The Road to Mobile Payments Services

Established banks and other payments com-panies have been forced into defensive playsagainst consumer-oriented and technology-intensive organizations that controlconnectivity infrastructure and networkingapplications. These companies, whichinclude technology leaders, mobile carriersand equipment manufacturers, are aggres-sively launching products and services thatare shaping the digital marketplace, creatingnew rules and complex patterns of cross-sec-tor competition along the entire paymentsvalue chain. Payments companies and finan-cial services providers should adoptinnovations in mobile payments, mobilemarketing and mobile banking to deepenrelationships with consumers and ensureparticipation in this emerging landscape.

Established players will need to re-evaluatethe scope and boundaries of their existingpayments businesses and learn how to com-pete with new players in a greatly expandedand altered arena.

The three dimensions of mobilecommerce evolution

Mobile commerce refers to searches and pur-chases enabled by a mobile phone or device.The transactional and financial market re-lated to mobile commerce is rapidly develop-ing across three distinct but interrelatedareas: mobile payments, mobile marketingand mobile banking (Exhibit 1, page 46).Building on previous discussions of mobilepayments in McKinsey on Payments,1 thisarticle focuses on the payments servicesneeded to unlock the area joining the mobilepayment and mobile marketing spaces.

The overlap of these three areas creates pow-erful opportunities and is attracting mobilenetwork operators (MNOs), operating equip-ment manufacturers (OEMs), operating sys-tem (OS) providers and other technologyplayers, each wielding new tools such as loca-tion-based services, social media and searchengines to intensify the interaction betweenmerchants and consumers.

45The road to mobile payments services

Monica Adractas

Philip Bruno

Olivier Denecker

Viken Gazarian

Kiyoshi Miura

Kausik Rajgopal

The road to mobile payments services

Web-capable mobile phones are rapidly changing the way the worlds five billion

mobile subscribers search, shop and buy. In 2010, an estimated 300 million

smart phones were sold worldwide, and smart phone sales are expected to

exceed 450 million units in 2011. The stakes in providing payments solutions for

the rapidly expanding mobile commerce world are high.

1 See Mobile money for the unbanked:Unlocking the potential in emergingmarkets, McKinsey on Payments 8,June 2010; and Mobile payments:Ringing louder, McKinsey onPayments 4, April 2009.

46 McKinsey on Payments September 2011

1. Mobile payments

Mobile payments encompasses many differ-ent solutions, ranging from near field com-munication (NFC) contactless solutions andSMS-based payments offline to e-wallets,digital currency and P2P networks online.

NFC has attracted considerable attention,but its impact as a payments technology re-mains unclear. True NFC success has onlybeen demonstrated in limited and con-trolled environments, such as transit orlocal government-sponsored trials. InFrance, for example, the government sup-ported the largest NFC pilot so far in 2010in Nice and recently announced additionalfunding to speed the adoption of NFC innine cities for non-commercial uses (e.g.,

access to public establishments and publictransportation). In preparation for the 2012Olympic Games, Transport for London hasannounced a deal between Visa and Oysterthat will allow users to board public trans-portation with contactless credit and debitcards.2 Barclaycard, which originally spear-headed the contactless roll-out with Oyster,now claims over 11.4 million contactlesscards and over 50,000 NFC terminals. Ac-tual usage, by contrast, remains very lowwith less than two million contactless trans-actions in 2010. In Japan the convergenceof smart cards and FeliCa-enabled mobilephones helped make pre-paid accounts(such as Edy and Suica) one of the most fre-quently used methods of payment.

Mobile wallet (Google wallet, DOCOMO)InApp micropayments (BOKU)Payment and loyalty platform (Mocapay)

Mobile bill payment (Danske Bank)

Account-based payment (ANZ goMoney)

Enhanced realty (CommBank Property Guide)

Consumption-driven savings (BofA Keep the Change)

Revolving loans

(Bill Me Later)

Mobile as NFC device (Suica, ISIS)

Mobile as payment terminal (Square, Intuit)

P2P payment (Bump)

SMS-based transfers (mPesa)

Mobile marketing

Expand retail commerce and consumer marketing solutions using mobile

Mobile banking

Leverage mobile as new and enhanced channel for banking service

Mobile payments

Enable mobile phone as a payment device

Location-based marketing (RedLaser)

Push offers (Cellre, Groupon)

Coupon delivery (My Starbucks)

Location nder (foursquare)

Enhanced access (PNC Virtual Wallet)

Immediate loans (Wonga, AkBank SMS loan)

Source: McKinsey Payments Practice

Exhibit 1

The three dimensions of mobile commerce evolution

2 For other examples, see Transitpayments: The open-standardsadvantage, McKinsey on Payments 7,March 2010.

Mobile or electronic wallets are another areaof rapid development in mobile payments.In 2004, DOCOMO, the leading mobile car-rier in Japan, launched a mobile wallet sup-porting online and in-store payments, withmultiple payments instruments (Exhibit 2).

