2020 Foresight: Best Practices in Implementing Mobile Payments

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2020 Foresight: Best

Practices in Implementing Mobile Payments

Product Code: VR0963MR

Published Date: November 2013

For more details about the full report, please contact:

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EXECUTIVE SUMMARY

2020 Foresight: Best Practices in Implementing Mobile Payments

1 Executive Summary

The increased use of mobile devices to manage day-to-day activities and the rise in the use of social media has encouraged a number of organizations to build business and product strategies around mobile platforms.

Banking institutions and non-banking startups are increasingly targeting consumers with new mobile payment solutions, allowing consumers to transfer funds and make payments at any time and in any location.

Technological developments, changing consumer preferences and an increase in competition among stakeholders in the payments value chain have been the key drivers in the development of new platforms.

To promote mobile payment products and services, financial institutions and payment companies are adopting multiple strategies, focusing on mapping changes in consumer behavior, applying the relevant technology and capitalizing on new trends.

Focus on existing customer relationships to promote mobile payments

Service providers are promoting mobile payment solutions through existing relationships with consumers, especially in the case of banks and mobile network operators which have the advantage of a ready market built from their existing product offerings. Encouraging loyal customers to adopt new payment solutions has turned out to be a rewarding strategy due to its relatively low cost and higher probability of adoption. One of the key success factors for M-Pesa, a mobile payment service offered by Safaricom in Kenya can be attributed to its strong presence in the country’s telecommunications industry. As well as banks and mobile network operators, merchants with strong and loyal consumer bases such as Starbucks are also capitalizing on this strategy.

New product offerings to target regional diversity

With more competitors entering the mobile payment arena, there is an increasing trend to commoditize products and services. This erodes the comparative advantage of an existing service provider and requires extra effort to acquire customers. To overcome this issue, both banks and non-bank payment companies are concentrating on exploiting gaps in the value chain through new product offerings. The desire for innovative services has resulted in the introduction of services such as smartphone- and tablet-based mobile point-of- sale (MPOS) terminals, contactless payment technology, mobile wallets and remittances by mobile phone numbers, all of which have the potential to disrupt the current payment ecosystem. Geographical diversity in economic conditions has prompted service providers to offer a variety of product and services.

Increasing reliance on social media and promotional offers to drive sales

Social media has become a mainstream channel to target consumers. Mobile payment solution providers are developing processes to respond to social media-oriented consumers, and are using the channel to promote new schemes and loyalty programs, and to identify customer needs through feedback. Payment solution providers are offering discounts on products purchased through partner merchants. Product giveaways and the use of advertising via social networks have become commonplace.

Security and data privacy risks act as key deterrents

Consumer-grade mobile devices usually lack bank-level security to protect sensitive information. Most new payment solutions revolve around mobile devices and social media platforms, and the risk of being exposed to data theft or other fraudulent activity has increased. Moreover, new payment systems generally require regulatory authority intervention to change existing standards and accommodate new solutions; a new payment concept can fail if regulators fail to recognize its potential or legitimacy. Although security issues exist, the potential benefits are likely to outweigh these concerns, and new payment solutions are expected to gain significant market share over the next five years.

Companies have begun to focus on improving security, so customers feel confident in using payment products and services. Digital security operators such as Gemalto, McAfee and Symantec have recorded an increase in demand from mobile security systems and mobile wallet developers, as PIN protection, remote blocking and one-time passwords gain popularity.

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EXECUTIVE SUMMARY

New market entrants more innovative than banks

Burdened by their legacy structures and preference for proven systems, banks are expected to lag behind new market entrants in terms of offering new mobile payment solutions. Banking regulations are also generally risk-averse, and promote prudence in the banking industry, a key inhibitor of innovation. In contrast, payment startups with a relatively flexible regulatory environment and disruptive concepts are well positioned to enter the payments market. However, rising competition and the redistribution of market share will act as a stimulus to push forward the new ideas of banking institutions. Additionally, the rise of non-bank companies such as Google and Amazon into the payment domain is expected to encourage the use of prepaid instruments over the next five years.

