Mobile payment has been on the agenda of numerous players across industries for more than a decade. Now, with Apple Pay and Google Wallet launched and the markets equipping themselves, mobile payment may finally take off. Is this the turning point in developed markets? In this article, Julien Duvaud-Schelnast, Manager at global consultancy Arthur D. Little, provides his view on the theme.
Mobile payment has taken off on a global scale, accounting for a total of $285 billion in 2014 and representing 7% of global electronic transactions. Arthur D. Little expects these figures to continue growing at a fast pace, exceeding $800 billion by 2017.
However, growth rates were mainly driven by emerging markets. By the end of 2014, 259 initiatives were operating in emerging markets and 21 had reached more than 1 million subscribers. Those markets lack widespread banking service networks, and mobile payment addresses the need for easily accessible, secure money transfer and storage. In developed economies, though, mobile payment is lagging behind expectations. Even markets that transformed into cashless societies early are still in a nascent stage. In Sweden, for example, where cash payments decreased to 22% of total transactions, mobile payments still only represented 3% of transactions as of 2014.
Nonetheless, Arthur D. Little believes a turning point for mobile payment in developed markets is more likely than ever before. Key reasons include the maturity of mobile payment technologies, the level of equipment available to customers and merchants, and awareness of mobile payment services.
Multiple technological options available to enable a mobile payment transaction
Providers in emerging markets have largely leveraged SMS/USSD due to its compatibility with any mobile phone and ease of implementation. The most prominent examples are M-Pesa, originally started in Kenya, and bKash in Bangladesh – both of which now count over 20 million users. In developed markets, however, no leading technology standard has been set. Depending on their backgrounds, key players push different technologies.
The Near Field Communication (NFC) standard, for example, emulates a contactless payment card on the mobile phone and therefore permits card-present transactions. The technology has been on the market for a number of years, is operated broadly in transportation applications, and enables numerous other services such as loyalty programs and couponing. It recently gained particular public attention when it was embedded in Apple’s iPhone 6. The main challenge is the cost of upgrading the merchant POS terminals to be NFC ready.
Quick Response (QR) code is a technology compatible with all smartphones, as the user only needs to scan a code generated by the merchant, e.g. on a tablet screen. Today the technology is particularly known in the US for its application in the Starbucks mobile payment solution. The upcoming initiative CurrentC, by Merchant Customer Exchange (MCX), which gathers major retailers in the US, relies on QR codes provided by Paydiant, which was recently acquired by PayPal.
Security enablers in mobile payment
A first security enabler involves payment credential storage, in which mobile payment players have pushed different types of secure elements (SEs) depending on the assets they aim to leverage. More recently, providers have started to introduce tokenization layers to enhance payment risk protection. Tokenization replaces the payment credential with a limited-use, non-sensitive substitute (token). This ensures that the payment credential does not need to be replaced in case of fraud.
Additionally, significant progress has been made on authentication technologies. By 2014, 300 million devices had biometric sensors implemented, which further improved the security of executing a mobile payment transaction. Fingerprint recognition is the most popular technology in this area, and the most integrated by handset manufacturers. Another means that has gained significant attention in this field is facial recognition, which was recently demonstrated by Alibaba.
The recent launch of Apple Pay has brought the mobile payment topic back into the spotlight. This is also due to the fact that Apple Pay has combined and leveraged multiple success factors, which few operators have managed to do. With the combination of eSE for credential storage, tokenization and fingerprint authentication, as well as the use of NFC, Apple enables both a high level of security and a smooth customer journey. In addition, in the introduction of its payment service, Apple benefits from a strong trust relationship across its customer base and has managed to onboard major banks. The only lever that Apple cannot immediately activate is the development of the merchant acceptance network.
Changes in the market have prepared it to adopt mobile payment
Users have become equipped. Among the different technologies identified, NFC requires specific end-user equipment. As a matter of fact, all leading mobile phone manufacturers (namely Samsung, Apple, Huawei and Xiaomi) market NFC-enabled smartphones. Market forecasts anticipate an 81% NFC penetration in the worldwide handset base by 2019. In addition, users have shown increased willingness to use mobile payments for their daily purchases. In Europe, 185 million users will utilize a mobile payment app this year, up 51% on 2014, according to a study by ING.
Lastly, the merchant network is developing. With large retailers planning to push mobile payments in their stores in the US and numerous initiatives active in the mobile payment space worldwide, the network of acceptance points for yet-heterogeneous mobile payment technologies is increasing steadily. The growing presence of mobile payment technologies is also reflected in the growing network of NFC acceptance points pushed by terminal manufacturers such as Ingenico. In 2014, there were 21 million NFC-enabled POS terminals in operation across the world.
How the mobile payment revolution will affect the industries
We believe mobile payment is at a turning point, with customers embracing digital behaviour, technological solutions providing the right level of convenience of use and security, and a steadily increasing acceptance network. Hence, we must explore how this will impact the different players in the market.
Mobile network operators
Mobile network operators (MNOs) have been active in this space for over a decade, but with limited success of their third-party partnership models. They are now facing an ever-decreasing window of opportunity as other players seek to bypass them. MNOs, nevertheless, still possess key assets in mobile payment, namely the secure element on the SIM and their customer relationships. They are now challenged to find ways of leveraging those assets, e.g. by establishing a nationwide hub trusted service manager (TSM) that could be used by financial institutions or other third parties.
Banks and payment networks
While payment networks have maintained their place at the forefront of innovation, banks have shown more reluctance to fully engage with mobile payment. Nevertheless, they have managed to demonstrate that they still play a central role in the ecosystem. This role has been confirmed in the latest OEM- and OTT-driven service scenarios. However, more recent models and, more specifically, merchant-driven initiatives (e.g. Starbucks, MCX) show alternative approaches in which the acquisition network does not need to rely on banks. Hence, building on their historically strong position, banks are being challenged to engage more strongly in innovation to maintain their role in the future of the ecosystem.
Limited merchant adoption is often mentioned as the main reason for the failure of mobile payment initiatives. Recent examples of partners blocking the roll-out of Apple Pay in the US show that merchants have a strong influence on the ecosystem takeoff. Merchants are key enablers of a solution. However, they also need to manage the stretch between leveraging the customer relationship with, for example, enhanced loyalty and couponing services or detailed customer analytics, and customers’ skepticism towards boundary-less use of analytics.
Handset manufacturers have been late entrants to the mobile payment market, but could still become relevant and game-changing players. They have benefited from the limited success of using the secure element on the SIM by integrating it into a secure element in the handset to store the payment token. The key challenge we see for those players is to achieve a critical mass and ensure sufficient customer stickiness so as to establish partnerships with banks.
Mobile payment has become an increasingly attractive playing field for OTTs, which often benefit from strong customer relationships and already have billing information. Their solutions are mostly device agnostic and therefore have the potential to reach the whole population. Google’s acquisition of Softcard shows the continuous willingness of the company to establish its footprint within payments and might represent the first step toward an enhanced partnership with MNOs.
Despite significant developments, especially in developed markets, no clear model or winner has been established yet. Hence, all players are still in a position to participate, as we believe the market will structure around global as well as local initiatives. Nonetheless, the window of opportunity is closing. There is an urgent call for all players to position and go to market with convincing strategies for success in the mobile payment space.