes developing some solutions for POS systems that enable tracking of coupons in order to prevent consumers from sharing them, but that are light enough not to require integration budget. SMEs are concerned about fraud related deals and promotions and sticking within a budget for their campaign. Protection against fraud requires removing used offers from the market and preventing re-use or unauthorized sharing of deals. This requires some level of tracking within the basic POS systems that small businesses use without getting into an expensive integration project. Solutions in this area started to appear in the market and the most notable companies who are already at the forefront of the implementation of these services are:  PayPal: recently introduced PayPal InStore (in the UK), which allows users to download an app on their smartphones to be linked to their PayPal accounts. Participating merchants in the initiative (initially only Oasis) are able to send offers (also geo-localised) to customers, who then can store them and redeem their discounts or benefits when using their phone to pay. With this solution companies like Oasis are able to fully track the buying behaviour of their customers and analyse those metrics;  Square: after launching their successful mobile POS replacement in 2010, which enables every user to accept credit card payments10, the company gained momentum and started developing solutions that give merchants access to various marketing tools. Square launched the ‘Square Wallet’ in May 2011, which enables users to register their credit card details and profile pictures in their virtual profiles. The app makes use of the GPS functionalities of current generation smartphones to allow merchants to send customised offers and coupons when clients pass by their stores. Integration with punch card-like services complete the loop of marketing tools aimed at maximising consumer loyalty and relative data analysis.

2.2.1 Value Added Services

Various additional ‘value added services’ can be integrated in mobile payment solutions. Currently, the most successful mobile payment initiatives offer merchants with at least one of them. Integrating a mix of value added services in a mobile payment solution radically increases the chances of success.

10 Currently limited to users in the US, owners of valid bank accounts

25 Mobile payments 2013 - Developed markets: lagging commercial adoption

Merchants are ready to pay premium prices for services that can increase in-store traffic and average turnover per user, but not for just another payment method that only replaces existing ones. Value added services come in different flavours to cover different needs and enable different types of transactions. Below we highlight some examples of value added services included in mobile payment initiatives currently available in the market:

 Loyalty, rewards: even before integrating loyalty solutions in mobile payments, companies have been exploiting the technology included in mobile phones to replace loyalty management solutions such as punch-cards and reward points. An example of this trend is the acquisition of Punch’d by Google. Punch’d offered a platform to use smartphone cameras to scan QR codes that represented points for a virtual punch-card. Google quickly acquired the company to integrate this service in its mobile wallet proposition.  Coupons, offers: similarly to tickets, various other products can be redeemed by using a mobile phone as a presentment method. For example, coupons and offers can be bought or stored in mobile devices and then shown at the point of sale to be converted in the actual discount or product associated with them. By including these services in a mobile payment proposition, merchants can better manage their campaigns and reconcile the redeemed offers with the relative payments.  Ticketing: mobile devices are often used to pay and receive digital content and store purchased material such as music and ticket passes on the go. Not only using a mobile device is convenient to browse and purchase, for example, movie tickets but it is often used to present these passes at the door to be granted access. The advantages of those solutions have also been adopted by the airline industry, that ever more often allows passengers to store their plane tickets as emails displayed on their phones. In particular countries, especially in Asia, mobile devices are used to store public transport tickets that can be then used via the contactless technologies widely available in those countries.

In developed markets, integration with value added services seems conditional for the success of a mobile payment solution. As discussed earlier, retailers are interested in mobile payments, as they allow a much deeper interaction with clients and buying behaviour patterns. There are also solutions available that focus on value added service, but that lack the actual payment functionality. Examples include the new Apple Passbook and Google owned Punch’d11, but these solutions often need to be integrated with solution that support payment services in order to truly become successful. Examples in this area include Square, which started as a mobile PoS solution only capable of accepting card based payments, and then included a wide array of value added services (such as loyalty points, advertisements and offers) to become one of the most successful companies in that area.

11 http://getpunchd.com

26 Mobile payments 2013 - Developed markets: lagging commercial adoption

2.3 Cash is king?

2.3.1 Consumers are increasingly willing to go cashless

Our developed societies are already embracing the idea of going cashless, as only a small fraction of our payments are done by using cash. In the US, it is estimated that only 7% of all transactions are carried out with cash, while the average European figure is around 9%. There are even countries trying to go 100 cashless: Sweden is the most advanced European country when it comes to cashless payments, as only 3% of the transactions involve cash, and the nation is expected to go cashless in the near future. Swedish churches even started adopting POS devices to accept credit card payments, recently12. Consumers are more and more willing to go cashless, as the convenience of not carrying change and the speed of transactions are driving the adoption of alternative payment methods. A recent report published by MasterCard shows that more than 1 in 3 Americans are using less cash today than 10 years ago13. Cards are the first example of a cashless payment method that is already widely accepted by consumers. The recent introduction of the same contactless technology in both cards and mobile phones enabled companies to envision new and integrated cashless mobile payments. This also enables consumers to replace their physical wallet, which is usually clustered with cash, coins and all sorts of loyalty cards, receipts, business cards, with a more convenient digital solution on their mobile phone. This sort of convenience renders the former obsolete and is driving interest and acceptance of innovative solutions as a large number of consumers already made the switch to a digital version of their wallet. Regulatory reforms are another important driver for the mass adoption of cashless payment methods. As more and more regulators are trying to fight tax fraud, countries are introducing new laws to ban cash transactions above certain thresholds. In Spain, for example, the use of cash has been recently outlawed for transactions above 2,500 Eur14, while in Italy, a similar ban has been imposed for transactions above 1,000 Eur15. A push from the top, as is happening in these two countries, would definitely spark change and adoption of cashless solutions (otherwise businesses and individuals alike are bound to face felony issues), such as credit cards and mobile payments. We expect a slight increase of card transactions in these countries, not a complete expansion, as most of the card transactions will still be ATM withdrawals. The lower limit would probably reduce the average value of the transaction size, but increase the overall number of transactions.

12 CBS – ‘Sweden moving towards cashless economy’, 2011 13 MasterCard – ‘Cashless Americans’, 2011 14 The Daily Bell – ‘Spain Bans Cash’, 2012 15 PaySys – Italian government restricts cash payments’, 2012

27 Mobile payments 2013 - Developed markets: lagging commercial adoption

2.3.2 Mobile phones are driving ‘cashless’

The mobile phone certainly has the potential to contribute to the emergence of a new brand of cashless consumers, for whom convenience and convergence are key attributes that define everyday life. To that end, a recent analysis conducted by ABI Research16 has found that a key factor that is likely to have a strong impact on consumer adoption of mobile-enabled payments has to do with how various and disparate elements coexist digitally for a consumer. The study has found that consumers are unlikely to respond favourably to ‘mobile wallets" that only work for one payment card and / or loyalty card, or which can only be used in isolated merchant locations. However, consumers are most likely to respond to entities that can aggregate a wider array of (virtual) payment tools and functionalities, including multiple cards, loyalty and reward programs, etc. For merchants, mobile devices have emerged as a gateway via which they can reach consumers directly via services, such as mobile wallets and location-based services. A study by Jiwire17 indicates that as mobile device adoption among US consumers grows, so does the use of mobile wallets and location based services. The report found that 47% of US smartphone owners also own tablets, up from 32% in Q4 2011. Tablet ownership, in general, is expected to continue its growth throughout 2012. Gartner, in turn, estimates that 118.9M units will be sold worldwide in 2012, a 98% increase compared to 2011. Mobile wallets are also becoming quite popular among Chinese consumers. This strengthens our idea that mobile payments adoption has more to do with the context they are created for, rather than the economic development of the countries they are introduced to. Despite China being one of the emerging BRIC countries, mobile wallet adoption is on the rise. A survey commissioned by Assurant Solutions18 found that over half (52%) of Chinese respondents are mobile wallet users compared to a combined total of 12% within the four other countries surveyed, namely Spain, Germany, the US and Argentina. The survey defines mobile wallet users as “consumers who regularly carry out three or more m-wallet transactions such as online banking, bill payment, online purchases, NFC-based in-store purchases, or peer-to-peer transactions”. In the UK, younger consumers and students in particular are embracing mobile money technology at a fast rate and show the highest willingness to use their smartphones to manage their finances compared to any other group of UK consumers, found a report issued by digital banking services provider Intelligent Environments (IE)19. The IE research found that 53% of UK students who own a smartphone would manage their bank accounts via their mobile devices, if they could, compared to 44% of employed consumers. A quarter (25%) of polled students

16 Mobile Wallet Strategies – ‘Payments, Coupons, Offers, Loyalty and Rewards Programs’, 2011

17 Jiwire – ‘Mobile Audience Insights Report’, 2012

18 Assurant Solutions, 2012

19 Intelligent Environments – ‘UK Mobile market study’, 2012

28 Mobile payments 2013 - Developed markets: lagging commercial adoption

with a smartphone, meanwhile, said they would use their mobile device for peer to peer transfers, versus 22% of people in full or part-time employment.

Moreover, the report has found that British consumers who own a smartphone are increasingly seeking convenient solutions to meet their busy and demanding lifestyles. Half of workers (49%) and students (47%) admitted they would be interested in using their mobile devices, if possible, to and pay at the PoS for goods or services. The survey has also revealed that 51% of British consumers now own a smartphone compared to a third (33%) in 2011.

A growing user acceptance of mobile banking services and a sharp rise in smartphone adoption are expected to drive the number of users of transactional mobile banking services up from 185M in 2011 to over 550M in 2016, data from Juniper Research20 suggests. The report indicates that mobile phone banking is gaining considerable traction, due to the exploitation of advanced functionalities such as banks bundling mobile bill presentment and payment services within their overall mobile banking platform and additional momentum from easy-to-use smartphone apps.

In the same report, Juniper also estimates that users who engage in bill payments are expected to continue conducting transactions actively and aggressively, as they become more accustomed to usage. As consumers engage in increasingly mobile lifestyles, approximately 80% of total mobile banking customers will pay their bills via mobile devices by 2016. However, the report warns that user security concerns, heightened by the rapid growth in spyware and malware, could act as a brake on adoption, particularly amongst older demographics. It is argued that this situation will continue unless and until consumers are convinced that mobile device security is of thesame grade as online security, if not better.

20 Juniper Research ‘Mobile Banking for Developed & Developing Markets’, 2012

3 Emerging markets: beyond empowering the underbanked

Unlike developed markets, where mobile payments must fight to carve out a role for themselves among a variety existing, mainstream payment instruments, the role of mobile financial services in emerging markets is traced along a different set of coordinates. In developing economies such as those in Latin America, Africa, Asia-Pacific and Central and Eastern Europe, mobile payments are establishing themselves as a cost-effective, secure channel for various types and sizes of (cashless) payment transactions whose main virtue is that they provide access to financial services to the under-banked and the unbanked. The life-changing potential of mobile financial services is perhaps more immediately evident for consumers in developing markets than for users in developed ones. In developed countries, mobile constitutes an alternative or a substitute for any number of other readily available payment instruments such as cards or cash. In emerging markets, mobile financial services are often the only viable alternative to otherwise hardly available, low-quality and inaccessible financial services; they have developed to become accessible and affordable precisely because they make the difference between existing and not existing from a financial standpoint. Mobile financial services make use of the abundant mobile infrastructure and render dedicated payment/financial infrastructure that are not readily available, obsolete. The differences between emerging and developed economies exists at multiple levels and range from banking infrastructure development (or lack thereof) to the behaviour, degree of sophistication and preferences exhibited by consumers. Also relevant are the many differences in market requirements, available technologies and local regulations that set developing markets apart from their more developed counterparts. On the whole, mobile financial services continue their expansion in emerging economies. They are becoming agents for change, empowering the unbanked and enabling the fast, reliable disbursement of funds from governments and NGOs. This chapter is dedicated specifically to mapping out the characteristics, prospects, drivers and inhibitors of mobile financial services in emerging economies. In order to better understand how these factors converge or diverge, this chapter will take a more in-depth look at BRIC countries (Brazil, Russia, India, China) before examining the state of affairs in Africa, Central and Eastern Europe, Asia – Pacific and the rest of Latin America. This differentiation between BRIC economies and the rest of the emerging nations worldwide was deemed necessary given that BRIC markets - India and China in particular but not exclusively – merit specific attention due to their combination of economic factors and consumer profiles which have the potential to shape and influence the development of unique mobile financial services ecosystems. Moreover, as the world’s most populous regions, China and India are two of the markets which drive the continued adoption of mobile services in the developing world – as opposed to developed economies where the mobile market has already reached saturation.

30 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

3.1 Reaching the underbanked

Emerging markets are characterised by a generalised lack of infrastructure regarding financial services, which have been, in most of the cases, outperformed by developments in the telecommunication infrastructure. This aspect is fundamental to understand the main difference in drivers between developed and emerging countries.

In emerging countries, like the African ones, the lack of bank branches has been a bottleneck not only on economic but also cultural developments. Access to basic services like cash handling has been limited by the lack of financial services of the most basic type. The large demand for local services to suffice those needs has encountered on the other side, little response from financial services suppliers. The cost of serving such a widespread consumer base with classical brick and mortar bank branches have always been too high, therefore creating the opportunity for other non-bank solution providers to tackle this problem.

In recent years, the telecommunication infrastructure in those countries has evolved at a much higher pace. The cost of owning a mobile phone has been decreasing steadily and the geographic coverage has been increasing at the same pace of demand for it. Some mobile number operators realized the opportunity that mass adoption of mobile phones brought to the emerging countries and capitalized on it by enabling phone users not only to call each other, but also to transfer balance between themselves.

The large number of individuals without access to financial services but with mobile phones has been an important driver for the development of specialised mobile payment solutions in those areas. According to the International Telecommunication Union estimates21, at the end of 2011 there were 4.5B mobile subscriptions in the developing world, representing 76% of all global subscriptions. Mobile penetration in the developing world now is currently estimated at 79%. With developed economies no longer providing sustainable growth rates for mobile network operators and mobile services providers in general, attention is shifting fast towards the developing world.

Such an offer has provided customers with an efficient and effective way to transfer funds between peers, without the need to travel for it. This service has proven to be such a success, that in some countries (Kenya above all, with its M-Pesa example) it evolved to become the favourite way of settling B2C transactions.

Those examples coming from emerging countries have important lessons to be learned for solution providers in developed ones:

 Alternative mobile payment methods have bigger chances of success when they are solving a tangible problem for the users. In economies where credit cards are not widely available, the banking infrastructure is not as developed as in the western world, there is a gap where mobile payments found an opportunity to flourish;

21 ITU – ‘ICT Facts and Figures’, 2011

31 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

 Flexible technologies allow the same payment method to be successful in different contexts. If the same technology can be re-used to extend the same payment method for different contexts (ie: Remote vs. Proximity), chances of success increase accordingly. There is evidence in the market showing that there is no need to introduce new, costly technology to allow mobile payments.

Therefore, players competing (or planning to compete) in developed markets have to keep an eye on emerging markets. The business models developed in Africa can be studied and reshaped to be applied to the global markets, bringing the benefits of scalable, flexible mobile payment methods to economies where massive investments still have to show their returns.

3.1.1 Rise of emerging market mobile users

Figures released by the International Telecommunication Union estimate that in 2011, there were 6B mobile subscriptions worldwide22, compared to 5.4B in 2010 and 4.7B mobile subscriptions in 2009. This is equivalent to 87% of the world population. The same statistics indicate that in developed markets, the number of mobile subscribers has reached saturation, with at least one mobile subscription per individual – which means that growth is mainly being propelled by the development of mobile phone usage and adoption in developed markets, which include some of the world's most populous nations – India and China. Additionally, as consumers use multiple devices, the number of mobile phone subscriptions worldwide is on pace to exceed the entire population of the planet very soon, the World Bank report has found. According to analyst firm Ovum23, the number of mobile phone users continues to increase steadily in emerging markets, while operators switching to 3G and 4G mobile broadband networks will also help to drive growth. Shipments of mobile broadband-enabled handsets are expected to grow by a compound annual growth rate of 15.1% , to reach 962M units in 2016. While it is difficult to quantify the impact of mobile services on innovation and productivity in any type of environment, research carried out by the GSM Association (GSMA)24 estimates that a developing country that had an average of 10 more mobile phones per 100 of population between 1996 and 2003 would have enjoyed per capita GDP growth that was 0.59% higher than in an otherwise identical country. The same analysis also estimates that Canada would have enjoyed a 1% higher average GDP per capita growth rate if it had matched Sweden’s higher levels of mobile penetration from 1996 to 2003.

22 World Bank –‘Information and Communications for Development 2012: Maximizing Mobile’, 2012.

23 AITE Group, ‘The Global Rise of Smartphonatics: Driving Mobile Payment and Banking Adoption in the Americas, EMEA, and Asia-Pacific’, 2011

24 GSMA – ‘European Mobile Industry Observatory’, 2011

32 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

As mentioned once already in this chapter, there are a number of elements which, combined, shape the core profile of emerging markets around the world. The development of traditional (banking) infrastructures in emerging markets is at a much different stage than in developed countries. In those markets, banking has not kept up with the pace of urbanization and wealth growth, which has overgrown the availability of such an infrastructure. In such a context, the development of mobile infrastructure has been swift but mainly needs-driven, lacking in sophistication, with almost none of the high-tech glamour that surrounds the mobile ecosystem in developed markets. The mobile phone has grown to become somewhat of a lifeline for consumers with limited access to financial services, a convenient alternative which can substitute for a bank branch at a (very) basic level, allowing for some degree of financial inclusion.

3.1.2 Rural-urban divide

A significant general characteristic of developing m-payments markets is the fact that differentiation of the industry (or industries) has led to the development of particular types of mobile payment instruments both on the consumer and the industry side. This in turn has given rise to a number of mobile financial services ecosystems, with demographics and the urban / rural divide acting as major triggers for services differentiation. Superimposed on this state of affairs, a second, more subtle differentiation can be made between the two main drivers shaping the mobile revolution in developing nations. The need for financial inclusion drives individuals with no previous banking relationship, who seek to access basic financial services. The need for convenience drives more sophisticated consumers, who already enjoy some level of access to basic financial services and for whom the mobile is an effective, convenient channel to engage in remittance and other types of mobile-powered money transfers. There are two category areas of mobile financial services which reflect and correspond to this state of affairs and which have emerged as playing a key role in developing markets. The first category is mobile banking, whose proliferation is mainly brought about by the need for financial inclusion of unbanked on under-banked consumers mainly in rural areas, where the costs of formal banking are very high. In such rural ecosystems, mobile banking is defined essentially as a means for consumers to gain access to basic financial services to which they would otherwise have little to no exposure. India’s rural segment is a very good example to that end: with the country’s rural population living in almost 600,000 villages, establishing brick-and-mortar branches would be a daunting task for any bank, made even more improbable by the remoteness of many such small, rural communities. Within this context, mobile banking emerges as a very cost-effective means of reaching a large number of consumers, irrespective of their remoteness. Banks in emerging markets are thus employing mobile phones to expand the reach of their services and provide banking connectivity to individuals with no previous banking relationship.

33 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

According to a 2012 AITE Group study25 in South American, Asian and European countries, mobile banking adoption has surpassed mobile payment penetration in every one of the 14 countries surveyed, with India leading the way with 76% adoption. A Berg Insight26 study estimates that users of mobile banking and related services (including money transfers) have doubled between 2008 and 2009 to 55M and have doubled again in 2010. In 2015 there will be an expected 894M users globally, the same Berg Insight analysis estimates. The second type of service which has developed in emerging markets comprises mobile money transfers (P2P and cross-border) and airtime top-ups, which have the potential to offer increased convenience to more sophisticated consumers. Gartner estimates27 that in developing markets, money transfer and airtime top-ups are likely account for most transaction volume, and money transfers will account for the largest portion of the transaction value due to the demand for secure, efficient ways to store and transfer money. Another development likely to impact the development of money transfer services in emerging economies has to do with the fact that due to market saturation, MNO revenues are falling and most of their new business comes from developing markets. However, MNOs cannot charge the same level of fees here as they do in developed markets. As a result, partnering with banks for mobile financial services and mobile-enabled money transfers (both P2P and cross-border) emerges as a logical next step for MNOs to maximize revenues and profits. In turn, for financial institutions, the main advantages of the mobile phone lie in its capabilities to reach a wide spectrum of consumers and transform the economics of financial services delivery, primarily by cutting back on the costs of financial transactions. In this context, the profile of mobile consumers and their experience in engaging the spectrum of available mobile-enabled financial services can be visualized in the shape of a pyramid. The base section is comprised of the majority of consumers, who own non-smartphone handsets: 68 – 69% of handsets sold globally in 2011 were not smartphones, but feature phones28; research also indicates that most subscribers in developing markets retain the same phone (handset) for a minimum of 18 to 24 months (depending on their type of contract). Prepaid handset users retain handsets for even longer. Despite the lack of sophistication of their phones, these consumers can carry out basic mobile banking transactions via SMS. Indeed, Gartner29 points out that SMS is likely to remain the dominant access technology in developing markets because of the constraints of (unsophisticated) mobile devices and the ubiquity of SMS. The middle section of the pyramid is comprised of consumers who already enjoy some access to basic financial services, either via traditional banking channels, and who use their mobiles to

25 AITE Group, ‘The Global Rise of Smartphonatics: Driving Mobile Payment and Banking Adoption in the Americas, EMEA, and Asia-Pacific’, 2011

26 Berg Insight – ‘Mobile Banking and Payments 2nd Edition’, 2010

27 Gartner – ‘Forecast: Mobile Payment, Worldwide, 2009-2016’, 2009

28 GSMA – ‘European Mobile Industry Observatory 2011

29 Gartner – ‘Forecast: Mobile Payment, Worldwide, 2009-2016’, 2009

34 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

engage in remittance and transfers by mobile, an area that is at least as fast, if not faster than mobile banking. These are consumers with higher revenues than those at the base of the pyramid. The top section (and also the narrowest section) of this pyramid is made up of smartphone users. Even though, as mentioned above, the majority of consumers in developing markets own non-smartphone handsets, this does not mean that smartphones do not continue to play an important role in developing markets, particularly India and China. Within this context, it is relevant to point out the fact that smartphone can be regarded primarily as enablers, rather than drivers of changing consumer behavior with regard to the adoption of mobile financial services in developing markets, as well as a potential indicator of how later adopters of the technology will behave.

