In my last year of investment banking I did a lot of work on new payment processing business models and we ran several events with industry participants. Skrill (a.k.a. Moneybookers) a highly profitable UK based e-wallet operation was looking at a public flotation and there are many other interesting European companies in the payment processing space, including listed companies Wirecard AG based in Munich and Monitise based in London.
In October I presented at Oxford University’s ForumOxford mobile event on the topic of mobile money. Mobile Money is one of the hottest new payment processing segments, but it comes in many flavours as the diagram below shows.
In traditional debit or credit card PIN or swipe transactions at point of sale, the card network takes around 2% of the transaction as a processing fee. For open networks (Visa and Mastercard) The bulk of this fee goes to the card issuer, typically a bank. A small amount goes to the card network itself (Visa or Mastercard) and another small amount goes to the merchant’s acquiror bank. In closed networks (such as American Express), the whole fee goes to the closed network provider and some may be paid away to its partners.
For online payments (which along with telephone or postal shopping is known as card not present transactions) an additional player in the chain is the payment service provider who run the secure payment screen for the online merchant where you type in your credit card details. The PSP market is highly fragmented and regional and usually acts for the acquiror bank. PayPal is competing with the card networks here and takes a 2-3% fee, but then has to pay some of this away to card networks if the PayPal account is card funded.
Mobile payments schemes are aimed at card present transactions – waving a phone over a point-of-sale (PoS) terminal to make the transaction rather than a card PIN or swipe. But it has similarities to online in that whoever is running your mobile payment scheme will know where you are shopping and what you are spending. This is valuable information for any advertiser. Google Wallet has already launched this service and there are many national projects with the same format, mostly using NFC (near field communication) radio to complete the contactless transaction.
In our opinion, a common fallacy is that mobile payment providers also want a cut of the 2% or so payment processing fee. But Google does not charge a fee at all. It uses the same credit card / card issuer / card network framework and those same players take their usual processing fee. Google gets your transaction data, which is far more valuable than the small processing fee, because it can use this for targetted advertising.
Mobile Money is not just about card present payments which is taking a long time to appear, perhaps because of security concerns, and merchant /bank/telco lethargy. Mobile Banking is attractive to banks because it cuts down on call-centre costs and can often be implemented using existing technology. Monitise in the UK capitalised on this by using the existing secure and tested UK Link ATM network to provide mobile banking services. Monitise has operations across the globe and with Visa Inc and Visa Europe as investors looks set to be much more than a UK mobile banking operation.
Merchants can hit back at Google’s attempts to own the consumer by using mobile services to extend their loyalty schemes. McDonalds in Japan is the flagship example here, 8% of Japanese have a McDonalds mobile loyalty scheme which includes mobile payments and a loyalty and voucher scheme. Tesco’s Korean subsidiary has an innovative “store in a metro station” concept whereby shoppers can use their smartphone cameras to make purchases from wall mounted posters of supermarket shelves. Eagle Eye is a UK private company offering mobile voucher schemes to retailers, and like Monitise is kick-starting its business by cleverly using the existing PIN/PoS network. Mobile Money Network is a CarphoneWarehouse/Monitise JV offering a “Simply Tap” smartphone service to buy goods by entering a code from an advert.
I’m helping with online discussion building on this topic here ahead of the Digital Agenda Assembly 2012 in Brussels on 21-22 June 2012. The page includes a link tagosphere containing numerous articles describing the mobile wallet wars in Europe, even before such technologies have become widely used. The wars can be broken down into the protagonist camps (telco vs banks vs tech companies) and technology camps (NFC or other radio interface, or not).
Lets’ start with a telco example. Deutsche Telekom, Telefonica, and Vodafone’s UK wallet JV Project Oscar is likely a prototype of a pan-European wallet. It still has no official name, yet is the subject of a Brussels probe that will last until August. Google and PayPal (owned by eBay) have their own wallets and both complain that a telecom driven wallet will be anti-competitive. Meawhile Visa just launched the v.me mobile wallet in three European countries. There are hundreds of mobile payment trials around the world (see the NFC World website for a list).
As a recent US FTC workshop on the topic concluded, the focus must be on competition, convenience, security, and regulation.
The case made against the telecom operators is that the mobile wallet will reside in their SIM cards, and they won’t subsidise phones that offer alternate payment methods via a chip located elsewhere on the phone (the method used by Google Wallet). Verizon, a US telco, has blocked Google wallet from the phones it subsidises. But of course Google owns the operating system, Android, that could also be used to control payment methods and Apple will surely be bringing a payment system, likely linked to its customers’ iTunes accounts, into future iPhone versions. Will Apple allow other payment methods onto its platform?
Many of these projects use NFC or similar radio technology, yet even this base assumption is in question (creating the “Not For Commerce” tag from some naysayers). Any radio technology is prone to interception and fraud and can be slow to transact. This has not prevented another radio based technology, Felica in Japan becoming widespread in that country. McDonald’s Felica based payment/loyalty app in Japan counts 1 in 8 Japanese as users. In Europe and the US contactless credit/debit cards (Visa payWave, Mastercard PayPass) are creating an installed base of NFC card readers at POS terminals in stores.
The alternative is to have the payment authorised via the internet connection to the smartphone using an app with pre-registered payment details. The transaction can be enabled using the phone camera to read a bar code (or the POS terminal can read a barcode on the phone screen), or the phone can sense what store it is in and offer up a password screen to complete a transaction. European companies offering similar payments methods include iZettle is a Swedish company with similar plans, The UK’s Mobile Money Network has another net-based payment approach, and UK start-up PayThru is pushing a pre-registered merchant app model. Visa Europe (and Visa Inc) are using UK company Monitise to do much of their mobile “plumbing”. In the US, players include Boku (in which Telefonica has invested), Chipotle, Dwolla, Google, Intuit, Levelup, PayPal, Square,Tabbedout, plus a telecom operator JV, ISIS.
All of these need to pass the interop test.
And finally, debit/credit card networks, the basis for most of these wallets, are not universally used by Europeans. Many citizens prefer bank-transfers to conduct e-commerce and will likely want similar to fund their mobile payments. Bank transfer systems are invariably local (ELV, Sofortueberweisung, and GiroPay in Germany, P24 in Poland, iDeal in the Netherlands) and so raise the question of interoperability. But without them, any Visa/Mastercard based system will shut out many millions of Europeans.
As a business representative, or as a citizen, please contribute your opinions, information, and questions to the Digital Agenda discussion site so that you can help European mobile payments policy.
is worth a look for more on the digital money space.