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Mobile Money: Where It's Headed and Telecom's Likely Role

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Dan BakerFew topics are as muddled or wrapped up with as much hype as telecom’s potential role in mobile money and mobile payments.

I’ve attended a few sessions on this topic at the CTIA show, but I must say, this is a tough subject because it touches on many banking and retail industry issues. So when your mind is in a daze, it’s wise to call in an industry expert. And that’s exactly who we found at the TM Forum event earlier this year in Orlando.

Dave Birch is one of the world’s foremost experts in this arena. And since I’m a neophyte in mobile money, you can bet that Dave carried the discussion along with his many insights and nuances.

Our discussion began with mobile shopping, then moved to a broad range of subjects: mobile vs. credit cards, fraud concerns, a splendid case study in Kenya, the very different regulatory climates of Europe vs. the U.S., the tussle between banks and retailers, and the considerable value a mobile wallet will have, even if there’s no money in it.

Dan Baker: Dave, hearing your perspective on where the mobile money market is headed would be a good place to start.

Dave Birch: Well, first, while it may not seem like it, there’s actually a lot of pressure for mobile money solutions these days. Certainly in the U.S. you don‘t see anybody paying for stuff with their cellphone except in Starbucks. But a lot of people are convinced this is the way it’s going to go.

There’s a saying that mobile eventually subsumes everything it touches — cameras, games, whatever. And if you check some of the retail figures for last year’s holiday purchases, you find there was a big surge in shopping using a mobile phone.

Baker: When you say shopping, do you mean investigating for shopping or is it actually purchasing something online?

Birch: The user experience is evolving. It used to be if you wanted an egg-pouching pan, you’d go to a department store. And only when you were desperate and you’d forgotten to purchase it at the store would you go online. So urgency was the motivation to buy off the Web. But today, you look up egg-poaching pans on Amazon directly and the whole discovery, purchase, and delivery are rolled up into the mobile experience.

Another thing that’s happening: Folks are beginning to realize that mobiles are more secure than credit or debit cards. The U.S. market accounts for 25 percent of the world’s card volume, but half of the world’s credit-card fraud occurs in the U.S., too.

While it’s true that most banks in the U.S. offer some financial protection if the customer’s credit card is stolen, the banking system still has to absorb that cost, so it’s passed onto in other fees. On average, a debit transaction that cost one cent in The Netherlands, cost 21 cents in the U.S.

Baker: Another solution is to opt for high-tech credit cards that offer great security and some even allow you to manage multiple accounts on one card. Is that a viable option?

Birch: That is happening as we speak. Visa and MasterCard have both announced the migration, but there are plenty of other people thinking that high-tech cards feel like a 1940s solution to things. And the skeptics of high-tech cards have a point: If almost all Americans have a secure transactional device in their pocket, maybe we should find some way to use that.

I’m not smart enough to know which way things will pan out, but mobile phones are a compelling solution for a number of reasons. It can do its own authentication, it maintain its own records, and can do data collection. It’s not surprising that a device like that can deliver a more secure solution than a plastic card with a number than anyone can read by snatching your wallet.

Baker: But what about the convenience factor of cards? McDonalds has a swiping point of sales that’s very fast and people have gotten very comfortable with that.

Birch: Cards are very convenient. It is especially convenient for fraudsters which is why when card numbers are stolen in great volumes anywhere else in the world, they get sent to the U.S. because it is in the U.S. where you can use the cards.

Baker: The other issue is politics. The bankers have a vested interest in keeping the cards and blocking the phone companies and retailers from gaining greater market share in financial transactions. And in the U.S., the bankers have a lot more regulatory clout than telcos.

Birch: Not sure I agree with you on that. Bankers have run into some pretty major problems and they played their hand rather badly: Lots of people hate the banks. The retailers were smart. They spotted the opportunity to go to Congress and explain that credit/debit card fees are one of their biggest expenditures. And they used the recession to reinforce the point that card fees are putting mom-and-pop stores out of business.

And the regulatory battle has been largely between the retailers and banks. The telcos have been relatively minor players, even though their influence is growing.