3.2 Developing markets push global volume growth

A recent World Bank report30 released in 2012 analysed the growth and evolution of mobile communications and data-based services such as mobile applications. The report also examined how the developing global "app economy" is playing out in the developing economies of emerging nations, impacting entrepreneurship and employment. The World Bank 2012 report looked at some of the local mobile programs being implemented worldwide to spread investment, entrepreneurship and financial inclusion. The report showed that 74 nations worldwide (most of them based in Africa) currently have in place some form of mobile money program. Kenya’s M-PESA mobile money program, for example, was found to facilitate payments volume equal to more than one-fifth of the country's gross domestic product. Another quoted example is a mobile service in the West Bank and Gaza that helps young workers find employment. Users have reported that the time spent looking for a job has dropped dramatically, and wages have increased as much as 50%, the same World Bank research reveals. At the present moment, the use of mobile payments around the globe ranges from roughly two-thirds of consumers in China and India to just a little more than one in 10 in France and Canada, according to a study published by AITE Group and ACI Worldwide31. Once again, this highlights the fact that in terms of mobile payments adoption in developing markets worldwide, the real picture is much more complex than we may be tempted to believe, with a great deal of factors— economic, regulatory, geographic, cultural and technological to name but a few—leaving their mark on how mobile payments are developed, marketed, packaged and sold to consumers.

30 World Bank –‘Information and Communications for Development 2012: Maximizing Mobile’, 2012.

31 AITE & ACI Worldwide – ‘The Global Rise of Smartphonatics’, 2012

35 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

Gartner forecasts32 that Eastern Europe will see the highest user growth between 2011 and 2016, albeit from a smaller user base. Asia/Pacific is expected to top all regions in the number of users, followed by Africa. This is also expected to contribute to high transaction volume, where the two regions combined will account for more than 60% of the global mobile payments volume in 2016, according to the same report. Africa will top all regions in transaction value throughout the forecast period, benefiting from a higher proportion of money transfer transactions that have higher value per transaction than other use cases.

3.2.1 Different regions, different needs

Unlike e-commerce, mobile commerce has been more widely adopted in developing markets due to the availability of mobile devices and the lower infrastructure requirements. In developing markets mobile commerce implementations are meeting the accumulated demand of a massive consumer base that is ready and eager to use mobile commerce solutions. These emerging markets have a more compressed consumer adoption arc than developed markets. Each geographic market contains more than 1,000 models of mobile phones. Releasing m- commerce apps for Android, BlackBerry and iPhone may cover a large proportion of a company’s target audience in developed markets. However, in emerging markets where smartphones are the minority, merchants need a different strategy. Consumers in emerging markets also exhibit the greatest enthusiasm for its prospects, whereas those in the US, the UK and other developed markets have a more subdued outlook. This is due in part to the fact that in developed markets, solid payment infrastructures and a wide array of payment instruments and channels provide a readily available alternative to using the mobile phone to initiate transactions and carry out payments.

3.3 BRIC countries: great growth pace, blurring opportunities

3.3.1 China: The emergence of a mega-market

In 2010, China had a huge number of mobile subscribers (well over 700M, nearing 750M according to the National Bureau of Statistics of China), high rates of mobile phone penetration and a relatively limited number of top-tier players involved, all with very large customer bases (here we mainly refer to MNOs, banks and third-party m-payment services providers). Given its sheer size and huge revenue potential, China is also frequently depicted as a “mega-market” as far as mobile payments are concerned, with wildly optimistic predictions being made in terms of its development over the coming years.

32 Gartner – ‘Forecast: Mobile Payment, Worldwide, 2009-2016,’ 2009

36 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

Reasons not making mobile payments in China Source: The Global Rise of Smartphonatics, AITE & ACI Worldwide

Smartphone users Other consumers

60% 46% 40% 27% 17% 10% 0% 0%

Mobile phone not Do not know how to Don't trust it Do not feel the need set up for mobile to payments

Figure 5: Prohibitors for mobile payments in China, 2012

According to a research report released by Kapronasia33, a provider of research-based advisory and consulting services, the Chinese mobile payment market is expected to be worth more than USD 80B and have 441M active users by 2015, with its size virtually doubling on a yearly basis. China has already overtaken the US as the largest smartphone market in the world, also adding that the Chinese mobile payments industry has made significant advances in 2011 and is expected to continue to grow over the next four years. The report also found that the Chinese mobile payment market was estimated to be worth USD 7.6B at the end of 2011, rising to USD 84B by the end of 2015. Chinese mobile payment users reached 218M at end 2011 and are expected to grow to 441M users by the end of 2015. Also, although China has surpassed the US as the biggest smart mobile phone market worldwide, the penetration of smartphones among Chinese consumers is still low: less than 10% of the total 900M Chinese mobile phone users currently own smartphones. A slowdown is expected to take place in the Chinese growth rates by the end of 2012 as businesses wait for China to finalise new standards and regulations covering the mobile payments market. A big impacting factor so far has been the closeness to foreign payment schemes, which has been overruled by the WTO this summer. New rules are expected, allowing for example international card schemes not to process transactions via UnionPay’s channel only. However, technology standards in the mobile payments industry may not be as important as thought before. The most important thing for main players to consider is to develop a payment instrument that could gain the interest of China’s affluent middle class, which is estimated to be composed by around 400M people. Most of the Chinese middle class is also located in urban and city areas, with a share of 50% of urban population belonging to it.

33 Kapronasia - ‘Mobile Payments in China’, 2012

37 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

This means that the affluent consumers in China not only are a large and growing group, but also that they are located in defined areas, sharing homogenous culture.

3.3.2 Brazil: Smartphone owners lead the way

For consumers in Brazil, the world’s fifth largest country in terms of both land and population, mobile is quickly emerging as an important solution for day-to-day tasks. As such, research conducted by GfK in April 201234 found that an upgraded national payment system supported by mobile phones would be a highly appealing prospect to the majority of consumers (73%). There are drivers with a high impact in the short and medium term that are likely to leverage the usage of this payment model in the country, and the industry is expected to start taking off by the end of 2012.

Reasons not making mobile payments in Brazil Source: The Global Rise of Smartphonatics, AITE & ACI Worldwide

Smartphone users Other consumers 38% 31% 27% 22% 24% 23% 17% 8% 4% 5%

Do not know Mobile phone Don't trust it Bank does not Do not feel the how to not set up for offer m- need to mobile payments payments

Figure 6: Prohibitors for mobile payments in Brazil, 2012

The 2012 AITE Group & ACI Worldwide survey mentioned earlier in this chapter35 has taken an in-depth look at Brazil’s mobile payments market and found that a significant percentage of Brazilian consumers (37% of them to be more precise) have changed their shopping, financial, and payment behaviour as a result of owning a smartphone. Around two-thirds of these consumers were found to have carried out mobile payments, while three-quarters did their banking with a mobile device. In contrast, among the rest of Brazilian consumers (non- smartphone owners), just 21% were found to engage in mobile payments and 32% have used a

34 GfK Insite –‘Markets Today’, 2012

35 AITE & ACI Worldwide – ‘The Global Rise of Smartphonatics’, 2012

38 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

mobile device for banking purposes. Moreover, paying with a mobile device was found to be the preferred method of payment for small-ticket items and person-to-person transactions for about one in 10 Brazilian smartphone owners. The outlook for MFS adoption among Brazilian consumers is quite optimistic, according to the AITE Group & ACI Worldwide survey. The research found that many non-smartphone users in Brazil are interested in replacing their payment cards with a mobile device. The next years will also be really important to Brazil and its infrastructure because of the huge investments the 2014 FIFA World Cup and the 2016 Olympics are bringing to the country. According to the Instituto Brasileiro de Geografia e Estatistica, Brazil’s construction industry growth could average 7.1% per year between 2012 and 2016. In addition to the sporting events, the current government is planning to implement the 2nd phase of the Growth Acceleration Program (PAC II) which will see over US$500bn invested between 2011 and 2014. A significant portion of this spending will go towards the required sports facilities as well as infrastructure investments included in Rio’s Olympic bid. Public transportation, subways, water & sewage infrastructure, IT, security and tourist facilities in Rio all require significant investments. Officials expect the World Cup and Olympics to draw 600,000 and 380,000 international visitors to Brazil respectively.

3.3.3 India: A highly self-sufficient mobile payments ecosystem

Reasons not making mobile payments in India Source: The Global Rise of Smartphonatics, AITE & ACI Worldwide

Smartphone users Other consumers 32% 30% 31% 28% 24% 19% 15% 13%

Do not know how to Mobile phone not Don't trust it Do not feel the need set up for mobile to payments

Figure 7: Prohibitors for mobile payments in India, 2012

39 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

Since the liberalisation of its economy in 1991, India has built up quite an impressive track record of almost uninterrupted growth – albeit an uneven one when it comes to its distribution among social groups, economic groups, geographic regions and particularly between rural and urban areas. However, we could very well argue that it is this very diversity which actively contributes to India’s economy displaying continued growth potential. India, the world’s second most populous country, the 12th largest economy on a global scale and also one of the world’s top 20 fastest growing economies, has emerged as a leader in terms of mobile financial services adoption, one reason for this being the high level of smartphone penetration. Even though India is still a cash driven economy, with an average of 65% retail transactions being carried out with cash, a recent survey by AITE Group and ACI Worldwide has placed the country in second place after China when it comes to the percentage of consumers in the Asia-Pacific region who report having carried out mobile payments during the past 6 months. The growing middle-class and their disposable income is also another factor that will drive adoption of non-cash payment methods in the next years, a trend that has recently started to happen already. The cultural and economic differences between the Western world and India, its large number of small, unorganized retail shops, its shopping culture based on low ticket / high value transactions, have proven not to allow a mass adoption of payment instruments that have been successful in other countries (cards among all). An innovative solution that makes use of mobile devices, arguably the ideal mode of capturing those transactions, would therefore have the chance to win this USD 410 Bn retail market.

Consumers who have used their mobile phone to make a payment over the past 6 months Source: The Global Rise of Smartphonatics, AITE & ACI Worldwide

66% 64%

48% 45% 45% 37% 30% 30% 23% 21% 21% 21% 15% 13%

Figure 8: Mobile phone use for mobile payments, 2012.

40 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

The fast-pace penetration of mobile phones, particularly smartphone in India has become the main growth driver for the development of specific types of mobile financial services in the region, mobile banking prominent among them. This has happened while in India, existing financial infrastructures, particularly the ones available to the country’s largely unbanked rural population, are poor-quality and not geared at reaching this large consumer segment. Mobile financial services come with the added advantage that they can largely function independently from the existence of a brick-and-mortar support network. With the mobile phone penetration expected to reach 100% by 2015, consumer preferences suggest that mobile devices are likely to emerge as the most popular medium of payment in India, a recent survey has predicted. According to the report conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM)36, India counts nearly 720M mobile subscribers, which are expected to start using more their devices to carry out mobile payments in the future. In addition, the report indicates that this prediction is based on the fact that although the majority of Indian residents are unbanked they do have a mobile phone. Moreover, the study has pointed out that the retail market in India has annual transactions worth USD 410B. According to the source, the middle class with over 300M people and their increasing disposable income has led the retail market to grow exponentially. In India’s rural segment, mobile banking is defined essentially as a means for consumers to achieve financial inclusion, as it allows users to gain access to basic financial services to which they would otherwise have little to no exposure. Indeed, with the country’s rural population living in almost 600,000 villages, establishing brick-and-mortar branches would be a daunting task, bordering on the impossible if we also consider the remoteness of many such small communities. Within this context, mobile banking emerges as a very cost-effective means of reaching a large number of consumers, irrespective of their remoteness.

3.3.4 Russia: Mobile slowly emerges, but cash is still king

Traditionally, Russian consumers are known to be very fond of cash – however, the mobile phone is slowly emerging as a viable payment channel on the Russian market. Russian mobile phone subscribers paid USD 660M in goods and service bills using their mobile accounts in 201137. Local mobile network operators (MNOs) are starting to see mobile financial services as a major (potential) revenues base and are leading the race to develop appealing m-payments propositions. A major step forward was undertaken in early 2012, when Russia’s three leading mobile operators – OAO Mobile TeleSystems, VimpelCom and OAO MegaFon – entered an agreement to provide their subscribers with full common access to their respective mobile payment systems and allow them to make cross-payments on restaurant and utility bills and goods

36 ASSOCHAM

37 ThePaypers – ‘Russian mobile network operators enter agreement over phone bill payment’, 2012

41 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

purchases. While the technical requirements for merchants will be standardized, the three mobile operators expect that their alliance will stimulate more mobile payments by making them more convenient to users. Over the past two years, Russian mobile operators have developed and diversified their mobile payment systems beyond the traditional premium SMS model. The Easy Payment offering developed by MTS, the ‘Mobile Payment’ and ‘Ruru’ services of Vimpelcom, as well as Megafon’s mobile payments proposition have become popular means for consumers to use their mobiles in order to paying for a range of services – from mobile and fixed line telephone bills to cable TV, utilities, air and train tickets as well as goods from some e-commerce sites. However, the reality of the situation is that at the moment, 95% of mobiles in Russia are prepaid. Also, the fragmentation of the mobile ecosystem also constitutes a drawback. The alliance mentioned above includes neither Scartel (Russia’s leading WiMAX provider operating under the Yota brand), nor Tele2 Russia (the subsidiary of the Swedish group serving more than 20M mobile subscribers in Russia), both of which have developed proprietary mobile payment solutions.

3.3.5 Global mobile players cannot afford to neglect BRIC countries

Players who aim to become global leaders in mobile payments cannot stay away from entering the BRIC markets. Their peculiar features, the expected growth and size all have to be carefully considered when developing a market-entry strategy. The Chinese market for example, is expected to account for 7.6 Bn yearly transactions in 2015, so scalability and performance are key requirements for a local payment solution’s IT infrastructure. In India, instead, mobile payment players should consider partnering with local banks, as they are the current catalyst for this change, and their leading role will shape the near future. In Russia, the inefficient bank infrastructure has created opportunities for alternative payment players to tap the USD 6Bn market for utilities bills and local players already started leading the way with digital wallets fuelled by cash-in kiosks. In Brazil, the USD 4.5 Bn opportunity around peer to peer payments is already leading players to look into the region. China instead is still in its mobile payments infancy, as the market size, despite the large population base, it is estimated to be ‘only’ around USD 2.5 Bn. Its closeness to international payments players such as MasterCard, Visa and PayPal has led internal third party solution providers to start developing solutions for the market. Players like Alipay, Tenpay, and YeePay all have large active user bases and are looking to use the power of smartphones and applications as a relatively easy way to break into offline mobile payments, On the whole, the accelerated development of the mobile communications sector in BRIC countries is expected to act as a significant trigger for the positive evolution of mobile financial services adoption in the four countries, all the more so since use of mobile banking services in the region is also on the rise. Banks are willing to contribute to this trend, as the mobile

42 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

financial services sectors of the BRIC countries is a potential source of revenue which cannot be neglected. As proof, new consumer-oriented mobile initiatives are launched constantly. Foreign mobile services providers are also increasingly aware of the vast potential presented by the huge number of mobile-ready consumers in the four countries. A number of limitations exist, such as the lack of unified technology standards, ensuring transaction security across wireless networks and boosting customer confidence in phone-based financial services. However, both banks and independent mobile technology providers seem to have taken up the challenge, a feat which is likely to significantly benefit both BRIC consumers and the countries’ economies as a whole.

3.4 Rest of emerging countries is catching up quickly

The extensive take-up of basic m-banking and m-payments services in emerging markets and among developing nations is real. To that end, Africa and India are often brought up as a glowing success story for the mobile revolution currently sweeping the world. It is certainly true that mobile phones have changed the lives of millions of unbanked or under-banked consumers in all developed markets around the world. However, it is also true that a little perspective needs to be applied in order to have a realistic discussion regarding the evolution of mobile financial services on these markets. In Africa for example, the mobile phone has grown to become somewhat of a lifeline for consumers with limited access to financial services. When it comes to mobile financial services, Africa’s ecosystem is paradoxical to say the least. A mobile industry that around the year 2000 was almost non-existent is today flourishing. Africa has grown to be one of the world’s fastest- growing mobile phone markets, while its number of active mobile subscriptions has crossed the half-a-billion mark in Q3 2010. This despite the fact that for many years, Africa has lagged behind the rest of the world insofar as mobile connectivity and m-commerce technology penetration were concerned, and is still the continent where over 30% of the population lives on an income of under USD 1 per day. In such a context, the development of (mostly rudimentary) mobile infrastructures has been swift but mainly needs-driven. There are, of course, a few notable exceptions – East Africa comes to mind, with Kenya and M-PESA at its epicentre - but even East Africa still has a long way to go down the road to becoming an established mobile market. The evolution of mobile financial services in these markets has brought important innovations to these markets that helped their economies to increase their sizes. In the next future, we expect to see more and more companies focusing on financial inclusion for the underbanked. This will probably happen through the use of mobile services, following the road paved by companies like m-pesa, to address basic needs. Smartphone penetration in Eastern Europe is growing rapidly from a small base, with estimated growth of 26% per year. The uptake in mobile internet in these developing markets

43 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

has largely been driven by handset affordability, as a growing market for smartphones has emerged across the pricing spectrum. In some countries this is especially the case given the cost of smartphones relative to the cost of a fixed line connection. Smartphone affordability has largely been driven by manufacturers competing to gain market share and operators providing customers with innovative tariffs with various levels of subsidization. Asia-Pacific consists of diverse set of markets with different payment ecosystems. This diversity manifests itself on a number of levels: Asia-Pacific includes both developed and developing markets; territories both large and small, some with an established and modern telecommunications, retail and transport infrastructure, other with high numbers of unbanked and under-banked consumers; some with a high urban population, other with a sprawling rural ecosystem marked by informal economic activities and lacking basic consumer access to financial services; finally, industry standards and levels of regulatory compliance differ considerably from one market to the next. G-XChange (GXI), a subsidiary of Philippines-based mobile operator Globe Telecom and operator of the m-commerce service GCash, has teamed up with financial services provider UnionBank of the Philippines (UnionBank) to allow its customers to link their bank accounts to their mobile wallets. The jointly launched service, dubbed the eMoney XChange, enables UnionBank clients with EON, E-Wallet, ePayCard and UnionBank regular savings and checking accounts to transfer funds to and from their GCash wallets via SMS through their UnionBank accounts. In developing markets, due to favourable conditions for large-scale adoption of mobile payment services, growth has been quite strong. We must not however lose sight of the fact that creating the right mobile strategy for a market demands an understanding of how consumer drivers differ and how they are evolving in developing countries as compared to developed ones. Many service providers have yet to adapt their strategies to local requirements. While developing markets have favourable conditions for mobile payments take-up of a massive scale (such as high penetration of mobile devices and low banking penetration), this is no guarantee of success, unless service providers adapt their strategies to local market requirements. Additionally, what also needs to be taken into account are consumer needs and perceived obstacles and drivers that shape the mobile ecosystem, along with technological developments—all these elements are need in order for mobile financial services to reach higher consumer adoption.

3.5 Leading the mobile banking revolution

The evolution of mobile financial services has displayed a certain amount of unpredictability over the past decade, with industry and customer expectations regarding what will work where, when and why being created, met, exceeded and reshuffled on a rather more frequent basis than one would normally expect.

