Mobile: Driving Intelligent Payment into the Real World

Fred Huet (Greenwich Consulting) Rob Bratby (Olswang LLP)

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Contents

Key findings Introduction The pure payment market Drivers of intelligent payment Evolution of new use cases for intelligent payment Race to own the customer

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Key findings
In the digital world, as in the physical world, the payments industry is one of low margin individual transactions which only delivers returns through scale. In order for digital payment on the go to create a compelling value proposition, mobile service providers need to find ways of including additional monetisable value added services over and above mere payment processing.
The increasing pervasiveness of smartphones is naturally driving digital payment into the real world, unlocking new services, and, through a combination of smartphone functionality and cloud data storage, allowing what we call intelligent payment. Based on our research with leading market participants, we believe that the growth of intelligent payment will act as a disruptive force to the payments value chain, as the combination of payment with online access and location information will unlock new use cases and applications, such as: Mobile banking (especially within the developing world) Ticketing and Travel Integration of payments within social media Location and user-based couponing and loyalty retail offers, which will improve retailers capabilities to assess the efficiency of their loyalty schemes Lead generation in a physical retail environment (increased footfall) The growth of intelligent payment will also drive efficiencies into the electronic payments ecosystem. The increased availability of context-specific information will reduce the risk of fraud, taking cost out of the payments model, whilst an increase in competition for transaction methods at Point of Sale will result in a reduction in transaction fees. Intelligent payment allows fulfilment tracking to be brought from the online environment into the real world, which will be a ground-breaking change for traditional advertisers. The pay-per-click model could migrate from online to offline and become a pay-per-tap model offering with realtime pricing of ads, depending on their ROI. Google of course has a lot of knowhow in this space and we would expect it to play aggressively to seek to secure a strong market position. The disruption of existing electronic payments models will allow the emergence of new players who will be able to provide traffic to retailers and allow more cost effective transaction processing. It is too early at this stage to predict who will be the winners, between mobile operators, credit card companies, banks, online payment providers and others, but in order to succeed in the intelligent payments eco-system, our research identified that successful companies should: Embrace innovation and interoperability Understand how to maximise the benefit of customer data access, whilst maintaining trust from their customers Have the most efficient and cost effective payment system Failing to embrace intelligent payment is not an option. As smartphone penetration and capabilities of cloud storage increase, intelligent payment will replace current payments as organisations see payments as the output of a customer engagement process rather than purely a financial transaction.

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Introduction
To an increasing extent mobile handsets are becoming a remote control for individuals lives, acting as communication devices, web interfaces, calendars, and increasingly payments. Co-authored by Olswang LLP and Greenwich Consulting, this white paper focuses on how the growth of mobile payments will disrupt the traditional payments value chain as intelligent payments move into the real world, providing retailers with greater information regarding their customer base and allowing lower cost electronic transactions.
Original research for this white paper was gathered through a number of qualitative ninety minute interviews with senior strategy individuals at mobile network operators, online payments providers and card schemes undertaken during 2011 to enable a cross-market view regarding the impact mobile will have on electronic payments. We would like to thank our survey participants for their generosity in sharing their time and insights with us. Views have been quoted on an anonymised basis any errors or omissions are our own. This white paper may be freely quoted from, or linked to, provided that such quote or link provides full attribution.

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The pure payment market

The payment industry is a low margin business by reference to the value flowing through the payment system. For growth in mobile digital money services (especially for new comers like mobile network operators) additional value needs to be identified to act as an incentive for investment.
The main issue challenging the model in a market like the UK is that mass-market banking services are provided free-of-charge to the end user. Therefore, to create revenue (disregarding any reduction in mobile network churn), the non-banking market participants have to either: provide a value-added service of convenience; have some means of direct monetisation; or create sufficient scale to profit from a share of the liquidity held on the platform. Whilst these form a medium to long term objective, a realistic first step is to transfer plastic cards onto mobile devices, and then providers can think of anything more innovative from a payment perspective 2. Driving what we think will be the next stage we call intelligent payment.

