Embed Size (px)
Citation preview
Opportunities for Action in Technology and Communications
Mobile Payments: Killer App or Paper Tiger?
Mobile Payments TC 8/01 9/6/01 11:33 AM Page 1
Mobile Payments: Killer App or Paper Tiger?
Just how important will mobile payments be to boost-ing usage and revenues for mobile phone operatorsand to spurring demand for a new generation ofhandsets and point-of-sale equipment? Put anotherway, will mobile payments applications alter consumerbehavior, ignite a revolution in the payments industry(both online and at the point of sale), and makemobile services an even more central part of howmany consumers live? Or will consumers give mobilepayments the cold shoulder and refuse to make ahabit of using their handsets as a replacement forcash, checks, and credit cards?
The answers to those questions will help shape theglobal payments landscape for many years to come.They could also have a significant impact on at leastsix distinct industry segments:
• Mobile network operators, which are looking forpopular applications to drive nonvoice services
• Handset manufacturers, which will need to intro-duce new functionality to drive replacement sales
• Software companies, which will have to create reli-able solutions for payments and billing
• Banks, which risk an incursion into their core pay-ments business if they do not rise to defend it
• Credit card associations, which will see their entirefranchise threatened by substitution
• Merchants, some of whose customers may demanda mobile payments option
Mobile Payments TC 8/01 9/6/01 11:33 AM Page 3
Many network operators and banks have grasped thatno single group will bring about a consumer pay-ments revolution. Telcos, banks, credit card associa-tions, and influential merchants must jointly lead thecharge into the brave new world of mobile payments.(One example of a cross-industry joint venture isMovilpago, a Spanish initiative involving TelefónicaMóviles and Banco Bilbao Vizcaya Argentaria.) To be successful, the players must focus on three keyobjectives: developing compelling value propositionsthat prompt consumers and merchants alike to takethe first step across the mobile payments Rubicon;nurturing the adoption of the necessary technologyand integrating mobile payments into the existingpayments and banking infrastructure; and effecting afundamental transformation in consumer behavior.
Will mobile payments prove to be a killer app or apaper tiger that never delivers on its promise? Thereare cogent arguments for both scenarios.
The Case for Failure
History is littered with technology-fueled visions thathave generated hype but failed to materialize becauseof complex implementation issues, varying levels ofservice, and low user adoption. Indeed, the initial e-commerce bubble has long since burst—and theexcitement over m-commerce might follow suit, lead-ing to heavy casualties and a rethinking of businessand revenue models.
For example, a recent report by Forrester Research,based in part on consumer-spending data provided bythe European Central Bank and interviews with retail-ers, disclosed three ominous findings: European con-sumers don’t trust mobile payments; partnerships arestruggling over the terms of their collaborations; and
Mobile Payments TC 8/01 9/6/01 11:33 AM Page 4
a standardized user-friendly infrastructure, thoughavailable in pilot programs, is some years away frombeing fully developed.
Security is one of the biggest concerns. Consumersperceive that there is a significant risk of interceptionwhen data move from a handset to a point-of-salereader, regardless of whether the path is through themobile network, infrared line-of-sight technology, orshort-range wireless networks such as Bluetooth.There is also the risk associated with stolen or losthandsets. Security will become still more of a concernas mobile purchases move from low-value vending-machine sales to higher-value transactions with multi-ple retailers.
Meanwhile, mobile network operators—which are try-ing to justify their investments in future generationsof network technology—are searching for new appli-cations that will drive nonvoice revenues and datatraffic. For all their dazzling technology, mobile net-work operators are in the service business. They mustprovide services that appeal to a wide range of con-sumers and can produce revenue now. Many of theapplications launched in Europe in the euphoria overthe arrival of wireless application protocol (WAP)have failed to generate much incremental usage. Inlight of that experience, mobile operators may hesi-tate to put their marketing and distribution musclebehind mobile payments until they are sure it willhelp them sell mobile service to new customers—andincrease loyalty and traffic from existing ones. Butmobile operators can’t achieve this if there is nothingto buy with mobile payments applications.