One thing for sure: North America is more conservative about banking deregulation. For example, a few months ago when Rogers in Canada decided they wanted to launch a service, they had to apply for a banking license which costs a lot of money and takes months – even years – for approval. But in Europe, the regulatory structure has already changed: The European Commission is pushing banking deregulation for the simple reason that it promotes greater competition. This is one reason why Telefónica recently got an institutional license to do mobile payments.

In Europe, there’s a divide opening up between companies doing payments and those doing “credit institution" activities like taking people’s deposits or lending them money.

If you are just handling payments, then maybe you should be regulated like a utility and less like a bank. So there’s a notion that we need to treat utilities with a light touch and allow more players into the payments marketplace. In Europe, then, the telecoms are getting licenses and can become member of Visa or MasterCard without being banks.

Baker: Where are some success stories in mobile money?

Birch: One of the most interesting projects we ever worked on is M-Pesa in Kenya. This is easily the most successful of the mobile-money systems anywhere in the world. By the way, we did the original feasibility study for that system, which came up with some pretty positive numbers, but nobody knew it was going to take off like it eventually did.

The scale is tremendous. There are more than 40,000 agents throughout Kenya and I read somewhere that about 30 percent of Kenya’s GDP shifting through this system. So far it’s mostly about how people send money to each other: It hasn‘t really hit the retail transactions yet.

Baker: How did they work up to 40,000 money agents? That sounds like an incredible network.

Birch: Well, to a very large extent, those agents were already in place because people in developing market buy scratch cards. So those agents were the first to pick up the mobile money services, but today the business is self-sustaining because a mobile-money agent can make a reasonable living in its own right.

There are many issues around the way the system works in Kenya. For example, every Friday night, the guys working in the city get paid and need to send their money to their wives and family back in the countryside. So, all of a sudden the agents in the countryside need a huge stash of cash because the families are walking in to pick up the cash in the rural areas.

Of course, the costs in Kenya are more explicit. In the U.S., the cost of maintaining cash for ATM machines are colossal — but those costs are mostly implicit in the way a bank handles security. In Kenya, if I can‘t use the phone to send the money upcountry, I have to obtain the money locally, put it in an envelope and pay the bus company to take the money directly to my wife.

Baker: What’s the technology the Kenyan system rides on?

Birch: Well, in the M-Pesa system, there’s a special menu on your mobile phone which says “pay" in Swahili. When the user enters his money amount, the wife receiving the money gets a message saying, “Your husband just sent you 50 shillings." Then the wife goes to a Vodafone outlet to pick up the money. And like I’ve said, since there are 40,000 outlets, it’s no real hardship.

Under the hood is an application sitting on the SIM card called a SIM toolkit application, which encrypts and creates digital signatures inside the SIM. The message actually goes to a central server that then sends a message to the recipient. Money, of course, doesn‘t actually go anywhere. The money is just sitting in a big pot in the bank and the trick is to figure out how much cash to have available in the countryside on Friday night.

Baker: That Kenyan story shows how explosive the mobile-money market can get. But let’s go back to the developed world and talk about how this will all get sorted out there. If you turn payment into a “utility" as you say, then the cost of transactions turns into a commodity, which means the telcos, banks, and retailers need to make money in other ways.

Birch: Yes, the natural corollary of a high-volume, low-margin business is that payment transactions fees are indeed headed toward zero.

So, how do you make money? Well, I think the answer is to make payments part of a larger value network which makes life easier for the consumers. One of my favorite case studies is the McDonalds Club in Japan. So, if you belong to the McDonalds Club in Japan, then once a week you get a special offer through your phone for “free French fries." And when the consumer goes to his local McDonalds, one tap on the mobile phone delivers the free potato-fries coupon to the retailer and the payment and loyalty points are calculated instantly.

So that raises an interesting point: A mobile wallet can be quite valuable even if there’s no money in that wallet! And that value comes from bonuses, coupons, loyalty points and other things that get wrapped around the payment. In short, the wallet in your mobile phone can do really cool stuff.

