Consumers of today want convenience; they want the daily necessities to run smoothly and invisible. Need for efficiency and speed is driving not only the consumer’s life, but even more the merchant’s investment decisions. The bigger the number of payments processed during the rush hours, the more sales and net profit there is at the end of the day. Long queues frighten customers away and the space for tills is limited.
Mobile operators’ are aiming to invent new mobile services that consumers would be willing to pay for, once the margins for voice and data are decreasing. Mobile commerce has for long time been one of their favorites in the search for best revenue generators. But how are mobile financial services generating revenues for mobile operators? As transactional revenues or as once off fees? Nowadays banks are the main supplier of payment tools for consumers. Transactional revenues, although constantly declining in percentage, are a major income source for Financial Institutions. Will the situation change in the future? How are the business models for mobile financial services going to look like? How should banks see this market, as a threat or opportunity?
What is driving bankers today? In the Western societies cash displacement is high on bank’s agenda. Cash handling is expensive, labor-intensive and exposes for crime. The electronic payment vehicles do often cover an extensive part of high-value payments, but the daily small shopping on-the-go is still predominantly cash-based. EMV is a tool for fighting against the crime, but doesn’t always mean faster payments. In many cases it is unfortunately the opposite; the customer who is paying with cards in a busy shop knows the angry glances from the queue behind, while the POS terminal is making its slow connection to the back end.
Another relevant theme for banks and their online divisions is their ever growing need to fight phishing. Internet banking has integrated into our daily lives. For example, pioneering leader Nordea has over 5 million active Netbank customers. These people make approximately 22 million transactions every month. Over 80% of all Nordea customers’ payments happen electronically. It is thus easy to understand that security measures taken to guarantee the security of these transactions and the property of those millions of customers, is not trivial. Today’s bank robbers do not wear black masks and carry a gun, they rather sit far away from their victims, shepherding the flock of thousands of bot-computers. Remaining trusted in consumers’ eyes is an increasingly important objective for banks.
Banks are investing a great deal in developing the authentication mechanisms from single static password and username to more sophisticated methods. One of the predominant solutions proposed is to have a separate token for end user authentication and transaction confirmation. There are several models available. Most of them use a credit card or chip based token, which is inserted in a reader with some processing capability, keyboard and a screen. For consumers this means that in order to access internet banking services, one need to carry a separate token - one more gadget to the already-full pockets and purses, and to stress about the card and the reader, while trying to use the service on another channel. The fact is that the mobile phone is already in the pocket or purse and it has the same – and even more capabilities than these tokens. Integrating the authentication and transaction signing functionality would indeed make a lot of sense, not only from consumer’s perspective, but it would also mean cost savings for banks if reasonable business models with operators can be agreed. Naturally the security of this open application environment device has to be guaranteed first.
Is mobile an answer?
Mobile as a payment vehicle is experienced to be very convenient from consumer’s perspective and it could be the solution to these needs and industry requirements.
Near Field Communications (NFC) is a new technology which enables applications stored on a Secure Element (SE) in the mobile phone to communicate with other NFC devices. This technology enables enormous number of user-friendly services, ranging from catching information of next bus at a bus station to payments at a point of sale or fast ticketing at a metro gate.
The pilot consumers have clearly expressed a preference towards using mobile as the payment card in several trials. These results reflect the customer feedback in majority of the case studies that I have seen. New mobile contactless payment trials are announced on weekly basis. The total number of pilots is expected to rise to 100 by end of the year; also the first commercial implementations have been announced. For instance, the France based mobile operator Orange has announced that they plan a commercial roll-out beginning of 2008.
In a recent Amex trial the result was that a NFC payment is 63% faster than a cash transaction. Other companies, for instance MasterCard, have reported similar results from their trials. Faster throughput time is an important driver for merchants.
Consumers prefer to pay fast. Payment is a necessity although not the most enjoyable moment while shopping. The convenience of mobile contactless payment will drive adoption of electronic payment channels, which will in turn make banks happy. But what is the impact on the revenue sheets of banks? Or is the additional revenue going to mobile operators? Are there going to be any additional revenues in the equation?
Mobey Forum is currently working on the business model analysis and results are expected to be released by end of the year 2007. Some early notes are already available.
When analysing the business case of the whole mobile financial services ecosystem, one of the earliest recognitions is that different ecosystem stakeholders get their business case fulfilled at different times. There are first level, “key” stakeholders in the ecosystem like banks, merchants and mobile operators. These all can be assumed to get some operational revenues. For example banks in terms of payment transaction fees (banks as payment issuers and providers of more efficient payment collection solutions to merchants) and lowering cost on cash processing, merchants as profits on goods, increased sales, customer loyalty through better satisfaction and operators in format of increased traffic revenues, new value added sales to consumers, possibly rental revenues on Secure Element storage etc. There are also secondary stakeholders in the mobile financial services ecosystem. These companies are the likes of handset vendors, POS vendors, semiconductors, software houses, system integrators and personalization houses. These companies typically get a share of revenues at the enrolment phase of services, when the system is set up.
Good news from the discussions between the key industry stakeholders is that the tone has lately developed to a direction where all parties would manage their own business and to remain in their primary area of expertise. Banking business, although it looks simple, is heavily regulated and requires special skills for instance regarding risk management and card issuing processes. Furthermore, setting up a netbank is not a trivial task. And – maybe most importantly – earning consumer trust is something which takes a long time without major failures in processes. On the other hand, mobility and the related services are an area which the mobile operators are experts on.
Since the ecosystem is complex, the interfaces, roles and responsibilities need to be clearly defined for a collaborative model. Sufficient amount of trust is needed between the key players if a common hardware platform is shared. This hasn’t always been the case, but the trust and real co-operation is building up constantly. Today operators are not requesting a revenue share on banking or payment transactions, but they are basing their business model calculations rather on the increased traffic, new services enabled and a potential rental fee from sharing the SIM space with other Service Providers like banks. It is also important that each Service Provider would have an exclusive control over their own applications. The “mobile virtual card” would be only a new channel and form factor for the existing payment products issued by banks.
This new approach is visible for instance in the recent White Paper issued by GSMA. Their Ecosystem model is drawing the consumer in the middle, and mobile operators and Service Providers (e.g. banks) both equally interfacing the consumer. It is indeed important that the key industry stakeholders can really work together in order to create better services for the benefit of their clients.
About Mobey Forum
Mobey Forum is a global, non-profit industry forum driven by the finance industry. The mission of Mobey Forum is to enable and encourage banks to offer mobile financial services by creating suitable business models through cross-industry collaboration. The membership encompasses leading financial institutions and mobile operators as well as other leading ecosystem stakeholders that are committed to accelerating the take-off of user-friendly mobile financial services by promoting commercially viable business models. In order to reach its targets Mobey Forum organizes 4 two-day plenary meetings annually and continues the detailed analysis in focused Task Forces. Often the outcome is also demonstrated or piloted by the members. The experiences are then shared in the meetings, which are also excellent opportunities for networking with key industry leaders cross sectors.
Liisa Kanniainen is the Executive Director of Mobey Forum, on a secondment from Nordea Bank. She is in charge of the operational activities of the cross industry body. Ms Kanniainen has over 12 years experience in the mobile financial services industry in several key positions both on the telecoms and banking sectors.