Future Payment Whitepaper

7/24/2019 Future Payment Whitepaper

1/17

April 2014

Whitepaper

Payment Solutions Trends

Telenor Research

Frode Kileng, Hkon Lnsethagen

TELENOR INTERNAL

Disclaimer:This White Paper is issued for information only. It does not constitute an official position of the Telenor Group.

All rights reserved. No part of this publication may be reproduced or utilized in any form or by any means, electronic or mechanical, including

photocopying, recording, or by any information storage and retrieval system, without permission in writing from the publisher.


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"When we launched the O2 Wallet 18 monthsago we were one of the first mobile walletsaround. Since then lots has changed for us, themarket and our customers. So, we've decided toclose the O2 Wallet to give us time to look intonew and better ways to help people managetheir money on the move, both in the UK and

abroad" [O2]

Executive SummaryThe area of online and mobile payments is gaining a lot of growth and optimism. According

to a Gartner analysis, worldwide mobile payment transaction value increased 44% to a value

of $235 billion from 2012 to 2013 [Gartner]. The same analysis forecasts a 35% annual

growth until 2017, reaching a market worth of $721 billion and more than 450 million users

in 2017. This optimism is shared by many analysts, including Visa that predicts that 50% of

their transactions in 2020 will be done using a mobile device.

The mobile payment market is chaotic with a lot of actors trying to establish a position and

with a wide range of competing solutions. According to Crone Consulting, there are more

than 100 competitors in the mobile payment market [Bloomberg]. Although many actors

are struggling to make any money, the willingness of investments in this market is high.

According to Crone Consulting, PayPal and Google have invested over $1.2 billion in mobile

payment since 2009.

Telenor and other operators are trying to take a stake of the mobile payment market. The

NFC based VALYOU mobile wallet solution from Telenor and DnB is one example. New

entrants face challenging competition from three types of actors.

1. New payment actors like Google and Apple that due to their control of the mobile

platform possess a vertical control over the mobile eco-system.

2. Traditional actors like banks and credit card companies with an established customer

relationship and customer trust and also their established financial network

infrastructure.

3.

Established pure online payment actors like PayPal with its roots back to 1998.

The complexity within a payment eco-

system itself is another challenge for

new entrants, not at least if there is a

need to deploy Point-Of-Sale

(PoS) solutions. An indicator that

it is challenging to succeed is the

closure of the NFC based wallet

service "O2 Wallet", one of the

first mobile wallet services to belaunched [O2].

The objective of this whitepaper is to give some insight into current trends in online and

mobile payment solutions. We also describe a potential future direction where a

standardization of open payment eco-system interfaces may enable Telenor and new

entrants to take and secure a position. The key take-away from this whitepaper twofold: (i)

Telenor faces challenges from actors with a competitive advantage and from new innovative

and potentially disruptive solutions; and (ii) Telenor should support payment eco-system

standardization efforts, including the new World Wide Web Consortium (W3C) payment

standardization initiative.
http://www.o2.co.uk/moneyhttps://www.gartner.com/newsroom/id/2504915https://www.gartner.com/newsroom/id/2504915https://www.gartner.com/newsroom/id/2504915http://www.bloomberg.com/news/2013-08-19/mobile-payment-startups-no-match-for-paypal-tech.htmlhttp://www.bloomberg.com/news/2013-08-19/mobile-payment-startups-no-match-for-paypal-tech.htmlhttp://www.bloomberg.com/news/2013-08-19/mobile-payment-startups-no-match-for-paypal-tech.htmlhttp://www.o2.co.uk/moneyhttp://www.o2.co.uk/moneyhttp://www.o2.co.uk/moneyhttp://www.o2.co.uk/moneyhttp://www.bloomberg.com/news/2013-08-19/mobile-payment-startups-no-match-for-paypal-tech.htmlhttps://www.gartner.com/newsroom/id/2504915http://www.o2.co.uk/money


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User accepptance and trust

According to a 2013 study commissioned by the mobile money company Monitise plc,

"banking", "shopping" and "discount vouchers" are all on the top-12 list of applications used

by smartphone owners in UK, Germany and Spain [Monitise]. This study also found that

about 50% of the users in these countries have bought something else than an app using

their mobile. But what is their preferred method of payment and who do the customers

trust to provide payment services?

According to a study commissioned by the outsourcing company Firstsource, UK consumers

don't trust mobile wallet solutions [Firstsource]. Only 22% of the UK respondents state their

willingness to use mobile wallet solutions. 80% of those not interested to use mobile wallet,

states that this is due to a lack of trust that their personal bank details would be kept

secure. A study from Forrester shows that 61% of US customers know about mobile wallets

but only 11% has used one [Forrester]. Another UK study from the payment solution

provider MPayMe supports the finding that lack of trust in the security is the biggest

problem (50%) [bankingtech.com]. This study also identified complex registration

procedures as a barrier and that 86% of the respondents stated their willingness to use a

mobile payment solution "if a simple system could be created using existing bank accounts

and mobile phones and no additional registration". Gartner is also pointing to the usability

challenge when stating that "people are not purchasing as much because the buying

experience on mobile devices has yet to be optimized" [Gartner].

Yet another study from the UK also points to the chicken-and-egg problem, finding that "less

than 10% of smartphone users made a point-of-sale payment", and at the same time, only

7.5% of the merchants of Oxford Street in London, Europe's busiest shopping street, accept

mobile payment [MPayMe].

Who do consumers trust as a provider of

payment services? The Monitise study

gives some indications, showing that

mobile operators have a lower degree oftrust compared to PayPal, banks, credit

card companies and retailers. At the

same time, the study shows that

operators have slightly higher degree of

trust compared to software companies

like Microsoft and Google and also

compared to mobile phone manufacturers like Apple and HTC. The Forrester study

mentioned above supports these findings. When asked who they trust to offer mobile wallet

solutions, 38% of consumers trusts PayPal, 35% bank and credit card companies and 23%

Amazon.