Amazons One-Click shopping feature is anexample of a simple e-wallet and has enabledreduction of abandoned transactions or on-line shopping carts. Many players in the U.S.,including Google, Visa and ISIS (a joint ven-ture of AT&T, T-Mobile and Verizon), haveannounced plans to launch e-wallets, manyof which are expected to incorporate NFCtechnology as a means of online-offline inte-gration. Visa already has Pay Wave terminals,Google has partnered with VeriFone, and

ISIS has agreements with the four majorcard processors.

Although NFC is a promising technology, itrequires ubiquitous acceptance and cus-tomer usage. As of today the value proposi-tion on both sides is largely unclear. Only alimited set of players (e.g., companies activein transit, healthcare or markets with stronggovernment backing for NFC adoption)should treat NFC as a priority in the nearterm. Banks and merchants should look tothese players to fund NFC initiatives andbuild business strategies that can incorpo-rate NFC later on as the technology maturesand is adopted. Furthermore, they shouldconsider solutions that do not require heavyinfrastructure efforts, but leverage existing


Online Mobile Point of sale

1-Click 1-Touch 1-Tap

E-Wallet

Ability to conduct e-commerce transactions with merchants online

Example: Amazon wallet

Ability to conduct m-commerce transactions with merchants through apps or mobile web browser

Example: iTunes wallet

Digital means for assigning multiple forms of payment within one application

User control of payment method and account information through account controls

Condence that nancial data on the phone cannot be hacked

Additional features potentially added (high-yield savings, personal offers, coupons, loyalty account tracking, etc.)

Ability to conduct physical POS transactions with merchants using NFC technology

Example: PayPal & Bling


Exhibit 2

Dening the e-wallet across channels


functionalities to hook into the mobile com-merce world.

Alternatives to NFC include barcodes andquick response (QR) codes. Using QR codes,Starbucks pre-paid program has enabledcustomers to use their mobile phones for in-store purchases. Some merchants are alsoprinting QR codes on posters and advertise-ments, allowing customers to scan the codewith their phone in order to retrievecoupons, real-time product information, etc.

Is QR code a rival to NFC or are the twotechnologies complementary? Regardless ofthe answer to this question, QR codes are inuse now and can be implemented at very lowcost. NFC, as some argue, is perhaps easierand more intuitive for users, but it is expen-sive to implement and not widely used inmobile marketing. Marketing applications ofNFC will require the development of stan-dards beyond the basic card emulation modeused for proximity payments.

2. Mobile marketing

Mobile devices link the offline world withthe online, enabling merchants to developnew methods of targeted, real-time and lo-cation-based marketing, focused CRM, pre-authorized sales, etc. Social media are alsohaving a tremendous impact, with peer-based recommendations and interactiveconsumer experiences. As a result, new busi-ness models and revenue pools are emergingalong the retail value chain, and payments

organizations are leveraging mobile market-ing to achieve a compelling value proposi-tion for consumers and merchants. The totalrevenues could amount to many times thepotential payments revenue.

A number of digital commerce start-ups andmobile commerce initiatives use SMS mes-saging, optical scanning and wireless Web tomake online and in-store shopping morepersonal, interactive and social (Exhibit 3).For example, RedLaser and other players en-able real-time price scanning, which allowsconsumers to shift purchases from an offlinestore to an online provider. Groupon Nowalerts smart phone users to nearby businessdeals. American Express recently partneredwith start-up company foursquare and Face-book to provide consumers with targeted of-fers based on social recommendations andlocation information. This is a new area ofpost-sales communication and social net-working, through which customers can eval-uate products and merchants and sharepromotional offers and coupons with friends.

As payment transactions become more auto-mated and offer fewer opportunities for cus-tomer interaction, banks and other paymentsplayers should consider how to capture morevalue across the spectrum of consumer activ-ity. Payment transactions and funding servicesare increasingly interwoven with marketingsolutions, creating a broader field of competi-tion. For payments players to drive value formerchants and consumers, mobile marketingmust become core to their business.

