Mobile Payments - Diamond

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Mobile Payments: Mobile Operator Market Opportunities and Business Models By Hamilton Sekino, John Kwon and Se Han Bong Mobile payments have been highly touted since it became apparent that the mobile phone would emerge as a ubiquitous consumer device. However early market adoption was stunted by technological challenges, a lack of standardization, fragmented commercial efforts, and most importantly, a lack of sustainable business models. More recently, however, there have been signs of renewed interest in mobile payments. Recent commercial initiatives include NTT DoCoMo and SK Telecom in Asia as well as mobile payment trials in the U.S., by PayPal Mobile, Visa and MasterCard. We believe mobile operators in the U.S. now have a real opportunity to lead this market development, given their large customer bases, and control of mobile device features, user interface, and subsidies. We define mobile payments (m-payments) as any payment transactions, whether in-store or remote, executed on mobile devices. In this paper, we first assess the market opportunity for m-payments in comparison to other traditional payment methods. We then identify and evaluate potential business models based on past and ongoing initiatives. Finally, we highlight key strategic questions for mobile operators to assess the mobile payment opportunity.

The Mobile Payment Market Opportunity

Potential Drivers for Market Adoption of Mobile Payments While mobile operators, financial services firms, and retailers have been evaluating the feasibility of m-payments since early 2000, recent developments on both the supply and demand side are prompting the key players in the m-payments value chain to get serious about its potential. On the supply side, mobile operators are under pressure to continue looking for new revenue sources to counteract voice pricing decline and subscriber growth saturation. While mobile operators in the U.S. are gaining traction with mobile data content and applications, which already represent 13% of total ARPU, the m-payment market presents them with an opportunity to further expand non-voice revenues. Mobile operators in mature wireless markets such as South Korea and Japan, where mobile data ARPU already reached 19% and 29% of ARPU respectively, are aggressively leading their respective m-payment ecosystems. We estimate that mobile operators in the US will need to generate more than $40B in nonvoice revenues by 2010 in order to sustain overall ARPU, and they will be looking at m-payments as one potential revenue source.

table of contents The Mobile Payment Market Opportunity . . . . . . . . . . . . 2 Mobile Payment Business Models

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Conclusion: Recommendations for Mobile Operators . . . . . . . 10 About the Firm

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About the Authors

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For more information contact:

Hamilton Sekino, Partner [email protected] 2

Furthermore, financial institutions, facing declining revenue growth from traditional credit cards, are also looking at cashdominated micro-payments (i.e. transactions less than $5) to generate new revenue streams. In 2004, micro-payments processed through credit and debit cards accounted for only $13.5 billion out of over $1 trillion total spent on micro-payments. On the demand side, the growing ubiquity of mobile phones and their increasing multifunctionality make mobile phones a compelling candidate for replacing a physical wallet. In the U.S. mobile penetration has passed 75%, with 235M mobile phone users, compared to 176M people with credit/debit cards. Surveys reveal that U.S. consumers today

are more likely to leave home without their wallets than their mobile phones. In addition, consumers are increasingly comfortable in using their mobile phones for applications other than voice. This is clearly the case in Japan and South Korea, which are leading m-payment deployments. It is reasonable to expect this trend to carry over to the U.S. market, where mobile data penetration is projected to grow from 21% to 52% by 2011.

Segmentation and Sizing of the Mobile Payment Market To help assess the market potential of mobile payments, Diamond first looked at the current payments market and identified and sized segments that are more predisposed to adopt mobile payments (Figure 1). The market is segmented into 4 quadrants: in-store vs. remote and micro vs. macro transactions, where a micro transaction is defined as less than $5. From this perspective, we focused on in-store transactions, aggregating to more than $6 trillion in annual transactions, and on peer-to-peer (P2P) and international fund transfers, a much smaller market with close to $60B in annual transactions. Mobile phones possess key value propositions that make m-payments ideal for these segments. For in-store segments—in particular the micropayments segment—the value proposition is the convenience and speed of contactless payments enabled by mobile phones with embedded NFC (Near Field Communication) chips. For on-line P2P and international transfer markets, the value proposition is the inherent connectivity, ubiquity, and near real-time verification capability of mobile devices (via SMS, WAP, or IVR).