Figure 1. "If you were paying for items with a mobile phone, which sort of

company would you trust most to carry out the transaction?" [Monitize]
http://www.monitise.com/news/press_releases?id=780http://www.monitise.com/news/press_releases?id=780http://www.monitise.com/news/press_releases?id=780http://www.firstsource.com/press-release-security-fears-still-hamper-mobile-wallet-adoption.htmlhttp://www.firstsource.com/press-release-security-fears-still-hamper-mobile-wallet-adoption.htmlhttp://www.firstsource.com/press-release-security-fears-still-hamper-mobile-wallet-adoption.htmlhttp://www.forrester.com/PayPal+Amazon+Top+Consumers+List+For+Trusted+Digital+Wallet/-/E-PRE6464http://www.forrester.com/PayPal+Amazon+Top+Consumers+List+For+Trusted+Digital+Wallet/-/E-PRE6464http://www.forrester.com/PayPal+Amazon+Top+Consumers+List+For+Trusted+Digital+Wallet/-/E-PRE6464http://www.bankingtech.com/162332/uk-mobile-payments-held-back-by-security-and-complexity/http://www.bankingtech.com/162332/uk-mobile-payments-held-back-by-security-and-complexity/http://www.bankingtech.com/162332/uk-mobile-payments-held-back-by-security-and-complexity/https://www.gartner.com/newsroom/id/2504915https://www.gartner.com/newsroom/id/2504915https://www.gartner.com/newsroom/id/2504915http://www.mpayme.com/news-press.html#new-research-mobile-money-failing-ukhttp://www.mpayme.com/news-press.html#new-research-mobile-money-failing-ukhttp://www.mpayme.com/news-press.html#new-research-mobile-money-failing-ukhttp://www.monitise.com/news/press_releases?id=780http://www.monitise.com/news/press_releases?id=780http://www.monitise.com/news/press_releases?id=780http://www.monitise.com/news/press_releases?id=780http://www.mpayme.com/news-press.html#new-research-mobile-money-failing-ukhttps://www.gartner.com/newsroom/id/2504915http://www.bankingtech.com/162332/uk-mobile-payments-held-back-by-security-and-complexity/http://www.forrester.com/PayPal+Amazon+Top+Consumers+List+For+Trusted+Digital+Wallet/-/E-PRE6464http://www.firstsource.com/press-release-security-fears-still-hamper-mobile-wallet-adoption.htmlhttp://www.monitise.com/news/press_releases?id=780


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3

"The easiest way to supportcreators. Give microdonations

when you "Like", "Favorite" &"Star" on all these services andmore." [Flattr]

"...until now, there has been noelectronic solution that cost-effectively addresses the very-low-value transaction markets,protects privacy, is available toeveryone and emulates thecharacteristics of cash."[Mintchi ]

"Monetas is building the worlds

first decentralized system forfinancial and legal transactions.... immune to abuses of powerand resilient to failure. Are youready for freedom? The futurestarts here." [Monetas]

10 000 feet view of payment solutions

This whitepaper does not intend to give an overview of all relevant payment solutions from

traditional bank and finance actors and new entrants. Instead, our focus is solutions that

stand out due to their innovativeness or potential disruptiveness. We have also included

solutions under development and also a patent application. At the end of this chapter, 27

different payment solutions are identified. Some of those solutions are briefly described in

the following paragraphs, while a more detailed description of Bitcoin, mozPay and

Payswarm are described in the next chapters.

It is a trend in the professional media business today

that paywalls are becoming common for accessing the

content. Another trend is the increased consumption of

content from non-professional contributors. How can

these contributors be supported with more than

reputation and "Likes"? This is the challenge addressed

byFlattr.Their solution is a micro donation platform enabling consumers of

content to donate money as simple as a "Like". Consumers can create an account, fill it up

with money and "flattr" content they want to support. Each month, the money in the

account is divided between creators of the content.

Mintchip from the Royal Canadian Mint is the first

initiative coming from a governmental organization.

It is a crypto currency for direct transfer between

"wallets" residing on a trusted store (secure chip) on

a mobile device, in "the cloud" or in an USB-stick to

be attached to a tablet or PC. The main targeted

payment use-case is to be the "digital equivalent of

the coins we use every day" in small value

transactions. Mintchip is currently under development, inviting developers and

entrepreneurs to contribute to its success.

Monetas is another solution under development and also the name of the company. They

are developing a mobile phone app enabling users to do payment and financial transactions

without a bank account and as an alternative to banking systems. They are also working on

an enterprise platform enabling anyone to set up a business to compete with traditional

payment and transaction systems. The system is fully

decentralized without a "single point of control,

attack or failure". No assets are stored on any server

and the users' receipts are the asset, receipts that

are digitally signed by all parties and transferred
https://flattr.com/http://developer.mintchipchallenge.com/devguide/index.phphttp://monetas.net/abouthttps://flattr.com/https://flattr.com/https://flattr.com/http://developer.mintchipchallenge.com/devguide/index.phphttp://developer.mintchipchallenge.com/devguide/index.phphttp://monetas.net/http://monetas.net/http://monetas.net/http://developer.mintchipchallenge.com/devguide/index.phphttps://flattr.com/http://monetas.net/abouthttp://developer.mintchipchallenge.com/devguide/index.phphttps://flattr.com/


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"Lets say, for example, that I want to sell a Webapplication to Bob, who knows my close friendAlice (credit limit $1000). Ripple allows Bob totrade with me using his credit limit with Alice. Ifshe trusts him for $100, that becomes his creditlimit with me. I would send Bob the merchandise inexchange for his promise to pay. But instead ofowing me, Bob would actually owe Alice, whowould in turn owe me. Once Bob satisfied his debt,

the Ripple network would destroy the entire chainof IOUs" [ieee.org]

using cryptographic protocols. The transaction system, based on the open source Open

Transactionplatform, is currency agnostic supporting transactions using Bitcoin, USD, NOK

or any currency. In addition to financial transactions, the solution also supports legal

transactions.

