Assembling the digital payments supply chain

The ownership or underlying operating model of a mobile payments provider determines the range of services that it can offer and at what cost. Balance transfers or bill payments can easily be managed by a bank operator, while payment networks such as Visa and MasterCard already hold an advantage when it comes to offering electronic payments between financial institutions (FIs).

This status quo can make it hard for other firms to offer a compelling proposition to either merchants or retail customers. Inevitably, without the existing infrastructure or regulatory compliance to offer banking services, mobile payment providers that are not owned by FIs have to get creative.

One of the key things that makes paying with a mobile wallet different to paying with a card is that the user can interact with the screen on their mobile. That can open up new potential revenue streams as firms blur the boundary between e-commerce and mobile payments.

“Often you can start shopping activity on the phone so the overall value chain is much longer than it is for a card,” says Rick Oglesby, senior analyst of research firm Aite Group. “You only pull out a card at the end of the transaction, but you might pull out a phone before the transaction has even begun. That creates a longer value chain for the provider. With a lengthier value chain there is a variety of ways to make money.

"For example, Google is at the front of that value chain so if you had a product in mind that you want to buy, you often search for that item with Google. By being the resource that is used to look for things, it has an advertising opportunity that it is looking to monetise.”

Early days

Mobile payment tools can be broken down into three broad types: the mobile wallet, which enables a digital money store; the mobile point of sale (PoS); and the mobile peer-to-peer (P2P) payment system, which is often an offshoot of the other two. Depending on the type, demand can be limited, according to Mr Oglesby.

“At its most rudimentary level, this is people using their phones to purchase items at retail locations,” he says. “There's a tremendous amount of investment and there's really not much traction. It’s way too early to call a leader at this point. There should be money in mobile payments. There is on the merchant side of [the business], with merchants using the mobile as a PoS. But there's significant evidence that firms serving the micro-merchant space are having a tough time making a profit."

There are a few exceptions to that rule. PayPal, a leader in the online and mobile wallet and P2P space, has been owned by online auction site eBay since 2002. According to Mr Oglesby, this relationship makes sense, because without one another, the two businesses would not function effectively.

“When eBay arrived, it created the opportunity for you to sell the junk you have in your garage, but in doing that you have no intention of becoming a merchant; you are not creating a full-time business,” he says. “You wouldn't go to your bank branch and sign up to get a terminal and you wouldn't qualify for it anyway. PayPal is there to enable you to get all the capabilities that you need, with a few keystrokes.”

This opportunity was unique and fleeting; effectively creating a new payment network that holds money, a model that has thus far not been copied as successfully.

Going it alone

For banks to compete in the P2P and wallet space they must launch systems that either link with other institutions, such as US payments network clearXchange that connects Bank of America, JPMorgan and Wells Fargo, or that compete outright, as Barclays' new Pingit service does.

UK-based Pingit facilitates P2P payments between UK bank account holders, not just Barclays' own customers. As of November 2012, it had been downloaded by 1.3 million people and had processed 800,000 transactions worth £56m ($85.4m), according to the bank. However, the bank does not have any way of directly monetising Pingit's transactions. Instead, it plans to exploit the new relationship with other banks’ customers to win them over.

“Pingit isn't about making money but is about pushing the innovation agenda and leading the industry by providing alternative payment options, giving customers of all banks choice about how, when and where they move their money and make payments,” says Barclays spokesperson Elizabeth Holloway.

Mind the gap

Pingit bypasses a challenge in P2P, namely that without common messaging infrastructure and message types, banks typically cannot interact with the services of their counterparts. Visa and MasterCard both have long-established networks that overcome this obstacle, and now there is a new player boasting this capability. Mobile payments platform provider Monitise says that it is able to bridge the gap between rival institutions.

Andrew Griffin, market intelligence director of Monitise, says: “As a bank you can't run a payments system on your own; if another bank is at the receiving end it has to be on the same system. You need to have cross-industry hubs, which is where we can come in."

He adds that there is huge interest, particularly in the US, in using mobile contact in such a way that enables the monetisation of data, but warns that banks have to do this very carefully.

“Mobile advertising has not made consumers very happy so far. Banks are thinking that if they know the customer, know what they like, they can bring them together with offers. For example, currently, loyalty cards are often left in the draw at home, but if that was held on your mobile phone it could actively tell you that you get a 10% discount as you enter a store, because of who you bank with,” he says.

Monitise is able to provide a bridge between firms because it does not handle money itself or take revenue based on transaction volumes, and so does not reduce traditional revenue streams. It provides the infrastructure for a payments system and charges clients with set-up fees and then on a per-user basis, with some additional income from loyalty schemes.

Monitise has already helped develop Visa Europe's personal payments (PP) mobile service, which RBS and NatWest went live with in March 2013. By the end of 2013, the PP service will allow payments to be sent and received across borders, allowing international P2P money transfers to be made with mobile devices.

Integrated thinking

More established non-FI players have also dipped into the wallet space. In 2011, Google launched a digital wallet and Apple was reported to have been planning for its Passbook app to have a degree of wallet functionality. When Passbook launched in September 2012, however, it was restricted to holding loyalty cards rather than banks cards

Plans to include near-field communication (NFC) functionality in Apple hardware were dropped in 2012, due to its effect on battery life. According to Zilvinas Bareisis, a senior analyst at IT research and consultancy firm Celent, since its launch, Google Wallet has changed its model, moving away from traditional payments and towards advertising.

As such, Google is moving into an area typically viewed as mobile commerce, dealing with online payments that are made via a mobile device. This may deliver a revenue stream from a merchant, says Kieran Hines, practice leader for global financial services at analyst firm Datamonitor.