Overview of Payment Value Chains Before evaluating and recommending an optimal new value chain and business model for mobile operators, it is useful to first review existing payment models (Figure 2).

U.S. Payments Market Segmentation and Sizing

In-Store

TRANSACTION LOCATION

Payments under $5 in physical locations = $1.2 trillion1 MicroTransactions

Incumbent: Cash

Wireless content & app. download = $2.0 billion Incumbent: Direct Wireless Billing

TRANSACTION SIZE Payments over $5 in physical locations = $5.0 trillion

MacroTransactions

Remote

Incumbents: Credit/Debit Cards, Cash, Checks

1 Vending,

= $176.4 billion = $16.0 billion = $43.5 billion $235.9 billion

Incumbents: Credit/Debit Cards, P2P Payments

parking, coin-operated machines, quick-service restaurants, and transit account for $160 billion. P2P payments, catalog sales, infomercial sales, telesales or bill payments.

2 Excludes

Online sales2 + Online P2P3 + Int’l fund transfers4

3 About

9% of US online shopping used peer-to-peer service, such as PayPal, to make payments, and nearly 95% of online P2P were generated by auction-related payments. 4 Total US remittance outflow (personal transfers from the US to other countries) in 2005.

Sources: Federal Reserve Bank of Philadelphia, 2006; IDC survey, 2006; eMarketer, 2006; Nilson Report, 2005; IMF, 2005; Diamond analysis.

Figure 1

Overview of Traditional Payment Value Chains

Merchants

Cash

Acquirers

Payment Networks

Issuers

Consumers • Accept cash

• Pay cash Consumers

Credit / Debit Cards

• Accept payments using card readers that are connected to merchant acquirers

• Hold merchant accounts • Manage transaction info & merchant payment • Typically outsource transaction processing

Checks

• Accept checks and verify consumers’ identity and account information

• Hold merchant accounts • Collect & process checks (verification and guarantee) • Clear checks & collect funds

Online P2P Payments

• Selling party must belong to the same payment network as the paying party to receive funds

• • • •

Mobile Payments

• Accept payments using M-payment readers or existing POS devices connected to merchant acquirers

• Hold merchant accounts • Manage transaction info & merchant payment

• Connect and switch transactions between merchants & issuing banks • Expand network and promote brand awareness

• Manage consumer accounts and assume associated credit risk • Typically outsource backoffice processing

• Pay issuers and manage accounts (via statements or online access)

• Hold consumer accounts and issue checks • Not responsible for fraudulent checks • Outsource check printing

• Monitor their checking accounts

Consumers

Consumers One entity performs acquiring, issuing & processing (network function) Transaction is identical to transferring funds between two accounts in a same bank User accounts are typically linked to member credit cards or bank accounts Service provider encourages users to maintain balances on their accounts by giving interest (via money market accounts)

• Transfer funds between other accounts to the service provider

Consumers • Connect and switch transactions (either through own network or existing payment networks)

• Authorize payments and manage wireless bills/credit card bills/m-payment accounts & M-wallet

