M-payments: a simple model


An Arthur D. Little report

Past m-payment market predictions estimated the global m-payment market (in terms of total transaction volume) could be as much as US$ 15 billion by 2003. In fact, global m-payment revenue in 2003 was US$ 3.2 billion.

The players of the value chain should agree on basic revenue sharing principles between industries, avoiding different standards, which reduce the value of m-payments for consumers and slow industry development. Flexible charging for different services and applications and split revenues between different parties in the value chain is key to a successful m-commerce environment.

There are four steps in an m-payment transaction: preparation, initiation, authentication and termination. Preparation involves downloading and installing any necessary software and configuration of the mobile device; done once before a customer makes the first transaction. Initiation is when the merchant sends the purchase request to the payment service provider (PSP), i.e. mobile operator, credit card company or independent PSP. Authentication, done by SIM or PIN acceptance to the PSP. Termination, when the customer receives a receipt and is logged off.

The mobile operators are the logical choice to lead market development as they have a customer base and a billing infrastructure for small transactions; m-payment is an extension of their core business. Though not having a merchant network, a system to process macro-payments or the necessary experience in risk management, a partnership with bank or credit card company is necessary to ensure success.

As mobile operators have limited capabilities to acquire merchants in different vertical segments, they should consider co-operation with traditional payment service providers and merchant acquirers. Through partnerships, mobile operators can expand their merchant network which is key to gaining critical mass.

Banks and credit card companies are attracted to m-payments as a way to increase revenue, secure virtual transactions and reduce fraud. Initially reluctant, there are an increasing number of financial institutions offering m-banking, enabling customers an m-payments-related experience familiarising them with the technology.

Banks that do not develop an m-payment strategy will be under increasing pressure from mobile operators. By not co-operating with operators, banks risk being dependent on costly SMS or voice channels for future m-payment solutions.

Credit card companies have an important role to play, tending to be more innovative than banks, understanding the value of co-operation in the areas of identification and authorization. Core competencies of both banks and credit card companies are their strong brands, well-established relationships with large customer bases, a network of merchant locations and long experience in risk management.

Co-operation, not competition, between mobile operators, banks and credit card companies is key to success in m-payments. The three industries are complementary; mobile operators have a billing infrastructure for processing large numbers of relatively small transactions, while banks and credit card companies have the resources to authorize lending for larger amounts.

For merchants, m-payments require an up-front investment, the size of which varies depending on the solution. For this reason merchants must be convinced of the value, through increased revenue, access to new customers, increased security, higher customer satisfaction and lower costs for distribution and collection.

Suppliers, such as platform and terminal vendors and handset manufacturers, have a clear motive to provide innovative solutions to the m-payment industry and to be involved in the creation of a broader solution that will open the market and increase their revenue potential. The success of m-payments in any market depends on the key players’ ability to partner and develop a collaborative model for addressing t