Payment revenues for non-banks

[Dave Birch] Naturally, when the talk turns to new retail electronic payment schemes, one of the first questions to be asked is about potential revenues. I often think this rather disadvantages banks when it comes to innovation, because the potential revenues from the most successful of payment systems are negligible compared to other sources of bank income. If banks do make a profit from retail payments transactions, it’s a small one when compared to the revenues earned from credit card balances or the interest foregone on current accounts (what you might term “payment related” revenues). Thus, the business model for (in this case) banks is not about transaction costs, but about the big picture.

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This is also true for potential competitors, which is why their business models will not be the same as banks. For a transit operator, it may be about removing cash and cash handling, for a vending operator is may be about differential pricing, and so on. Even if their income from transaction fees is lower than a banks, or their costs are higher, they may still have a more attractive business and this should lead to competition, ultimately to the benefit of consumers.

The world of mobile provides food for thought. For an operator, mobile payments may not be any more a source of revenue than they would be for banks, but they may have a much more important impact on the operator’s business case because they appear to reduce churn significantly. Even an established mobile payments player such as NTT DoCoMo only gets 2% of its revenue from mobile its payment platform, but mobile payments appear to reduce churn by 15%, and that adds up to a much bigger number. Reducing churn has a big impact on the bottom line, and the profits earned from the lower churn would (I imagine) be significantly greater than the profits earned on the mobile payments revenue, so just as for retail banks, payment-related income is a much, much bigger than payment income.

DoCoMo’s payment antics continue to fascinate. I couldn’t help noticing (as did very many other people), that in an article called Everything You Know About 3G is Useless, Wireless Watch Japan reports that Girl’s Walker (which pushes thousands of mobile e-mail marketing magazines to millions of “youth” subscribers) is now selling an autumn collection of fashionable goods that can be paid for using DoCoMo’s DCMX credit product. The article goes on to say: note no reference to any sort of ‘card’ – the service is the phone, and credit ‘cards’ are oh-so-1970s.

While I completely accept the argument that the Japanese markets has many special characteristics that allowed DoCoMo to sell (at the time of writing) more than 15 million handsets with contactless payments built in to them, there is one characteristic that it shares with the rest of the world (excluding the USA): mobile penetration higher than internet penetration. Mobile phones need to be at the very centre of any technology roadmap in the retail payments world.