• Pay bills and recharge M-wallet • Monitor their accounts via mobile phones

Figure 2

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Traditional payments typically involve a merchant, acquirer, issuer, and a consumer. The roles of merchants and consumers are obvious. Acquirers are responsible for acquiring merchants and enabling merchants to process payments. Issuers are responsible for issuing payment devices to consumers and processing the transfer of funds from consumer accounts to merchants. In the case of credit and debit cards and other electronic forms of payment, a payment network provider, such as Visa or MasterCard, resides between acquirers and issuers to facilitate the transfer of information and funds. Payment network providers are

also responsible for expanding their merchant networks and user membership to ensure wide acceptance and drive revenue growth. In recent years, PayPal spearheaded the development of a simplified payment value chain to facilitate frictionless payment methods for on-line commerce between individuals and on-line merchants. In this online peer-to-peer (P2P) payment model, one entity, PayPal, holds the relationship with both merchants and consumers, thus playing the role of both acquirer and issuer. For providing these payment services, the various players in the value chain typically take a percentage of the payment

transaction that ranges between 1 and 3%. Typical share of interchange fees for players in the value chain, along with the U.S. market size for each payment types, are illustrated in Figure 3. These interchange fees are considered a major cost factor for merchants and have been an extremely contentious issue between merchants and financial services firms in recent years. Any new payment model for mobile payments must be cognizant of these interchange fees and attempt to reduce or match these fees to be successful, especially for micro payments.

Breakdown of Processing Fees Across the Value Chains

U.S. Market Size

Cash

Credit / Debit Cards

Checks

• 2005: 49B trans ($1.4T) • 2009: 47B trans ($1.7T) • 2005: 46B trans ($2.6T) • 2009: 63B trans ($3.7T)

• 2005: 26B trans ($2.0T) • 2009: 23B trans ($1.4T)

Merchants

Acquirers

Payment Networks

Issuers

• Keep 100% of payment value

• CC:

Keep ~98%

• Keep 0.4% (shared w/processors)

• Keep 0.1%

• Keep 1.5% (shared w/processors)

• Offline DC:

Keep ~99%

• Keep 0.25% (shared w/ processors) • Keep 0.1%

• Keep 0.77% (shared w/ processors)

• Online DC:

Keep >99%

• Keep 0.16% (shared w/processors) • Keep 0.05%

• Keep 0.25% (shared w/processors)

• Keep ~96% of payment value

• $0.25 per transaction (verification) AND 2% + $0.15 to $0.25 per transaction (guarantee)

• May collect fees from consumers

• Keep ~97% of payment value

• 1.9% to 2.9% + $0.30 per transaction

• Keep ~98% of payment value

• 2% + $0.20 per transaction

• Keep ~97% of payment value

• Keep 1.3% (1.0% going to subsidizing Moneta phones)

• 2005: ($16B*)

Online P2P Payments

• 2009: (25B)

• 2005: Negligible

Mobile Payments

• 2009: 0.4B trans ($5B)

• Keep 0.1%

• Keep 1.2% (less than half their usual 2.5 cut)

*About 9% of US online shopping (i.e. 9% of total $176.4B) used peer-to-peer service, such as PayPal, to make payments. Nearly 95% of online P2P were generated by auction-related payments. Note: Breakdown of payment value based on an $100 transaction.

Sources: The Nilson Report; eMarketer 2006; UBS; FDC; EFT data book; Card Association Interchange Schedule; SK Telecom.

Figure 3

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Assessing Mobile Payment Business Models

Diamond evaluated seven representative m-payment initiatives in the market, for both in-store purchase and P2P remote payments, to assess their feasibility in the U.S. market.

In-store Payments To understand the m-payment options for in-store purchases, we look at four current m-payment initiatives (Figure 4): NTT DoCoMo (DCM) FeliCa in Japan; SK Telecom Moneta in South Korea; MasterCard m-payment trials in the U.S.; and the Mobilelime venture in the U.S. While some of these services offer payment applications beyond in-store purchases, for the purpose of this assessment we will focus on their in-store payment capabilities as the dominant service offering.