3. Mobile banking

The third dimension of digital commerce ismobile banking. Smart phone users today cangain access to most Internet banking sitesand perform common tasks via their mobile

If payments players are to drive valuefor merchants and consumers, mobilemarketing must become a cornerstone

of their core business.

browser, and many banks have created inter-faces to adapt page views for smaller screens.Some mobile banking applications (e.g.,Nordeas mobile offering in Lithuania) alsooffer currency exchange and domestic andinternational transfers. The key to a com-pelling mobile banking offering will be inno-vative features that are available exclusivelyto smart phone users. Danske Bank recentlylaunched a bill payment application throughwhich users take a picture of a bill with theirphone camera and then approve payment bytouching a single button. A forthcomingstudy by McKinsey and EFMA shows thatmobile banking is becoming a central com-ponent of consumer financial services.

What is at stake?

The winners in this emerging arena will bethose who own the consumer. This in-

cludes both access to customer information(e.g., daily contacts for gaming, shopping orchatting), as well as the ability to provide acompelling value proposition to activate andengage the consumer over time. Financialservices providers are in a prime position tocapture the mobile payments and marketingvalue pools given their broad scale, connec-tivity assets and privileged role as theguardians of consumers financial informa-tion. However, if financial services providersmove slowly or resist disruption of theircore business, nimble non-bank technologycompanies are likely to develop work-around solutions in the medium term, ex-posing banks to full disintermediation.Googles partnership with VeriFone to de-velop and install NFC-capable terminals is aprime example.


Pre-visit Decision-making Transaction Post-visit

Generate demand

Find local merchant

Comparelocal merchants

Contact/arrive at store

Decide on purchase

PayReview business/tell friends

Loyalty/Decide to return

Howm-commerce can change behavior

Mobile can be highly effective for branding / advertising (location-based ads)

Mobile can be used to do timely, local searches

Use local review apps such as Yelp to find best merchant in vicinity

Mobile can be used to contact merchant and get point-to-point directions

Mobile can be used to compare prices, get peer advice and browse competitor offerings in store

Mobile payments

Instant mobile reviews while checking out

Publish whereabouts to social network

Mobile can enable couponing and other out-of-the-box loyalty programs

Use Cellfire to sign up for specific deals and receive coupons based on triggers (e.g., location)

Use AroundMe to find nearby stores with product and compare prices

Read Yelp reviews to find the best merchant out of all local options

Use Google Local to get business information

Use Google Maps to map route

Use RedLaser to find cheapest price for product in vicinity

Use Tabbed-Out to pay restaurant bill without waiting for server

Publish location to foursquare

Use Swipely to get feedback on purchases

Examples

Local search funnel


Exhibit 3

Mobile innovations target each component of the retail experience


Banks are relatively vulnerable in the area ofbrand visibility and customer attention andmay therefore seek to improve their positionvis--vis mobile carriers by partnering withone or more technology leaders.

In addition to the eight assets and 10 typesof competitors competing in the digital com-merce arena (Exhibit 4), security for mobilepayments could be another key area of com-petition between banks and mobile carriers.The brands owned by banks and networkprocessors are arguably the strongest fromthe standpoint of consumer trust and secu-rity, since they are the owners of paymentsnetworks, standards and funding accounts.Furthermore, security around mobile pay-ments and mobile access to confidential fi-nancial data could become a crucial factor indigital commerce. The level of consumerconfidence in the security of payment fea-tures and banking features on mobilephones could affect how widely they usetheir phone to make purchases and managetheir financial affairs.

If MNOs can achieve widespread adoption ofNFC, they have a chance to compete withbanks on trust and security. One option forbanks would be to push the development ofbarcode-based solutions for mobile pay-

ments, possibly working with an OS provideror OEM to tighten security around the pay-ment application. Alternatively, banks mayact to diminish the marginal value of NFC asa security solution. For example, a globalbank, network processor, or industry consor-tium may form a partnership with an OS orOEM to implement a global security stan-dard for mobile payments (remote and POS)and mobile access to financial data.

Recommendations

Banks and non-bank payments organiza-tions face serious challenges from youngdigital champions. Digital commerce, how-ever, with its shift in emphasis from onlinee-commerce to location-based digital serv-ices, affords the owners of brick-and-mortarstorefronts new opportunities to strengthencustomer relationships and multiply oppor-tunities for sales. Not only do banks boast arobust network of physical branches in bothcommercial and residential neighborhoods,but they are also technologically intensiveorganizations. However, bringing techno-logical innovations to market and buildingnew infrastructure do not fall within thetraditional bank raison dtre. The organi-zational culture and mindset required forrisk management and regulatory compli-ance are not easily adapted to the competi-tive demands of digital commerce, but oneof the urgent requirements for banks is todevelop ways to think and act like a digitalcompany, while retaining a strong focus onsecurity and reliability.

