First Annapolis m-payments study


Direct Carrier Billing

Direct-to-carrier billing (DCB) has emerged as yet another way that mobile is altering the payments landscape. Several service providers are using the technology to enable consumers to enter their phone number and a passcode they receive by SMS to complete transactions. Mobile customers can add these purchases directly to their monthly carrier bill or deduct the value from their prepaid phone balance. While the technology isn’t new, the transformation of mobile phones into multi-media devices that enable gaming and other forms of digital entertainment is spurring growth in DCB.

Game publishers in particular have embraced DCB. Facebook Credits, the leading payment method for digital goods on top-US games publisher Zynga, can be purchased via DCB through Zong. There is also potential for the service to expand beyond zero-overhead goods. In South Korea, an estimated 50% of digital goods are purchased via DCB. Danal is the premier provider of the service and partners with SK Telecom in that country, having billed almost $3 billion in purchases since 2000.

The fact that DCB relies on relatively straightforward technology is one of the more favorable aspects of the product. The billing system is already in place; mobile customers usually have a payment product linked to their monthly bill. No new software or hardware is necessary, and with 4 billion handsets in use worldwide, the addressable market is ubiquitous. Furthermore, payment information is not stored on the phone, eliminating the need for a Trusted Service Manager or other complex security protocols.

Stimulating impulse purchases is also a key selling point. Customers usually know their phone number by heart but not their payment account number and CVV. Some DCB providers have cited conversion rates of up to 90% in incremental sales, though it’s unclear that this success could be replicated for e-commerce and eventual physical POS use.

DCB also offers clear in-roads to the teen market; consumers in the 13-18 age brackets have mobile phones, but don’t always have cards. The expanded use of DCB isn’t unfounded. In Slovenia, over 3,000 POS terminals nationwide allow customers to pay by entering their phone number and only require a passcode for transactions above €10.

DCB does however, have its challenges. The ability to purchase anything is dependent on having phone service. OTA latency, SMS reliability, and the form factor itself (battery life is a problem in the age of smartphones) all present potential obstacles to mass adoption.

MNOs are also a gatekeeper to the growth of DCB. To-date, MNOs have required merchant discount rate fees of 40-60% or more because of the risk involved with extending credit to MNO customers for products beyond handsets and wireless service. Today, DCB is limited to digital goods purchases, donations, and subscriptions to digital content. The $10 per month limit most MNOs impose also restricts use of these services, though some carriers like Verizon are experimenting with increasing those limits. Concern over monthly bill sticker shock, additional customer service costs, and potential regulatory scrutiny present additional challenges, and it is unclear how MNOs will prioritize DCB relative to other payments initiatives.

Some DCB providers have recognized that it may be some time before purchase limits are raised by the MNOs. Zong in particular is addressing this problem by enabling users to register a bankcard for purchases above $10, allowing digital games publishers to sell at a higher average ticket. Users still authenticate with their phone and an SMS passcode, but the payment product issuer bears the ultimate transaction risk.

Other, potentially more significant providers are entering the DCB market. RIMM offers direct carrier billing for Blackberry AppWorld purchases. Google has started to allow the payment option for Android Store purchases, but the Apple App Store does not. In 2005, the major European carriers attempted to form a collaborative DCB network with provider Simpay (MPW 65). The venture did not succeed, but the MNOs offer the service individually today.

One can envision a world where DCB will become an integral and ubiquitous part of the mobile payments landscape. Whether the product rises to the upper tiers of future mobile payments hierarchy will depend on the degree to which adjustments can be made to accommodate a broader range of digital goods, hard and soft e-commerce goods, and eventually even POS payments. At the least, the product would require higher transaction value limits, more sophisticated credit risk management, and greater integration with other payment vehicles.

But if this evolution does occur, at what point might the complexity of an enhanced DCB outweigh the simplicity and niche focus that is driving its current popularity?

What would justify significant investment in DCB to capitalize on the $10 billion global digital goods market? Virtually every player in the mobile and payments spaces are considering investments in other OTA and contactless technologies to capture potentially trillions of dollars in traditional payment volume.

Differences between the evolution of m-commerce and e-commerce

Intuitively, m-commerce will evolve differently from e-commerce, but the ways in which new entrants penetrated elements of the traditional e-commerce payments value chain and developed new market opportunities provides an instructive foundation for evaluating how m-commerce may evolve. As a starting point, consider some of the basic similarities and differences in the nature of the technologies used for e-commerce and m-commerce.

While both the PC and mobile phone were among the most rapidly adopted new technologies of their times, mobile is estimated to have 50+ million more US subscribers than there are internet users, and mobile phone penetration is surpassing 90% of the US population. Furthermore, the portability of the mobile phone has set a new standard for the ability to communicate and transact ‘anytime, anywhere.’

Contrast this with the ‘anytime, but only in the home or office’ nature of the PC, which itself was a quantum leap over the ‘only during store hours, at the store’s location’ paradigm of in-store shopping. Furthermore, mobile phones have quickly taken a role in extending connectivity to broad segments of the population rather than just deepening the richness of access for select groups as the PC did in its early days.