n NTT DoCoMo FeliCa — Operator-Dominated Model NTT DoCoMo launched e-wallet mobile phones using Sony’s FeliCa technology in July, 2004 with very positive results. By 2006, DoCoMo already had more than 24,000 POS readers throughout Japan and over 18 million e-wallet service subscribers (35% of the total subscriber base). Here’s how the DoCoMo FeliCa service works. Customers get a FeliCa-enabled phone that comes with a smart chip embedded in the device. Once customers use their phones to activate the service, they can choose from a prepaid account similar to a debit account or an extended credit account. In addition, Felica users can apply for multiple third-party

Potential Business Models for In-store Payment Segment

Merchants

Operatordominated Model (DoCoMo FeliCa)

Operator/FS Collaboration Model (SKT Moneta)

FS-dominated Model (MasterCard)

3rd-party Intermediation Model (Mobilelime)

Acquirers

Payment Networks

Issuers

M-wallet Aggregator Device: FeliCa-embedded phone

POS Requirement: New DoCoMo FeliCa reader

Primary Acquirer: DoCoMo

Processing: DoCoMo

Issuer: DoCoMo Billing: DoCoMo Interchange Collector: DoCoMo

M-wallet: DoCoMo Provisioning: OTA by DoCoMo

Activation: Via phone menu (OTA) Payment: Wave phone (NFC) Device: Moneta-enabled phone

POS Requirement: New Moneta payment reader

Primary Acquirer: SKT Moneta

Processing: Leverages existing VISA & MC networks

Issuer: Banks Billing: Banks Interchange Collector: Banks

M-wallet: SKT Moneta Provisioning: Smart chip distributed by banks

Activation: Insertion of smart chip into phone Payment: Wave phone (NFC) Device: Nokia 3220 w/NFC (from at&t)

POS Requirement: New Paypass sensors

Primary Acquirer: MasterCard leverages existing acquirers

Processing: Leverages existing MasterCard network

Issuer: Banks Billing: Banks Interchange Collector: Banks

M-wallet: Issuing banks Provisioning: OTA by issuing bank

Person or Merchant POS Requirement: Registration only

Activation: OTA Payment: Tap & Go (NFC) Device: No new phones required

Primary Acquirer: Mobilelime

Processing: Mobilelime

Wireless Operator

Issuer: Mobilelime Billing: NA Collector: NA

Financial Services

M-wallet: NA Provisioning: None

Activation: Online registration Payment: Call IVR

New Entrant

Figure 4

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services such as transit tickets, ID cards, and electronic keys to be incorporated into their e-wallet phones. Unique to the DoCoMo model is its vertical integration. DoCoMo purchased a bank to handle account management, credit issuance, and merchant acquisition processes. In this model DoCoMo has established an endto-end service delivery model: acquisition, payment network, and issuance. This model allows the operator great flexibility in implementing the payment value chain, particularly in establishing attractive processing fees. Since there are no other players in the value chain, the operator is free to set appropriate device costs and lower transaction fees to entice new merchants. In addition, having the full range of relationships as a wireless provider and a banker is likely to increase the stickiness of the consumer relationship, thus reducing overall churn. However, there are added risks and disadvantages to going it alone. In addition to the initial investment of acquiring a bank with credit-issuing capability, DoCoMo also had to invest in acquiring new merchants and distributing new POS readers throughout Japan. Given the geographical size and population of the U.S., this would be an even greater challenge for operators here. DoCoMo was able to establish partnerships and standards very quickly by leveraging their dominant market share in the Japanese mobile market. This may be challenging in the U.S. market where there is not a single dominating operator. n SK Telecom Moneta—Operator and FS Collaboration Model Originally trialed in South Korea in 2002 using infra-red readers, SKT Moneta currently uses a NFC chip inserted into mobile phones to facilitate payments. Visa and SKT also