If a bank cant make money out of payments and if PayPal does not make much money out of payments, then we cant.1

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A major global MNO A A global card scheme 8 www.olswang.com www.greenwich-consulting.com

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When it comes to payment, its not because we want to make money out of payment its because somehow we feel theres some value thats created for consumers and we need the integration of payment with loyalty and with customer care. 3

Drivers of intelligent payment

Our research identified two drivers, one push, one pull, for the development of intelligent payment:
First, sources of additional value must be found to generate profit out of mobile payment; however the increasing pervasiveness of smartphones is unlocking renewed competition at the payment level and, through a combination of smartphone functionality and cloud data storage, is allowing the development of smart services which have the potential to deliver such additional value. By way of example, in the developing world where the banking infrastructures are limited to urban areas and for the higher valued customer segments, mobile payment and banking services are already being accessed by a large unbanked population using their mobile phones. By contrast, in the developed world, where access to bank accounts and ATMs is ubiquitous, the main needs for mobile money is extending payment with specific demands for improved on-the-go access, increase security for payments and targeted customer benefits. Emerging technology trends include NFC as well as a range of remote solutions such as QR Codes and value-added services integrated on the smart-phone. Moreover, NFC enabled contactless transaction can utilise location based information that cross check purchase location and registered addresses stored inside the card. NFC technologies are currently being implemented around Europe and the US. These products aim to reduce users time spent on queues and access to internet banking, improve security from magnetic strip based credit withholding cards and increase users mobility.

A major global MNO B 11

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Evolution of new use cases for intelligent payment

On the basis of our research, in our view intelligent payment will drive new use cases and applications, some of them already well-known and other newer applications:
Mobile banking: the core mobile financial services in the developing world are peer-to-peer transfer with cash-in and cash-out at point of sales using basic mobile phones. Prominent examples include Vodafones M-Pesa in Kenya and Xooms Globe G-Cash in the Philippines. These services are often extended onto trialling or collaborations with financial services products such as co-branded credit cards and crossed platform products such as airtime top-up. Ticketing and Travel: According to a major global MNO, Oyster cards will disappear:

We believe that consumers will get and understand how to use apps for payment in the real world and we have got certain hypotheses about how this will happen but it could take different forms: mobile optimised sites or apps, NFC or simply scanning a bar code on the phone, wifi or NFC or Mobile network. 4

There is no extra utility thats created by having a separate card [for transport]. What we have found out, what we do believe is that you need an anchor application for NFC for it to succeed, and we think it is ticketing, its mass transit ticketing 5
Integration of payments within social media: Social shopping is increasing today, and mobile payment could benefit from it as well: The loyalty application will take a look at

your purchase history, but take a look also at the purchase history of your friends and your social network before it pushes a coupon 6
Location and user based couponing and loyalty retail offers, which will improve retailers capabilities to assess the efficiency of their loyalty schemes. Lead generation in a physical retail environment, such as the location-based Voucher Cloud solution: You dont have to check-in to look at it, and it will tell me all the

nearest restaurants near me. Because theres a Zizzi restaurant over the road there, I can get 25% off my food at that Zizzi 7.
In our view, intelligent payment facilitates a shift away from couponing to a pay-per-visit model, and the jump of the internet advertisement paradigm from the online to the real world. The referencing and pay-per-click model that made Google so powerful online applies to physical stores as well, because intelligent payment makes it possible to track viewers of real-world ads, check whether they contribute to the footfall increase or not, and pay the campaign depending on its ROI.
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A major Internet Player Global MNO B Global MNO A Global MNO A 12 www.olswang.com www.greenwich-consulting.com

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Everyone wants to own the end customer 8

Race to own the customer

In our research, we spoke to market participants with different perspectives and backgrounds. Whether they were from the traditional payment world, the internet payment system or the mobile eco-system, all the players saw customer ownership as their goal. Unfortunately it seems unlikely and improbable that all those aiming to form strong customer relationships will be able to achieve their goal, and indeed that was recognised by our interviewees, although each saw that as being a problem for others.
However, total control of the customer is incompatible with a fully interoperable service, required to deliver a smooth customer experience. To develop an attractive consumer proposition a consumer will not want to be constrained by having to have an account with a specific bank or MNO, or a card issued by a particular card scheme. As such, intelligent payment could be develop as a device and channel agnostic strategy9. Whilst African mobile money sucesses demonstrate there is opportunity for initial growth within sole-operator models, interoperability between m-wallets is required to enhance the proposition and provide a pervasive adoption of intelligent payment. Our final conclusion is that intelligent payment adoption and consumer loyalty requires trust and security. We know that the first big fraud on mobile money is going to be all over the press and we know the damage that can do in the words of one interviewee. All our survey participants agreed that putting in place adequate security measures would be critical to building consumer trust in mobile money, a necessary pre-condition for mass adoption.

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Internet payment provider Internet payment provider Global card scheme company 15

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