Based simply on adoption and portability, it’s easy to envision m-commerce evolving quite differently than e-commerce, but a more structured review reveals the specific drivers and impacts of the differences. The payments value chain below provides a view of the e-commerce third parties which have encroached on the activities of traditional payments players to date and highlights opportunities for new participants in the mobile space.

Retailers’ emphasis on m-commerce advertising and merchandising solutions may enable new third parties in the payments value chain. Moving from left to right along the payments value chain, retailers made a significant contribution to the overall development of e-commerce by driving internet shopping and payments with various third parties like hosting services, search engines, and payment gateways playing strong supporting roles.

In the evolution of m-commerce, transacting goods and services will be one of several use cases that jump start mobile commerce and shape the third party provider landscape for merchants. Retailers are initially focused on the unique capabilities of the mobile device to provide real-time promotions, disburse coupons, and target nearby consumers using geo-location services. These mobile marketing requirements portend an environment where merchants leverage providers such as Cellfire and Bango, which are further outside of the traditional payments universe. These new third parties that enable advertising and merchandising will be positioned to assert roles in payments.

New m-commerce payments use cases will create new product opportunities for network intermediaries. Payment networks and processors have largely been able to retain their historical roles in the e-commerce environment, but mobile commerce will present a new set of potential disintermediation threats. Over the past ten years PayPal, inclusive of BillMeLater, has developed into the only meaningful e-commerce alternative payments provider but only accounts for a portion of overall transaction volume. While the payment networks and issuers have invested in e-commerce, their ability to continue to dominate this channel with credit cards has been driven by supporting the adaption of existing products (through security enhancements, $0 liability, etc.) to the channel rather than creating brand new products.

In the mobile environment; however, existing payment products may not be as well suited for the types of transaction activity that consumers and merchants may initially demand. For example, mobile may facilitate payment use cases such as low ticket transactions, remittances, and face-to-face P2P that are not well served by cards or other current electronic payments. While the emerging m-payments landscape of companies like Obopay, Zoompass, and mPesa is still in the early stages of its evolution, there will be no shortage of third party providers that believe they can deploy a product set and business model better tailored to mobile. Also, m-commerce may open up a new front in the ongoing competition for economics and customer mindshare in the overall payments industry.

A significant investment in a mobile payments platform by a retailer, software provider, wireless carrier, or issuer could, at the least, cause traditional payments value chain constituents to evaluate significantly re-positioning their current product suite to facilitate m-commerce and prevent share erosion.

Consumer relationships with technology providers will provide a leverage point for non-traditional payment providers. The greatest difference between e-commerce and m-commerce, and possibly the greatest threat to traditional payments providers, lies with the issuer at the consumer end of the value chain. The heart of this threat lies in the relationship consumers are developing with their mobile device and service providers relative to their e-commerce enablers.

When PCs became common in the 1990s, buyers would place some value in the computer’s brand and capabilities, treating the purchasing process similar to that of TV. But mobile devices are commanding a new level of consumer engagement and attention, perhaps since their portability makes them easy to show off. Similarly, e-commerce service providers, with the early exception of a handful of name brand providers like AOL, were mostly considered utilities for getting on the internet and did not play a strong role in engaging consumers in e-commerce.

Today, many mobile phone users, even those who have a love/hate relationship with their provider, can identify with their wireless carriers, at least in terms of the coverage, speed, cost, device offerings, and other capabilities that drive their provider selection.

The point of calling out these differences is to highlight that, relative to e-commerce, in m-commerce consumers may have a stronger relationship with and a greater potential to be influenced by the companies that are most directly responsible for enabling their overall mobile experience. This situation is illustrated by the fact that US wireless carriers currently heavily influence mobile handset features and capabilities through their buying power with device manufacturers.

More broadly, non-payments companies’ ability to capture consumer mindshare to support the launch of a new payments offering is correlated with extent to which companies like Apple drive the user experience with a mobile device. In response, traditional issuers and networks will likely need to re-tool their products for and deepen their relationships with mobile consumers more than they did with e-commerce consumers in order to retain their roles as the predominant payments enablers.

One relevant axiom that applies to almost any payments environment including m-commerce is that ‘owning the end-points’ of the payments value chain is critical for success. In other words, the providers that can successfully demonstrate value to and from direct relationships with consumers and merchants (the ‘endpoints’) have the greatest ability to generate payments economics and to forge a lasting role in the value chain. This concept should be particularly meaningful to traditional electronic payments providers seeking a long-term role in m-commerce, since new players are rapidly developing relationships with consumers and merchants that extend beyond payments.

Ironically, despite how m-commerce is poised to reshape the payments landscape, e-commerce may yet have its own resurgence from a payments innovation perspective. As social networking becomes more mainstream, sites like Facebook are redefining the way individuals use and experience the internet. These social networking tools are the gateways to a new level of consumer mindshare that can be used as a platform for commerce and payments. Some of the most popular websites today have the most to gain from a shift to an always-on mobile world. And as mobile technology begins to provide speed and capabilities comparable to PCs, e-commerce and m-commerce, as well as the physical POS, may converge to drive new commerce and payment solutions that work seamlessly across delivery channels.