By Julien Duvaud-Schelnast, Manager at management consultancy Arthur D. Little
Mobile network operators (MNOs) have been active in the mobile payment space for over a decade, but with limited success in developed markets.
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.
Mobile payments have taken off on a global scale, accounting for a total of $285 billion (€252bn) in 2014 and representing seven percent of global electronic transactions.
Arthur D. Little expects these figures to continue growing at a fast pace, exceeding $800 billion (€706bn) by 2017.
However, growth rates were driven mainly by emerging markets.
By the end of 2014, 259 initiatives were operating in emerging markets and 21 had reached more than one 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 percent of total transactions, mobile payments still only represented three percent of transactions as of 2014.
Prominent examples of success are driven by Korea Telecom in South Korea and NTT DoCoMo in Japan.
Success stories in developed markets are mostly regionally bound and specific, such that they have not been replicated or extended on a global scale.
Nonetheless, Arthur D. Little believes a turning point for mobile payments 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.
Providers in emerging markets have largely leveraged SMS/USSD1 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.
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.
Besides NFC and QR code-based solutions, mobile internet payment solutions have been popular in recent years, despite necessitating a continuous broadband connection to enable the service.
Security enablers – beware the weakest element
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.
MNOs have long pushed to establish the SIM card-embedded SE as a standard.
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.
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 market NFC-enabled smartphones.
In addition, users have shown increased willingness to use mobile payments for their daily purchases. Lastly, the merchant network is developing.
MNOs will play a key role in both B2C and B2B developments thanks to their local footprint and market understanding.
They are now challenged to find ways of leveraging their assets, for example by establishing a nationwide hub trusted service manager that could be used by financial institutions or other third parties.
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 payments space.