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announced that they will be offering Universal SIM (USIM) cards, which can be personalized over-the-air (OTA) starting in April 2007. The SKT Moneta service has over 500,000 POS readers and 2.6 million subscribers with Moneta phones. Customers sign up for the SKT Moneta service via the web or through their local bank branch. Customers then receive a personalized chip that they insert into the phone to activate the service. Starting in April, 2007 customers are able to sign up and get their mobile phones provisioned OTA and no longer need to wait for a new chip. Once activated, the mobile device can be used as an e-money account, credit card, transit ticket, membership loyalty card, and for mobile online trading. SKT is the m-wallet owner, meaning that customers are able to hold multiple accounts from different issuers under one mobile device that is serviced by SKT. The SKT Moneta service exemplifies a collaboration model between a mobile operator and financial services firms. Credit/account issuance is performed by the partnering banks and payments are processed through the existing Visa and MasterCard networks. SKT develops new payment applications and is responsible for rolling out new POS readers to merchants. For those investments, SKT partakes in a portion of the transaction revenue from the payments. SKT receives 1.3% of the transactions, payment networks 0.1% and issuing banks 1.2%, which is less than their usual fee of 2.5% in South Korea. We believe the operator/financial services collaboration model implemented by SKT may be a better fit for U.S. operators than the operator-dominated model. In this model, the payment service is issued in partnership with existing bank issuers. Hence, all credit issuance and account management are performed by the partnering banks and not

by the mobile operator, which may be a point of concern for U.S. consumers who prefer to receive banking services from financial services firms. However, while SKT had to invest in the rollout of new payment readers in South Korea, U.S. operators should collaborate with financial services firms to leverage the existing payment networks and their contactless payment infrastructure. Visa, MasterCard, and American Express already have a big lead in rolling out contactless payment readers and they are likely to continue their investments. Partnering with those firms would reduce the investment required in rolling out new readers and help to expand m-payment adoption by establishing a single standard across operators and financial services firms. n MasterCard M-Payments Trial— FS Firm Dominated Model MasterCard’s m-payment trials in Dallas and New York illustrate a financial servicesdominated model. In November, 2006 MasterCard launched its trial of m-payment service in Dallas, partnering with Mobile Virtual Network Operator 7-Eleven Inc.’s Speak Out Wireless and Peoples Bank of Paris Texas. MasterCard later launched a similar trial in New York, partnering with Cingular and Citibank. In both trials, customers received a NFC-enabled Nokia 3220 phone that is activated OTA using the carrier network. Once activated, customers can “tap and go” to pay for goods in more than 32,000 merchant locations that accept Paypass, including 7-Eleven stores, McDonald’s, CVS, Duane Reade, Sheetz, and Regal Entertainment Group. The m-payment works just like the MasterCard Paypass cards in that a customer taps the reader to initiate the payment. No signature is required for purchases lower than $25, making it ideal for replacing cash transactions.

The MasterCard m-payment trial exemplifies a financial services-dominated model by leveraging existing payment value chains. The New York trial works with a customer’s existing Citibank credit account and payment is processed using MasterCard’s existing payment network. While a permanent business model has yet to be established, currently the mobile operator’s involvement is limited to providing the wireless network for OTA provisioning of the mobile payment device and participating to provide mobile banking services. This model has some advantages in terms of consumer adoption. Given that the issuer of the m-wallet is the issuing bank, it works with existing credit accounts and does not require customers to apply for new ones. The trial uses MasterCard’s existing payment networks and Paypass readers, avoiding new investments in payment readers or acquisition of new merchants. MasterCard and Citibank, the issuing bank in the New York trial, were able to leverage their trusted brand names which should help to mitigate security concerns around m-payments. However, outside of the trial, a permanent business model that would satisfy all players has yet to be determined. In the trial, the operator facilitated the OTA provisioning of the phone via the wireless network, but all the other aspects of the payments process are managed and owned by the financial services firms. The mobile operator does not partake in the interchange fees or own the m-wallet. Given that U.S. operators have a dominant relationship with device manufacturers and heavily subsidize mobile devices, we believe it is unlikely that operators would be satisfied with such a passive role in the value chain.