Technological advancements to power new payment concepts

Developments in cloud technology and the increasing use of open application program interfaces (APIs) have provided powerful tools for payment companies to develop new solutions with enhanced security features.

Cloud technology and open APIs offer cost savings and flexibility to developers, significantly increasing the functionality of available resources. In addition, data analytics, combined with the cloud and the large pool of data available on social networks and mobile devices, is attracting attention in the area of predictive analytics.

The improved efficiency of predictive analysis is allowing payment operators to streamline their strategies.

Smartphone apps and MPOS to be key drivers of mobile payments

Among the various mobile payment platforms, payments through MPOS terminals and mobile apps focused on instant fund transfers to individuals and enterprises are likely to gain attention from consumers and merchants over the next five years. MPOS enables payments through mobile devices such as iPhones, iPads and Android handsets. Although mobile wallets and near-field communication (NFC) payments offer several advantages to users, they have been difficult to engage with consumer profiles and, consequently, have expanded below expectations. Consequently, mobile wallets and NFC payments are expected to gradually gain strength over the next five years as consumers become more aware of, and confident about, their capabilities.

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TABLE OF CONTENTS

LIST OF FIGURES

Figure 1: Global Mobile Payments (US$ Billion), 2010–2017 ... 9

Figure 2: Global MPOS Terminals (Units in Millions), 2011−2017 ... 10

Figure 3: Global MPOS Terminal Penetration, 2011−2017 ... 11

Figure 4: Card Payments through Mobile Devices in the US (US$ Million), 2008–2012 ... 12

Figure 5: Card Payments through Mobile Devices in the UK (US$ Million), 2008–2012 ... 13

Figure 6: Card Payments through Mobile Devices in Australia (US$ Million), 2008–2012 ... 14

Figure 7: Card Payments through Mobile Devices in Singapore (US$ Million), 2009–2012 ... 15

Figure 8: Card Payments through Mobile Devices in India (US$ Million), 2009–2012 ... 16

Figure 9: Mobile Payment Pyramid ... 19

Figure 10: Growth Potential of Various Payment Models ... 21

Figure 11: Dynamics of Various Mobile Payments ... 22

Figure 12: Level of Transaction Cost for a Financial Institutions... 28

Figure 13: Number of Mobile Subscriptions (Million), 2009–2013 ... 30

Figure 14: Broadband Internet Users on Mobile Devices (Million), 2009–2013 ... 31

Figure 15: Mobile Payment Behavior in the US, 2012 ... 34

Figure 16: Payment Source Preference on Mobile Domain, 2012 ... 35

Figure 17: Intensity of Challenge in Developed and Emerging Economies ... 36

Figure 18: Basel II vs Basel III ... 40

Figure 19: Key Impeding Factors for Consumers in the US, 2012 ... 42

Figure 20: Responsibilities on Key Stakeholders of Mobile Payment Platforms ... 46

Figure 21: Pingit App ... 56

Figure 22: Safaricom’s M-Pesa Customers in Kenya (Million), FY2010–FY2013 ... 64

Figure 23: Safaricom’s M-Pesa Revenue in Kenya (US$ Million), FY2010–FY2013 ... 64

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LIST OF TABLES

LIST OF TABLES

Table 1: Global Number of MPOS Terminals and Penetration, 2011–2017 ... 9

Table 2: Card Payments through Mobile Devices in the US, 2008–2013 ... 12

Table 3: Card Payments through Mobile Devices in the UK, 2008–2013 ... 13

Table 4: Card Payments through Mobile Devices in Australia, 2008–2013... 14

Table 5: Card Payments through Mobile Devices in Singapore, 2009–2013 ... 15

Table 6: Card Payments through Mobile Devices in India, 2009–2012 ... 16

Table 7: Potential Roles and Benefits for Key Participants of the Mobile Ecosystem... 20

Table 8: Guidance for Securing Payment Transactions ... 44

Table 9: Risk Management Guidelines for Supporting Environment ... 45

Table 10: Regulatory Attitude Towards Mobile Payments ... 47

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APPENDIX

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APPENDIX

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