Yet another wrinkle will come when the worlds of social networking and mobile wallets collide. For example, my wallet can talk to your wallet. What will that do to the world? I’m not sure, but it may be that your wallet and my wallet will collude with each other. Who knows? Maybe we belong to the same bank, so when you got a good deal on something, your wallet tells my wallet, “Hey, I just got a really good deal on this stuff."

Baker: But doing all these fancy exchanges of information between merchants means you need to worry more about mobile security, right?

Birch: Yes and no. If I steal a debit card from your wallet, you may not notice that for a few days, time enough for the fraudster to do his damage. But if I stole your phone, you would know in five minutes. In Japan, all of the phones have these mobile-money chips in them. All of the phones come with an ID number. If I steal your phone, you just borrow your friend’s phone, call a toll free number, punch in your security code and your phone shuts down — end of story. So overall, fraud opportunities are reduced with a mobile phone. And robbers don‘t like stealing something that could be traced by ID. Guys who rob money don’t like being tracked via GPS. So when you add up all of those factors, the phone to me looks way, way safer.

And at a government policy level, I think there are strong incentives to migrate away from cash and toward mobile money. I mean, it’s 2013 already, but when you open up a newspaper you can read about somebody robbing a gas station with a gun.

So I think drawing down cash and moving it to phones is a good thing for society with one caveat: We need an appropriate privacy settlement between the stakeholders. And this is something that still needs to be worked on because, obviously, if the revenue service is tracking everything you spend at the store, that’s both a good thing and a bad thing. As a taxpayer, it’s nice to know that everybody else is paying their fair share of sales taxes. But as a consumer, I don‘t want the retailers exchanging information about what I buy from other retailers.

And when you aggregate all of those costs, I think you can see a case which says: in a few years‘ time credit cards will become a fallback payment method and that phones become the winner.

Baker: So what’s your prediction for the future, Dave? Who’s going to win the turf battle between bankers and retailers? And what role will telcos play?

Birch: Well, I’m reluctant to predict. One of the reasons why mobile money is an exciting area to work is because it is so fluid and dynamic and you have new innovators coming in using the phone as a platform to do cool stuff. Look at Square. They came up with a clever way to allow credit cards to be swiped by a mobile phone. Great idea. And the company has grown from nothing to $4 billion in value in no time.

But if I was pushed to make a central prediction, I think by far the best mobile money experience on my phone is Starbucks. It works great and I’m not sure a telco or bank could come up with something that will work better than the Starbucks model.

Starbucks has control over their retail environment. So, they can make the app work best there and I think more and more retailers will head down that same road. Some retailers are already saying they’ve bought their last generation of cash registers. In the future, when you come into a store to buy a $500 pair of shoes, you’re not going to stand in line at a checkout counter. Why can‘t the person who showed you the shoes take the payment right there.

I think the best operator strategy, by the way, is to make sure that they are delivering services into those retailer wallets so that they are present in every transaction.

Baker: Dave, this is splendid stuff. Thank you for educating us in this important area. Please tell us a little about what your business is about there at Consult Hyperion.

Birch: Thanks for asking, Dan. We are probably have 45 to 50 permanent staff and a dozen associates working with us. Based in the U.K., we recently opened an office in New York.

Our specialty is secure electronic transaction because we happen to know an awful lot about chip and migration to chip. We did work for the U.S. banks in Europe when they were migrating to chip in Europe. So, we saw an opportunity to leverage some of the lessons learned. The U.S. banks are going to have to start spending much more money fairly soon on chip migration. Some of the lessons we learned I think can be valuable.

So, it is not just mobile. It is boring old cards as well and it is devices like tablets. We are also very interested in cloud-based promos. We know an awful lot about identity management, but when you start shifting the stuff onto the cloud, it starts to become an identity-based flow rather than payments flow. So, yes, that is why we thought there are opportunities for us in the U.S. as well.

We’ve recently been staffing up our New York office so I’m very excited about that.

Dan Baker is research director of Technology Research Institute (TRI) and has been a B/OSS market synthesizer since 1994. He is also editor of the Black Swan Telecom Journal .

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