n Mobilelime—3rd Party Intermediation Model Mobilelime’s third party intermediation model represents another approach. Mobilelime works to combine marketing and loyalty programs with m-payment service. Initially designed with marketing and loyalty programs in mind, Mobilelime and partnering merchants provide discounts and send optional promotional information to customers via SMS. To pay using Mobilelime, customers call a 1-800 number and enter a PIN along with a specific vendor location number to initiate a payment. The vendor then inputs the last 4 digits of the customer’s phone number to receive the payment. Once the payment is verified, Mobilelime transfers the money to the vendor from a preregistered customer credit card similar to a PayPal online payment. Merchants can also participate in Mobilelime’s marketing and loyalty programs to send promotional information via SMS and track consumer behavior via a customer’s phone number.

Targeting Remote & Macro Payments To understand m-payment options for remote (mainly P2P) payments Diamond looked at three m-payment initiatives in the market: SMART Money in the Philippines and two mobile services recently launched in the U.S., Obopay and PayPal Mobile (Figure 5, page 8). While some of these services offer payment applications beyond mobile P2P, for the purpose of this assessment we will focus on their mobile P2P capabilities as the dominant service offering. n SMART Money—Operator and FS collaboration Model SMART Money, the world’s first reloadable e-wallet account, was launched in 2000 by SMART, a leading mobile operator in the Philippines, and Banco de Oro. Each SMART phone is shipped with a SMART Money application pre-loaded on its SIM card. Customers activate the SMART Money service OTA using the pre-loaded SMART Money menu on the phone.

Mobilelime banks on consumer desire for discounts and merchant interest in maintaining effective loyalty programs to motivate m-payments. Additionally, their IVRbased payment method does not require any new POS readers at the merchant location or NFC-enabled handsets, which are adoption barriers for other mobile payment methods discussed earlier.

Once activated, customers can use SMART Money to send funds to other subscribers, pay merchants, pay utility bills, and pay for prepaid mobile airtime. Customers can also reload or deposit cash into their SMART Money account in over 700,000 retail locations that participate as SMART Money reloading stations. SMART also distributes an optional prepaid MasterCard that can be used to access funds in SMART Money.

However, Mobilelime’s payment processes are cumbersome. Furthermore, Mobilelime currently lacks the brand awareness and marketing muscle to acquire new users and the credibility to acquire merchants in large numbers. We believe that it will be very difficult for any third party new entrant to disintermediate mobile operators and financial services incumbents in the value chain.

In the SMART Money payment value chain, all of the account management and payment processing (except for MasterCard transactions) is performed by the partnering bank, Banco De Oro. SMART handles marketing and acquisition of new merchants and consumers. While SMART does not get a portion of the transaction fees, the transactions are performed

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using SMS, thus contributing to the carrier’s overall data revenue. Moreover, SMART reports that using SMART Money and SMART reload stations to recharge prepaid airtime have reduced their prepaid top-up costs. We believe mobile operators and large retailer banks under a collaboration model similar to SMART Money may create a valuable proposition to consumers with an on-the-go P2P service. For example, parents could send money to their kids on family plans upon receiving a request for more funds on their accounts; or teenagers could exchange small amounts through mobile P2P replacing cash. However, the major limitation of the model is the “interoperability” between mobile operators allowing P2P transfers between subscribers of different operators. The importance of “interoperability” is shown

by the adoption curve of SMS in the US that only took off after SMS exchanges across operators became available and more reliable. Mobile operators should collaborate on P2P as well to ensure cross-network transfers. n PayPal Mobile—Third-Party Intermediation Model PayPal, a leading online P2P payment provider with more than 100 million users worldwide, launched a SMS-based mobile payment service in 2006 that allows U.S. and Canadian members to send money using their mobile phones on-the-go. Existing PayPal members can activate their service online by registering their Mobile number along with a PIN. PayPal Mobile works with any mobile phone, either via SMS or IVR. Once registered, customers can send money by texting the amount to be paid along