If you want to create your own (virtual) bank,Puddle is

the answer. It was initiated by three Ashoka fellows,the

largest worldwide network of social entrepreneurs, as an

answer to the criticism on the way microfinance

institutions are evolving. Puddle does not intend to

replace formal banking but enables anyone to establish

"lending circles". The service seems to be in a test phase

allowing only invited members.

Ribbon used to provide payment checkout services to

websites but launched a new service in January 2014

offering a free P2P transaction service allowing the users to send and receive money using

debit and credit cards. If using credit cards, transaction fee applies (2.9%+$0.30 per

transaction). To send money to a person, visit their Ribbon

account short URL, a URL that can be sent in a SMS, mail,

instant message, etc. No Ribbon account is required to send money, although this will

improve the user experience by enabling the auto-filling of payment details. The current

requirement that the receiver has a Ribbon account will most likely be removed in thefuture. Ribbon currently limits the number of new users and is also only currently available

in the U.S.

Ripplehas been described as "the solution to the Bitcoin exchange challenge or a potential

competitor" [ieee.org]. It is an open distributed network for financial transaction, allowing

anyone to send money to anyone, almost at no cost, outside traditional banking systems. It

is also an automatic currency exchange, network wallet and introduces a new network

internal currency. Work on Ripple was initiated in 2005, predating

Bitcoin, becoming an Open Sourceproject (Opencoin.org) in 2013. The

anonymous user wallets are stored in a

public database served by an open

distributed system, working together

to establish consensus stored in Ripple.

Ripple is currency agnostic, supporting

any currency, including Bitcoin. XRP (or

Ripples) are the core currency within

Ripple. A small fee in XRP applies toeach transaction, "approximately

Figure 2. How Puddle Works [Forbes]
http://spectrum.ieee.org/telecom/internet/ripple-credit-system-could-help-or-harm-bitcoinhttp://opentransactions.org/http://opentransactions.org/http://opentransactions.org/https://www.puddle.com/https://www.puddle.com/https://www.puddle.com/https://www.ashoka.org/fellowshttps://www.ashoka.org/fellowshttps://ribbon.co/https://ribbon.co/https://o.ribbon.co/https://o.ribbon.co/https://ripple.com/how-ripple-works/https://ripple.com/how-ripple-works/http://spectrum.ieee.org/telecom/internet/ripple-credit-system-could-help-or-harm-bitcoinhttp://spectrum.ieee.org/telecom/internet/ripple-credit-system-could-help-or-harm-bitcoinhttp://spectrum.ieee.org/telecom/internet/ripple-credit-system-could-help-or-harm-bitcoinhttp://opencoin.org/http://opencoin.org/http://opencoin.org/http://www.forbes.com/sites/ashoka/2013/08/05/creating-a-line-of-credit-with-friends-the-new-trend-in-finance/http://www.forbes.com/sites/ashoka/2013/08/05/creating-a-line-of-credit-with-friends-the-new-trend-in-finance/http://www.forbes.com/sites/ashoka/2013/08/05/creating-a-line-of-credit-with-friends-the-new-trend-in-finance/http://www.forbes.com/sites/ashoka/2013/08/05/creating-a-line-of-credit-with-friends-the-new-trend-in-finance/http://opencoin.org/http://spectrum.ieee.org/telecom/internet/ripple-credit-system-could-help-or-harm-bitcoinhttps://ripple.com/how-ripple-works/https://o.ribbon.co/https://ribbon.co/https://www.ashoka.org/fellowshttps://www.puddle.com/http://opentransactions.org/http://opentransactions.org/http://spectrum.ieee.org/telecom/internet/ripple-credit-system-could-help-or-harm-bitcoin


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0.00001 USD". The only purpose of this fee is to prevent Denial-Of-Service (DoS) attacks. It is

not collected by anyone and "destroyed" after the transaction is completed. Ripple

gateways are the bridges towards the traditional financial systems and also new systems like

Bitcoin. IOUs (I Owe You) are the key for moving money in-and-out of Ripple in the gateways

exchanging between XRP and any other currency. Similar to the trust given to banks and

credit card companies in traditional transactions, trust relationship is the core of exchanging

XRP to any other currency. IOU represents a promise of a future payment in the selected

currency and is based on your trust relationship with a friend or a 3 rd party exchange

service. Ripple Labs Inc., i.e. the San Francisco based company behind Ripple, previously

known as OpenCoin Inc., succeeded in 2013 to receive venture capital from some notable

sources, including Google Ventures.

The last two payment solutions we would

like to mention are both from the San

Francisco based company Square Inc.

Square Cash enables you to transfer

money without any transaction cost as

easy as writing an e-mail to the receiver,

adding square.com as CC-receiver and the

amount in the subject field. No Square

account is required by the sender or

receiver. If the sender has not already

registered a debit card, a mail will be sent instructing the

user to do this. The receiver will get an e-mail from

Square with a link with instructions to add debit card

information. Square also provides Android and iOS apps

for Square Cash. Square is also a provider of PoS

solutions. After customers have installed their Square

Wallet,added a photo and credit card information, they

can pay at the cashier by showing a QR code or just state

their name. The cashier uses the photo to validate thecustomer. Payment by showing the QR code is supported at 7000 Starbucks stores.

Figure 4. Sending money by Square Cash [Square]

Figure 3. Square Wallet [Square]
https://square.com/cashhttps://square.com/cashhttps://squareup.com/wallethttps://squareup.com/wallethttps://squareup.com/wallethttps://square.com/cashhttps://square.com/cashhttps://square.com/cashhttps://squareup.com/wallethttps://squareup.com/wallethttps://squareup.com/wallethttps://squareup.com/wallethttps://square.com/cashhttps://squareup.com/wallethttps://squareup.com/wallethttps://square.com/cash


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Payment Solutions

Company Name

Primary payment use-cases

DescriptionOnline

PoS

P2P

-fin

-don

Amazon Login and Pay X Online retail solution connecting pay & checkout to Amazon accounts. ("Amazon Coin= digital gift card)

Amazon "P2P payment" X Person-to-person payment solution, bypassing banks and other networks. Under development

American Express "Sync with" X Twitter (Pay by tweet), Facebook and Foursquare

Apple "iMoney" A patent application from Apple, combining virtual currency , wallet and PoS payment

Bitcoin Bitcoin X X Virtual currency and p2p payment network (Se detailed description)

Barclay Pingit X X Mobile transfer of money. No requirement to have Barclay bank account

Canadian Gov. MintChip X X X Anonymous, crypto currency and wallet for smartphones, USB stick, PC, tablet and "cloud". In proof-of-concept phase.