In order to leverage both their physical re-tail presence and extraordinary core compe-tency as technology companies, banks needto do some soul-searching and find a visionfor their role in the digital ecosystem. We

If financial services providers moveslowly or resist disruption of theircore business, nimble non-bank

technology companies are likely todevelop work-around solutions inthe medium term, exposing banks

to full disintermediation.

recommend four strategic steps: think hard,choose your game, maintain flexibility andleverage the banks digital nature.

1. Think hard

Banks and non-bank payments organizationsshould consider updating their payments ormobile strategy groups as digital commercegroups. Bank-owned technology incubatorscan experiment with innovations, even test-ing them in the market before incorporatingthem into the banks portfolio of core pay-ments offerings. Think hard about the future

of retail commerce and what it means for theorganization. Where does it want to play?Does it want to lead a change in consumerspending patterns or follow? How should theorganization build the infrastructure to im-plement its strategy? How can the organiza-tion be retrained so that people have thenecessary skills and expertise?

2. Choose your game

Payments organizations and financial serviceproviders should consider how and wherethey want to play narrowly in mobile pay-


Access to new customers

Access to servicing network

Prime share of customer attention

Access to consumer data

Access to technology

Inuence over POS systems

Inuence over merchants

Regulatory management

Access platforms where people spend time

Integrated into other popular offerings

Piggyback on others marketing

Enable network effect/word of mouth

Location

KYC

Purchasing behavior

Phone number to account mapping

NFC

QR Code

Coupon redemption

1

Key assets

Participant

2

3

4

5

6

7

8

Bank

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Telc

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Devi

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Mfa

nufa

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OS p

rovi

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App

deve

lope

rs

Clou

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atfo

rms

Cred

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reau

s

Spec

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secu

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prov

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Reta

ilers

Paym

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Netw

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Key battleground or potential partnership


Exhibit 4

Banks face new competitors across all areas of mobile commerce


ments and banking or more broadly in mo-bile marketing. If they choose to offer an e-wallet, do they want to develop their own, orpartner with an established payments organ-ization or technology firm (OS, OEM or per-haps even an MNO)? Banks have played akey role in combining payments and market-ing in the credit card business and shouldnow measure the broader sources of value inthe digital environment, whether in mobilemarketing (coupons, posters, loyalty) or mo-bile banking (P2P, billing, e-wallet). On thisbasis they can then decide where and how tomake their best play. For example, each or-ganization should decide whether to cooper-ate or compete with Google on themarketing front.

3. Maintain flexibility

While NFC-based solutions may represent astrategic challenge to banks, banks shouldremain open to partnerships with organiza-tions willing to fund the implementation ofNFC. If banks and other established playersavoid working with new entrants to delivernew services to their natural space (airtime,advertising, search), the new challengerswill develop payments solutions independ-ent of banks. This would leave banks vul-nerable to disintermediation. Any NFCpayments initiative should, however, de-pend largely on funding from the true bene-ficiaries of proximity payments, that is,MNOs or Internet innovators.

4. Leverage the banks digital nature

The irony of digital commerce is that physi-cal stores, branches and ATMs give theirowners a strategic advantage in the digitalecosystem, where the combination of onlineand physical presence creates a more dy-namic, interactive customer experience.Banks, in the way of sophisticated mer-chants, can use location-based services tosupport online searches and price compar-isons, while also leveraging their physicalpresence to deliver value here and now.Banks should create a customer experiencethat encompasses branch, ATM, online andsmart phone. Again, building on their expe-rience in developing the credit card busi-ness, banks can also develop solutions tohelp merchants compete more aggressivelyin the digital ecosystem.

* * *

Digital commerce poses significant chal-lenges and opportunities for traditionalplayers and young companies alike. For fi-nancial services providers, the challengesand opportunities lie in finding the optimalway to participate in this new businesslandscape by harnessing the power of mo-bile applications to strengthen their tradi-tional role as a trusted advisor in financialmanagement, payments, liquidity, invest-ments and risk management.

Monica Adractas is an associate principal, and

Kausik Rajgopal is a principal in McKinseys

San Francisco office. Philip Bruno is an expert

principal in the New York office, Olivier Denecker

is a senior knowledge expert in the Brussels office,

Viken Gazarian is a consultant in the Paris office,

and Kiyoshi Miura is an associate principal in the

Tokyo office.

Banks must develop ways to thinkand act like a digital company,

while retaining their strong focus onsecurity and reliability.

Documents

The Road to Mobile Payments Services