44 Mobile payments 2013 - Emerging markets: beyond empowering the underbanked

Let us consider, for example, the extensive take-up of basic m-banking and m-payments services in emerging markets and among developing nations such as the ones in Africa or India – two areas which are often brought up as glowing success stories for the mobile revolution currently sweeping over the world. While it is certainly true that mobiles have indeed changed the lives of millions of unbanked or underbanked consumers around the world, it is also true that a little perspective and a lot of differentiation need to be added in order to have a realistic discussion regarding the evolution of mobile financial services outside the developed world and to understand the underlying mechanisms of its future development. What has to be considered here is the role of banks in this ecosystem:  Banks so far have been lacking activity in most of those markets. They have been outpaced by MNOs and entrepreneurs;  Banks will now have to integrate with the existing solutions rather than developing new ones from ground up;  There is also the opportunity for banks to partner with those MNO providers to offer financial services through their network. Some banks, such as Equity bank from Kenya already explored this path by partnering with M-Pesa, to offer integrated financial mobile services.

As mentioned before, the future sounds good for the advent of mobile financial services in emerging and developing economies – provided, of course, that proper regulatory frameworks are set in place to allow consumers to enjoy the advantages of gaining access to reliable financial services. The CGAP - a microfinance group based at the World Bank – is of this opinion and claims that increasing access to financial services for the world’s poor depends in large part on regulatory frameworks that should manage to strike the correct balance between protecting customers and promoting the innovation required for branchless banking to flourish. While there is still a long way to go on the road to such a secure, branchless banking- based ecosystem, it definitely looks like developing economies are on the right track.

THE PAYPERS KEEPS YOU UP-TO-DATE ON GLOBAL DEVELOPMENTS IN MOBILE PAYMENTS

The Paypers www.thepaypers.com

The Paypers is the leading independent source of news and analysis for professionals in the global payment community. Their products are created by payment professionals and cover all significant developments in cards and payments, with a special focus on the online payment, online banking, mobile payments and e-invoicing industry, globally.

The Mobile Paypers

The Mobile Paypers biweekly newsletter covers all the developments in the global market for mobile payments, m-commerce, mobile ticketing, and mobile banking services. The Mobile Paypers comprises several feature articles as well as short items with news from the previous fortnight.

Mobile Payments Market Guide 2012

The Mobile Payments Market Guide 2012 provides an in-depth look at the global mobile financial services ecosystem, combining insights from key stakeholders and industry thought leaders with a comprehensive overview of market players. The guide lists over 280 profiles of companies in the global mobile financial services ecosystem.

Part 2 Trends and developments per region

4 Europe: on the edge of convergence

When looking at the state of mobile financial services in a developed market such as Europe, the first thing we ought to keep in mind is the fact that mobile payments do not constitute a novelty, as consumers already have a wide array of more traditional payment instruments at their disposal – cards, cash, even cheques. Additionally, the mobile payments proposition for European consumers is characterised by a growing level of complexity, as more and more players enter the arena: banks, technology companies, Mobile Number Operators (MNOs), payment processors, etc. Within this context, consumers must be made aware of exactly what (added) value the m-payments proposition holds for them: faster transactions (in the case of NFC), the possibility to access personalised targeted loyalty deals, check store inventories via barcode scanning and access to products information on the go. While the attraction of mobile payments continues to be amply acknowledged, the struggle to balance rapid technological advances, regulatory and infrastructure demands, consumer marketing strategies and (above all else) market fragmentation continues to be a challenge for players looking to establish a successful presence in the European mobile ecosystem. Europe’s mobile ecosystem shows a fragmented region which is working at different speeds, but that’s trying to make the most out of its solid banking system and make it work for mobile payment solutions. The singularity of the European mobile financial landscape lies in his fragmented and diverse geographic composition. It shares some of its characteristics both with developed, sophisticated markets such as the US, as well as with developing regions such as those in Asia and LATAM. Europe also has a strong differentiating factor in the cooperation effort its Commission put in the banking system. This is expressed in the self-regulatory body of the EPC. The European Payments Council is the coordination and decision-making body of the European banking industry in relation to payments. The purpose of the EPC is to support and promote the Single Euro Payments Area (SEPA), which is looking to phase out differences between national and intra-European cross border payments (inevitably, mobile money transfers will be affected by this as well). In particular, the EPC defines common positions for the cooperative space of payment services. The EPC consists of 74 members representing banks, banking communities and payment institutions. Geographically, Europe is home to nearly 50 different countries and territories and therefore naturally fragmented, making it a complex ecosystem for the development and deployment of financial and telecommunication solutions, whether for banking, money transfers or proximity payments. The wide differences between European cultures, such as the ones coming from

48 Mobile payments 2013 - Europe: on the edge of convergence

Western Europe (more affluent and more advanced) as opposed to the ones coming from Eastern Europe (on average less affluent) shape a much more diverse region than what first meets the eye. On the other hand, Europe, despite being the world's second-smallest continent by surface area, is also the biggest global economy, the richest region in the world as measured by assets under management and home to about 11% of the world’s population (around 739M inhabitants)38. The effects of Europe’s geographical fragmentation are made even more complex by the historical divide between Western and Northern Europe one the one side and the Central and Eastern European bloc on the other side. This division, the result of the post-WW-II Iron Curtain, is reflected in the current state of both e-commerce and mobile commerce across Europe. The countries which were part of the Eastern communist block are, with few exceptions, de facto developing markets, while the Western half of Europe includes developed markets with solid financial infrastructures and successful commercial implementations of m- payments services. Analysing Europe’s progress regarding mobile-powered financial services needs to take into account both the West / East divide and the current and future impact of SEPA. This chapter aims to sketch an outline of the market and provide an overview of the main developments.

4.1 Coalitions of the willing

The European ecosystem, as anticipated, shows a stronger focus on collaboration than what can be found in other regions. This peculiar characteristic is directly opposite to the American strategy of ‘winner takes it all’. Examples of collaboration between multiple parties can be found in organizations such as the EPC (at a European level), the UK Payment Council, but also in MNO-led organizations such as Project Oscar. Another example, even though it failed, is represented by the SixPack initiative in the Netherlands, which was disbanded in July 2012. Collaboration in the area of mobile payments requires different stakeholders, often with opposing interests, to come together and join their efforts. No wonder why, so far, only few collaboration initiatives have been initiated and even less have succeeded. Europe is more focused than other regions on creating a collaborative environment. This has resulted in several different initiatives around (mobile) payments. In the next list we would like to highlight the most well-known examples, which all have suffered setbacks:

38 Wikipedia – Europe entry, 2011

49 Mobile payments 2013 - Europe: on the edge of convergence

 EPC: The European Payments Council is the self-regulatory body of payment institutions, banks and related players. It oversees the implementation of the SEPA, and it’s closely connected to the European Commission. On the mobile payments side, the EPC recently published a white paper for public consultation; has released a paper published jointly with the GSMA; and has published a preliminary version of the ‘Mobile Contactless SEPA Card Payments Interoperability Implementation Guidelines’.  Payments Council (UK): The Payments Council is the body with responsibility for ensuring that payment services work in the UK. Payments Council membership brings together payment service providers, organisations with a commercial interest in payments, and end users. The Payments Council’s areas of interest cover the full spectrum of payment methods including cheques, cash, cards, direct debit and credit, CHAPS and faster payments. The aim of the council is to drive forward innovation and the strategic agenda in the payments industry. The Payments Council has started work on a central database that links mobile phone numbers to account details. This will open the possibility of making and receiving almost- instantaneous payments using your mobile without needing to know account details - regardless of who you bank with. This new payment method will rely on a centrally managed database that links phone numbers and bank accounts, and will guarantee almost instantaneous payments via the Faster Payment scheme.  Project Oscar: Vodafone, O2 and Everything Everywhere, which owns T-Mobile and Orange, have applied to the European commission to form a company that would create a mobile wallet platform and an advertising sales house that could reach every subscriber on their networks. The Commission agreed for the JV to move forward despite concerns about monopolistic advantages. The joint venture is aiming at creating NFC-enabled sim cards to allow companies that enable anything from credit debit and loyalty cards to membership cards and transport tickets to create secure mobile versions of their products. Users will then be able to use their mobile as a replacement for their physical wallet. Project Oscar has still yet to be launched, but it is another example of collaboration (this time by MNOs only) in the mobile payments space.  Six Pack: Vodafone, KPN, Rabobank, ABN Amro and ING have joined forces in 2010 and signed a cooperation agreement to jointly introduce mobile payments at the checkout in the Netherlands. The consortium was established to develop a user-friendly and secure mobile payment service in the Netherlands, and to create a legal entity that would act as a TSM. Unfortunately, the joint venture came against some serious challenges right after its announcement. The main issue was finding the right business model which allowed the financial institutions and the telecommunication services providers to share existing revenue. Another challenge was that a large-scale deployment of point-of-sale (POS) terminals which would accept Visa payWave or MasterCard PayPass payments from NFC phones (and possibly other contactless mobile devices and cards) was needed all across the Netherlands. In truth, such a contactless payment infrastructure was (and still is) almost non-existent in the Netherlands.

50 Mobile payments 2013 - Europe: on the edge of convergence

In November 2011, T-Mobile, which was part of the initial group of six, decided not to become a shareholder in the legal entity to be established and therefore not to continue the cooperation. Finally, in July 2012, the remaining five companies cancelled the original joint venture plan because of legal and competition issues, as well as due to the fact that the planned mobile NFC roll-out turned out to be more time consuming and complex than initially anticipated.

4.2 United in diversity

Europe not only differs from other regions on the cooperation/competition level, but also because of the special situation its economies play. Europe is composed 50 different countries, 27 of them in the European Union. Unlike the United States of America, Europe doesn’t rely on a single constitution and its countries have different regulations and economies. This results in a ‘single’ geographic area that hosts diverse markets, and different ecosystems in which the circumstances for providers and users of mobile financial services are very different. Both emerging and established markets coexist here. At the same time, Europe - the world's second-smallest continent – is also a rather “compact” ecosystem. It thus emerges that the key to understanding Europe’s mobile landscape and tapping the considerable European revenue stream lies in understanding how adoption drivers vary between developed and developing regions. Essentially, two trends can be identified in both types of markets, but the dynamic between the parties involved – both on the consumer and on the mobile services supply side (banks, merchants, MNOs) – is different. The first trend refers to existing financial services and their movement from the offline / online channel to the mobile channel. The second trend involves developing mobile financial services that promote a new type of value, a technology or business model that is so disruptive it has the potential to alter existing revenue models. This trend requires the development of large-scale m-payments ecosystems in which all participants (banks, MNOs, third-parties) are compensated satisfactorily.

4.2.1 Developed economies: seeking an alternative for existing payment methods

Transferring the traditional European financial value chain to the mobile domain is something that is happening in developed economies, where mobile-savvy users are prompted to start using their handsets for banking and shopping. However, adoption drivers need to be carefully mapped out before addressing mobile financial services propositions in developed European markets such as the UK, France or the

51 Mobile payments 2013 - Europe: on the edge of convergence

Netherlands. If end-users are not given a valid proposition to stop paying with a card – already a well-established method - and start paying with their phones they will not do so. Rather, m- payments would have to create a new type of value, primarily in terms of user experience, in order to attract seasoned consumers. Otherwise, providers looking to push m-payment propositions onto the market will appear to be promoting useless technologies that have no real-life applicability. Similarly, IBM39 has highlighted the fact that in developed markets there are two drivers for mobile adoption, namely direct savings and improved user experience. The advent of smartphones and the emergence of app stores, such as Apple’s App Store or Google’s Android Marketplace, has proven to be a complete game-changer for the mobile ecosystem and for consumer perception of m-payments, particularly in developed European markets such as the UK, Germany, France or Sweden. For example, according to a report issued by digital banking services provider Intelligent Environments (IE), 53% of UK students who own a smartphone would manage their bank accounts via their mobile devices, if they could, compared to 44% of employed consumers. A quarter (25%) of polled students with a smartphone meanwhile said they would use their mobile for peer to peer transfers, versus 22% of people in full or part-time employment.

Percentage of European consumers who expect to make m-payments in the next six months Source: The Global Rise of the Smartphonatics, AITE & ACI Worldwide

30% UK 96%

41% Germany 90%

42% Sweden 89%

34% France 86%

49% Italy 78% Other Consumers Smartphone Users

Figure 9: Consumer expectations for m-payments, 2012

According to a report issued by US online payment services provider ACI Worldwide and research and advisory firm Aite Group, there is a stark difference between mobile adoption

39 IBM - 'Go Mobile, Grow', 2008

52 Mobile payments 2013 - Europe: on the edge of convergence

among smartphone users and other consumers. While 80% of polled smartphone users use their smartphones for mobile banking, only one-third of non-smartphone users report doing so. Similarly, 70% of smartphone users used their smartphones for mobile payments, while less than a quarter of non-smartphone users have done so. The graph below shows the likelihood of consumers in different European countries to adopt mobile payments. Reasons for European consumers not to make mobile payments vary widely by country and by consumer segment. In the UK, 30% of smartphone users who haven’t made mobile payments cite a lack of trust as their reason for not doing so. Among other UK consumers, however, having a mobile phone that isn’t set up to make mobile payments is the most prevalent reason. The pattern among German consumers was similar to the reasons cited by British respondents. More than half of French smartphone users haven’t made mobile payments because their banks don’t offer it. Other French consumers, on the other hand, pointed to the inability of their mobile phone to make mobile payments. For both Italian smartphone users and other Italian consumers, too, this reason was the most frequently cited factor for not making mobile payments while in Sweden, nearly four in 10 smartphone users said they don’t know how to make mobile payments. The same report has also revealed that, looking ahead, smartphone users are expected to continue to lead the way in the adoption and use of mobile payments and mobile banking. Smartphone users are in fact more likely than others to adopt mobile payments in the near future. In addition, an overwhelming majority of smartphone users will be using a mobile device for banking by 2013. According to the report issued by UK-based research firm Juniper Research, more than 1 in 4 of US and Western European mobile phone users are set to use their NFC-enabled mobile phones to pay for goods in-store by 2017, compared with less than 2% who are ready to do so in 2012. The Western European mobile financial services market has seen some successful m-payment trials and implementations, mostly NFC-based but not exclusively so. However, despite markets in this region being remarkably active, mass-market adoption of mobile financial services has not yet taken off. Forester Research 40 values the mobile opportunity in Western Europe at EUR 6B by 2013, and estimates that this market is likely to grow at an average of 25% annually by 2013. However, given the current state of affairs, this optimistic outlook does not appear justified. One reason for the slower-than-expected uptake of mobile applications such as banking, ticketing and payments solutions in Europe’s North - Western markets has to do with security issues concerning both the mobile devices as such as well as the back-end systems involved, particularly when it comes to mobile web (online) payments. These concerns affect the consumer segment, making would-be buyers reluctant to carry out mobile payments via the internet. Acceptance of mobile applications in the merchant sector is also impacted negatively by security concerns, which come to strengthen merchants’ existing doubts about the

40 Forrester Research - 'Mobile Commerce Forecast, 2011 To 2016', 2011

53 Mobile payments 2013 - Europe: on the edge of convergence

profitability of replacing a card with a phone for PoS transactions. Such issues also drive online retailers to avoid providing the infrastructure which would allow their goods or services to be purchased online via mobile devices, for fear of seeing themselves exposed to fraud liability and assorted risks. However, Europe’s developed economies have made considerable progress over the past year in making mobile financial services a reality for consumers and many new initiatives came to life. The UK is an example of a market where mobile payment initiatives have already been implemented. In May 2011, UK-based mobile network operator Orange teamed up with Barclaycard to launch Quick Tap41, a contactless mobile payments service. Quick Tap allows customers to make purchases up to GBP 15 in a single transaction by tapping their Quick Tap mobile handset against a contactless reader at over 50,000 stores in the UK. The service is also designed to allow UK shoppers to load up to GBP 100 on their phones from their Orange or Barclays cards. In order to use the service, UK customers have to be holders of a Barclaycard, a Barclays debit card or an Orange credit card, as well as a Samsung Tocco Lite device, with other handsets from other manufacturers to follow as part of future developments. By using Barclaycard’s contactless payment technology, customers are expected to be able to pay for items in places they see the contactless payments symbol, including shops and cafes such as Pret A Manger, EAT and Subway. The payment capability for the contactless mobile transactions is provided by MasterCard, while the Dutch digital security provider Gemalto provides Barclays with Trusted Service Management (TSM) operated services that enable the secure deployment and management of mobile contactless payments. Gemalto’s NFC services also include the UICC Cards supplied to Orange. This is one example of the considerable progress made in recent years. Nevertheless, mass- market adoption of mobile financial services is not yet emerging.

4.2.2 Eastern Europe: moving towards maturity

On the other side of the former iron curtain, Europe’s Central and Eastern Europe (CEE) developing markets have a different story to tell. While CEE is one step behind the more developed nations of Western Europe, its lower-income countries and consumers constitute a fertile ground for the proliferation of mobile financial services. What needs to be made clear here is the context in which mobile financial services can be deployed. In developing markets m-payments need to solve problems and ease pain points, such as helping unbanked / underbanked consumers gain financial inclusion and access to basic financial services. However, the CEE space is by no means lacking in dynamism on other fronts including the commercial, regulatory and political arenas. Over the past year, mobile financial services trials have been initiated in countries as diverse as Slovakia, Poland and The Czech Republic.

41 Barclays Newsroom - 'Orange and Barclaycard launch of the UK’s first contactless mobile payments service', 2011

54 Mobile payments 2013 - Europe: on the edge of convergence

In Slovakia, Gemalto42 has been selected by local financial services provider UniCredit Slovakia to provide the Optelio contactless stickers for the first commercial mobile payments deployment. The Slovakian bank is part of UniCredit Group, a European bank present in 22 countries and an overall global network serving approximately 50 markets through over 9,600 branches. By attaching the Optelio contactless sticker to their mobile phones, UniCredit customers are expected to be able to use the contactless feature for payments under EUR 20, with larger transaction amounts requiring a PIN code. Payments via the service can be made in fast food restaurants, cinemas, supermarkets and other retail outlets across Slovakia, with a contactless payment market of over 3,000 acceptance points in place. Gemalto has also made its presence felt in Poland43, where it partnered with mobile network PTK Centertel, an Orange group affiliate, to deploy an NFC mobile payments program. The latter would enable PTK Centertel’s customers to use their mobile phone to pay for goods and services with a wave of their handset. Poland has a contactless infrastructure of approximately 35,000 acceptance points, including fast food restaurants, cinemas, supermarkets and a number of retailers. As part of the partnership, Gemalto has provided an offering that includes NFC software and user interface applications embedded on an NFC SIM, as well as Trusted Service Management (TSM) services. The Polish initiative shows Gemalto’s role in Orange Group’s NFC expansion strategy which is already deployed in the UK and France. In the Czech Republic, telecom and ICT service providers Telefónica O2, T-Mobile and Vodafone partnered to develop a joint platform in a bid to drive mobile payment adoption in the Czech Republic, according to online news outlet cellular-news.com44. Dubbed "Plat mobilem" ("Pay by Mobile"), the platform will enable customers to pay for their purchases at checkout points using their mobile devices, either by sending a Premium SMS or via the jointly-developed payment gateway. In addition, customers using pre-paid SIM cards will have the amount deducted from the loaded credit, whereas customers with a tariff plan will have the amount charged on their monthly Statement of Services. No need for previous registration is required as the service will be activated as part of existing contracts.

4.3 Multi-stakeholder collaboration on implementing NFC

NFC mobile payments are mostly used in Asia, for instance in Japan and South Korea, where paying with a NFC-enabled mobile phone or an NFC-smartcard is already part of everyday life. In Europe however, NFC mobile payment business models have yet to materialise. Most predictions on the future size of the NFC mobile payments market are encouraging and positive, even though the market still has to prove them right. Indeed, in recent years there

42 The Paypers - 'Slovakia: UniCredit selects Gemalto Optelio service for mobile payments', 2011 43 Gemalto Media Room - 'Gemalto and Orange Group Extend Collaboration on NFC with Rollout of Poland's Largest Mobile Contactless Program', 2011 44 The Paypers - 'Mobile contactless trial program starts in the Czech Republic', 2011

55 Mobile payments 2013 - Europe: on the edge of convergence

have been many developments in NFC technology and some contactless technology development institutions have created specifications and protocols to incorporate their solutions into the NFC ecosystem. Juniper Research45, for example, believed that the gross transaction value of payments made via NFC contactless technology, for relatively low value purchases (including refreshments, tickets and food), will exceed USD 75B worldwide by 2013. In a more recent report, Juniper forecasts that mobile payments for digital and physical goods, money transfers and NFC transactions will quadruple by 2014, reaching USD 630B in value46. However, in areas such as NFC greater collaboration is required to establish a widely accepted business model that translates easily into tangible services. Some of the fears about security of NFC enabled mobile payments centre around the short communication distance between the sender and the receiver. Other threats come from skimming, eavesdropping (where a third party intercepts the signal and becomes the receiver of the payment) and tracking (where the unique identification number used to establish communication between phone and terminal can be tracked). The lack of available phones has also been mentioned as an impediment by several companies (like MasterCard) that launched trials which use NFC stickers or tags.

