The mobile payments market has long been gestating in developed markets, and is now finally starting to gain momentum in terms of product launches and levels of investment from significant players across the financial services, IT, and telco markets. However, it is clear that the market is unlikely to reach a big bang moment, and will instead continue to evolve on several fronts at once. What this also means, however, is that market entrants must think beyond existing business models to find a means of creating a financially viable mobile payments ecosystem for all parties involved.
Key to this is understanding that mobile payments are not a vertical market. Players must understand how the different participants in a payment system – the merchant, issuer, and consumer – can all benefit through mobile. Only through a combination of established payment technology and the new world of mobile can mobile payment players hope to reach their true potential.
Mobile payment growth is now irreversible
Mobile payments have seemingly been on the verge of mainstream success for a long time now. Following numerous false starts and stops in most developed markets with an established payments infrastructure, consumer-facing, commercially viable mobile payment systems are now live and in growing day-to-day use. Although not occurring as rapidly as initially hoped, mobile payments are finally shifting from a hype phase to a growth phase across various products and services in these developed markets.
In the 15 years since the launch of the world’s first mobile payment service – an SMS-enabled Coca-Cola machine in Helsinki – mobile payments have remained frustratingly far away for many potential players in this emerging payments ecosystem. However, while the big bang moment of mass consumer uptake has not occurred, mobile payments have instead developed and will continue to develop in more of an evolutionary rather than revolutionary style on multiple fronts simultaneously.
From a consumer viewpoint, mobile payments, particularly in the form of mobile commerce, have crept into common popular use and prove that consumers are willing to use their mobile devices as payment tools. Major retailers such as Amazon and Wal-Mart report a huge shift in growth in transactions through mobile channels, and are making mobile an increasingly central platform for retail.
Although mobile payments are still not yet a common sight in the real world, barring a few key regions such as Japan and South Korea, large players with considerable clout and resources are now launching major products and services.
Not all of these programs will be successful, but with some products doing extremely well, such as Starbucks’s prepaid mobile wallet app, which reportedly now accounts for 10 per cent of all US revenue for the coffee giant, the mobile payment market finally has momentum and will continue to grow.
But market entrants need to think beyond existing models
Although the momentum in the mobile payments space is seemingly irreversible at this point, the overall structure of the market, and more critically the future revenue streams, remain extremely unsettled. In a market that is noteworthy for more failures than outright successes, many payment providers are now jockeying for position in the hope of being in the right place when mobile payments finally reach critical mass.
The differing forms of mobile payments, including m-commerce, P2P, and NFC (near field communication) or cloud-based proximity payments, each operate on different models, with the potential to disrupt various aspects of the traditional four-corner payments model. Alongside this, many potential stakeholders in a wider mobile payments ecosystem are trying to position themselves as the central component of the business model and retain any advantage they can.
However, the core tenets of payments remain unchanged, with most transactions requiring an issuer, merchant acquirer, and payment network to authorise, clear, and settle any payment. In most instances mobile payments act as an overlay of this, and while potentially replacing aspects, are not capable of fully replacing the overall payments infrastructure.
As a result, mobile payment players are having to think beyond existing models and focus on how they can generate revenue. These potential revenues can vary from a slice of the interchange fee, to merchant and consumer fees, or even peripheral services such as location-based advertising and couponing services. The revenue model of any mobile payments platform will inevitably have an impact on the overall design and attractiveness of mobile payments to consumers, merchants, and issuers alike. This will have a major impact on the types of services and products needed from vendors.
Mobile payments are not a vertical market
With mobile payments entering a growth phase, and the overall market structure remaining embryonic, it is a mistake to think that any individual player, or even market vertical, can own the mobile payment space outright. Central to the successful rollout of any mobile payment service is an understanding of the needs and roles of telcos, issuers, card schemes, merchants, and consumers alike.
With the broad range of existing and potential players in mobile payments, many are now attempting to claim a dominant position often to their own detriment. Telcos who don’t have the full support of merchants or payment schemes will face the same problems as issuers who do not have the support of telcos.
While disintermediation is a risk for many, a lack of cooperation will only slow overall market growth. Consumers are gradually shifting to mobile payments, but there are no guarantees of what shape the market will take in the future. Only by understanding the potential and needs of all potential links, can market entrants to mobile payments hope to remain nimble to these evolutions in payments. Would-be successful mobile payment players will need to combine the deep merchant and consumer penetration, scalability, reliability, and infrastructure of established payments infrastructure with the user experience, mobility, and seamless integration of digital commerce functionality of the mobile world.
Gilles Ubaghs is a Senior Analyst in Ovum's financial services technology team