“It is wrong to think of high-street stores and mobiles apps as different channels for retailers; increasingly they are using their apps in stores to enrich that shopping experience,” says Mr Hines. “If you go to a store and find they haven't got the shoes you want in your size you can go online and order them, using the store's WiFi and pay using a mobile commerce transaction.”

Challenges for new entrants

The mobile wallet space is heavily occupied by well-established financial services firms as well as telephone and mobile network operators. The challenge for alternative new entrants is in the fact that money is predominantly and effectively kept within the financial services system. It is also true that they may discover that their business model is in competition with a loss leader.

As a consequence, these firms have sought to look for alternative revenue streams from mobile payments. Taking a return from reward schemes rather than the transaction flow allows the mobile payment service to avoid adding to the cost burden on the acquirer side, a model being used by US start-up LevelUp.

Tying advertising to actual sales is the target for Google, although it has yet to identify a solid model. In 2011, the company's CEO, Eric Schmidt, gave a speech at the Cannes Lions Advertising Festival in which he described NFC payments as being the route to a “trillion-dollar opportunity” for mobile advertising. However, in the same speech, he had also predicted the widespread adoption of NFC payments in 2012.

Not only did that adoption not take place, by the end of 2012, PayPal president David Marcus wrote that the NFC payments debate would “slowly die in 2013”. He argued that tapping a phone on a terminal was no easier than swiping a credit card and that it was not actually solving a real consumer problem, nor was it providing additional value to encourage a change in payments behaviour.

Money matters

Start-up firms are either trying to encroach on the margins of existing payment systems or stealing a lead where those schemes have not yet ventured, but typically without the resources of an FI that allow a speculative loss-leading exercise.

Mr Bareisis says that mobile transactions are still, largely, card transactions as payments are tied to a card account. So, understandably, Visa and MasterCard want to make sure they stay relevant. “There are a whole bunch of players that want to challenge them. PayPal is one. Some of the emerging wallet [providers], such as Square in the US and SumUp in Europe, are trying to come up with a payment scheme,” he says.

Square is best known for its PoS device, primarily used in the US, which allows merchants to accept card payments with a mobile device. As with PayPal, Square's service allows merchants to receive payments without having to go through the process of becoming a merchant via a bank. This part of the business does not disrupt the status quo of payments, as the payments are still made through cards issued by merchant acquirers.

Payment service providers that allow mobile devices to be used to make payments, rather than as the receiver, are targeting the consumer rather than the merchant and, therefore, must source an alternative revenue stream to merchant acquirer fees.

The willingness of consumers to make payments depends on the market; for instance, in the UK direct debit arrangements make bill payments relatively straightforward and free, whereas in the US a bill payments aggregator is often used, which incurs a small fee.

Beyond PoS

Square has gone beyond PoS and has begun offering a digital wallet, which provides member merchants with the user’s picture and name. The scheme relies on the merchant recognising the user and authorising the payment. Although a card system is present in the background to provide the credit line for the payment, no actual card technology is used. The scheme is operating in some branches of coffee house Starbucks. It also powers the company's loyalty card, which allows users to hold deposits and make in-store payments.

The Isis wallet, which launched in October 2012, is a PIN-protected system that allows payments to be authorised with a mobile device. It is operated by AT&T, T-Mobile and Verizon Wireless in partnership with Visa, MasterCard, Discover and American Express. It has been launched in two US cities: Salt Lake City and Austin.

Mr Bareisis says that expansion beyond local areas in the US can be a problem, due to the lack of comprehensive secure payments systems, such as chip and PIN. This issue also limits cross-border expansion. “I expect schemes such as Square to sign up merchants in geographically local areas in limited regions; I don’t expect them to expand in a global way in the near future,” says Mr Bareisis.

Standing out from the crowd

PoS mobile payment devices are a good entry point into the business. As with PayPal, they facilitate transactions for individuals or firms that have no desire to set up a formal payments structure. They typically function in one of two ways: with the mobile as the PoS, which allows a merchant to swipe a card though a mobile device such as Square; and there is mobile at the PoS, which enables a consumer to use their mobile device to pay.

Intuit Pay offers mobile-as-PoS systems, with a free app and portable chip and PIN card reader to allow payments to be made securely face to face, via a website or over the phone. Already operational in the US and Canada, it launched in the UK in March 2013, ahead of a similar product from PayPal, called Here, which is expected to launch in April 2013. US rival Square has not, as yet, confirmed plans to launch in Europe.

“Where we try to differentiate ourselves from the alternatives on the market is in the underwriting process,” says Terry Hicks, the vice-president of products for Intuit’s global business division.

“We use a process that allows us to be fully compliant with Visa and MasterCard rules but that allows us to identify the merchant and collect their compliance data automatically by asking for a few pieces of information and within 30 seconds they get a response saying 'approved', 'declined' or 'more information needed'. It's an easy application with instant approval for most merchants so they can start accepting payments within minutes of being approved through a mail-order transaction. The card reader is ordered in that process and is delivered two to three days later.”

Intuit also offers a range of personal finance software, allowing it to provide the small business owner with a relatively well-rounded set of products. Mr Hicks says it is primarily marketing Intuit to these firms, typically targeting those without retail premises.

To offer such services, Intuit operates as an agent of its subsidiary GlobalPay UK, which functions as the acquirer under a joint venture with HSBC and is responsible for the financial transactions. Although new to the UK, the firm is still seeing growth in the US where it launched its service in 2009.