45 Juniper Research – ‘Mobile Payments: Strategies & Markets 2007-2011’, 2008

46 Juniper Research – “Mobile Payment Markets Strategies & Forecasts 2010-2014”, 2012

56 Mobile payments 2013 - Europe: on the edge of convergence

4.4 CASE STUDY: iZettle, Mobile Point of Sale from the Nordics iZettle is one of the most talked about companies in the European mobile payments area. iZettle offers a simple way for merchants and individuals to accept credit and debit card payments through the use of a smartphone and a special device to attach to it. iZettle’s service includes an app and the world’s first mini chip-card reader that turns smartphones and tablets into an EMV approved chip-card terminal, instantly ready for secure transactions. iZettle lets anyone, individuals and small businesses, to take credit or debit card payments anytime, anywhere. What’s making iZettle flourish in the market is its pricing scheme: unlike traditional point of sale terminals, iZettle has no lengthy sign up processes or fixed fees. Instead, iZettle charges a percentage of the transaction amount. As iZettle is the world’s first mini chip-card reader for smartphones and tablets, the company experienced huge interest from all over the world right from the start – from banks and MNOs seeing opportunities for partnerships – and from small business and individuals across Europe who had been waiting for a service like iZettle. iZettle offers advantages over other systems that let businesses accept chip-card payments – it requires no financial commitment, no lengthy sign-up process, monthly fees or minimum. It offers a simple pricing model and only charge users for successful transactions. There are about 20M small businesses across Europe who currently don’t take card payments so iZettle is naturally targeting the biggest payment markets in Europe – Germany, France, Italy and Spain are key areas for expansion. As of August 2012, iZettle have 75,000 merchants (small businesses and individuals) around the Nordics and the U.K. It is also beta testing the service in additional European markets. The average transaction value is €60. The interest in iZettle has been really amazing, Jacob de Geer and Magnus Nilsson (cofounders) say. ‘What’s so fantastic is that there really is no typical iZettle merchant. Instead we see a wide range of users – from dog walkers, silver smiths, street vendors, and personal trainers, to bands, taxis, hair stylists, artists, and bicycle delivery companies. What they do have in common is that they formerly got paid in cash or by cheques and invoices. As far as market expansion goes, a year from now iZettle expects to be operating in the biggest payment markets in Europe. It will also target outside of Europe where chip-card penetration is high but card payment facilities are still relatively rare among smaller businesses. iZettle started off as the first payments company in the world that offered an EMV approved mini chip-card reader and app that transforms a smartphone or tablet into a mobile card terminal. With such an interest in solutions like iZettle it’s only natural that more players are

57 Mobile payments 2013 - Europe: on the edge of convergence

entering the market. Currently, there are various European companies (such as PayLeven, JUSP, PayPal and mPowa) that are trying to compete, but as the market is still maturing, a clear winner is still not to be found.

4.5 M-SEPA: piggybacking on standardization

It is not only on a regional or national level that parties are collaborating. On a European level there have also been attempts to standardise mobile contactless transactions. In order to standardise payments the European Union has created the Single Euro Payments Area (SEPA). The vision of the European banking initiative is to make all electronic payments across the euro area, for example by credit card, debit card, bank transfer or direct debit, as easy as domestic payments are now. An expanded market in Europe is expected to boost technological innovation in terms of cards and other payment businesses. We are already seeing product developments in contactless or 'tap-and-go' cards, as well as in convergence with mobile telephone technology. In Europe, more banks and mobile network operators are initiating trials of mobile and contactless payments via NFC. The GSM Association (GSMA), which brings together major mobile operators around the world, and the European Payment Council (EPC) have published a paper that could speed up the adoption of NFC-based mobile phone payments in Europe47. EPC and GSMA have released the paper 'TSM Service Management Requirements and Specifications' in the Single Euro Payments Area for public consultation. This document focuses on various processes involved in the provision and lifecycle management of banks’ mobile contactless payment applications incorporated into a mobile device. The document describes the Mobile Contactless Payment (MCP) as any SEPA card based payment executed by a customer using a Mobile Contactless Payment Application provided by an issuer and loaded onto the Universal Integrated Circuit Card (UICC – also known as a SIM card and provided by a mobile network operator) of a customer’s NFC enabled mobile phone. According to the paper, using mobile devices for contactless payments in a secure manner is the next step in the development of mobile applications and payment systems. The document contains specifications meant to enable Universal Integrated Circuit Card-based NFC-enabled Mobile Contactless Payment Application deployment and interoperability between issuers and mobile network operators. The collaboration between mobile network operators and payment providers potentially could enable more than 300M consumers to make SEPA payments on their phones. The two organizations plan for the new services to be managed by a trusted service manager, an intermediary between banks and mobile operators, which would provide

47 EPC, GSMA - 'TSM Service Management Requirements and Specifications’, 2010

58 Mobile payments 2013 - Europe: on the edge of convergence

a single point of contact for mobile service providers and manage the activation of mobile services on NFC-enabled handsets.

5 North America: epic battle for consumer ownership

When it comes to the North American mobile financial services landscape, the main challenge lies in separating hype from fact and putting the state of affairs into perspective. In order to do this, there are first of all a few preconceptions that must be dispelled, or at least brought down to more reasonable proportions. First off, the reality of the situation is that currently, mobile payments are not happening on a large scale – not yet, at least. In the US as worldwide, m-payments are growing but are still worth just a fraction of total e-commerce payment volumes. A survey by Yankee Group indicates that in terms of mobile transactions value, North America is lagging behind EMEA, which in 2011 accounted for 41% of global mobile transactions value, compared to 35% in North America. Also, despite the hype that surrounds NFC, this technology is expected to need at least a few years before going truly mainstream as the majority of m-payments in the US are currently WAP-powered and are likely to remain so through 2016, according to a May 2012 survey by Gartner. Yet another research report made public in February 2012 by comScore found that NFC use is virtually non-existent among US mobile bankers. The study indicates that US mobile banking users engage with financial institutions from their devices primarily via a mobile browser, a dedicated app or text messaging (SMS) and text alerts. Browser usage continues to be the dominant channel US consumers use to access banking-related services from a mobile device: the survey found that some 17.6M US mobile banking users turn to their browsers to access banking information. Despite previous overly optimistic predictions, North America is not a mobile payments paradise where consumers use their handsets to carry out all types of mobile financial transactions with little hesitation. Overall North America is a developed market, with high mobile phone penetration, diverse mobile service offerings, a higher proportion of upper-market consumers and sophisticated market dynamics among banks, MNOs and third-party payment processors. In addition, while in North America the mobile channel faces serious competition from payment instruments, such as bank cards, payment cards and the online (banking) channel, there is still a long way to go before all opportunities offered by true financial mobility are exhausted. When it comes to the relatively low uptake of mobile commerce in North America keep in mind that, unlike Africa or Latin America, where consumers use handsets as a lifeline to previously inaccessible (basic) financial services, North America is a much more layered, developed market. The mobile opportunity in a developed market stems from the fact that in such a challenge-rich context, mobile phones can fulfil a variety of roles. Revenue from mobile financial services can come in a variety of ways and mobile payments can be packaged to meet a wide array of consumer-, merchant- and corporate needs. This versatility can only occur in a developed mobile ecosystem.

60 Mobile payments 2013 - North America: epic battle for consumer ownership

This chapter aims to provide an overview of the North American mobile financial landscape, as well as to explore the various types of services in use and have a look at what the future holds for this highly dynamic market.

5.1 Overview of the North American mobile payments landscape

5.1.1 USA: low uptake of mobile financial services, battle for consumer ownership is fierce

As far as mobile financial services are concerned, North America is predicted to account for 35% of all mobile transactions worldwide by the end of the year, ranking second after EMEA, which is expected to account for 41% of the global mobile transactions value in 201148. In 2011, the US had a total of 331.6M mobile subscribers, which equates to 105.8% of the population49. According to Morgan Stanley50, in 2010 37% of all handsets owned by US consumers were 3G-enabled, ranking the US at number 7 in the top 10 countries worldwide as far as penetration of 3G handsets is concerned. More widespread availability of unlimited data plans has helped the US overtake and extend its lead in mobile media use, such as mobile web, apps and content downloads, compared to Western Europe. comScore51 for instance found that 29% of US subscribers have unlimited data plans, compared to 8% in Western Europe (which includes the UK, France, Germany, Italy and Spain). Also, anothercomScore study52 monitoring the US mobile consumer market for Q4 2010 found that 234M Americans aged 13 and older used mobile phones and that 63M consumers used smartphones, up 60% from Q4 2009. At the end of 2010, smartphone users represented 27% of the total number of mobile phone users in the US. However, while in the US mobile phone penetration is over 100% and a wide variety of mobile- based financial services are available, consumer mobile behaviour statistics53 indicate that financial activities do not rank among US consumers’ top things to do with their mobile phones, irrespective of the technical sophistication of the device. In other words, owning a mobile phone (even a smartphone) is not synonymous to using it to access mobile financial services. Reports by Research and Markets, a research company, show that at the beginning of 2011 only 30% of US mobile users accessed online banking services. By 2015 however, numerous forecasts expect at least 50% of US mobile users to be conducting transactions from their mobile devices. Then, the question that comes to mind is: why the power play? Why are banks, credit card networks, telecoms and technology companies vying for control of a still-struggling US mobile

48 Yankee Group - 'Mobile Money Forecast ', 2011 49 CTIA – ‘ Wireless Quick Facts’, 2011 50 Kleiner Perkins - 'Internet Trends’, 2011 51 comScore - ‘The 2010 Mobile Year in Review’, 2011 52 comScore - 'comScore MobiLens ', 2011 53 comScore – ‘The 2010 Mobile Year in Review’, 2011

61 Mobile payments 2013 - North America: epic battle for consumer ownership

financial services market? And why is the US financial services industry so keen on investing billions into mobile payment solutions? The answer is that what the US mobile payment market lacks in transaction volumes and consumer adoption, it makes up for by being very dynamic, with technologies still emerging and new business models still being trialed. The potential for large-scale consumer adoption of mobile payments is there, and although industry estimates are getting progressively less optimistic in recent years, we do not need to look further than mobile credit card processing company Square to see just how successful a disruptive mobile payments solution and business model can be. Launched in early 2009, by the end of 2011 Square was processing payments worth USD 11M on a daily basis. Also, in terms of device sophistication the US is a mature market, with 234M Americans aged 13 and older currently using mobile devices and over 100M of them being smartphone subscribers (according to a March 2012 comScore survey). Also, Nielsen’s US Digital Consumer Report reveals that while only 29% of US smartphone owners use their phone for shopping- related activities, 71% of smartphone app downloaders would be interested in an app that allows them to use their phone as a credit card. The potential for large-scale consumer adoption of mobile payments is clearly there – a blessing and a curse, given that the playing field keeps getting progressively more crowded, with many available solutions, resulting in confusion for buyers. But then, there is another challenge, this time one of principle rather than practice – namely, convincing a sufficient percentage of US shoppers that paying via their mobile device is truly faster, safer and more convenient than using their plastic cards. Despite the low uptake of mobile financial services, retailers remain optimistic. According to a study by Forrester Research together with Shop.org, m-commerce revenues are expected to hit USD 6B by the end of 2011, growing to USD 31B by 201654. This despite the fact that globally, m-commerce is only expected to account for 2% of e-commerce in 2011, and 7% of e- commerce by 2016. The data also indicates that 91% of online retailers in the US have a mobile strategy in place or in development. Moreover, 48% of US retailers surveyed by Shop.org and Forrester had a mobile-optimised website, 35% of them had deployed an iPhone app, 15% had deployed an Android app and 15% had deployed an iPad app. As mentioned in this chapter, the data shows that even a developed mobile market, such as the one in the US still holds significant untapped revenue potential, as long as the mobile payment channel is properly adapted to the context in which these payments are expected to take place. Whether the US mobile ecosystem can sustain long-term growth in m-commerce is a different discussion. Arguably, long-term m-commerce growth is more likely to originate in developing economies, where the mobile channel is virtually the only way to access the internet. However, a sophisticated market like the US has both the potential and the resources to develop and support innovation in mobile payments.

54 Shop.org - Retailers Increasing Mobile and Social Efforts According to Shop.org/Forrester Survey, 2011

62 Mobile payments 2013 - North America: epic battle for consumer ownership

In an ecosystem that is still struggling to gain traction, competition has been getting progressively fiercer. Both Visa and MasterCard have been very active in the mobile wallet and mobile payments space. Online payments giant PayPal has also been taking decisive steps to beef up its presence in the mobile space, with its parent company eBay estimating that the total payment volume carried out via mobile devices through PayPal would reach USD 3.5B in 2011. Not to be outdone, MNO giants AT&T Verizon and T- Mobile USA have been working to consolidate their Isis joint venture, while tech giant Google has rolled out its much-anticipated Google Wallet. And while the very nature of mobile payments means that cooperation is needed in order to achieve success, everyone clearly wants to be at the head of the pack.

5.1.2 Canada: diverse offering, still lacking widespread drive

The Canadian mobile financial services ecosystem is varied. It includes mobile payments and mobile banking offerings, m-wallets and carrier billing options. Smartphones in particular are growing in popularity among Canadians, as indicated by July 2011 estimates from Toronto- based Solutions Research Group55. The latter indicate that over 2.5M Canadians currently carry out purchases via their smartphones. A similar survey carried out on behalf of PayPal Canada56 provides additional data with regard to the main drivers behind consumers’ increased adoption of smartphone-enabled mobile payments. In Canada, convenience seems to be a significant argument prompting users to value the mobile channel, which allows them to shop, share expenses, send money or get paid back via one single device – their handset. NFC and other smartphone-based e-wallet solutions are thus expected to become major competitors to cash and bank cards in the Canadian market. But Canada’s mobile financial services ecosystem is even more comprehensive than that. The Task Force for the Payments System Review, an organisation appointed in 2012 by the Canadian Minister of Finance, issued a report in April 2012 analysing the Canadian mobile payments market and the role that the Canadian government must play in the adoption of e- invoicing and mobile payments services. By having an in-depth look at the Canadian digital payments landscape, the study has found that although Canada is falling behind in the international push to generate a mobile ecosystem, the country has the ability to take a leap into the digital era by resorting to a combination of strong government leadership and sound governance. Despite the fact that Canadians are considered to be early adopters of technology, the study found them to still rely largely on old-fashioned methods of payment, such as paper-based processing of bank transfers, cash and cheques.

55 Solutions Research group – ‘2011 Mobile Money & Banking’, 2011

56 PayPal Canada – ‘PayPal Canada Mobile Wallet Survey’, 2011

63 Mobile payments 2013 - North America: epic battle for consumer ownership

The Task Force study signaled that unless Canada develops a modern digital payments system, Canadians would be unable to fully engage in the digital economy of the 21st century‚ leading to a lower standard of living across the country and a loss in international competitiveness. Additionally, the Task Force report argues that a modernised payments system could save the Canadian economy as much as 2% of GDP in productivity gains‚ equivalent to CAD 32B in annual savings for Canada. Also, a modern Canadian payments system will lead to far greater choice, efficiency and convenience for consumers, businesses, governments and organisations, as well as a safer, more secure system. Furthermore, the study has unveiled some of the challenges that the adoption of mobile payments faces in Canada. Players in The Canadian payments system‚ consumers, retailers, SMEs, large businesses, governments and not-for-profit organisations‚ are dissatisfied with the lack of digital alternatives to paper cheques and invoices as well as the lack of a payments infrastructure. Consequently, more than half of consumer payments‚ including those to retailers, schools, charities, associations, relatives and friends‚ are made with either cash or cheques. The study warns that about one billion cheques are written annually in Canada. Some 60% of the cheques is issued by the government, large corporations and SMEs while 405 is issued by consumers. The Canadian system was found to be controlled by major banks and other key institutions whose interests are best served by keeping at bay new entrants to the system‚ the very entrants who would bring the innovations that Canadians need. Therefore, in the absence of a healthy competitive environment, the government is the one who needs to create demand for a modern digital payments system. In order for it to be a viable system, it must put the needs of users first, protect the public interest and encourage collaboration and innovation by all stakeholders now and in the future. Additionally, the study claimed that that financial institutions’ reluctance to replace legacy systems when a digital alternative may not deliver the same revenues is understandable‚ but it is not good for Canada and will not, in the long term, be good for the financial institutions. In fact, reducing the use of cheques will not necessarily lead to lost revenues for banks. Some estimates show that financial institutions will save CAD 600M a year in cheque-handling related cost savings by 2020 under a digital payments system. In other words, the Canadian government should pass legislation to define a discrete payments industry and create a public oversight body to ensure effective governance of the industry, amend the Canadian Payments Act by overhauling the governance, business model and powers of the Canadian Payments Association and, most important, transform the payments infrastructure so that it can innovate to meet the evolving payment needs of Canadians in a digital economy.

64 Mobile payments 2013 - North America: epic battle for consumer ownership

5.2 Smartphones taking over the US market

46% of US consumers are currently smartphone owners and that share is likely to continue to grow in the foreseeable future, according to The Payments Report issued by US management consulting firm Auriemma Consulting Group. The research found that sophisticated phones could soon dominate the US payments landscape by enabling consumers to use these devices instead of other forms of payment, either via contactless chips that could be read at terminals or via downloadable applications. So far, however, predictions for smartphone devices replacing the plastic payment cards have proven to be premature and the use of smartphones for payments is unlikely to be the primary motivation in selecting either a new mobile carrier or a new phone. Furthermore, the same report revealed that less than a third of US respondents would switch handsets in order to use their mobile phones to make purchases. This figure was slightly higher among consumers under age 45 (41% vs. 20% among older respondents). However, only 23% of US consumers reported considering switching mobile telephone providers in order to obtain a phone that has the ability to facilitate mobile payments. Finally, the survey has found that consumer concerns about mobile security continue to be a priority. While 66% of polled consumers say they are already satisfied with their current payment methods, 73% of US consumers are worried about security.

5.2.1 People getting more connected

The advent of smartphones and the emergence of app stores have truly altered the way people use their mobile phones. The creation of apps has led to more extensive and specific functionalities for the smartphone with a better user experience. Consumer behaviour is increasingly influenced by this growing convergence of multiple technologies on single devices that are available on an “anytime, anywhere” basis, allowing the internet to evolve and grow its reach even further. This is where the value of the mobile channel becomes more evident, because as far as convergence is concerned, smartphones are well-placed to allow consumers to carry out multiple types of activities: pay online in social networking / gaming environments, receive mobile transaction alerts and opt-in promotional information, carry out mobile money transfers, access funds, pay bills or top-up wireless airtime as well as carry out mobile NFC- enabled transactions (provided the right infrastructure is in place).

65 Mobile payments 2013 - North America: epic battle for consumer ownership

US Consumers Smartphone Usage

98% 100% 83% 78% 80%

60% 52% 44% 40%

20%

0% Smartphone Use at home Use it on the go Use it in store Look up local Adoption products Figure 10: US smartphone use. Source: Google / IPSOS OTX – ‘Our mobile planet: Understanding Smartphone Users’, 2012

According to Google’s 201257 survey, US smartphone adoption is on the rise, levelling at 44% in Q1 2012. Smartphone users are becoming more and more attached to their devices, 66% of them using it every day to connect to the internet, and more than 80% using it on the go. Smartphones are also being used by the American population to research products and services: 57% of the respondents carry out at least one search a day on their devices with more than 90% of those searches referring to local availability or information on products. More importantly, smartphones are being used by 31% of users to look up information about products while in store. As far as the divide between mobile web and mobile app usage is concerned, a comScore58 study found that the mobile web currently trumps mobile app usage, but mobile app popularity is growing at a faster rate. According to the research, in Q4 2010 30M US customers accessed their accounts via mobile devices, marking a 54% increase compared to Q4 2009. The research found that in the interval under review, 18.6M users accessed their accounts via mobile browsers (a 58% growth compared to Q4 2009), while 10.8M consumers accessed their accounts via mobile applications, up 120% compared to the same interval in 2009. The report points out that SMS represented the smallest access point for financial service audiences with 8.1M US users in Q4 2010, up 35% from Q4 2009. The reality of the situation is that even in developed markets such as the US (where smartphone penetration is higher), more consumers use the mobile web than mobile apps, and very few consumers use either mobile apps or mobile web exclusively. In fact, US

57 Google / IPSOS OTX – ‘Our mobile planet: Understanding Smartphone Users’, 2012. 58 comScore - 'The comScore 2010 Mobile Year in Review’, 2011

66 Mobile payments 2013 - North America: epic battle for consumer ownership

consumers prefer browsers to apps for most mobile activities, according to a Keynote/Adobe survey59 of US smartphone users carried out in October 2010. Also, according to a Nielsen June 2010 survey, the most used apps across all smartphones in the US are Facebook, Google Maps and The Weather Channel (TWC). The most popular app categories are games, news, maps, social networking and music. Mobile financial services apps (whether for m-banking or P2P mobile-enabled payments) simply do nott make the cut – yet. The situation is unlikely to change considerably in the coming years; in fact, if we are to listen to ABI Research, app stores are likely to slowly decline by 2013, as subscribers migrate from downloaded apps to mobile websites. This switch is fuelled by app developers trying new distribution channels other than appstores, which dictates the use of only some monetization methods, which are not the best options for developers. Also, phone manufacturers are increasingly preloading some of the more popular apps, such as social networking, onto mobile devices, making it redundant for consumers to download the apps themselves from an app store. Gartner, however, does not share this rather pessimistic view. In fact, the company’s most recent statistics on mobile commerce indicate that the success of mobile-application stores, such as Apple's App Store is one factor which causes merchandise purchases to outweigh other use cases in developed markets such as North America, along with the efforts in driving mobile sales by major retailers, such as Amazon and eBay.

