[Dave Birch] In the last few days, two of the U.K.’s biggest banks have announced mobile payment projects. Barclays Bank, O2 and Transport for London have announced a combined payment/transit pilot in London and RBS and MasterCard have announced a mobile debit card trial in London and Edinburgh. Still, just because lots of people are going nuts about a new payment technology doesn’t make them right. Payments is a notoriously conservative “marketplace”, where custom, practice and network externalities act to constrain innovation. Therefore, we must be very careful about predicting success. After all, who was the savant quoted in Wired magazine in December 1994 in this paragraph:

[Mondex] creators envision the system spreading worldwide, as people slip their smart cards into special phones and wallets to conduct cash-like, tamper-proof transactions, even across borders. “It will become ubiquitous – it’s the cheapest way of moving money around.”

Me, of course. I’d become very excited by the link between electronic money, smart cards and phones and a few back-of-the-envelope calculations had convinced me that since people all had phones and since smart cards were very cheap, the fact that telecommunications costs were going to fall would mean that no-one in their right mind would use any other technology for payments. Still, there’s no harm in making mistakes, provided that you learn from them.

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It is obviously difficult to construct worthwhile business models and ROI calculations around disruptive technology and part of the problem is that people tend to look forward in terms of the existing business. This is why it’s easy to dip into any book on the history of technology and find no end of quotes underestimating the potential of a new technology (which is what I did when writing this post).

“There will never be a mass market for motor cars — about 1,000 in Europe — because that is the limit on the number of chauffeurs available!” — Gottlieb Daimler, inventor of the gasoline-powered automobile, 1889

I was recently quoted by Deloitte, in a report on mobile payments called “Reversing the Charges”, as agreeing with the head of Visa USA. He had said that mobile payments were inevitable and I thought (and still think) he was right. But Deloitte are not so sure. Louise Brett, their head of UK Customer and Channel Strategy, writes that

…our research suggests that the substantial and growing investment in mobile POS payments is misjudged, at least in the United Kingdom.

I thought it would be interesting to both air and play with these different perspectives. Barclays and RBS presumably do not see their investment as misdjudged. Perhaps the apparent disconnect between the Deloitte and bank perspectives is in some way linked to the way that innovation is accounted for. As has often been discussed here, it is very difficult for incumbents to invest in anything other than core business: this is why BT didn’t invent Skype, Wells Fargo didn’t invent PayPal and Sears didn’t invent eBay. And, more relevantly I suppose, it’s why banks didn’t invent payment cards or ATMs. What banks did do is wait until someone else had invented them and then draw the technology into mass market financial services. Why would NFC-equipped mobiles follow any different trajectory?

More to the point, what trajectory might they follow if banks don’t get involved? Perhaps mobile phones are so different from previous technology waves eventually embraced by banks (eg, the web) that not being involved is a dangerous strategy, akin to record companies deciding not to support music downloading because they (genuinely) couldn’t see how to make money from it. But they had made the mistake of trying to do the spreadsheet on their existing business model, with only the distribution technology changing. Other people (eg, Prince and Madonna) were meanwhile looking at new business models, and they’ve turned out to be on the right track.

Remote shopping, while entirely feasible, will flop – because women like to get out of the house, like to handle merchandise, like to be able to change their minds. TIME magazine (1966).

It’s not just me and the head of Visa USA who are on this particular bandwagon. The GSM Association has announced that, over the next several months, 12 mobile operators will run trials of contactless mobile payment services in Australia, France, Ireland, Korea, Malaysia, Norway, The Philippines, Singapore, Taiwan, Turkey and the U.S. as a precursor to commercial launches. They seem confident that the services will gain traction. Two-thirds of the 2,574 consumers in 17 countries that they surveyed said they expect to begin using their mobile phone to pay at point of sale within two years of the service becoming available. It’s not all about what is convenient for the customers, though, and half of the 240 merchants from 10 countries surveyed said that they see “promotional opportunities” in using the mobile phone as a payment device. So it’s not all about payments, either. Simply taking the contactless payment applications and putting them in phones instead of in cards is not enough. We need to use the phone environment as a means to add significant value around the phone at POS.