Merchants that could become pioneers in mobile pay-ments run the gamut from online entities (such asgame companies, which could charge consumerssmall sums for products and services delivered over
Mobile Payments TC 8/01 9/6/01 11:33 AM Page 5
the phone) to offline players (such as mass transportsystems, which could reduce costs by providing termi-nals that let travelers pay their fares with mobile hand-sets). But until there is a critical mass of end users, nomerchant will have the incentive to push forward.
With no individual player willing—or able—to sparksufficient demand, and with the interests of variousindustry segments sufficiently misaligned to preventthe formation of cross-industry consortia, the conceptof mobile payments may never get the kick-start itclearly needs.
The Case for Success
Despite the concerns suggesting a bleak future formobile payments—concerns that echo the doubtsraised nearly a decade ago about the Internet—dra-matic change is certainly possible. Even the worriesabout security are subject to debate. In fact, there isstrong evidence that the perceived compromisebetween security and convenience is about to end.Technology in this area is rapidly improving, thanksto personalized codes that must be entered before amobile purchase is made and dual-slot phones thatact as smart-card readers. In addition, convenience isexpanding through interactive handsets that are eas-ier to use—and increasingly ubiquitous. Perhaps moreimportant, the concerns of people in their thirtiesand forties may be dismissed by people in their teensand twenties, many of whom already transmit theirsecrets and love letters through instant messages andshort message service (SMS).
Above all, a browser-equipped mobile device is capa-ble of serving as a highly effective virtual wallet forconsumers. It would perform the functions of cash,checks, and debit and credit cards, as well as contain
Mobile Payments TC 8/01 9/6/01 11:33 AM Page 6
other features such as an address book and calendar.In a survey conducted in the third quarter of 2000,The Boston Consulting Group found that more than60 percent of early mobile-device users and potentialusers expected that such devices would become widelyused payment tools within three years.
Use of handsets at the point of sale and as a tool for m-commerce is already evolving, as in Scandinavia,where consumers can use their mobile phones to buy drinks from vending machines. Such payments are made through calling-line identification and arecharged to mobile-phone-service accounts. With im-proved contactless technologies such as Bluetooth,these applications should become faster and easier to use. In Japan, young people use handsets to down-load cartoons and images from Web sites available toNTT DoCoMo subscribers. A range of providers supplythe content, and DoCoMo bills users for it. DoCoMonot only receives a 9 percent commission from provid-ers but also benefits from increased traffic revenue.
The burgeoning youth market is of particular signifi-cance to the future of mobile payments. As more andmore young people use handsets for voice communica-tion, SMS, and other applications, they are developinga facility and familiarity with the devices that will natu-rally extend to financial transactions. In Europe, forexample, many teenagers are already familiar with pre-paid service, which lets them store value on handsets.Many young people will probably use their mobilephones for purchases long before they become eligiblefor credit and debit cards. All of this will contribute toa generational shift in consumer behavior.
The opportunity—and challenge—for banks lie inlinking their current services to mobile devices. Theyown today’s card- and check-based payment systemsand have had a monopoly on key related services. But
Mobile Payments TC 8/01 9/6/01 11:33 AM Page 7
both banks and credit card associations could be disintermediated in the mobile payments process iftelcos were to build their own payment networks.Indeed, a virtual wallet could contain a debit card, a prepaid card, a charge card, and a nonbank creditcard such as Discover—but not necessarily a Visa,MasterCard, or bank credit card. In such a scenario,however unlikely, telcos could provide authentication,clearing, and even settlement services—billing theconsumer directly for purchases made with mobilephones. The result could be significant erosion oftoday’s credit-card business.
Mobile network operators, for their part, are in a hurryto develop services that will increase consumer usageand build loyalty—and going it alone with mobile payments would be both tricky and time consuming.Banks have exactly what mobile operators lack in thisarea: access to the existing payments infrastructure,refined credit-management skills, and brand namesthat consumers trust when dealing with payments.