5.2.2 Positive outlook for mobile banking

In a report titled “2011 State of Online and Mobile Banking”, market research firm comScore has revealed that mobile continues to grow in popularity as a channel for acquiring financial information and account servicing, with mobile financial users representing 16% of the US mobile audience of 234M users in Q2 2011. The report has shown that the number of US mobile users who access banking information is considerably higher than the number of consumers who use their mobile phones to access other financial services related to credit cards, auto/property insurance or stocks/mutual funds. Consequently, there were 32.5M US users in Q2 2011 who accessed banking information compared to 18.4M who used their mobile phone for credit cards, 7.2M who used it for auto or property insurance and 9.6M who used their mobile devices for stocks/mutual funds. Furthermore, the study has found that the widespread adoption of smartphones among mobile users allows for a user-friendly web-browsing experience and significantly greater access to apps associated with bank accounts. In Q2 2011, 33.5% of all mobile users owned a smartphone, enabling greater mobile media consumption and access to bank accounts while

59 Keynote / Adobe - ‘Adobe Mobile Experience Survey’, 2010

67 Mobile payments 2013 - North America: epic battle for consumer ownership

on-the-go. By November 2011, this percentage grew to 39.1%. The survey has also revealed that in 2010 the US mobile customers’ preferred platform was RIM followed by Apple and Google. However, by the end of 2011, Google has taken over the lead followed by Apple, RIM, Microsoft, Symbian and Palm. Additionally, the total US mobile audience grew from 20% in 2010 to almost 405 at the end of 2011. According to the survey, US mobile banking users engage with financial institutions from their devices via a mobile browser, a dedicated app or text messaging (SMS) and text alerts. Browser usage continues to be the dominant channel US consumers use to access banking-related services from a mobile device: the survey found that some17.6M US mobile banking users turn to their browsers to access banking information. Some smartphone owners were found to remain uncomfortable or be unfamiliar with available financial service apps in the marketplace and how to effectively use these from their devices. The survey has also shown a growth in app usage among US mobile financial users reaching 13.7M users compared to 6.3M mobile credit card app users. The comScore survey has found that it becomes increasingly important for US banking institutions to invest in their mobile channel, as 52% of polled bank customers have accessed their account from a mobile browser at least once a week, 56% from a PC or laptop, 42% clicked on a link in a text message and 41% of bank customers accessed their accounts from a mobile app. As client servicing via the mobile channel becomes a regular mode of contact for highly-engaged mobile financial users, it is critical for banks to ensure that they provide user- friendly mobile experience that meets their customers’ needs. The survey has also revealed that 3 out of every 5 US mobile bankers are between the age of 18-34 (59%), more than double the percentage of those who do not take advantage of mobile banking offerings (28%). Consequently, mobile bankers are twice as likely to have a household income of USD 100k or more than non-users (31% vs. 15%).

Awareness of Mobile Banking Offerings Among Smartphone Users Source: comScore 2011 State of Online and Mobile Banking

Editing bank account preferences 27% Depositing cheques remotely 29% Transferring money 43% Paying bills 43% Finding the nearest bank/ ATM 45% Receiving bank alerts 45% Viewing transactions 48% Checking balances 57%

Figure 11: Mobile banking functionality awareness, 2011.

68 Mobile payments 2013 - North America: epic battle for consumer ownership

Finally, the survey has found that, among those who are aware of mobile banking functionalities, awareness is twice as high as actual adoption and is limited to slightly more than half of all smartphone owners with a bank account. Although smartphone users are aware of options such as checking balances (57%), viewing transactions (48%), receiving bank alerts (45%), paying bills (43%), transferring money (43%), only few of them use these features. To illustrate, the banking activities conducted most often from a mobile device by smartphone users are checking balances (32%) and viewing transactions (23%), followed by receiving bank alerts (16%), paying bills (16%) and transferring money (15%). As online and mobile banking services are gradually adopted, building a positive customer experience becomes more important.

Use of Mobile Banking Offerings Among Smartphone Owners Source: comScore 2011 State of Online and Mobile Banking

Editing bank account preferences 6% Depositing cheques remotely 5% Transferring money 15% Paying bills 16% Finding the nearest bank/ ATM 16% Receiving bank alerts 16% Viewing transactions 23% Checking balances 32%

Figure 12: Mobile banking functionality usage, 2011.

With more financial customers shifting to using online and mobile banking channels more frequently, it is critical for financial institutions to provide a reliable, secure and user- friendly experience. Just as improvements to website features have a positive impact on customer satisfaction measures, enhancements to mobile usability have the potential to bolster the bank’s brand and encourage the adoption of mobile financial services.

5.2.3 Increasing risk of fraud

Mobile commerce and transaction execution are expected to increase at a rapid pace by the end of 2013, with the improvement of browser experiences on smartphones, a report by Gartner revealed60 in late 2010. However, they also point out that the growth in m-commerce

60 Gartner – ‘Get Smart With Context-Aware Mobile Fraud Detection, 2010

69 Mobile payments 2013 - North America: epic battle for consumer ownership

transactions will necessitate the development of fraud detection mechanisms capable of coping with fraud-related issues specific to the mobile world. According to Gartner, 12.5% of all e-commerce transactions are expected to be carried out via mobile devices by the end of 2013, as a result of the rapid adoption of smartphones. This hasty adoption is forcing banks, social networks and other e-commerce providers to implement the types of fraud detection capabilities on mobile platforms that have already become mainstream with fixed-line computing. The main problem is that the fraud detection tools available today in fixed-line computing environments do not work well or at all in the mobile world. Although there are a number of methods that can be implemented to help enterprises detect fraud in the mobile environment, they are still in their early stages of development, and it will take until at least 2014 for them to reach the stage of technically mature systems that work easily and transparently across disparate mobile networks. According to Gartner, fraud prevention methods available today to mobile applications include mobile device identification (enabled through a JavaScript on the server that the user logs in to, which captures whatever information it can get from the user's browser and phone) and location of device (based on the phone's location information independent of the browser). The study has also predicted that location or profile information from mobile phones will be used to validate 90% of mobile transactions by year-end 2013. With such a forecast, the development of professional fraud detection tools is expected to play a significant role in the transformation of mobile commerce into location- and context-aware commerce, contributing to the increase in confidence on the part of businesses, financial institutions as well as end users. Security concerns over m-payments give US banks an edge. Within the context of fraud continuing to be a major deterrent for widespread adoption of mobile financial services among US consumers, a survey made public by global market research company Market Strategies in Q1 2012 found that US banks might actually have an unexpected edge in this sector. US retail banks take customers’ concerns regarding online and mobile security as a competitive advantage over other financial services, technology and communications companies, the study found. According to the report, more than 6 of 10 US consumers are concerned that mobile payment solutions could jeopardise their financial and/or personal security. The major providers of mobile payment services are in a position to convert this security challenge into a competitive advantage, noting that banks may have the biggest advantage with their existing customers. Additionally, the report has found that consumers prefer a mobile payment service provided by a financial services company by a wide margin over a technology or communications company.

70 Mobile payments 2013 - North America: epic battle for consumer ownership

Trustworthy providers of mobile payments services, as perceived by consumers Source: Market Strategies International survey, Feb 2012 73% 67% 62% 62% 59% 54% 49% 47% 45% 42% 34% 32%

Current banks Visa PayPal MasterCard AmEx Discover

Smartphone users Standard mobile phone users

Figure 13: Consumer trust in mobile payment service providers, 2012.

Both smartphone users and mobile phone users have cited their current banks as the most trustworthy providers followed by Visa, PayPal, MasterCard, American Express and Discover. Finally, the report has shown that PayPal scored at parity with Visa and MasterCard as a trusted provider which means that banks partnering with VISA and MasterCard in their credit card businesses will have the opportunity to consider working with PayPal as a trusted partner in the mobile payments system. If you thought the US mobile financial services space was competitive – a report made public by the Wall Street Journal in early May 2012 indicated that the fight to capture that ever- elusive consumer confidence and drive consumers to use their mobile devices as payment tools was about to reach a whole new level. And this time, the new player about to enter the fray was not a disruptive hi-tech start-up, or an alliance of banks and MNOs. This time, a number of major US retailers – some two dozen according to the initial report, including giants such as Target and Wal-Mart – had joined forces and announced their intention to develop their own mobile payments solution for consumers. As a result, the already fragmented ecosystem of players and initiatives vying for control in the US mobile payments market became even more divided and more complex. The Wall Street Journal, which broke the story, also reported that representatives of the US retailers involved in the m-payments joint venture declared themselves “disappointed” with the current solutions available on the market, which – they feel – are not secure enough and do little in terms of value added services for consumers, such as targeted offerings, loyalty programs and couponing. This sounds like a bit of a stretch, particularly if we consider the fact that financial services providers now moving into the m-payments space (such as Visa, MasterCard and PayPal) already have global reach, years of experience in moving money and solid infrastructures at their disposal.

71 Mobile payments 2013 - North America: epic battle for consumer ownership

The true bone of contention here is; who owns the customer data? What has presumably prompted these major US retailers to join forces in a bid to deliver yet another m-payments solution is ownership of the extremely precious customer details – because in turn, owning this information opens up additional revenue streams having to do with personalised couponing and location-based marketing opportunities. The question at this point becomes; are retailers better positioned to promote mobile payments adoption among consumers? They certainly have the market presence necessary to reach masses of consumers and considerable experience in the area of value added services and managing customer loyalty programs. Whether this is enough to convince clients to abandon their plastic cards in favour of their mobiles, remains to be seen. The real danger here is oversaturating an already mature market with too many solution options and creating confusion among consumers, who rather than wrapping their heads around yet another alternative (mobile) payment option, may just choose to continue paying with their plastic cards. Betting on NFC – the right answer? The appeal of using mobile contactless-enabled devices in a commercial environment is undeniable. NFC-based transactions take place quickly and in a user-friendly manner. Moreover, NFC devices are versatile: they can be used for actual payments, as well as for ticketing and couponing, they can also function as boarding passes and serve as a medium for advertising and loyalty programs at the PoS. In this context, adding NFC capabilities to mobile phones seems to be a recipe for success. However, although the NFC Forum was formed 8 years ago in 2004 and mobile companies have announced NFC plans and have run a great number of pilots in this area, mass-market adoption of NFC mobile payments has still not happened in the US. While many market players – industry associations such as the GSMA, phone manufacturers, banks and MNOs - are enthusiastic about its undeniable potential, mobile NFC adoption has been lagging behind expectations. Some of the main causes for this are the lack of a supporting infrastructure, the existence of a complex ecosystem of stakeholders and the lack of unified standards. In order for consumers to start using this technology, the proper infrastructure must be put in place, both at merchant and at consumer level. On the other hand, merchants will not invest in the proper infrastructure unless mobile contactless payments reach sufficient volume through increased customer adoption. NFC is exciting and offers huge potential for an array of businesses, but a lot needs to happen if it has any chance of taking off. In the US and Europe, the majority of operators, handset manufacturers and payment providers alike are unwilling to relinquish control over customer data to third-parties and this also contributes to the fact that mobile NFC adoption has been struggling to take off. It appears that the current situation in the US and many European nations is not conducive to mass adoption of mobile NFC deployment and customer adoption anytime soon. However, given that mobile phones are seen by many to be the hallmark of systems and services integration (since they already carry email, daily planners, music, photos, maps,

72 Mobile payments 2013 - North America: epic battle for consumer ownership

applications for banking and mobile money transfers, even books), many predictions on NFC and NFC-enabled phones have been and continue to be highly optimistic.

5.3 Hoping for the “American dream”

A June 2011 study by Juniper Research forecasts that global NFC mobile contactless payment transactions will reach nearly USD 50B worldwide by 2014. Additionally, at the time when the study was released, 20 countries were expected to launch NFC services by the end of 2012 with North America and Western Europe expected to overtake the Far East region in under three years based on transaction value. Furthermore, according to a June 2011 Yankee Group mobile money forecast, NFC-enabled phones were expected to grow from 7M in 2011 to 203M in 2015, a CAGR of 208%. Accordingly, the value of global mobile transactions was also expected to grow from USD 241B in 2011 to more than USD 1T by 2015. That growth, coupled with 500M mobile banking users around the world in the same time frame, presents an enormous opportunity for both new and established players in the mobile money ecosystem. Despite their slower-than-expected rate of adoption in developed and developing markets and the hurdles to overcome, NFC-powered mobile payments adoption is still happening. In the US, Google and Isis are at the head of the pack, spearheading the efforts to make NFC-enabled mobile payments a reality for banks, consumers, MNOs and retailers alike. At the end of May 2011, Google has launched Google Wallet, a mobile payments service that initially allowed owners of Samsung’s Android-powered Nexus S 4G NFC-equipped smartphone handset to trial using their phone for payments at 20 retailers in New York and San Francisco. Google Wallet is NFC-powered, enabling consumers to make payments by tapping their phone on an NFC-enabled terminal at checkout. In September 2011, Google was awarded a worldwide license to Visa’s payWave NFC-based payment technology. Under the terms of the agreement, Visa-issuing banks worldwide enabled Visa account holders to add their credit, debit and prepaid accounts to the Google Wallet. Following this move, Google closed agreements with several US companies including American Eagle Outfitters, Peet's Coffee & Tea and other. Although Google Wallet was expected to be accepted at around 124,000 PayPass-enabled merchants in the US and over 311,000 globally and despite its fulminant launch, at the end of March 2012 Google was allegedly forming plans to share revenue with carriers like US mobile operator Verizon Wireless and US-based mobile operator AT&T in order to enable them to adopt its mobile wallet technology and boost its market share in the mobile payments market. In November 2010, US-based mobile carriers Verizon Wireless, AT&T and Deutsche Telekom’s subsidiary T-Mobile USA established Isis, a joint venture to offer contactless mobile-phone payments based on NFC technology. Initially, Isis teamed up with several US merchants for its NFC-based mobile payments service. In August 2011, international secure mobile transactions

73 Mobile payments 2013 - North America: epic battle for consumer ownership

technology company C-SAM has signed an agreement with Isis to license its wallet management platform and software development kit (SDK). The C-SAM platform was to enable Isis to offer smartphone users a mobile wallet for conducting NFC transactions related to payments, rewards, coupons, tickets, transit and other services. A major step for Isis occurred in September 2011 when seven major mobile device makers agreed to use the Isis NFC technology standard for the mobile payment sector. HTC, LG, Motorola Mobility, RIM, Samsung Mobile and Sony Ericsson introduced NFC-enabled mobile devices which were in conformity with the Isis NFC and technology standards. This technology allowed Isis consumers to use their handsets to make mobile payments, store and present loyalty cards and redeem offers at participating retailers. Recently, Isis has partnered with global provider of payment services Ingenico, US-based NFC software and systems company ViVOtech, payment processing and security vendor Equinox Payments and US-based electronic payment services provider VeriFone Systems to integrate the Isis mobile commerce application in current and future product lines. While NFC is perhaps most closely associated with mobile payments, it has the added advantage that it can go far beyond; NFC could also be used to facilitate a wide range of new applications for consumers, such as mobile ticketing to board public transportation, the exchange of information and content, control access to cars, homes, hotels, offices and car parks and more. This is just the tip of the iceberg, as the possibility for innovation is endless, provided the right context and business models are identified and implemented. For operators, NFC is a crucial enabler for a whole array of new services that will become indispensable in people’s lives. Mobile payments are probably the first opportunity that comes to mind, but not the only one. We are all familiar with contactless bank and transport cards. These contactless cards have created interest in the NFC space and are encouraging merchants to put in place PoS terminals. In the UK, McDonald’s offers NFC payments in restaurants across the country and other merchants are following suit. Customers with a mobile phone have the advantage of getting e-coupons from merchant terminals. Mobile NFC would be able to read smart tags in and outside of stores and get up-to- date information and offers, thus creating a totally new shopping and information experience. Because mobile can enable more targeted offers to consumers, it could in turn encourage merchants to install terminals ready to receive payments for those offers. In the UK, the UK Internet Advertising Bureau conducted a research and found that UK consumers now see NFC as “a positive move for mobile”, with 74% of consumers reacting favourably towards using NFC services. These statistics underscore the importance of NFC- devices have gained in our lives, and why mobile is the ideal platform for these new services. Differing approaches to NFC will fragment the market, and potentially stifle the growth of NFC. There are a number of potential methods of deploying NFC being explored in the market - stickers, micro Secure Digital (SD) cards, technology embedded in the device. Another viable option could be the Subscriber Identity Module (SIM)- based approach - a viable route to take

74 Mobile payments 2013 - North America: epic battle for consumer ownership

since SIM cards are provided by the same manufacturers who provide secure chips for credit cards, and thus offer bank-grade security. The connection between the NFC chip and the SIM card is industry standard, utilising the Single Wire Protocol. The SIM can support multiple services, it can be updated over the air and provides portability between devices and operators. The SIM is certified and standardised, and is also tamper-resistant, providing greater security over other NFC form factors. Further, because SIM-based mobile NFC services can be remotely provisioned over the air, they can also be terminated in the event of handset loss or theft.

5.4 The mobile PoS revelation

A recent phenomenon is the use of the mobile phone as a Point of Sale (PoS) to accept (typically) card payments. With the help of an extra device and an application for the hardware the mobile phone can be used to accept such payments. The external card readers typically support payments between consumers and small enterprises. They are specifically targeted for enterprises not large enough for traditional PoS devices, thereby providing access to those otherwise excluded due to high up-front investments. There are a few initiatives in this field, each with a slightly different approach and different background. Most of these initiatives originate from the USA. The most successful and famous one is also the first mover in this field: Square. Founded by Twitter co-founder Jack Dorsey, Square is now already processing payments in excess of $8Bn (in September 2012). Through strategic partnerships with famous coffee retail shop Starbucks, Square is aiming at becoming one of the leading players in mobile POS solutions. Verifone, the US provider of PoS solutions and also mother of the PayWare solutions, provides a device surrounding the iPhone through which the card can be swiped61. The Verifone solution also includes a stylus by which cardholders can sign for the transaction. Mophie, the US provider of iPhone hardware such as external battery cases, also developed an iPhone case that allows users to accept credit card payments62. Intuit, the US provider of financial services software and hardware that works with Mophie card readers has also developed its own card reader that can be mounted in the audio jack of iPhones, Android phones and Blackberry smartphones63.

61 Verifone Media Room – ‘VeriFone’s PAYware Mobile Now Available on App Store as Credit Card Encryption Sleeve Begins Shipping’, 2010

62 Mophie Media Room – ‘mophie Powers Mobile Credit Card Transactions for the iPhone’, 2010

63 Mophie Media Room – ‘Intuit GoPayment and mophie marketplace Offer Complete Credit Card Solution for iPhone ‘, 2010

6 Asia-Pacific: taking the lead in m-payments growth

Asia-Pacific consists of rather diverse set of markets with different payment ecosystems and contexts. This diversity manifests itself on a number of levels: Asia-Pacific includes both developed and developing markets; territories both large and small, some with an established and modern telecommunications, retail and transport infrastructure, other with high numbers of unbanked and under-banked consumers; some with a high urban population, other with a sprawling rural ecosystem marked by informal economic activities and lacking basic consumer access to financial services; finally, industry standards and levels of regulatory compliance differ wildly from one market to the next. All these diversity presents an incredibly rich set of payment contexts. What many of these contexts share is that Asian consumers and businesses are at the fore front of adopting mobile as the channel for their financial transactions. A recent study by the International Telecommunication Union (ITU)64 shows that mobile adoption growth was driven by developing countries, which accounted for more than 80% of the 660M new mobile‐cellular subscriptions added in 2011. In 2011, 142M mobile‐cellular subscriptions were added in India, twice as many as in the whole Africa, and more than in the Arab States, CIS and Europe together. The same report shows that by the end of 2011, there were more mobile‐broadband subscriptions in Asia – Pacific than inhabitants in the Republic of Korea and Singapore – all in all, an impressive feat.

Figure 14: Mobile Penetration, 2000-2011, in percentage, 2012.