with the payee’s phone number to PayPal or by calling a 1-800 number and using the IVR system. For SMS requests, PayPal authenticates the transaction by calling back the payer and verifying their PIN. For IVR requests, the PIN is verified on the initial call. Once the payment is confirmed, PayPal notifies the payee with instructions on how to claim the payment. PayPal is also working with merchants and charity organizations to offer “text to buy” and “text to donate” codes. For participating merchants and charities, customers can buy items on ads or donate to a charity simply by texting the “text to buy” or “text to donate” codes to PayPal. PayPal Mobile’s value chain is identical to PayPal online. In fact, PayPal provides one account for both online and mobile payment services; the only difference is the mode of communication when requesting and acknowledging payments.

Potential Business Models for the Remote P2P Segment

Merchants

Operator/FS Collaboration Model (SMART Money)

3rd-party Intermediation Model (Obopay)

3rd-party Intermediation Model (PayPal Mobile)

Acquirers

Payment Networks

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M-wallet Aggregator Device: SMART-enabled phones

Person or Merchant POS Requirement: Registration only

Primary Acquirer: SMART

Processing: P2P processed by BDO; optional prepaid MC processed via MC

Issuer: BDO Billing: None (prepaid) Interchange Collector: BDO

M-wallet: SMART Provisioning: SMART (OTA)

Person or Merchant POS Requirement: Registration only

Primary Acquirer: Obopay

Processing: Obopay transfers funds between two Obopay accounts

Issuer: Obopay Billing: Obopay Interchange Collector: Obopay

M-wallet: NA Provisioning: OTA (participating operators)

Payment: SMS via phone menu

Activation: Download Java software Payment: SMS via Obopay menu of IVR Device: No new phones required

Person or Merchant POS Requirement: Registration only

Activation: Via phone menu (OTA)

Device: No new device

Primary Acquirer: PayPal

Processing: PalPal transfers funds between two PayPal accounts

Wireless Operator

Figure 5

Issuers

Issuer: PayPal Billing: PayPal Interchange Collector: PayPal (free for now) Financial Services

M-wallet: NA Provisioning: None

Activation: Online registration Payment: Send text or call IVR

New Entrant

n Obopay—Third-Party Intermediation Model Launched in March, 2006, Obopay offers onthe-go P2P mobile payment service. Similar to PayPal, both payee and payer must belong to Obopay to send and receive funds. Also similar to PayPal, Obopay links to a userprovided bank or credit account to replenish account balances when payment is made. Customers can send money using an Obopay application (which can be downloaded OTA for subscribers of select operators), SMS, or via a 1-800 number (IVR). The receiving party can acknowledge payments and request payment via the same Obopay application. Obopay also provides an optional prepaid MasterCard that can be used with the Obopay account to make purchases at MasterCard locations and to get cash at ATMs. Obopay’s business model is based on a simplified value chain, much like PayPal,

where Obopay holds accounts for both the payee and payer and manages the transfer of funds between the two customers. Just like PayPal, Obopay customers rely on existing payment networks (credit or debit accounts) to reload their virtual accounts. The third-party intermediation model being pursued by PayPal Mobile and Obopay offers an inherent value proposition by enabling customers across multiple mobile operators to request and send money on-the-go at anytime. Additionally, in PayPal’s case, they already have a substantial user base and the payment infrastructure established from their online P2P payments. However, compared to the collaboration model there are significant limitations. Because the third-party intermediation model does not involve the mobile operators directly, the user experience may not be ideal. In PayPal’s case, the payment is initiated by texting

to PayPal’s number or by calling PayPal. Obopay does offer a downloadable application for select operator subscribers but relies on SMS or IVR via a 1-800 number for other operator subscribers. Even if the provider has an SMS-based application, some mobile operators may block messages to the providers’ short codes, and even if the provider has a Java-based downloadable application, it is an issue to ensure that the application will work across all handsets. Involving the operators may help to develop an on-deck application that is conducive to a better customer experience. Moreover, without partnerships with mobile operators or well known financial services partners, the provider may also lack the brand awareness to drive adoption of the service, a particular challenge for new players such as Obopay.