If banks offer their experience and scope, and telcosprovide their skills in monitoring and driving con-sumer behavior, a complementary relationship couldbe very effective. Indeed, it’s possible that such a rela-tionship would produce a revolution in which mobiledevices become the preferred method of paymentacross a wide range of transactions, including at thepoint of sale. As a result, there could be a significantincrease in average revenues per user (ARPU) formobile operators.
The Course of Action
Ultimately, a revolution in payments will depend onmany millions of people having a simple and satisfy-ing experience: seeing a product, deciding to buy it,
Mobile Payments TC 8/01 9/6/01 11:33 AM Page 8
punching in the necessary numbers on a handset orsimply waving it at a point-of-sale reader, receiving theproduct, and then being efficiently, correctly, andsecurely billed for it. The revolution can happen—ifmobile operators, banks, credit card associations,equipment manufacturers, and merchants worktogether to meet four challenges:
• They must develop subscription services (such asgames) as a way of introducing customers to theidea of mobile payments. Getting an early start ingiving users the experience of paying for serviceswith mobile devices will help set the stage for moreextensive usage.
• They must also stimulate acceptance of mobile pay-ments with strong consumer-value propositions.Applications that allow people to make a paymentquickly and efficiently—for example, without wait-ing in line—will be critical. One successful experi-ence using a mobile phone to pay at the point ofsale will lead to repeat behavior.
• They must mobilize merchants, whose value propo-sitions will stem from the ability to serve customersmore quickly and cheaply, and from declining processing costs as usage grows. Adoption of theneeded infrastructure will become easier as point-of-sale terminals run through their natural replace-ment cycle. The goal is to replace as many high-cost cash and check payments as possible.
• They must leverage the existing infrastructure—including clearing and settlement systems, paymentschemes, and telecom networks—if they want tomove within a reasonable time frame.
In all this shared activity, mobile operators and hand-set manufacturers must not lose sight of their individ-
Mobile Payments TC 8/01 9/6/01 11:33 AM Page 9
ual needs. Mobile operators must increase ARPU byadding new applications and opportunities for usageto their service. Payment functionality integrated intohandsets is compelling, but the operators must recog-nize that the economics of mobile payments have tobe attractive to the other players, too. For their part,handset manufacturers need to create new productsand applications that will drive replacement demand.They must work with network operators and otherplayers to produce complete consumer propositions.
The next three to five years will determine the extentof the possibilities that mobile payments has to offer.But the real impact will be felt over a period of five toten years. Now is the time for mobile operators, banks,and credit card associations to get themselves intoposition.
Henry ElkingtonNick Viner
Ryo TokudaMiguel Ortiz
Henry Elkington is a vice president in the London office ofThe Boston Consulting Group and a member of the firm’sTechnology and Communications practice. Nick Viner, alsoa vice president in BCG’s London office, is head of the firm’sglobal payments practice. Ryo Tokuda is a vice president inBCG’s Tokyo office. Miguel Ortiz is a manager in the firm’sLondon office.
You may contact the authors by e-mail at:
© The Boston Consulting Group, Inc. 2001. All rights reserved.
Mobile Payments TC 8/01 9/6/01 11:33 AM Page 10
www.bcg.com
BCG09/01
AmsterdamAthensAtlantaAucklandBangkokBerlinBostonBrusselsBudapestBuenos Aires ChicagoCologneCopenhagenDallasDüsseldorfFrankfurtHamburgHelsinki
Hong KongJakarta Kuala Lumpur LisbonLondonLos AngelesMadridMelbourneMexico CityMilanMonterreyMoscow MumbaiMunichNew DelhiNew YorkOsloParis
San FranciscoSão PauloSeoulShanghaiSingaporeStockholmStuttgartSydneyTokyoTorontoViennaWarsawWashingtonZürich
Mobile Payments TC 8/01 9/6/01 11:33 AM Page 12
