Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
At first glance, mobile payments seem like a strategic slam dunk across several sectors. This technology offers new growth possibilities to mobile carriers; it gives financial institutions an opportunity to differentiate themselves and benefit from innovations on the mobile platform; and for merchants, these capabilities could deepen relationships with customers and enhance the shopping experience. However, despite a chorus of companies and headlines promising new mobile payment applications “that will come to revolutionize the pocket,” consumers in the United States still have few options to pay for a movie ticket, much less a bucket of popcorn, with their mobile devices. What gives?
A recent Deloitte study found that key players’ lack of revenue sharing agreement and a market that’s deeply fragmented by competing technology platforms are preventing mobile payment from establishing a foothold in the United States. Uncertainty around which mobile payment technology will prevail is leaving retailers (and consequently, consumers) reluctant to make a first move.
Two significant and potentially competing mobile payment initiatives in the United States have decided to adopt an open coalition approach by opening up their partnerships to carriers, credit card companies, banks, technology companies and merchants. In so doing, they may be sowing the seeds for an “open federation” alliance, which has the greatest chance of creating a mobile payment ecosystem in the United States on a standardized, interoperable platform. Such a platform could let consumers design their “mobile wallet” by picking and choosing between a wide range of payment applications, depending on their preferences. Unlike a closed partnership with few players, an open federation alliance can probably attract the critical mass of partners and end-users needed to scale the U.S. market.
If an open federation is the desired destination, getting there will likely not be easy. The complexity of bringing together disparate players from different industries is daunting. The prospect of sharing merchant fees with carriers and slicing the existing revenue pie thinner has not appealed to banks and credit card companies that have largely shied away from the mobile payment landscape. Mobile carriers and independent payment providers are hoping to compete with financial institutions by luring retailers away with attractive transaction fees. However, the Fed’s recently proposed regulation to lower debit card fees by as much as 70% is throwing a wrench in this strategy. Mobile carriers are now forced to look at more innovative services to generate revenues from mobile payment rather than pursue a shrinking slice of revenue from interchange fees.
The Deloitte study found that mobile carriers in the United States will likely continue to control the secure elements and applications (the mobile wallet) that reside on mobile devices. Mobile carriers can emulate the “hotel model” of doing business where they generate revenues by renting out memory space to service providers (banks, credit card companies) and merchants (retailers, mass transit, airlines). Mobile carriers can also gain revenues by managing merchant loyalty programs, coupons and mobile advertising based on real-time, location-aware data, thereby completely side-stepping the potential tussle on interchange fees. This would also entice financial institutions to collaborate with mobile carriers and application providers, thereby removing one of the biggest barriers to mobile payment.
Mobile payments are expected to generate rich data on consumer buying behavior that can help retailers customize the shopping experience and target ads and discount offers that lead to higher sales. Mobile payment players like carriers and application providers may have visibility on user shopping patterns and can generate significant new revenues from business analytics. Mobile carriers can make their platform more attractive to service providers by forgoing ownership of consumer purchase data and by relying on wallet rentals. For mobile search advertising providers, consumer purchase data will be a critical life-line.
Near field communication is a payment technology with the greatest promise, according to respondents in the Deloitte study, and nearly nine out of every 10 players surveyed across the value chain are testing NFC. Compared to other payment instruments, NFC technology can significantly reduce transaction times and allow businesses — especially quick service restaurants, mass transit stations and sports stadiums to increase “transaction velocity,” which may lead to greater profitability. The full potential of NFC-enabled devices can be realized in an open federation that will be able to aggregate significant transaction volumes from a large customer base belonging to a number of different banks and carriers.
Although the tug-of-war between carriers and financial institutions on merchant fees is resolvable, another potential tussle — this one pertaining to data security — is brewing between carriers, handset-makers and financial institutions. The contention is where the customer’s confidential data like credit card information and passwords will be stored-whether it should be on the handset, on the SIM, or on a memory card (e.g. a microSD card). The player that controls this data would also own the customer and would dictate revenue sharing and the payment applications that interface with the device.
An open federation can resolve this contentious issue by moving the secure elements “to the cloud,” which is managed by a trusted third party manager. With LTE implementation around the corner, consumers would have a high-bandwidth, robust pipe that would be able to quickly route transaction data from a mobile device to the cloud and back. A TTPM could be a large payment processor or a mobile security provider, an entity that is neither a carrier nor a financial institution and is perceived to be a neutral party.
In the absence of an open federation alliance, limited cooperation between disparate industries and a lack of scale will likely stifle services, fragment offerings, and restrict adoption to niche markets. Furthermore, limited cooperation among key players could engender other potentially disruptive mobile payment services that bypass current incumbents. In the long-term, such a scenario can significantly erode payment revenues from established players.
Phil Asmundson is vice chairman and U.S. media and telecommunications leader at Deloitte LLP. Divakar Goswami is the India lead for technology, media and telecommunications research within Deloitte Research, Deloitte Support Services India Private Limited.