EE (Operator) Cash on Tap NFC Mobile Wallet. UK operator EE service based on MasterCard PayPass

Flattr Flattr X "Donate money to a website/page as easy as a Facebook "like"

Google Google Wallet X NFC X Google's wallet solution

MasterCard PayPass NFC Contactless payment for NFC handsets or plastic cards

MasterCard MasterPass NFC, QR PayPass with QR support. Also a wallet white label product offering to 3rd party banks/retailers

Monetas Monetas X X X X Fully decentralized. Financial and legal transactions. "Any" currency. Under development

Mozilla MozPay X Payment API for HTML5 mobile apps and any website. Producer selects Payment Processor (Se detailed description)

O2 (Operator) O2 Wallet NFC Discontinued at 31.03.2014, launched in 2012

Orange Orange Money X X X "Mobile banking", transfers and payment. Partnership with Visa enables payment "anywhere"

PayPal PayPal X BLE, QR X Traditionally online payment/wallet. Expected to launch physical payment in 2014.

PaySwarm PaySwarm X X Under development. Allows Buyer, Store and Producer each to select payment & currency (see detailed description)

Puddle Puddle X Social network principles for creating microfinance closed groups / "Virtual banks"

Ribbon Ribbon X X X Lightweight solution. App or Ribbon account not needed. Initially online payment focus, now P2P main focus

Ripple Ripple/OpenCoin X X Payment, exchange and remittance network. "Cloud wallet". Open decentralized service infrastructure.

Square Square Cash X Send cash by e-mail (CC to square.com, amount in subject field).

Square Square Wallet QR,name POS Payment solutions. Pay by showing a QR code or state your name.

Telenor & DnB ValYou NFC NFC based mobile wallet

Vodafone (Operator) SmartPass NFC Mobile wallet for NFC smartphone or "NFC sticker". Pay at Visa contactless terminals.

Vodafone&Safaricom(Op) M-Pesa X X X X "World's most successful" mobile money deposit and transfer service.

Visa "Mobile Money" X X Managed "white label" solution for mobile operators and financial institutions

Onl:Online payment PoS:Point-of-Sale at physical store P2P:Person-to-person -fin: Micro financing -don:Micro donations
https://payments.amazon.com/homehttp://www.amazon.com/gp/help/customer/display.html/ref=zeroes_subnav_help?ie=UTF8&nodeId=201181010http://www.amazon.com/gp/help/customer/display.html/ref=zeroes_subnav_help?ie=UTF8&nodeId=201181010http://www.amazon.com/gp/help/customer/display.html/ref=zeroes_subnav_help?ie=UTF8&nodeId=201181010http://techcrunch.com/2014/01/29/amazon-wants-to-include-peer-to-peer-payments-in-its-real-world-paypal-competitorhttps://sync.americanexpress.com/http://appft1.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&u=%2Fnetahtml%2FPTO%2Fsearch-adv.html&r=10&p=1&f=G&l=50&d=PG01&S1=%28apple.AS.+AND+20130606.PD.%29&OS=An/apple+and+pd/6/06/2013&RS=%28AN/apple+AND+PD/20130606%29https://en.wikipedia.org/wiki/Bitcoinhttp://www.barclays.co.uk/PersonalBanking/P1242603570446?WT.mc_id=301RDpingithttp://www.barclays.co.uk/PersonalBanking/P1242603570446?WT.mc_id=301RDpingithttp://developer.mintchipchallenge.com/devguide/index.phphttp://explore.ee.co.uk/cashontaphttps://flattr.com/http://www.google.com/wallet/index.htmlhttp://www.mastercard.com/contactless/index.htmlhttps://masterpass.com/http://monetas.net/https://hacks.mozilla.org/2013/04/introducing-navigator-mozpay-for-web-payments/http://www.o2.co.uk/moneyhttp://www.orange.com/en/press/press-releases/press-releases-2013/Orange-launches-the-first-offer-for-mobile-to-mobile-money-transfers-between-three-different-African-countrieshttp://paypal.com/https://web-payments.org/https://www.puddle.com/https://ribbon.co/https://ribbon.co/https://ripple.com/how-ripple-works/https://square.com/cashhttps://squareup.com/wallethttp://valyou.no/http://c/Users/ttfrki/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.MSO/Visa%20contactlesshttp://www.vodafone.com/content/index/about/about-us/money_transfer.htmlhttp://pressreleases.visa.com/phoenix.zhtml?c=215693&p=irol-newsarticlePR&ID=1784575http://pressreleases.visa.com/phoenix.zhtml?c=215693&p=irol-newsarticlePR&ID=1784575http://www.vodafone.com/content/index/about/about-us/money_transfer.htmlhttp://c/Users/ttfrki/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.MSO/Visa%20contactlesshttp://valyou.no/https://squareup.com/wallethttps://square.com/cashhttps://ripple.com/how-ripple-works/https://ribbon.co/https://www.puddle.com/https://web-payments.org/http://paypal.com/http://www.orange.com/en/press/press-releases/press-releases-2013/Orange-launches-the-first-offer-for-mobile-to-mobile-money-transfers-between-three-different-African-countrieshttp://www.o2.co.uk/moneyhttps://hacks.mozilla.org/2013/04/introducing-navigator-mozpay-for-web-payments/http://monetas.net/https://masterpass.com/http://www.mastercard.com/contactless/index.htmlhttp://www.google.com/wallet/index.htmlhttps://flattr.com/http://explore.ee.co.uk/cashontaphttp://developer.mintchipchallenge.com/devguide/index.phphttp://www.barclays.co.uk/PersonalBanking/P1242603570446?WT.mc_id=301RDpingithttps://en.wikipedia.org/wiki/Bitcoinhttp://appft1.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&u=%2Fnetahtml%2FPTO%2Fsearch-adv.html&r=10&p=1&f=G&l=50&d=PG01&S1=%28apple.AS.+AND+20130606.PD.%29&OS=An/apple+and+pd/6/06/2013&RS=%28AN/apple+AND+PD/20130606%29https://sync.americanexpress.com/http://techcrunch.com/2014/01/29/amazon-wants-to-include-peer-to-peer-payments-in-its-real-world-paypal-competitorhttp://www.amazon.com/gp/help/customer/display.html/ref=zeroes_subnav_help?ie=UTF8&nodeId=201181010https://payments.amazon.com/home