64 Key statistical highlights: ITU data release June 2012

76 Mobile payments 2013 - Asia-Pacific: taking the lead in m-payments growth

However, just labelling the mobile payment ecosystem in Asia-Pacific as fragmented and leaving it at that is too simple. This label may in fact lead to the, false, conclusion that fragmentation is in itself a definition of the mobile payments ecosystem in the region, an unmovable reality that has to be taken as a given. In fact, the fragmentation of the Asia-Pacific market is no more than a premise for development. It is a fluid state of affairs that evolves from one year to the next, as new technologies emerge, as consumer behaviour changes to accommodate change and as the mobile web evolves and as mobile payments develop along such coordinates as m-commerce, NFC and mobile banking. Mapping the mobile payments value chain in the region is a complex undertaking, one that ought to depart not from what sets the countries in Asia-Pacific apart, but from what brings them together. What constitutes the main argument pro mobile payments all over Asia-Pacific is the fact that m-payments are versatile enough to be feasible both in developed and in developing markets, to bridge the urban – rural divide, to bring access to financial services to millions of unbanked consumers, and to allow MNOs, banks and third party m-payments service providers to tap a diverse, rich and still largely unexplored consumer market. This chapter aims to provide an overview of the Asian – Pacific mobile payments landscape. In this way the chapter helps to understand the sources of fragmentation, the differences per mobile payment service and per country.

6.1 Differentiation based on market segmentation & the urban – rural divide

Mobile payments are expected to witness a significant increase in the Asia-Pacific region, with mobile-based transactions set to reach USD 3.6B by 2015 as compared to USD 1.6B in 2009, a report released by market research company Frost and Sullivan has shown65. According to the study, previously less-developed mobile markets such as China, India, Indonesia and the Philippines, where access to traditional banking services has been hindered for the rural mass population, are expected to show rapid take-up of mobile banking services, including person-to-person (P2P) transfers and remittances. According to the same source, contactless payments enabled via the NFC channel are likely to increase in popularity in 18 Asia-Pacific countries including Japan, to account for 23% of m-payments volumes in 2015, from only 12% in 2009. Moreover, NFC is expected to gain ground in developed markets where mobile penetration rates and the use of smart cards for contactless payments are already high, the study highlights.

Moreover, according to data released by the Telecom Regulatory Authority of India (TRAI), 30% of the world’s mobile phone users currently reside in India and China. As of March 2012, China is host to more than a billion, with India coming in second place, not far behind. By comparison, both India and China vastly surpass the US, which ranks third on the leader

65 Frost and Sullivan – ‘Asia-Pacific Mobile Payments Outlook study’, 2010

77 Mobile payments 2013 - Asia-Pacific: taking the lead in m-payments growth

board. China was thus shown to host 1,023.7M subscribers – equivalent to 76% of its population – in April 2012; remarkably, 159.3M of these were found to be 3G users. In March 2012, TRAI statistics showed that India hosted 919.2M subscribers, amounting to 75% of population. 65% of those mobile subscribers were found to be urban dwellers.

The growth of MNOs in the region in terms of size and coverage has been accompanied by rapid advances in mobile technologies. The wide diversity of contexts present in these markets led to specialization among m-payment services providers. Put simply, different market players (be they banks, MNOs or else third-party service providers) are targeting their offerings at specific payment areas and types, such as mobile wallets, mobile banking, contactless retail payments or the provision of mobile P2P (including mobile remittance) services. Furthermore, when developing their specialized offerings, these players adapt to the specificity and make-up of each market in the Asia-Pacific space. A very good example of this is India, the world’s second most populous country, the 12th largest economy on a global scale and also one of the world’s top 20 fastest growing economies. The fast-pace of mobile phone penetration in India has become the main growth driver for the development of specific types of mobile financial services in the region, mobile banking prominent among them. This has happened while in India, existing financial infrastructures, particularly the ones available to the country’s largely unbanked rural population, are basic and not geared at reaching this large consumer segment. Mobile financial services come with the added advantage that they can largely function independently from the existence of a brick-and-mortar support network. Also, some types of services such as mobile banking can be carried out very well (at a basic level) in the absence of sophisticated phones. This is good news for the Asia – Pacific region, as most handsets currently in use there are low-tech, allowing only access to relatively unsophisticated mobile-based financial services. Therefore, the proliferation of mobile banking services among India’s underbanked and unbanked consumer segment has continued unhampered by technology barriers. Within this context, mobile banking emerges as a very cost-effective means of reaching a large number of Indian consumers, irrespective of their remoteness. At a more general level, the development and consumer take-up of m-banking services in India perfectly illustrate the differentiation of mobile financial services according to specific consumer realities and payment areas that is so characteristic of the Asia-Pacific mobile payments ecosystem. Yet another major characteristic of Asia’s m-payments market is the differentiation of the industry (or industries) which have developed particular types of mobile payment technologies, according to their specific needs. For example, NFC has been widely developed by players in the transportation industry, with stored-value cards either attached to the mobile phone or else embedded in the SIM like the Sony Mobile FeliCa ICs. In Japan, for example, the implementation of mobile NFC technology such as the Osaifu-Keitai system for fare collection on mass-transit transport networks has eventually led to NFC becoming the de-facto standard method for mobile payments in the country.

78 Mobile payments 2013 - Asia-Pacific: taking the lead in m-payments growth

In conclusion, the Asia-Pacific mobile financial services ecosystem is characterized by fragmentation and differentiation brought about by specific needs, both on the consumer and the industry side.

6.2 Three main regional models

6.2.1 India: Mobile banking made to serve the unbanked

As described in the previous section, mobile banking has emerged as a way to serve the unbanked. In many countries, such as India, there is a lack of proper financial infrastructure and mobile banking has become a cost-effective method of reaching a majority of the population. As most mobile phones used are rather low-tech, the majority of the mobile banking initiatives so far have centered on the deployment of simple mobile banking services accessible by the unsophisticated mobile phones: funds transfers and account inquiries. This relative simplicity of use has led to high levels of m-banking services adoption. This state of affairs also reflects a reality particular to the Indian financial ecosystem: the fact that in the country’s rural areas mobile banking is essentially a means for consumers to achieve financial inclusion, as it allows users to gain access to basic financial services to which they would otherwise have little to no exposure. Indeed, with the country’s rural population living in almost 600,000 villages, establishing brick-and-mortar bank branches would be a daunting task, bordering on the impossible if we also consider the remoteness of many such small communities. The biggest potential of mobile banking comes from tapping the large unbanked markets such as India or China. A study carried out by research and consulting company Celent66 in 2010 found that around 25M Indians were registered for mobile banking, with an active user base of 2.5M, or just 10% of registered users. However, the report also indicated that financial services providers operating in India had grown into the mobile commerce space – comprising both mobile banking and the mobile payments sector – as a cost-effective means of expanding their reach and increasing their customer base. According to a different study published by Celent in mid-April 201067, India’s mobile banking sector was clearly divided into urban and rural segments, each with its own history, characteristics and prospects. Celent expects the number of urban mobile banking subscribers in India to reach 65M by 2012 and refers to mobile banking in an urban environment as an “enabling fifth channel”. This is a reasonable view, in line with the fact that mobile banking growth among urban consumers was quite low in 2009 as well, its continued development facing different barriers from those affecting India’s rural population. Prominent among these barriers is competition from other

66 Celent – ‘Mobile Payments in China: Emergence of a Mega-Market’, 2010 67 Celent – ‘Mobile Banking in India: Dual Strategy for Rural and Urban Segments’, 2010

79 Mobile payments 2013 - Asia-Pacific: taking the lead in m-payments growth

alternative banking media such as ATMs and online banking, which are more readily available to urban consumers. The National Payment Corporation of India (NPCI) has been actively involved in supporting, consolidating and expanding the range of services available to mobile banking users. Most recently (more precisely, in September 2012), the NPCI has launched a value-added service dubbed IMPS Merchant Payments as part of its Interbank Mobile Payment Service (IMPS) in a bid to enable Indian mobile banking customers to make payments to merchants via their mobile phones. Here we see an example where the use of mobile phones in financial contexts and the confidence of consumers using them in one context, sparks the development of another.

With IMPS Merchant Payments, merchants can receive payments from customers through different channels. IMPS can be integrated with merchant website. In turn, merchants can integrate IMPS with their mobile applications or mobile websites and thus provide services to customers. In addition, merchants can integrate payment facility with their call center through IVR so that customers can place order and make payment via IMPS. Using IMPS, customers can transfer money from one bank account to another provided that both sending and receiving banks are IMPS member banks. Additionally, IMPS supports channels including mobile banking, internet banking and ATM. For IMPS transactions, NPCI provides the central switching, clearing and settlement service.

The Reserve Bank of India (RBI) has also been closely involved in enabling both regional rural banks (RRBs) and cooperative banks to participate in the country’s centralized mobile banking and payment system. Most recently (August 2012), RBI has established a mobile banking security laboratory set up by the Institute for Development and Research in Banking Technology; this security laboratory is set to provide solutions in the fields of mobile banking and security through research and development and will train participants from banks and financial institutions.

Additionally, at the end of 2011, the RBI removed the transaction limit of Rs 50,000 per customer per day on mobile banking transactions, allowing banks to place transaction limits on mobile money transfers based on their own risk perception and with approval of their respective boards.

6.2.2 Japan and South Korea: Mobile wallets are combined with NFC

Mobile wallets allow users to store credit and/or debit card details or stored value on their handsets, subsequently using the mobile phone to pay for goods and services in a variety of contexts. In the most advanced Asia-Pacific countries, developments around mobile wallets started even before the advent of smartphones, therefore their adoption as already reached mass level. Markets such as Japan, South Korea and Hong Kong are pioneering the use of this particular m- payment option.

80 Mobile payments 2013 - Asia-Pacific: taking the lead in m-payments growth

In a recent market study by NPD In-Sat, it was found that Asia Pacific is expected to dominate proximity mobile payments, which is set to represent 41% of the transactions in 201668. In Japan, the country’s largest mobile phone operator NTT DoCoMo started to deploy devices featuring the FeliCa contactless IC chip developed by Sony as early as 2004. The FeliCa chip makes it possible for Japanese mobile devices to effectively function as mobile wallets and contain multiple forms of data including bank account numbers and credit account information. This allows mobile devices to be used as a substitute for cash and cards at vending machines and merchants’ PoS. It is important to notice how the cultural situation in a country such as Japan impacts the adoption of mobile wallets: given the lifestyle in urban areas, where time constraints are much higher than in other regions, users are very willing to use solutions that reduce time for paying and receiving an item. A solution like FeliCa allows Japanese users to use their phones to pay for public transportation just by tapping their phones against special ‘check-in’ poles, as well as enabling offers redemption and payment through a simple tap. Insofar as m-wallet usage, Japan once again emerges at the top of the list. According to statistics released by comScore69, in December 2010 9.8M Japanese mobile users carried out a purchase using their mobile wallet. This accounts for nearly 10% of the country’s base of nearly 100M mobile subscribers. When it came to the most likely places consumers used their mobile wallets to make purchases, retail/convenience stores topped the list, with 7.6M mobile subscribers using their mobile wallets at such locations in December 2010. Vending machines came next (3.2M), followed by public transportation (2.7M), grocery stores (2.6M) and restaurants (1.5M).

Location of mobile wallet purchases in Japan

Restaurant 15%

Grocery Store 27%

Public Transport 28%

Vending Machine 33%

Retail or Convenience Store 78%

Figure 15: Location of mobile wallet purchases in Japan. Source: comScore, 2011

68 NPD In-Sat, 2012 69 comScore – ‘The 2010 Mobile Year in Review’, 2011

81 Mobile payments 2013 - Asia-Pacific: taking the lead in m-payments growth

While the rest of the world trial/dream of payment by mobile, in Japan it is already a way of life. ComScore (February 2011) research indicates that in December 2010 alone, 9.8M or 10% of Japanese mobile subscribers used their mobile wallet to make a purchase. 7.6M consumers made a purchase in a retail/convenience store; 3.2M purchased from a vending machine; 2.7M paid for public transport; 2.6M purchased in a grocery stores; and 1.5M paid a restaurant bill all using their mobile phone, instead of cash, card or cheque. Moreover, research carried out by IDTechEx found that 47M Japanese consumers adopted NFC-powered mobile phones over the course of three years, in what is deemed to be one of the fastest roll outs of electronic products in human history. East Asians are expected to continue to lead this market, mostly due to the fact that good cooperation between governments and industry leaders has enabled the development of projects in this area while effectively dealing with any regulatory issues that might have occurred. When it comes to the main sectors where m-wallet technology adoption has flourished, the retail sector is definitely on the list. M-wallets are particularly popular in high-volume outlets such as supermarket chains and fast food restaurants. The Asian telecommunication industry also features m-wallet-based value chain scenarios and services, as do the region’s transportation, media and entertainment industries. To date, various public transport agencies in Japan, South Korea and Singapore have piloted and implemented the use of NFC-enabled mobile phones. NFC is used in the context of transport ticketing in gateless systems to enable a simple start-up program. Other trials have added retail contactless payment cards to the ticketing options. Other applications, including online payment and over-the-air ticketing, have also been enabled by the phone.

6.2.3 The Philippines example: Mobile remittances allow migrants to send money home

As need for speed is key driver for mobile wallet adoption in Asian countries, remittances are a key driver for mobile financial services in the region, especially for cross-border transfers. Mobile payments, including in the form of remittance, have the potential to provide a viable alternative for traditional money transfer channels such as banking and established agent locations. This potential derives mainly from the fact that mobile payments and mobile- powered remittances can be more cost-effective for price-conscious migrants looking to send money home either as credit which can be immediately accessed and withdrawn or in the form of airtime top-ups. In order for Asia’s mobile remittance market to take off, a close partnership needs to be established between MNOs, banks and third-parties such as retailers. The latter are instrumental in the development of a solid mobile remittance infrastructure across Asia, as they operate widespread agent locations which could be used to transmit cash from mobile customers and then to credit / debit their mobile phone accounts.

82 Mobile payments 2013 - Asia-Pacific: taking the lead in m-payments growth

So far, there have been few mobile-to-mobile remittance services in Asia, and they tend to focus on establishing a mobile money corridor between one developing country in the region and one developed country. One such initiative was launched in mid-July 2011 by Japanese mobile operator DoCoMo under the DoCoMo Money Transfer heading. It enables Filipinos residing in Japan to send cash directly to over 8.5M Smart Money accounts of relatives and friends in the Philippines. Smart Money is a reloadable payment card linked to a Smart handset powered by the mobile commerce platform of Philippine-based mobile network operator Smart. NTT DoCoMo is a partner of Smart’s mother company Philippine Long Distance Telephone Co. To access of the service, the Japan-based sender must register for a DoCoMo Money Transfer account. Once registered, the sender then can remit cash to any Smart Money account in the Philippines by making an order from a mobile phone. The sender must indicate the designated recipient, the cash value and 16-digit Smart Money account number; the funds are then remitted to the recipient. The mobile-to-mobile remittance service is also expected to enable remittances to Brazil, South Korea and China – three countries that alongside the Philippines account for almost 80% of all foreign residents in Japan. The DoCoMo Money Transfer service is also available to Japanese nationals, allowing them to send money to other Japanese nationals visiting or residing in the Philippines. In 2010, the record of Japanese visitor arrivals in the Philippines stood at over 350,000, as reported by the Department of Tourism.

6.3 Countries vary between sophisticated and simple services

6.3.1 Japan is one of the most sophisticated markets

Japan has one of the world’s most sophisticated mobile phone markets. It boasts 102M70 mobile subscribers (half of which have access to a 3G network) and a mobile-based payments infrastructure dating back to 2004, when the country’s largest mobile phone operator NTT DoCoMo started to deploy devices featuring the FeliCa contactless IC chip developed by Sony. Unlike Europe, where the uptake of mobile payments has been slow due to a number of factors, cost and regulatory concerns prominent among them, the Japanese market’s response to mobile payments services has been extremely enthusiastic. Among the major contributing factors to Japan’s positive uptake of m-payments are the high levels of mobile phone penetration, along with fact that Japan is the world's tenth most populated country; also relevant is the fact that Japan is an overwhelmingly urban society (just 5% of the population is employed in agriculture) and therefore has a large number of potential end-users. Within this context, the continued expansion of Japan’s smartphone market can be seen as a natural move away from the multiple-function mobile phone towards a more complex device.

70 comScore – Japan’s Smartphone Surge, 2012

83 Mobile payments 2013 - Asia-Pacific: taking the lead in m-payments growth

For the sophisticated Japanese user to have a smartphone, which is essentially a mini- computer and whose functionality can be extended with various applications, is the next logical step. More than 24M people in Japan owned smartphones during the three months ending in June, representing 23.5% of the entire mobile population. Smartphone adoption has increased rapidly in 2012, growing 43% versus the end of 2011. Android’s share of the smartphone market reached 64.1% (up 1.9 percentage points versus March), while Apple ranked second with 32.3% of the smartphone market, followed by Microsoft, which accounted for 3.2% share in June 2012. Currently, Japan’s smartphone market is dominated by Android. Data released in summer 2012 by Comscore71 indicates that nearly 60% of all Japanese smartphone users rely on Google’s Operating system. Apple’s system follows in second place with 33% market penetration. Despite its strong presence on the Japanese market, the Apple iPhone lacked embedded support for the FeliCa wireless payment system. This was a rather serious issue, given that the FeliCa chip makes it possible for Japanese mobile devices to contain multiple forms of data including bank account numbers and credit account information, allowing mobile devices to be used as a substitute for cash and cards at vending machines and merchants’ PoS.

6.3.2 China has the potential to become the ‘mega-market’ for mobile payments

China is one of the most interesting developing markets, and this is also true when talking about mobile payments. With a total population of more than 1.3B, it is the world’s most populous country. Its mobile subscriber’s base it is expected to grow at a 20% pace, and to have reached 400M users already in 2012, according to an iResearch estimate72. China also has high concentration in the mobile landscape, with a relatively limited number of top-tier players involved, all with very large customer bases. Given its sheer size and huge revenue potential, China is also frequently depicted as a “mega-market” as far as mobile payments are concerned, with wildly optimistic predictions being made in terms of its development over the coming years. Not only mobile adoption is on the rise, but also mobile internet has been constantly increasing its user base, which is now estimated to be greater than the fixed internet one. CNNIC estimates the mobile internet audience to be at 388 users, while the fixed internet n to be at 38073.

71 ComScore – Japan’s Smartphone Surge, 2012

72 iResearch – ‘Numbers of mobile users in China’, 2011

73 CNNIC – ‘Mobile Internet users at 388 Million’, 2012

84 Mobile payments 2013 - Asia-Pacific: taking the lead in m-payments growth

iResearch also estimates that mobile payments in China will grow at an exponential pace. At the end of 2012 they are expected to reach $33 Bn.

Mobile Payments in China, Growth and Volume

USD Bn Growth 40 160% 151% 140% 149% 30 120% 100% 80% 20 80% 60% 10 40% 20% 0 0% 2010 2011 2012 2013

Figure 16: Mobile Payments in China, Source: iResearch, 2011

Chinese Mobile Payments Market Size Source: Ministry of Industry and Information Technology, Celent 1200,0 1800,0

169,0 1600,0 1000,0 79,0 26,0 1400,0

5,0 800,0 236,0 1200,0 - 145,0 199,0 82,0 241,0 1000,0 600,0 800,0 400,0 600,0 Users(Millions) 665,0 686,0 677,0 640,0 586,0 400,0 200,0 200,0 TransactionValue (US$ Mn) - - 2009 2010e 2011e 2012e 2013e Non Mobile Payment Users Remote Payment Contactless Payment

Figure 17: China m-payments market size, 2011

85 Mobile payments 2013 - Asia-Pacific: taking the lead in m-payments growth

In November 2010 Celent74 estimated that by 2013, China was expected to become the leading mobile payments market globally, while within the same timeframe the Chinese m-payments ecosystem would be expected to reach 410M users. Around the same time (October 2010), research by Frost & Sullivan claimed that mobile payments would witness a significant increase in the Asia-Pacific region, with mobile-based transactions set to reach USD 3.6B by 2015. According to the same source, the increasing adoption of mobile payments in the region would mainly be driven by technological innovations and operators’ initiatives, particularly in the NFC (Near Field Communication) field, with China leading the way. Once we go deeper beneath the (very optimistic) surface, however, a more complex picture emerges. No one can dispute the fact that China has an impressive mobile user base, and implicitly strong potential for the deployment and take-up of handset-initiated payments – particularly when we also take into account that credit card adoption in China is remarkably low, with considerable room for versatile alternative payment methods. Mobile financial services certainly fit the bill, in the sense that they have the potential to appeal both to China’s young, tech-savvy urban population as well as to underbanked consumers living in remote rural areas. In China’s rural segment, mobile banking in particular is of particular interest, being defined essentially as a means for consumers to achieve financial inclusion, as it allows users to gain access to basic financial services to which they would otherwise have little to no exposure. Nevertheless, high mobile handset penetration does not, of course, equal high m-payments adoption. In fact, the majority of Chinese mobile phone users cannot access mobile payments services on their devices. A 2010 study published by Beijing-based telecom consultancy Maverick China Research75 found that at the time when the research was carried out, 75% of surveyed mobile phone users in China didn’t have access to mobile payments, while of the 25% whose phones enabled them to access m-payments services, less than 2% actually made use of their mobiles to carry out transactions. In June 2011, ResearchInChina76 published more optimistic estimates, concluding that the penetration rate of the Chinese mobile payment market had reached 18.5% for 2010 and would increase to 25.8% by the end of 2011.

