Report overview

Mobile payments is starting over.  When the Google Wallet launched on September 20, 2011, the first test of a remarkable new financial ecosystem began.  But despite the apparent success of traditional mobile payments products like M-PESA in Kenya and South Africa, Google and rival Isis have decided to rewrite the business model - and for good reason.  Actually, four good reasons:

•    Significant revenue is available from the advertising, retention and rewards programs, leaving the usual payments fees to the payments companies.
•    The payments ecosystem cannot afford new categories.  The-existing players are companies with considerable resources and the willingness to use their resources thwarting a new category of entrants.
•    Regulatory pressures are already pressuring known revenue streams, increasing the motivation for existing players in the payments ecosystem to protect position.
•    Cash is resilient to other tender types in developed worlds, not so in developing countries.

As a result, both Isis and the Google Wallet products are creating a simple strategy which lets the payment ecosystem continue to charge and earn as much as possible from the payments business.  The new revenue these companies seek to earn comes from two vulnerable industries: advertising and loyalty.  Google, with its extreme interest in data collection and distribution, will likely seek new revenue from that channel also.

A different breed of service that includes advertising and rewards programs as well as data services will vastly overshadow stand-alone mobile payments products.  These new services are called “mobile commerce.”

Mobile commerce does not exist as a functioning or mature industry. The form, function, features, benefits, roles, and players that will exist in the new mobile commerce industry have yet to be decided. This implies a dramatic change in the features, benefits, and operational structure of payments.  Many believe that the wallet format is the most likely industry to succeed the payments industry, as it exists today.
The Google Wallet, and its future competitors, are relying on a set of technology changes, namely:

•    JACC (Just Another Connected Computer);
•    NFC;
•     EMV (Europay, MasterCard, Visa, a global standard for inter-operation of integrated circuit cards);
•     TSM (Trusted Services Manager, a provisioning role); and
•     Smart phone operating systems.

In addition, the Google Wallet and its competitors will focus on several different elements of older business models:
•    Interchange;
•     Processing fees;
•     Loyalty/rewards account management fees;
•     Data mining;
•     Breakage;
•     Advertising and conversion.

The overriding conclusion is that the winning mobile commerce business model, inclusive of the mobile commerce players that will prevail in the long term, may be decided months or years before mobile commerce penetrates the general transaction volume by more than one half of 1% in developed markets.

Contents

Executive Summary
Summary of mobile commerce
Early consolidation
The winning combination

1  The current payments industry
1.1  Payments penetration in the US
1.2  Mobile Network Operator billing
1.3   No room for competition
1.4  Rewards and loyalty systems
1.5   Merchant tolerance
1.6  Conclusion of current system

2  Vulnerability of the current payments system
2.1  Case study

3  Elements of mobile commerce
3.1   Customer acquisition
3.2 Conversion
3.3  Transactions
3.4 Current state of mobile commerce
3.4.1 Japan and Korea  
3.4.2 Remittance
3.4.3 Information

4  Market changes enabling mobile commerce
4.1  NFC – Near Field Communications
4.2 JACC - Just Another Connected  Computer
4.3 TSM – Trusted Service Management
4.4 EMV – Europay, MasterCard, Visa
4.5 Mobile prepaid
4.6 Data mining

5 Market forecast
5.1   Phases of development: the timeline

Conclusion

List of Figures

Figure 1: Quote from Jim Stapleton, Head of Sales and Account Management, Isis.
Figure 2: Payment system diagram
Figure 3: US market penetration of general-purpose cards, 2002 to 2012
Figure 4: The rewards and loyalty accounts in the US
Figure 5: Merchants  support  ~8% as cost of a sale
Figure 6: The entire payments system - including loyalty and rewards
Figure 7: Case study of long-distance decline in ARPU
Figure 8: The elements of mobile commerce
Figure 9: NFC comparison to EMV and magnetic stripe
Figure 10: Brick-and-mortar sales volume versus Internet retailing
Figure 11: Starbucks reloadable prepaid
Figure 12: The Google Wallet – image of the Google prepaid card
Figure 13: Accounting 101 refresher
Figure 14: Breakage accounts for over $31 million at Starbucks, and $100 million at Best Buy
Figure 15: Forecast indicating that mobile commerce will be the form factor of 20% of all payments
in the United States by 2015

Author

David W. Schropfer is an international business leader with two decades of management experience ranging from telecommunications to payment systems. Mr. Schropfer is a Partner with the internationally recognized consulting firm, The Luciano Group, where he leads its Mobile Payment and Mobile Commerce practice. Earlier in his career, he was Senior Vice President with IDT Telecom, and a Business Development Officer for Capital One. He has served on the Board of Directors for multiple companies, and is a frequent speaker at industry conferences and trade shows.

After graduating Boston College, David earned an Executive MBA from the University of Miami.