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"Its similar to me in import as theweb browser,. Its as exciting andsignificant as that."[Jeremy Allaire, Circle Internet Fin

Perceived Benefits from Bitcoin

Simple and cheap usage optional or no transaction fees

Global reach more than 200 countries

No banking fees or limitations on use no central bank

Likely to increase in value over time although its future value is

uncertain

Bitcoin

Bitcoin is getting increased attention and coverage in a wide variety of news media. But

what is Bitcoin? Is Bitcoin the new global currency

that will conquer the world? In the following wewill provide an introductory overview attempting

to answer some questions around Bitcoin.

What is Bitcoin?

Bitcoin was launched in 2009 and is based on a 2008 paper written under the Satoshi

Nakamoto pseudonym. It is generally conceived as both a digital currency bitcoin, in

lower case based on cryptographic algorithms and a peer-to-peer Internet payment

system -- Bitcoin, with the capital B with no intermediary transaction provider (i.e. no

unique trusted party). The benefits of Bitcoinare several, as shown in the text box on the

right. This completely decentralized way of

working involves.

The bitcoin digital currency is not tied to a

specific monetary value. The value of a

bitcoin can be seen through goods and

services priced in bitcoin or the valuation of

bitcoins in online Bitcoin Exchanges. While its

value has been fluctuating heavily, the longer

trend has so far been a strong increase in itsvalue (see Figure 5).

Bitcoins can be purchased at Bitcoin Exchanges or earned as a reward for transaction

confirmation workas explained later on. Cryptographic techniques are used to ensure

correct and secure transaction behaviour, including avoidance of the double spending

problem. Each user has one private crypto key that is stored anywhere, including in a digital

walletor on paper. This private key is used to prove ownership over an asset of bitcoins, as

well as to sign transactions.

All legitimate transactions are stored in chronological order in a shared public record called

the block chain, which acts as a transparent, public ledger. The block chain also keeps trackof the current bitcoin ownerships. For a transaction to be added to the block chain, it must

be confirmed as legitimate. For this, newly performed transactions are broadcasted to all

members of the Bitcoin network. Special members called miners take on the job of

confirming the transaction. Such a job involves packing together into blocks several

transactions awaiting confirmation and generating a hash code with very specific

characteristics, which demands time-consuming computations. When a miner is finished

processing and confirming a block of transactions, it appends the block to the shared block

chain. As a reward for their services, Bitcoin miners can collect transaction fees for the

transactions they confirm. New bitcoins are also createdor found, thus the mining

analogyevery time a block of transactions is confirmed and added to the block chainin

this way new bitcoins come into circulation. Per 4 thof March, the transaction fee equalled
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0.14 USD per transaction, while for the same day, the income per transaction, including the

rewarded bitcoins, amount to USD 28.72 [BlockChain]. Hence, the income from the

rewarded bitcoins is as of today the main motivation for establishing a Bitcoin mining

operation. However, the bitcoin mining algorithm is designed to steadily increase the

computational burden of the mining process until a ceiling of maximum 21 million bitcoins.At this point, the reward for mining will solely come from transaction fees.

Status

In the first Bitcoin purchase in 2010, the bitcoin's exchange value was 0.003 USD. The year

2013 put Bitcoin in the spot

light of mass media and was

the start of a dramatic increase

in bitcoin's value, but also of

heavy fluctuations. After

reaching its all-time peak valueof 1163 USD in December

2013, the fluctuations

continues and the value of

bitcoin per 25th

of March 2014

is $573. The rapid and large

drop and fluctuations in Q1 this

year are mainly due to the

closing of one major exchange, Mt.Gox based in Japan [CoinDesk].

Currently, around 20.000 online shops [Bitcoin Directory] and more than 1000 physical

shops [CoinDesk] accept bitcoins. There is a substantial circulation of Bitcoin exchanges.

New exchanges enter the market while those that get into trouble may take client bitcoins

down the drain in their closure as they typically also offer a secure home of clients

bitcoins. Note that the price of a bitcoin does vary from one country or region (exchange) to

another.

What drives Bitcoin?

There are several additional motivations and drivers for supporting, using and investing in

bitcoins. In many countries the national currency is unstable with high risk of inflation.

Government imposed regulation on foreign exchange, as well as other capital controls,weakens the laymans trust in the local currency. Lack of trust makes people perceive

bitcoin as an alternative. There is also a more general conception that the current banking

system is too heavy weight and with far too high transactions fees.

The combination of substantial value increase of bitcoin and the systemic ceiling of 21 mill

bitcoins also contributes to a belief that the bitcoin's value will keep increasing. This has

resulted in the bitcoin becoming a target for investors as well as a general tendency of

hoarding.