74 Celent – ‘Mobile Payments in China: Emergence of a Mega-Market’, 2010 75 Maverick China Research – ‘Mobile payment market hurt by weak demand’, 2010 76 ResearchInChina – ‘China Mobile Payment Industry Report, 2010-2011’, 2011

7 Africa: pace is slowing down

The extensive take-up of basic m-banking and m-payments services in emerging markets and among developing nations has become one of the main drivers for the adoption of mobile financial services worldwide. To that end, Africa is one area which, along with India, is often brought up as a glowing success story for the mobile money revolution currently sweeping the payments world. It is certainly true that mobile phones have changed the lives of millions of unbanked or underbanked African consumers – and, statistics indicate, they are likely to continue doing so in the coming years. Indeed, research from Berg Insight indicates that while the leading market for mobile financial services growth will be Asia, Africa is also expected to become a key market, as mobile operators continue to develop initiatives centred on banking the unbanked. Another report issued by Global Industry Analysts (GIA) predicts that the need to develop and deploy mobile financial services in remote, unbanked or under-banked areas will continue to be a principal factor in the growth of m-banking in Africa. However, we must keep in mind the fact that a little perspective and a much focus on details need to be applied in order to have a realistic discussion regarding the evolution of mobile financial services on the African market. In Africa, the mobile phone has grown to become a lifeline for consumers with limited access to financial services. In such a context, the development of (mostly rudimentary) mobile infrastructures has been swift but mainly needs-driven, lacking in sophistication, with almost none of the high-tech characteristics that define the mobile ecosystem in developed markets. There are, of course, a few notable exceptions – East Africa comes to mind, with Kenya and M- PESA at its core - but even East Africa still has a long way to go down the road to becoming a uniformly established mobile market. In the developed world, one of the main selling points of mobile financial services is their inherent convenience. M-payments allow busy consumers to keep track of their spending, shop and pay bills with a few keystrokes. However, in the developed world the mobile is an alternative or a substitute for any number of readily available payment instruments. In Africa, mobile financial services are often the only alternative to otherwise poor-quality financial service; they have developed to become accessible and affordable and have come to make the difference between some access to banking and no access to banking, in other between existing and not existing from a financial standpoint.

7.1 GSMA: Africa poised to become world’s 2nd largest mobile market

In its “Africa Mobile Observatory 2011 report” released in November 2012, the GSM Association indicates that Africa is currently the world’s second largest mobile market by

87 Mobile payments 2013 - Africa: pace is slowing down

number of connections after Asia, as well as the world’s fastest growing mobile market. The research found that mobile penetration in Africa has reached 649M connections in Q4 2011, after having exceeded 50% mobile penetration in 2010. In the last five years, the number of subscribers across Africa has grown by almost 20% each year and it is expected to reach more than 735M by the end of 2012, the GSMA study has also revealed. 96% of current subscribers in Africa were found to be pre-paid and are dominated by voice services. There are currently six live High Speed Packet Access+ networks across Africa with a seventh one preparing for deployment in the near future. By 2015, next-generation LTE networks are expected to reach 500,000 connections in Kenya, 1.1M connections in Nigeria and 2.5M connections in South Africa. The mobile ecosystem in Africa currently generates almost USD 56B or 3.5 per cent of the continent’s total gross domestic product (GDP), out of which USD 49B represent the mobile operators’ contribution. Recent studies by the World Bank have shown that, in developing countries, for every 10% increase in mobile penetration there is a correspondent 0.81% point increase in a country’s GDP. According to the GSMA report, 36% of Africans within the 25 largest African mobile markets currently have no access to mobile services. Future projections indicate that reaching 100% mobile penetration could add over USD 35B in aggregate GDP if governments and operators will bring mobile communication to the entire African population. In terms of mobile subscriptions, Nigeria has the highest number with over 93M, representing 16% of the continent’s total mobile subscriptions. According to the same report, South Africa is first in terms of broadband penetration with 6%, followed by Morocco as the next biggest market, with 2.8%. In terms of mobile money transfers and m-banking, Kenya is at the forefront with 8.5M users, the research indicates.

7.2 Untapped potential

When it comes to mobile financial services, Africa’s ecosystem is a paradox in itself. A mobile industry that around the year 2000 was almost non-existent has been flourishing for some years. Africa has become one of the world’s fastest-growing mobile phone markets, while its number of active mobile subscriptions has crossed the half-a-billion mark as far back as Q3 201077. This is despite the fact that for many years, Africa has lagged behind the rest of the world insofar as mobile connectivity and m-commerce technology penetration were concerned, and is continues to be the continent where 36% of the population lives on an income of USD 1 or less per day. However, the African mobile financial services ecosystem continues to be one of paradoxes, where an unexpected mix of market forces and consumer acceptance has made mobile

77 ITU – ‘The World in 2010, 2010

88 Mobile payments 2013 - Africa: pace is slowing down

payments a reality. According to the Mobile Payments Readiness Index (MPRI) survey issued by MasterCard in May 201278, consumer readiness is a critical success factor for mobile payments adoption in Africa. In other words, the most advanced infrastructures in the world, with responsive legal systems, mature economies and sophisticated technology networks, may be fertile ground but until consumers embrace mobile payments, that ground will remain shallow. Markets such as Singapore with a score of 45.6 on the MPRI have highly advanced infrastructure, financial systems and regulatory structures but relatively weak consumer willingness. Conversely, in markets such as Kenya where the score is 40.4, the infrastructure, financial services and regulatory systems are much lower, while consumer willingness is high. According to a survey issued by the Communications Commission of Kenya (CCK) in July 2012, of the 29M mobile subscribers in Kenya, 65% (19M users) were found to be subscribed to mobile money services. The most popular services among Kenyan consumers were found to be transferring money from one handset to another and depositing / withdrawing funds via a network of local agents. According to the same report, mobile money are currently being used in many other innovative scenarios in Kenya, including paying utility bills and school fees, for in-store purchases, m-ticketing, phone top-ups, ATM cash withdrawals and sending money home from 45 countries overseas. All of this can be currently achieved without the need for a bank account, bank card or smartphone device. Thus, despite still being torn by war and famine, despite extreme poverty and the lack of a uniform financial infrastructure, mobile financial services have bloomed in Africa, more often than not leapfrogging traditional financial services models and proving impervious to adverse factors. Another paradox come on the heels of the first one: while fixed telephone line penetration is still in single digit percentages and computers are absent from most African households, there are cities in Africa that boast modern 3G mobile services. And while reliable electricity may be an occasional problem, a mobile payment landscape unique to Africa has developed despite (or rather, due to) these adverse elements, sailing past the obstacles hampering traditional financial infrastructure development and creating an ecosystem worth over USD 25B, according to Bharti Airtel estimates. The mobile revolution that has gripped Africa has created quite some hype, with Africa’s mobile market being described in optimistic terms. Not only has Africa’s mobile penetration rate jumped from merely 3% to an impressive 48% between 2002 and 2010, but mobile money transfer services in Africa are predicted to surpass USD 200B by 2015, as research carried out by Pyramid Research79 suggests. According to the Pyramid research report, Africa’s mobile money transfer services market is expected to account for some 8% of the continent's GDP by 2015. The report also reinforces an aspect that has already been highlighted in previous analyses of the African market, but has

78 MasterCard – ‘No two markets the same’, 2012 79 The Paypers – ‘Africa: mobile payments to exceed USD 200B by 2015 – report’, 2010

89 Mobile payments 2013 - Africa: pace is slowing down

not lost its relevance in the slightest. While the global mobile financial services market is reaching saturation, the African market constitutes fertile ground for the continued development of mobile money services. Mobile penetration has skyrocketed, but there is still room for improvement. There are still substantial under-served regions in Africa - in some rural areas mobile penetration rates rarely exceed 10%, for example. And there are still significant divides across regions. Consumer take- up of mobile-powered basic P2P transfer services may have grown spectacularly, but there are millions more Africans still reluctant to put their (sometimes extremely low) incomes into a formal banking system. Once they have been persuaded to do so, these consumers will most likely grow into a profitable market segment, with increasingly sophisticated needs. As M-PESA has shown, the use of mobile technology to reach large, unbanked consumer segments not only holds great promise, but has already been tested and proven to be a recipe for success. Looking beyond the hype, Africa’s short but intense history with mobile money has its roots in a number of premises that have shaped the African mobile ecosystem into its present-day form. The first is Africa’s large unbanked or under-banked population. Before mobile payment became a reality for everyday consumers, throughout most of the African continent the availability of formal financial services was limited to certain geographic and income ranges. Put simply, it was unprofitable for banks to serve poor consumers, as the revenues resulting from managing their small-value deposits could not offset the costs of servicing them. This left the majority of Africans to look for an alternative, which consisted largely of unreliable and costly informal channels. The second premise has to do with the poor quality of the financial services serving as alternatives to mobile payments. In the absence of a widespread network of bank branches and of more established payment instruments, it is not difficult to understand why mobile money transfers - carried out from anywhere via a relatively cheap prepaid mobile phone, without the need to travel to the bank and manage a bank account - became very attractive. This takes us to the third important premise behind the current African m-payments ecosystem: the continent’s economy. There was an underlying need for a service that would allow migrant breadwinners working away from their homes in urban centres to send money back to their families and friends. This state of affairs also explains the fact that P2P money transfers – which allow consumers who do not own bank accounts to send money immediately and safely over the mobile phone – are the most common type of service carried out by African consumers. The most successful revenue model in Africa has proven to be one that a 2010 report by the Bill & Melinda Gates Foundation’s Financial Services for the Poor (FSP)80 division refers to as “usage‐based rather than float‐based”. Traditionally, banks assess (and reward) their customers based on their account balances and the frequency with which they use their money. Mobile operators employing the usage‐based model have chosen to develop their

80 World Bank – ‘Mobile Payments go Viral: M‐PESA in Kenya’, 2010

90 Mobile payments 2013 - Africa: pace is slowing down

services based on the actual context in which most consumers are likely to use their hard- earned money and payments occur. Safaricom’s M-PESA service has pioneered mobile money in Kenya and has served as a model of mobile financial services deployment in emerging ecosystems worldwide. Starting only six years ago, M-PESA now has an amazing 15M subscribers, (78% of total mobile money subscribers in Kenya). All other Kenyan operators and some banks also offer mobile money services. Its mobile money offering has also means a significant increase in Safaricom’s profitability, as the company now makes more money from M-PESA than from its SMS and data revenues pooled together. It has thus become obvious that selling prepaid airtime to poor customers in small increments has the potential to make each transaction profitable on its own. In fact, on closer inspection, Africa’s most successful initiatives to date rely on the development of low-value transactional platforms (again, M-PESA serves as the best example) that provide consumers with more than one type of service, based on their real needs. Additional services may include adding money to a savings account, paying bills or making and receiving P2P payments (domestically or cross- border). One valuable lesson that Africa’s rapid mobile financial services adoption has yielded is that while “banking for the unbanked” holds great promise, it is not particularly easy to make African consumers see the need for an electronic banking system or trust such a system. A Sybase 365 report81 indicated that in 2010, fewer than 10% of African consumers were enrolled in formal banking, due to the poverty and the fact that brick-and-mortar bank branches were inaccessible. As far as trust was concerned, the same survey revealed that the easiest way for m-payments companies to bring consumers on board is to keep their offering simple and allow customers to carry out multiple types of transactions via locally established agents that can offer hands-on assistance.

7.3 Key players take decisive steps

Ever since 2012, a number of significant shifts have taken place in the line-up of key players in the African mobile market, the most important being the acquisition by India’s Bharti Airtel of local mobile telecom giant Zain82, which set the tone for other relevant developments. For example, in early 2012 Barclays Africa, a subsidiary of UK financial services company Barclays, has entered an agreement with Kenyan mobile commerce services provider Cellulant to provide mobile banking services across Africa. The agreement was part of Barclays’ One Africa strategy. Under the deal, mobile and internet banking as well as ATMs would be made available across Africa through the deployment of a new bill payment platform and MNO aggregator provided by Cellulant. Following the agreement, users across Africa would gain

81 Sybase 365 – ‘Mobile Banking in Africa’, 2010 82 TheNigerianVoice – ‘Bharti Airtel Completes Acquisition of Zain’, 2010

91 Mobile payments 2013 - Africa: pace is slowing down

access to mobile banking, merchant payments and other banking services including mobile wallet, internet banking and mobile airtime top-ups. In April 2012, credit card giant MasterCard announced it has entered an agreement with South African mobile payments and financial services provider Oltio to launch a mobile payments service dubbed MasterCard Mobile in South Africa. This service is set to enable African MasterCard and Maestro cardholders to use their PIN-based debit, cheque or credit cards and their mobile phones to pay for online purchases. To make an online payment using the system, cardholders can select to use the payment option on participating e-commerce sites in the same way they would select to pay by credit card, debit card or EFT. First-time users will be prompted to register their payment cards and enter their PIN-based debit or credit card, the expiry date of the card and CVC number. They will also be required to enter their mobile phone number. Once this is done, the cardholder's mobile phone number is used to initiate subsequent payments. Authorization of payments is done by entering the cardholder's PIN on their mobile phones. One month later, MasterCard took another step in its strategy to expand its presence on the African market by closing a deal with international secure mobile transactions technology company C-SAM to provide mobile operators, retail banks and payment providers in Africa with a mobile wallet service. The service has also been made available to consumers in the Asia Pacific region and the Middle East. The service is based on C-SAM's Mobile Transaction Platform (MTP) enabling integration with MasterCard's pre-paid platform. The mobile wallet would be made available on different mobile devices and operating systems. Not to be outdone, French telecom operator Orange has made some moves of its own in the African m-payments space. In April 2012, the company entered an agreement with African TV channels packages provider CANAL+AFRIQUE to provide CANAL+/CANALSAT subscribers in Africa with access to the Orange mobile payment service. The subscription fee payment using Orange Money is set to be launched in Madagascar in June 2012 enabling CANAL+/CANALSAT subscribers to pay their subscription fees with their mobile phones using the Orange Money m-payment service. In July 2012, Orange also closed a deal with MFS Africa, a value added services provider, to launch the online money transfer service Orange Money Transfert International. The latter enables Orange customers in Madagascar to receive international remittances directly to their Orange Money accounts. International customers can register on the website, proceed to pay with most bank cards and remit funds to Madagascar. Orange Money is the mobile phone-based payment service designed by Orange for customers in Africa and the Middle East. It provides Orange subscribers with applications such as person to person transfers, bill payments and agent-based cash-in and cash-out services for loading or withdrawing funds. Orange Money was launched in Madagascar in 2010 to enable domestic transfers and currently serves over one million customers. The international remittance service extends the services of Orange Money to the Malgache diaspora community in France and elsewhere.

92 Mobile payments 2013 - Africa: pace is slowing down

7.4 The success story of M-PESA

CGAP (Consultative Group to Assist the Poor) has published a brief83 on one of the first studies which researched the usage of mobile financial services offered by MPESA in two locations in Kenya, as well as the impact that usage has had on the lives of the users. There is much information being published on the various technologies of mobile financial services, as well as on the companies involved, but very rarely have the actual users been the focus of attention. M-PESA was chosen as it is one of the first successes in mobile financial service provisioning. It is a joint venture between Safaricom and Vodafone. Since its launch more than 6M customers have registered with M-PESA. Although an average of 150M Ksh (EUR 1.39M) is transferred through M-PESA per day, most of this is done in small amounts of around 1,500 Ksh (EUR 13.93) per transaction. The study also discovered a barrier to usage. For urban users the two most important barriers were failed transactions and problems getting help from Safaricom. For the rural users the biggest barrier by far was the lack of cash at agents. Agents have to maintain their cash float by making regular trips to the bank, where the money is stored. As banks are often located far away from the rural agent, these trips are costly and time-consuming.

7.5 West Africa on its way to becoming Africa’s hottest market

When discussing the advent of mobile payments in Africa, most of the focus is captured by ecosystems such as those in Kenya, Tanzania or South Africa, whose momentum has already attracted a lot of attention internationally. And while the success of initiatives such as M-PESA cannot be denied, the Vodafone / Safaricom mobile money partnership is not the only such initiative worth analysing on the African continent. In fact, recent research quoted by media outlet businessdayonline.com84 has found that West African economies are fast catching up with Kenya and South Africa insofar as mobile financial services adoption is concerned. Nigeria is expected to become the largest mobile payment market in sub-Saharan Africa by the end of 2011. According to same source, Nigeria currently has approximately 90M mobile phone users (out of a total population of 150M). Conversely, only around 22M Nigerians own a bank account, signalling that – like in many other African regions – the mobile financial services opportunity cannot be denied. In Nigeria’s mobile payment market, operators and the regulator are currently involved in the shift from card-based transaction to mobile-based transaction. As a result, the Central Bank of Nigeria (CBN) has issued additional seven approvals in principle (AiP) to prospective mobile payment service providers in the country.

83 CGAP – ‘Poor People Using Mobile Financial Services: Observations on Customer Usage and Impact from M-PESA’, 2009 84 BusinessDay – ‘Nigeria may become largest mobile payment market in Africa’, 2011

93 Mobile payments 2013 - Africa: pace is slowing down

One company that has been very active in the Nigerian mobile market is UK-based mobile financial technology company Monitise, which as recently as August 2011 has been granted a Mobile Payment System Provider license by Nigeria’s Central Bank. The license allows Monitise to develop and deploy a mobile financial services platform in the country. The Monitise technology platform is designed to be shared by various banks and payment providers, enabling them to offer mobile payment services under their own brands. Monitise, with its local partners, has set up a network of agents in Nigeria that can be employed by banks and payment service providers to offer branchless banking services. Monitise received a provisional license in December 2010 and launched a mobile payments pilot in four cities and 11 rural locations in Nigeria earlier in 201185. Within the trial, the Monitise pilot attracted around 7,000 users and handled payments totalling over 25M Naira (GBP 100,000). Using the service allows consumers to register via their handset, deposit money at a registered agent, send money to others (regardless whether the recipient is registered or not), as well as top up airtime for their prepaid mobile, withdraw funds at a registered agent and check transaction histories The next step for Monitise is to enable Nigerian banks and other financial institutions to provide mass market mobile phone based financial services including loans, insurance, pension products and savings. The Monitise platform aims to increases access to financial services without needing to build and operate bank branches across the country.

7.5.1 Orange in West Africa

Mobile network operator Orange has been one of the most active players in the field of mobile payments in West Africa. Its Orange Money offering is a mobile phone-based payment system that allows customers to carry out basic banking operations and transactions . The service is available for consumers whether or not they own a traditional bank account. The service allows mobile customers to deposit and withdraw money, to transfer money, buy call credit, pay for goods at retailers and pay bills. Orange Money was initially rolled out in the Côte d'Ivoire in December 2008 after extensive trials . In May 2010 , Orange Money was also made available to consumers in Senegal and Mali. Orange's mobile-payment service is built around partnerships with banks, which are responsible for issuing and guaranteeing the electronic money. For countries in Western Africa Orange has been working in partnership with local subsidiaries of BNP Paribas (BICIS, BICIM). For its part, Orange is responsible for the service’s IT platform and marketing, also leveraging its extensive distribution network in both countries. In November 2010, Orange also partnered Kenya’s Equity Bank to launch Orange Money outside West Africa. Orange expects to see the take-up of its mobile financial offering accelerate in West African territories over the coming years as the customer base reaches a critical mass and the service

85 Monitise Media Room – ‘Monitise Pilot Brings Secure Mobile Money Into Nigeria’, 2011

94 Mobile payments 2013 - Africa: pace is slowing down

becomes part of everyday consumer habits. In a statement following the launch of Orange Money in Senegal and Mali, Orange’s Executive Director for the Africa, Middle East and Asia Pacific Region Marc Rennard indicated that for Orange, the mobile money offering serves a dual purpose. “By providing our customers with the means to save money, pay bills and run their businesses”, he stated, “we are not only reinforcing customer fidelity but we are also able to play an active role in the economic development of the country”. The fact is, MNOs in West Africa have every reason to develop their presence in the region and bring cost-effective, secure access to banking services to low-income consumers. The revenue opportunity is considerable, given the fact that a large percentage of the population lack access to traditional financial services. But there is another factor which makes West Africa a potentially ground-breaking region for mobile financial services: its high potential for interoperability at cross-border level. Eight West African countries - Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, Togo and Guinea-Bissau – make up the West African Economic and Monetary Union (UEMOA). The latter is an organization established to promote economic integration among its members, all of which share the CFA franc as a common currency. All eight UEMOA countries are governed by the same central bank, giving Orange – a company with an established presence in the region – with the opportunity to expand its mobile money services by adding a cross-border dimension. In fact, Orange has already expressed its intention of developing additional, more advanced mobile payment services such as international money transfers – an intention which due to the favourable monetary conditions in West Africa has every chance of being successful.