The Americans have need of the telephone, but we do not. We have plenty of messenger boys.
Sir William Preece, Chief Engineer, British Post Office (1878).

Now, naturally, Deloitte are entirely right to point out that the money to pay for the new infrastructure must come from somewhere and they are equally right to point out that for technologists to expect banks to pay simply to “impress” their customers is crazy. It’s the operators who select, order and subsidise the mobile handsets, so they must be persuaded that they will gain revenue from creating (a quite complex) NFC infrastructure for application management and use. That revenue is unlikely to come from:

  • Retailers volunteering to pay higher fees. Or, at least, higher fees for the same service (more on this later).
  • Banks volunteering hand over a slice of transaction fees (the margins are too thin, as we very accurately predicted back in the days of Simpay).
  • Processors volunteering to forego a portion of their fee. We work for a processor in this field at the moment and I can assure you that nothing is further from their mind (or business plan).
  • Customers paying a premium to use the mobile wallet. Again, I hate to agree with Deloitte so publicly, but there’s no chance of charging customers for a payment mechanism when all the other mechanisms are free. That’s not to say, however, that you may not be able to charge customers for some new services around the mobile wallet.

So in the digital money corner, we think mobile payments are cool, we want operators to get the phones out there, but we know that banks don’t want to pay more for payment infrastructure. And Deloitte show clearly in their report that there’s not enough margin in a card transactions to provide a living for another player: their figures indicate that in a typical credit card transaction there might be a penny available to pay for the mobile operator, handset subsidy and so on. That’s not enough.

The wireless music box has no imaginable commercial value. Who would pay for a message sent to no one in particular?
Associates of David Sarnoff responding to the latter’s call for investment in the radio in 1921

But this kind of analysis assumes that a mobile phone is a substitute for a payment card and that bank-issued payment “cards” are the only reason why mobile operators would sell phones with NFC and that transactions are the only source of income. This combination seems unlikely. A consumer is not terribly likely to go into a shop and buy an NFC phone because they can put their Visa card in it (although they might because they can put their Oyster card in it). Consumers will want NFC because of service discovery (the whole smart poster/tag thing is going to be huge), zero-configuration data exchange (no more sodding about pairing your Bluetooth headset: just touch it to your mobile and hey presto!) and as-yet-uninvented P2P services (we touch our phones together in the nightclub — romantically, of course — and thereby swap contact details)

The service discovery aspect is probably the one to generate the short term revenue for the operator. A great many consumers don’t use data services (other than text) on their phones. It’s just too much hassle to figure out how to type in URLs and then it’s too much hassle to actually type them in once they’ve figured out how. But if you could simply hold your phone against the timetable in the bus stop to bookmark the bus timetable in your phone browser, you might well open it up and take a look sometime.

So who is right? Are the investments misjudged or is Paul Geedes (Chief Executive of Consumer Banking at RBS) right to say that RBS:

…therefore believe that mobile phones will be the next step in the payments evolution.

One of our clients asked me about this a few days ago and I said that I thought that both views are accurate: the answer depends on the question (if you see what I mean). Deloitte are posing a particular question: given that the business model remains the same as it has been for decades, what is the ROI on this particular payment technology? Answer: not that great. Other people are asking an innovation question: given the possibilities opened up by the new technology, what new business models will emerge? Answer: no-one knows, but for a relatively small expenditure it is worth it for banks not to take the chance of getting outflanked and gain the opportunity to (as Deloittes note inside their report) to explore new value-creating opportunities around the payment itself. And if a few more people choose RBS or Barclays’ cards because they can have them on their phones, and if mobile operators can charge a quid for letting the banks put the application in the SIM, then that’s great too.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


  1. Your comments above are interesting but I think that the business case for mobile payments rests squarely on a simple calculation – Transactions * Users.
    The average US consumer has 5.5 credit cards and several bank accounts to compete for the transaction numbers. (The UK and Singapore may have slightly lower averages for credit cards). Waving a cell phone at a local Starbucks may thus not be as enticing in these markets.
    Developing countries – with populations that are ‘un banked’ are the key. Pakistan being a great example is where this can really pay off. The numbers there speak for themselves; 70M cell connections with only 5M bank accounts leaves a lot of cell phone users with cash as the ONLY way to make payments. P2P remittances, both domestic and especially international are the key to drive mobile payments into the mainstream.
    i cash is a pioneering firm focused squarely on this task.