Figure 5. Bitcoin value in USD, Jan 1, 2013 to Mar 21, 2014 [CoinDesk]
https://blockchain.info/no/statshttps://blockchain.info/no/statshttps://blockchain.info/no/statshttp://www.coindesk.com/non-experts-guide-mt-gox-fiasco/http://www.coindesk.com/non-experts-guide-mt-gox-fiasco/http://www.coindesk.com/non-experts-guide-mt-gox-fiasco/https://bitpay.com/directory#/https://bitpay.com/directory#/https://bitpay.com/directory#/http://www.coindesk.com/surge-in-real-locations-accepting-bitcoin/http://www.coindesk.com/surge-in-real-locations-accepting-bitcoin/http://www.coindesk.com/surge-in-real-locations-accepting-bitcoin/http://www.coindesk.com/surge-in-real-locations-accepting-bitcoin/http://www.coindesk.com/http://www.coindesk.com/http://www.coindesk.com/http://www.coindesk.com/http://www.coindesk.com/surge-in-real-locations-accepting-bitcoin/http://www.coindesk.com/surge-in-real-locations-accepting-bitcoin/http://www.coindesk.com/surge-in-real-locations-accepting-bitcoin/https://bitpay.com/directory#/https://bitpay.com/directory#/http://www.coindesk.com/non-experts-guide-mt-gox-fiasco/https://blockchain.info/no/stats


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More than taking off as a widely-usedalternative currency, it is much more plausiblethat bitcoin eventually has a significant impactin terms of its innovation on paymentstechnology, by forcing existing players to adapt

to it or coopt it.[Dominic Wilson /Jose Ursua, GS Markets

Research

Risks that you should be aware of whenbuying, holding or trading virtual currencies" You may lose your money on the

exchange platform Your money may be stolen from your

digital wallet You are not protected when using virtual

currencies as a means of payment The value of your virtual currency can

change quickly, and could even drop tozero

Transactions in virtual currency may bemisused for criminal activities, includingmoney laundering

You may be subject to tax liabilities[European Banking Authority (EBA)]

Security Threats and Uncertainty

Bitcoin is also associated with illegal trades and money laundering. The use of bitcoins for

selling illegal drugs, gambling and unregistered sales of guns is assumed to be higher than

the volume of legal merchandise. One

driver behind this trade has been the

seemingly anonymity property of

the Bitcoin transactions. Although

it is not a straight forward task, it is

possible to trace the block chain

transactions back to the Bitcoin

exchange where the bitcoins where

purchased. This lack of strict

anonymity is considered as a problem

by some users and has been a

motivator for the introduction of other

crypto-currencies. As of this writing,

around 100 different crypto-

currencies with varying degrees of

anonymity and functionality exists

[ArsTechnica].

The total number of bitcoins in circulation today is some more than half of its designed

maximum volume. It is difficult to say if there are any scalability issues or other systemic

issues of the peer-to-peer network for maintaining Bitcoin mining and the Block chain.

Especially as the computational workload of these tasks increases exponentially while thereward decreases. Hence, the transaction fees must increase in order to maintain the

system.

Regulation and outlook

It is important for regulators and legal

authorities that illegal trade can be

combatted, that Bitcoin based trades

are not evading taxation and that

customer rights can be established and

protected. Bitcoin and other crypto-currencies work independent of

traditional banking systems and there

are challenges related to existing and

future regulation in that the Bitcoin system and the bitcoins can relate to

several roles or instruments and extends globally. While some countries, such as Thailand

and China, have banned financial institutions from trading in bitcoins, apparently

considering it as currency, other countries such as Germany state that it is a "unit of

account" (more akin to "private money")[CNBC], meaning it can be used for tax and trading

purposes.

In the US, the Internal Revenue Service (IRS) has clarified that bitcoins will be taxed asproperty, not money [Wall Street Journal]. The US Department of Treasures has also
http://www.paymentlawadvisor.com/files/2014/01/GoldmanSachs-Bit-Coin.pdfhttp://www.paymentlawadvisor.com/files/2014/01/GoldmanSachs-Bit-Coin.pdfhttp://www.eba.europa.eu/documents/10180/598344/EBA+Warning+on+Virtual+Currencies.pdfhttp://arstechnica.com/business/2014/03/behold-arscoin-our-own-custom-cryptocurrency/http://arstechnica.com/business/2014/03/behold-arscoin-our-own-custom-cryptocurrency/http://arstechnica.com/business/2014/03/behold-arscoin-our-own-custom-cryptocurrency/http://www.cnbc.com/id/100971898http://blogs.wsj.com/totalreturn/2014/03/25/qa-the-new-irs-rules-on-bitcoin/http://blogs.wsj.com/totalreturn/2014/03/25/qa-the-new-irs-rules-on-bitcoin/http://blogs.wsj.com/totalreturn/2014/03/25/qa-the-new-irs-rules-on-bitcoin/http://blogs.wsj.com/totalreturn/2014/03/25/qa-the-new-irs-rules-on-bitcoin/http://www.cnbc.com/id/100971898http://arstechnica.com/business/2014/03/behold-arscoin-our-own-custom-cryptocurrency/http://www.eba.europa.eu/documents/10180/598344/EBA+Warning+on+Virtual+Currencies.pdfhttp://www.paymentlawadvisor.com/files/2014/01/GoldmanSachs-Bit-Coin.pdfhttp://www.paymentlawadvisor.com/files/2014/01/GoldmanSachs-Bit-Coin.pdf


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declared that: 1) if bitcoin mining is done "for a user's own purposes, the user is not a money

transmitter"; and 2) "a company purchasing and selling convertible virtual currency as an

investment exclusively for the companys benefit is not a money transmitter" [US

Department of Treasures].

In Japan, vice finance Minister Jiro Aichi states that any regulation of the bitcoin crypto-

currency should involve international cooperation to avoid loopholes [Reuters].