8 Latin America: still in development stage

As argued earlier in the report, some of the most promising countries regarding mobile payments are the US, Western Europe (as a whole region), India and China. The parameters that define a market’s potential to sustain a profitable mobile payments ecosystem are dependent on the context(s) in which mobile financial services develop and evolve in that particular ecosystem. A solid business case for mobile financial services adoption is also needed, which in emerging markets is often connected to the existence of a large unbanked / underbanked consumer segment. India and China do score high on the previously mentioned parameters; however, the emerging mobile payments ecosystem in Latin America also has all the major ingredients in place to become a success story – albeit, of a different nature. Latin America, which includes South and Central America along with the Caribbean region, has so far been subject to less scrutiny than other regions with similar growth potential. Attention has, understandably, been focused on Brazil, the country with the largest population and the highest rates of mobile phone usage in Latin America, not to mention a mobile penetration rate over 102%86. However, other countries and sub regions, such as Argentina, the Caribbean and Central America, also warrant attention: they display equally high or even higher mobile penetration rates than Brazil, having growing consumer purchasing power and are emerging as ecosystems ripe for the massive adoption of mobile financial services. For example, in 2011 Argentina had a mobile penetration rate of 134%, with over 55M mobile subscribers. Like Asia-Pacific, Latin America is a patchwork of markets, each with its own dynamic and characteristics. Latin America is also less culturally divided than other regions such as Asia- Pacific, especially in terms of language and divisions between social classes. This makes Latin America a fertile ground for expansion for American and Spanish companies that are looking to use the mobile channel to tap into Hispanic and Caribbean communities. Spanish telecom giant Telefónica is an excellent example of this. This chapter provides a closer look at what Latin America has achieved so far on the mobile financial services front and where the region is headed next.

8.1 Typical emerging markets outlook

All Latin American regions and sub-regions share some common traits as far as mobile financial services deployment and adoption is concerned. These common features currently shape the region’s mobile landscape and trace the main coordinates that are likely to impact its future development. The first such common denominator is the fact that all across Latin America mobile phone penetration is very high, unlike fixed internet and fixed phone line adoption which is very low

86 Fortumo – ‘Mobile penetration in Latin America and the Caribbean’, 2010

96 Mobile payments 2013 - Latin America: still in development stage

and will most likely remain low. Overall, Latin America has 89% mobile penetration. Argentina leads the way with 130% mobile penetration, followed by Venezuela (98%), Chile (97%), Colombia (92%) and Brazil (90%)87. Another common characteristic shared by Latin American territories is the fact that prepaid usage trumps contacts as far as mobile phone ownership is concerned. This is partly responsible for the high rates of mobile penetration across the region, as consumers often own more than one prepaid mobile account.

Mobile Vs Online penetration in Latin America 130%

98% 97% 92% 90%

64% 50% 49% 38% 38%

Argentina Venezuela Chile Colombia Brazil Mobile Online

Figure 18: Mobile vs Online penetration in Latam, 2010.

The prevalence of the mobile over fixed-line internet means that the mobile handset is likely to turn into consumers’ main access portal to the internet. Moreover, mobile is emerging as the main (sometimes the only) channel via which large numbers of consumers can be reached simultaneously. This state of affairs makes the mobile channel the only thing banks and third- party payment service providers will want exploit. Put simply, there is no other choice.

8.2 Economic and social context shape mobile financial services

A major consequence of Latin America's history of hyperinflation and political unrest is widespread consumer mistrust in banks. This means that on the one hand, consumers in the region are prone to considering alternative payment channels, which gives mobile-based financial services a head start. On the other hand, given consumers’ mistrust of the banking system, the struggle for customer ownership between operators and banks so often witnessed

87 mobiThinking – ‘State of mobile in Latin America’, 2010

97 Mobile payments 2013 - Latin America: still in development stage

in developed economies is likely to have a much smaller impact on the evolution of Latin America’s mobile financial services ecosystem. According to the Sybase Mobile Commerce Guide 201288, the adoption of mobile payments in the region has developed, with many financial institutions having revisited their approach to mobile banking, MNOs forming new alliances with financial players. The outlook of local mobile payment solutions will also strongly depend on the national regulators, whom in Latin America tend to take a very cautious view of mobile financial services. This approach has been brought about by the instability of the Latin American economic climate, as well as by concerns that m-payments could be the starting point for the creation of a parallel currency, which could in turn be used for money laundering and other illicit activities. In Venezuela, while a regulatory framework for mobile payments has been sanctioned by the government, no international mobile-based remittance services have been green-lit to date. This in itself is quite significant, given that cross-border mobile-powered remittance services are one of the most promising areas of mobile financial services in the region. This state of affairs, with a gap between internet and mobile penetration and mistrust of banks, allows mobile operators to lead the mobile transaction services revolution across the region, with consumer demand for reliable, fast and accessible banking services driving innovation. This situation is also likely to put MNOs at odds with the restrictive regulatory frameworks present in some Latin American countries, such as Colombia. The substantial poor – rich divide accounts for the fact that a large percentage of Latin America’s economy is “informal”, meaning that it consists of activities not included in the official GDP. This also ties in with the large percentage of unbanked consumers. For people making a living out of informal activities, and who on top of that have little access to traditional financial infrastructures (bank branches, ATMs), mobile phones often constitute a lifeline. The key here is keeping it simple. There is a huge number of mobile phones currently in use in Latin America, most of which are unsophisticated and can only be used to access a limited range of financial services. However, SMS works on virtually all handsets, which makes mobile phones ideal tools for receiving transaction alerts or accessing bank account information. Compared to this, the use of mobile phones for actual payments is likely to remain in an embryonic state for a long time. The development and deployment of mobile financial services in Latin America has taken place on two distinct fronts: one more sophisticated, targeting richer, more established consumers; the other less complex but targeting the region’s vast unbanked population. Due to money laundering concerns, Latin American regulators would rather see banks taking a leading role in the provision of mobile financial services both for established consumers and for the unbanked (via mobile wallets and mobile airtime top-up services). However, there are a number of strong MNOs in the region – Telefónica, America Movil, Digicel – that are likely to form alliances with the bigger banks and leverage their own brand recognition and established network of agent locations so as not to be outdistanced by the latter.

88 Sybase – ‘Mobile Commerce Guide’, 2012

98 Mobile payments 2013 - Latin America: still in development stage

The social disparity between rich and poor consumers has also been an influencing factor with regards to the types of mobile financial services developed by banks. The development of more sophisticated mobile financial services has been prompted by considerable growth in 3G+ networks and broader use of smartphones in the region. As banks seek to place themselves at the head of the mass deployment of m-payment solutions throughout Latin America, they are likely to pursue MNOs as their main partners. MNOs can offer low transaction costs for mobile financial services, because their distribution networks (like in Africa) are already in place. With more than 99% mobile penetration by the end of 2011 (according to Pyramid Research), the vast majority of which involves prepaid usage, Latin America’s consumers are already well acquainted with their operators’ correspondent agent networks. Banks expect Latin America’s unbanked and underbanked consumers to manifest an interest primarily in mobile wallet solutions. Some banks, such as Banco Agrario in Colombia and Caixa Economica Federal in Brazil, have significant physical presence in their respective countries. They have less of a need to leverage the MNOs’ networks for mobile wallet registration and cash-in/cash-out procedures – however, these are the exceptions. Telefónica, a Spanish MNO and leading operator in Latin America seems ambivalent about mobile money. In January 2011 it teamed up with MasterCard in a joint venture that aimed to provide mobile financial services in 12 countries in Latin America where Telefonica is represented by the Movistar brand. The joint venture in question was dubbed Wanda. Wanda has 50% ownership participation and combines Telefonica’s telecommunications assets and MasterCard’s payments expertise. The joint venture aims to ensure interoperability among the banked and unbanked segments and link the financial and telecommunications sectors. At the time of its launch, Wanda was set to provide mobile payment services to the over 87M Movistar customers in the 12 markets. These mobile payment services will be linked to a mobile wallet or prepaid account that is set to allow users to make money transfers, mobile airtime top-ups, bill payments and retail purchases. The key factor in the rate of future growth of the m-payment market in Latin America is expected to be the degree to which collaboration increases between the key market stakeholders including mobile phone manufacturers, banks and MNOs. Without this, the Latin American m-payment mass market is much less likely to take off.

8.3 Brazil leading the way

As the largest country and economy in the region, Brazil is a reliable indicator of what could become successful throughout Latin America in terms of mobile financial services. The rapid growth in access to mobile telecoms in Brazil has created new opportunities for MNOs and banks to provide financial services using the local mobile networks. At over 102%89, Brazil has

89 Euromonitor – ‘Mobile phones in Brazil’, 2012

99 Mobile payments 2013 - Latin America: still in development stage

one of the highest penetration rates of cell phones in Latin America – however, the country’s mobile payment market is still small, with very few transactions actually carried out via mobile phones. The total number of mobile payment transactions in Brazil reached 3.9M in 201090. This number is negligible in comparison to the total number of credit and debit card transactions which reached 5.8B in 2010. With growth rates over 30% in the short term, the number of transaction is likely to reach 5.1M by the end of 2011. The past year has seen a number of significant mobile payments initiatives centered around the Brazilian market. One example is the joint venture set up by MasterCard and Telefónica, which have joined forces in late 2011 to provide mobile financial solutions for 65M Vivo consumers in Brazil. The initiative aimed to create a mobile wallet allowing consumers to make mobile payments, transfer funds, pay bills and make online purchases. The service was set up to promote financial inclusion for Brazilian consumers allowing operations between banked and unbanked consumers and fostering the acceptance of mobile payments in locations that traditionally have only accepted cash transactions, such as taxis and delivery services as well as direct sales such as door-to-door transactions. In early 2012, global provider of mobile payment services Mopay closed a deal with Brazil- based alternative payments network Paymentez to add a direct carrier billing option for single and recurring online payments to the latter’s existing payment methods, including an in-app service for the Android platform. Paymentez is a monetization platform processing micro- transactions for virtual goods and content via online and offline payment methods including credit cards, virtual currencies, game cards and cash. Under the agreement, Mopay would be made available as an in-game payment method in online and social games in Brazil and across other territories in Latin America.

8.4 Various speeds of development

Latin America’s adoption of mobile financial services has grown and developed throughout the past year. As far as banks are concerned, many such financial services providers revisited their deployment of mobile banking, while MNOs continued to expand their reach by closing new alliances - most notably Telefónica which partnered MasterCard and America Movil that entered a joint venture of its own with Citibank. No one can deny that progress has been made, however no decisive step has taken place towards taking mobile payments truly mainstream. One potential cause for this state of affairs might be the rather strict regulatory environment in Latin America, which has given rise to isolated mobile financial services ecosystems, powered by distinct players in finance and telecommunications, all operating within well-defined frameworks.

90 Frost & Sullivan – ‘Opportunities to offer payment services through cell phones are arising in Brazil’, 2011

100 Mobile payments 2013 - Latin America: still in development stage

Despite the fact that Latin America has a growing number of urban consumers, a significant percentage of its population is still rural, with divergent socio-economic levels emerging between various segments of consumers. For example, Central America hosts some of the region’s least effective economies, with a comparatively greater percentage of its population poorly educated and living in poverty (Honduras and Nicaragua) than the more developed (thought still troubled) economies of countries such as Chile, Argentina and Uruguay. Education and income are likely to affect how mobile payment projects are conceived and deployed. A rural citizen of Honduras is more likely to find attractive a mobile wallet solution, deployed via SMS or USSD channel, which enable government disbursements, P2P transfers and bill payments. As opposed to this, Argentina’s urban inhabitants are more likely to feel attracted by a mobile wallet offering that accumulates loyalty points and enables discounts at restaurants and retailer locations. Honduran citizens are more likely to fund their mobile wallets with stored value accounts, and in Argentina residents will be more inclined to link mobile wallets to their bank accounts. In Latin America, mobile payments can be deployed in several ways, but there is little guarantee that the models of Africa and Asia will be effective here as well. Ecosystems are likely to evolve that bring together many types of participants. Regulatory requirements provide the perfect context that allows players in the financial sector to the lead and assume a leadership role. Large MNOs—America Movil, Telefónica, Oi and Vivo (in Brazil) —have very large subscriber bases and a considerable capital of trust, as a result of the fact that they are viewed more favourably than players in the banking sector. As such, the Latin American mobile financial services ecosystem can be regarded as being still in a development stage, wherein a clear leader is yet to emerge and take control.

101

Annexes

102

Annex 1: Glossary

App Mobile phone applications (apps) built on top of existing infrastructure by companies themselves or by independent, third-party developers. They enable more extensive and specific functionalities for the smartphone.

App store App stores are the distribution channels for apps where users can browse and download both free and paid apps. Independently of the platform used, app stores generally act as repositories for the apps available to that particular platform.

Consumer A consumer is an individual or household that use goods and services generated within the economy. The consumer is the end-user of a product or service, and constitutes the last element in the production-consumption chain of goods and services.

Context or Transaction Context The context or transaction context is the total of situational circumstances in which each of the three processes of the transaction – agreement, payment and delivery - take place.

Ecosystem Term derived from biology; a natural unit consisting of different elements in an area functioning together with other factors of the environment.

European Commission The European Commission – formally the Commission of the European Communities – is the executive branch of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding Union’s treaties and the general day-to-day running of the Union.

103 Mobile payments 2013 - Annex 1: Glossary

European Payments Council The European Payments Council (EPC) is the decision-making and self-coordination body of the European banking industry in relation to payments. Its primary responsibility in recent years has been the implementation of SEPA, the Single European Payments Area.

Financial Institution A financial institution (FI) acts as an agent that provides financial services for its clients or members. Financial institutions generally fall under financial regulation from a government authority. Common types of financial institutions include banks, building societies, credit unions, stock brokerages, asset management firms, and similar businesses. Financial institutions provide a service as intermediaries of the capital and debt markets. They are responsible for transferring funds from investors to companies, in need of those funds. The presence of financial institutions facilitates the flow of monies through the economy. To do so, savings accounts are pooled to mitigate the risk brought by individual account holders in order to provide funds for loans. Such is the primary means for depository institutions to develop revenue. Should the yield curve become inverse, firms in this arena will offer additional fee- generating services including securities underwriting, and prime brokerage.

GSMA The GSM association (GSMA) is the global trade association representing 700 GSM mobile phone operators. In addition, 180 manufactures and suppliers support the association’s initiatives as key partners. The primary goals of the GSMA are to ensure mobile phones and wireless services work globally and are easily accessible, enhancing their value to individual customers while creating new business opportunities for operators as their suppliers.

Merchant Merchants function as professionals who deal with trade, dealing in commodities that they do not produce themselves, in order to produce profit.

MNO Mobile Network Operator is a company that provides service and has its own frequency allocation of the radio spectrum, and it has the entire infrastructure required to provide mobile telephone service.

104 Mobile payments 2013 - Annex 1: Glossary

Mobile payment A mobile payment is a payment where the mobile device is involved in the initiation and/or confirmation of the payment. The payer may or may not be ‘mobile’ or ‘on the move’.

NFC Near Field Communication (NFC) is a short-range high frequency wireless communication technology which enables the exchange of data between devices over about a ten centimetre (or four inches) distance. The technology is a simple extension of the ISO 14443 proximity-card standard that combines the interface of a smartcard and a reader into a single device.

Payment A payment is a transfer of wealth from one party to another. A payment is usually made in exchange for the provision of goods, services or both, or to fulfil a legal obligation.

Payment Institution A legal person that has been granted authorisation in accordance with the Payment Services Directive (PSD) to provide and execute payment services throughout the European Community. It is envisaged, but not a requirement, that a payments institution would be an entity providing as its core business payment services, as distinct from other banking services. However, the PSD does allow for hybrid institutions, such as telecoms providers, who in the course of their business may also provide some forms of payment service (and in turn are to be regarded as payment institutions).

Perceived Risk Perceived risk is the subjective judgment that people make about the characteristics and severity of a risk.

PoS PoS is short for Point of Sale. It refers to the physical location where an offline transaction occurs, which is oftentimes a retail shop or the checkout counter in that shop.

Risk Risk is a concept that denotes a potential negative impact to some characteristic of value that may arise from a future event. Exposure to the consequences of uncertainty constitutes a risk.

105 Mobile payments 2013 - Annex 1: Glossary

Secure Element Also Security Element (SE). Physical place used for user authentication, authorisation and stored credentials; it houses confidential information.

SEPA SEPA is short for Single Euro Payments Area. This is the vision, directive and goal of the European Commission to let consumers and businesses within the EU pay with one set of payments instruments. This set includes bank transfers, direct debits and cards. SEPA marks the end of international payments within the EU.

SMS Short Message Service is a communications protocol allowing the interchange of short text messages between mobile phone devices.

Standardisation Standardisation is the process of developing and agreeing upon technical standards. A standard is a document that establishes uniform engineering or technical specifications, criteria, methods, processes or practices.

Transaction Context See context.

Trusted Services Manager Trusted third party who securely distributes and manages the service providers services to the mobile network operator customer base.

UMTS Universal Mobile Telecommunications System (UMTS) is one of the third generation (3G) cell phone technologies, which is also being developed into a 4G technology. Currently, the most common form of UMTS uses CDMA as the underlying air interface. It is standardized by the 3GPP, and is the European answer to the requirements for 3G cellular radio systems.

106 Mobile payments 2013 - Annex 1: Glossary

USSD Unstructured Supplementary Service Data (USSD) is a capability of all GSM phones. It is generally associated with real-time or instant messaging type phone services. There is no store-and-forward capability that is typical of ‘normal’ short messages. Response times for interactive USSD based services are generally quicker than those used for SMS.

107

Annex 2: References

For news and research on the payments industry: www.thepaypers.com www.finextra.com www.pymnts.com

For news on the mobile payments industry we can recommend the following websites: www.mobeyforum.org www.mobilepaymentsworld.com

For news, feeds and research on the telecom industry: www.telecompaper.com

For more information on NFC: www.contactlessnews.com www.nfc-forum.org www.nfc-research.at

108

Annex 3: About the editors and publishers

Shikko Nijland Shikko Nijland is Managing Partner of Innopay, an independent full service consulting firm specialised in payments and transactional services. Shikko has over 15 years of experience in management consultancy and is specialized in growth and operational strategy. Prior to Innopay he was Partner at Accenture and headed the growth strategy practice. Shikko holds an MSc in Business Administration from Rotterdam School of Management and a bachelor degree in Information Sciences.

Chiel Liezenberg Chiel Liezenberg is a founding partner of Innopay. Chiel is one of the thought leaders in online and mobile payments, e-invoicing and e-identity, shaping breakthrough business and market innovations, schemes and standards. Chiel holds an MA in Mechanical Engineering and Industrial Organisation from Delft University of Technology.

Alessandro Longoni Alessandro Longoni is a business analyst on Online Payments and related transaction services at Innopay in Amsterdam, The Netherlands. After studying at ESCP Business School in London, Alessandro started his career in an M&A advisory boutique and gained additional international experience working at PayPal’s European headquarters in Luxembourg.

Monica Gâza Monica Gâza is a news editor at The Paypers, the leading independent source of news and analysis for professionals in the global transaction services industry. Monica has been actively involved in covering mobile payments-related topics for three years now. She enjoys the dynamics of the global mobile payments ecosystem and is keen on tracking and analysing the latest developments in the field

109 Mobile payments 2013 - Annex 3: About the editors and publishers

About Innopay Innopay is an independent full service consultancy firm specialised in payments and related transaction services. Our key practices include online payment, e-invoicing, e-identity, mobile payment, cards and related regulation. Given our independent position, we work for all players in the industry. We devote research time and investments to help peer professionals ‘structure & understand’ these topics and actively facilitate industry knowledge transfer, which we consider crucial for the further development of global e-business. Our leading industry reports can be downloaded for free. With our in-depth knowledge and experience gained on both the demand side and the supply side, we are ideally positioned to help our clients determine the direction of their growth. This often results in new products and/or markets that we successively help to ‘develop & manage’ and bring to market in a controlled and effective way. We do this for single clients but also for groups of clients. Consequently, we have extensive experience in developing multi-party transaction schemes and accompanying messaging standards in diverse industries such as financial services, insurance and document exchange. On the other side, we help corporate users to ‘choose & use’ the transaction services that fit their specific business needs from the wide array of often industry tailored transaction services on offer. We use a multi-disciplinary approach covering commercial, operational and technical aspects. Innopay is a member of the European Payments Consulting Association (EPCA) and an associate member of the Euro Banking Association (EBA). Innopay was also a member of the former Payment Systems Market Expert Group (PSMEG) of the European Commission. For more information visit www.innopay.com or contact Shikko Nijland at [email protected] or +31 20 6580651.

110