Conclusion: Recommendations for Mobile Operators

After years of hype surrounding mobile payments, recent developments in NFC technology and standardization efforts by Visa and MasterCard have finally paved the way for U.S. mobile operators to think realistically about their role in a world of contactless payments. While the appropriate business model has yet to be developed in the U.S., operators in other markets have achieved success, thus demonstrating the viability of the m-payment concept. U.S. operators will need to play an active role in developing an m-payments value chain to ensure that they capture a fair share of revenue from a payments market sized at $8 trillion in 2009 thereby further monetizing their investments in customer acquisition and retention, and justifying the cost of higher handset subsidies. Diamond’s analysis suggests that an Operator/Financial Services collaboration model has the highest likelihood of success for implementing an m-payment strategy in the U.S. market. However, mobile operators and their financial services partners have to address key strategic questions on the demand and supply sides before committing organizational and capital resources to pursue the m-payment opportunity:

Key Questions—Demand:

Key Questions—Supply:

End-users:

Financial services firms:

• What is the value proposition of the m-payment offer as compared to competing payment methods?

•W  hat incremental revenues can m-payment generate?

• Would consumers adopt m-payment? • What are the early adoption segments? • Would they accept costs for the service in the form of financial fees or mobile data charges? Retailers:

• Is the collaboration model a profitable proposition considering incremental acquisition, IT, and care costs? Mobile operators:

•W  hat is the value proposition of m-payment as compared to competing payment methods?

• What is the incremental ARPU that m-payment can generate?

• What is the expected speed of upgrade to POS terminals that are NFC reader enabled?

• What is the upside to the core business in terms of retention, data plan uptake, and casual data usage?

• How can the upgrade cycle be accelerated?

• Is the collaboration model a profitable proposition considering incremental handset subsidies, IT and care costs?

• Would they accept any additional fees for the service?

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• What is the upside to the core business in terms of retention and acquisition of new customer segments?

About Diamond

Diamond (NASDAQ: DTPI) is a management and technology consulting firm. Recognizing that information and technology shape market dynamics, Diamond’s small teams of experts work across functional and organizational boundaries to improve growth and profitability. Since the greatest value in a strategy, and its highest risk, resides in its implementation, Diamond also provides proven execution capabilities. We deliver three critical elements to every project: fact-based objectivity, spirited collaboration, and sustainable results. To learn more visit: www.diamondconsultants.com.

About the Authors

Hamilton Sekino is a Partner in Diamond’s Telecom and High Tech practice. Hamilton has experience across North America, Latin America, Europe, and Asia in launching mobile operators and helping them grow through new technologies, new products, channels, and MVNO programs. He also has experience in generating growth for wireless handset OEMs, infrastructure vendors, and media & entertainment companies through the introduction of new technologies, services, business models, and strategic partnerships with mobile operators. John Kwon is a Manager in Diamond’s Telecom and High Tech practice with experience across North America, Europe, and Asia in developing mobile operators’ market entry strategies and launching new products and services. His experience also comprises 3G network strategy, operations improvement, customer value management, and MVNO strategy for leading mobile operators as well as market opportunity analysis for a major wireless handset and infrastructure vendor. Se Han Bong is a Manager in Diamond’s Telecom and High Tech practice. Se Han has deep experience across the telecom, high tech, and financial service industries, helping clients identify and develop new revenue opportunities ranging from demand stimulation to new product and new market entries. His experience includes mobile commerce, enterprise mobile data applications, new wireless launch strategy, and go-to-market sales plans for telecom service providers, as well as technology portfolio management and global product strategy for financial services firms and payments processors.

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W ashington ,   D . C .