The instability of the bitcoin value, uncertainties related to inherent properties as well as

regulatory issues makes the future prospects of Bitcoin uncertain. Even during these volatile

times for the bitcoin, the attention, acceptance and optimism has increased. But since a

first-mover advantage for businesses not targeted to the Bitcoin business itself is considered

negligible, a wait-and-see attitude may be a reasonable strategy.
http://fincen.gov/news_room/nr/html/20140130.htmlhttp://fincen.gov/news_room/nr/html/20140130.htmlhttp://fincen.gov/news_room/nr/html/20140130.htmlhttp://fincen.gov/news_room/nr/html/20140130.htmlhttp://www.reuters.com/article/2014/02/27/us-bitcoin-mtgox-idUSBREA1Q1YK20140227http://www.reuters.com/article/2014/02/27/us-bitcoin-mtgox-idUSBREA1Q1YK20140227http://www.reuters.com/article/2014/02/27/us-bitcoin-mtgox-idUSBREA1Q1YK20140227http://www.reuters.com/article/2014/02/27/us-bitcoin-mtgox-idUSBREA1Q1YK20140227http://fincen.gov/news_room/nr/html/20140130.htmlhttp://fincen.gov/news_room/nr/html/20140130.html


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Towards a future open payment framework?

The future payment landscape is complex with traditional and new actors trying to establish

or protect a position and also with new solutions enabled by new technologies. Predicting

the winners in this battle is impossible and makes it challenging to navigate and prepare for

new payment solutions. But do we need to elect the winner(s)? What if the details of

payment systems do not matter and instead it is possible to establish an open online

payment framework, mapping the generics of the payment process onto any underlying

payment solution and make each actor in the payment process individually select their

preferred payment solution and provider? Here, we will identify a couple of existing

initiatives as an indicator that this is possible. In the context of this analysis, we are covering

sales on the Internet of both digital and physical products. We also define four main roles

involved in the payment process:

Buyer /Customer

The buyer of the service or digital or physical product. In our context, it canrepresent both the user itself and the end-user terminal.

StoreThe store or aggregator where the buyer finds and pays for the product. For

example Apple's AppStore, Google Play or a web store.

Producer

The producer of the product. In many payment scenarios, the Producer is not

involved in the purchase payment transaction, only the Store. The direct

involvement of the producer role came with the introduction of appstores.

Payment

Processor

The actor that processes the payment. For example a debit or credit card

company, PayPal, Bitcoin, etc. A Payment Processor can process the payment

itself or It can be an intermediary, such as PayPal, that delegates theprocessing to a 3rd party.

Today, it is the Store (or aggregator) that decides which Payment Processor/solution to be

used. A Buyer is typically given a few alternatives to choose from, but the list of alternatives

is decided by the Store. The Store is also deciding the Payment

Processor on behalf of the Producer, i.e. selecting how the Producer

will get paid for the app/content/service.

In the following, we will show how the Mozilla mozPay payment

interface and Payswarm challenges the Store's position on making the

decision of which Payment Processor to use. We will also describe aninitiative to establish a standard for a future open payment

framework, supporting any payment solution, reducing the current

complexity in supporting multiple payment solutions and enabling

anyone to take a position in the payment eco-system, independent of

current position.

Figure 6. The traditional

payment processor

selection


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5

FirefoxOS lets Producer choose Payment Processer

FirefoxOS is a HTML5 based operating system for smart phones, tablets and other devices.

It is based on Linux and provides a pure HTML5/JavaScript application

environment. FirefoxOS is an initiative from the open source Mozilla foundation,

supported by many OEMs and mobile operators, including Telenor. Currently

smartphones with FirefoxOS has been launched in some countries in Europe,

Central and South America.

A fundamental property of FirefoxOS is the ability to install applications from

anywhere, including traditional appstores as well as websites. The applications

do not even have to be physically installed on the device, but run-on-the-fly

when visiting a website. This openness and flexibility demand a more open and

flexible payment solution than traditional mobile platforms like Apple iOS orGoogle Android.

FirefoxOS implements a payment interface named mozPay, available

not only for traditional mobile applications but also for any website. In

mozPay, it's the Producer of an app, content or service that makes the

decision of which Payment Processor to use, enforcing this choice on

the Buyer and the potential Store. The Producer may also make an

agreement with multiple Payment Processors and let the Buyer choose

one among them. Another key feature is the removal of the Store from

the payment dialogue, instead establishing a payment dialogue directly

between the Buyer and the Payment Processor. Avoiding the handling

of payment details by the Store increases the security and trust.

MozPay enables the producer to sell digital products through any online Store, select

Payment Processor and provide Buyers with the same purchase user experience across

Stores. A typical flow of a successful payment process when buying an app at an appstore is

as follows1:

Set-up

1. Payment Processor signup: Producer signs-up with one or

multiple Payment Processors. Main outcome of this is twokeys used for securing the product/price/sales-channel and

for securing payment transactions.

2. Product published for sale: Producer makes the digital

product available for sale at a Store (marketplace or website),

specifying product and pricing details.

1MozPay also supports in-app payments. For inn-app payments, the app itself represents theStore/marketplace.

Figure 7.

FirefoxOS

phone

Figure 8. Producerselects Payment

Processor in FirefoxOS

Figure 9. FirefoxOS payment set-

up


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6

Purchase (Buyer "selects Purchase")

1. List of Payment processors presented to Buyer: The Store

retrieves from the application back-end server signedpurchase requests, one for each supported Payment

Processor.

2. Completing the payment process:

1. Buyer selects preferred Payment Processor and the Store

initiates a secure purchase dialogue directly between

the Buyer and Payment Processor. The user interface is

provided by the processor.

2. The Store receives a purchase confirmation directly

from the Payment Processor

3. The Store asks the application back-end server to verify

the purchase confirmation by validating the payment

processor signature

4. The product is delivered to the Buyer

5. At some point in time, the Producer receives the money

for the sale from the Payment Processor

For security reasons, the current version of mozPay use a whitelist of approved Payment

processors, a whitelist maintained by Mozilla. MozPay is currently only available for

FirefoxOS but Mozilla intends to also make it available in the multi-platform Firefox web

browser, available on any PC, smartphone or tablet.

Payswarm2enables Buyer, Seller and Store to select their "payment processor"

independently

Although mozPay moves the decision of selecting the payment

processors to the Producer, it's still one actor that makes the decision

on behalf of the other. Payswarm changes this, enabling each actor to

choose independently, i.e. letting the Buyer decide which method touse to pay for the product as well as enabling the Producer to specify

where to deposit the payment of the sale and the Store to specify how

to receive commissions for the sale. Each actor can also individually

specify which currency to use.