  2. The case for mobile payments remains regional. NFC will be a real challenge unless it becomes a standard offering on cellphones like bluetoth and infrared. Phones have become very personal subsidy or not. In the developing world where the rtio of phones to bank accounts is skewed banks are driving the phenomena irrespective of ROI, relationships are more of a priority and for the forseeable future this will be only growth an profitable area. In the developing world, the youth market will be the exclusive driver resulting from covergence (i-phone/ds-phone etc.) where gaming, location based services/ads/marketing will attract them as basis to extending the offering. Mobile operators will work against nfc as it cuts them out of the value chain.

  3. Great post. You certainly presented the challenges in a clear manner. I’d like to ask a follow-up question related to one point you made. You wrote: “We need to use the phone environment as a means to add significant value around the phone at POS.” You gave a couple of potential examples of this (would I need latex protection when touching phones in a nightclub?), but I wonder whether that value can be defined? In other words, what is the hurdle of POS and/or P2P value for mobile payments to yield meaningful adoption? I don’t go to nightclubs anymore, so the touching thing won’t benefit me. Thanks again for the post.

  4. “I wonder whether that value can be defined?”
    Here’s an example for discussion: if POS terminals didn’t need keyboards, screens or printers (because they use the consumers phone instead) they would be both cheaper and more secure, so everyone benefits.

  5. Lesetipp: Business Cases beim NFC-Payment

    David Birch hat einen sehr lesenswerten Beitrag zum derzeitigen Stand beim Mobile Payment via NFC geschrieben. Insbesondere beleuchtet er den Aspekt, dass neue Business Modelle bentigt werden, um dieser Art des mobilen Bezahlens zum Durchbruch …

  6. Great post and comments. I totally agree that the business model for NFC is not clear yet. First experiences on shops with creditcard inside the phone don’t show yet a clear added value services.
    Mobile payment business must be service driven. People will use it only when they will realize that the additional service generated wouldn’t have been possible otherways.

  7. Business Case for mobile payments

    Dave Birch sur son blog dans Mobile, business cases, that sort of thing est assez critique sur l’approche économique attribuée notamment aux projets sans contact (NFC) actuels. Il est un fait que les coûts supplémentaires qu’engendre l’utilisation du m…

  8. IMO, there is no way to make a profitable business case for a bank-based payment system. The only analysis that makes sense is a structural / competitive one. Which is why the only real reason for a bank to do these things is because the telcos are forcing them to maintain a seat at their own table.
    Whether telcos can make it happen or not depends on the circumstances, but frankly, they aren’t much innovative than banks. The really tough challenge (“what innovation did banks invent?”) isn’t much easier with telcos. Which correlates to a lot of mind-bogglingly slow adoption, only just starting to wake up in the last few years as handsets have allowed independent code writers to play.
    Which is good. telco payment systems will probably launch into reality some time after the indie payment systems designers make it happen. And banks will follow that lead.

  9. This topic has recently become of great interest to me. Starting from the realization of how it is to transfer monies across international borders and how hard it makes to create a reasonable cash flow when trading/investing etc. So starting from this I got interested on the general topic of Payment Systems etc. Then I began to further realize that here there may be a great investing opportunity in the mid to long-term (who knows maybe even within this year or so)
    Personal view is that this technology will go off in a big way in the developing countries where people are in great need of financial support systems. India, Pakistan, Africa etc.
    Above all, would anyone know of some cutting edge players in this game? quoted on the markets? Are there more focused ETF’s in this business?
    Finally, what do you think of the possibility of speculating on the various digital currencies – do these e-currencies stand a chance against mobile payments? If so, how?
    Thanks for any comments or advice

  10. Many people are right, there is a huge potential for mobile payments in developing countries.
    Lang, our company is a start-up in India working on mobile-payments. Would you be interesting in investing in a start-up?

  11. mobile phones with free gifts

    If this looks to be good to be true… its through Tesco! Valuable free gifts such as laptops, HDTV, Wii, PLaystations and Tom Toms all for ordering your next mobile from a name you can rely on. All handsets and tariffs avaialble

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