Payswarm is an open patent-free community specification developed

by volunteers organized as a W3C Community Group (CG)3. The

2Although the open group working on Payswarm changed the name of the specification to "Web Payments" in

January 2014, we prefer to use the old name do differentiate this from the more formalized initiative withinW3C described later.

Figure 10. FirefoxOS purchase

Figure 11. Payment

Processor selected

independently by Buyer,

Seller and Store


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7

Payswarm framework is a fully decentralized solution with no central components and

supports any existing and future payment solutions, as long as they adapt to the payment

interfaces in the specification. It is suitable for both traditional banking services and crypto

currencies like Bitcoin. In addition to payment, it also supports signing of legal contracts. In

addition to online payment, it can also be used in physical POS.

Payswarm is a complex solution but a simplified process description is as follows:

Set-up

1. Create and Publish Public Identities: The Producer, Buyer

and Store each create their public identity using public-key-

cryptography and publish the public key part to their

"Payswarm Authority". This Authority is typically a Payment

processor.

2.

Make Product available for sale: The Producer createsproduct description ("Asset

description") and a product "Listing"

("Asset listing") defining the specific

terms of sale, including pricing and

payment information and potential

information of resale conditions. This product description is

digitally signed by and published by the Producer.

Purchase (Buyer "selects Purchase")

1.

Buyer retrieves the Product Listing: The Product Listing andAsset is retrieved. The Listing is digitally signed by the Store and

the Asset by the Producer. The Buyer then creates a digitally

signed Purchase Request, including payment details.

2. The Purchase Request is sent to the Buyer's external

Payment Processor or processed locally at the Buyer's

device:

a. External payment processor: Request submitted to

buyers external payment processor.

b. Local device/software: This could be a mobile or

Bitcoin wallet solution on the device.

3. The Buyer's Payment Processor generates a "Contract"

after completing the authorization of the purchase, a

contract that is permanently stored and later available for

any of the actors.

4. The Buyer's payment processor sends a "Receipt" of the sale to the Store.

3A W3C Community Group is an open forum for discussing ideas for potential future standardization. Anyonecan participate, not only W3C Members, and does not develop specifications, only reports.

Figure 12. Payswarm Set-up

Figure 13. Payswarm Purchase


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8

W3C is "the main international standards

organization for the World Wide Web",

consisting of about 400 member

organizations, including Telenor, other

mobile operators, large Internet actors

(Google, Microsoft, Apple, PayPal, etc.),

vendors, government organizations,

interest groups.

5. The Store delivers the Product to the Buyer.

6. The Buyer's Payment Processor transfers money to the Payment Processors' of the Store

and Producer, using the details specified in the product "Listing".

The Payswarm specifications are under development and not ready for deployment. Onlyone commercial implementation exists, a solution from Meritora that enables bloggers

using the WordPress platform to get paid for publishing content.

Although the W3C Community Group behind Payswarm includes individuals from payment

stake-holders, most of them seem to have joined just to observe and to track the

development. The lack of direct involvement and contributions in the specification

development from key stake-holders is a main challenge. This gives uncertainty with regard

to the suitability to cover their needs and their willingness support such a framework.

A future open payment standard?

Within the W3C, there have been on-

going discussions for some time

regarding the opportunities for W3C

to initiate payment standardization

efforts. Although the main focus

would be web payment, i.e. using a

web browser or web applications, it

would influence other application

scenarios: 1) Web technology is

extensively used by a majority of mobile

native applications. 2) Payment interfaces defined by W3C are easily utilized by any Internet

solution or application.

A W3C Payment Workshop took place in Paris in March 2014 with participants from multiple

sectors, including the banking industry, payment service providers, virtual currency

providers, financial institutions, telecom operators, mobile industry, browser vendors,

payment regulators, payment standardization bodies, merchants associations and

academics institutions. Telenor Digital was one of the participants. A W3C Workshop is

typically the first step within W3C to initiate new standardization work. The main objective

of this workshop was to gather all potential stake holders to discuss use-cases to be coveredand also to sense the interest and commitment to contribute in the standardization effort.

A key outcome of the Payment Workshop was a consensus to create a W3C Payment

steering group, organized as a W3C Interest Group (IG), to drive the future work on

payment within W3C. The scope of this IG is currently under development, with

participation from Telenor Digital. On a short term, it is expected that the IG will ensure that

payment related work items that falls within the scope of existing W3C technical Working

Groups (WGs) will be covered. Work items outside the scope of current WGs are expected

to be covered by launching new WGs. Further details of the workshop, including minutes

and presentations from the individual sessions, can be found in the [Web Payments

Workshop Report].
http://www.w3.org/2013/10/payments/final_reporthttp://www.w3.org/2013/10/payments/final_reporthttp://www.w3.org/2013/10/payments/final_reporthttp://www.w3.org/2013/10/payments/final_reporthttp://www.w3.org/2013/10/payments/final_reporthttp://www.w3.org/2013/10/payments/final_report


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It is an open question if it is possible to succeed to establish a future web payment standard.

One challenge is the conservatism in the traditional banking and financial sector and their

old core IT systems. There is also a challenge with new actors trying to grab positions in

Internet payments and where any standard may challenge or undermine their positions or

key assets. A last challenge is potential regulatory issues.

It is a challenge for Telenor and other operators to establish a position within mobile

payment. The vertical control over the mobile eco-system gives actors like Google and Apple

a strong competitive advantage over new entrants. The competitive advantage from

traditional actors like banks and credit card companies is also a challenge for new entrants.

Another challenge for new entrants is the complexity within a payment eco-system itself. An

open payment eco-system based on open standard interfaces will contribute to increase the

competition and enable Telenor and other operators to establish a position. It is therefore

important for Telenor to participate in this standardization work to ensure that our use-

cases and requirements from operator billing, mobile wallet and current and future financial

services are taken into consideration. Telenor Digital has stated their intention to participatein the W3C payment initiative.

Documents

Future Payment Whitepaper