[Dave Birch] I didn’t want to bore people with more stuff about mobile payments so soon, but judging from the comments and e-mails that I’ve been getting, it’s a topic that plenty of people want to discuss more. In particular, the issue of business models around mobile payments seems to be a live one. I can’t help noticing that the division between those who think that existing business models can be re-applied to the new technology environment and those who expect new business models to emerge is still wide. As an example of this, I note that a recent survey by Aite Group found that mobile network operators say they will derive POS payment revenue chiefly from consumer transaction fees. This seems hard to believe, frankly, especially given the discussion we had here about the lack of margin in the transaction. Yet four-fifths of the carriers who responded to the Aite survey said that per-transaction fees charged to users are the most likely way they will get revenues from mobile-payment services. Aite’s Nick Holland points out the contradiction here:

Mobile operators are confident that they will be able to generate revenues from fees per end-user transaction for all forms of mobile transaction services… However, banks and card networks have expressed that they are unlikely to allow this to happen.

As he goes on to point out (and I agree with him)

Operators are much more likely to generate revenues from end-user subscription fees for mobile data access, as well as from mobile advertising and from handset upgrades to support contactless technology.

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There were a few questions that I wanted to ask about the survey, so in the spirit of innovation and openess that characterises this blog I thought I’d try something new: our first e-interview. Nick’s a good bloke so I asked him if I could interview him about his report by chat and put the (lightly edited) transcript into the blog and he agreed. So here we go…

Dave: Were these all US operators, Nick?
Nick: The sample included two US operators and two US MVNO’s, so a fairly large chunk of respondents. Others were typically from developed markets that had yet to deploy any form of m-payment (so no Korea or Japan).

Dave: Do you think that the answers would vary between markets that are thinking about deploying and markets that have started deploying?
Nick: I would expect so. My hunch was that mobile payments were far enough off for the scenario of being able to generate revenues from physical world payments was science fiction.

Dave: The reason for asking is that is seems me that the European operators we deal with were maybe a year ago thinking that they might be able to “tax” financial transactions, but now they seem to be moving away from that position.
Nick: I agree. Responses I’ve received from financial institutions in the US have made it clear that they will give no room for additional transaction fees to be levied by mobile operators — the news may have just not made it to the mobile operators yet.

Dave: Thanks, I thought that’s what you were getting at in your comments but I didn’t want to move on without getting that shared baseline, if you see what I mean. It seems very clear from all the evidence to date that there’s just no margin in the transactions. It’s possible the news hasn’t reached but more likely that they just haven’t thought about payments in detail, right?
Nick: I think that is more likely. The minutiae of where the margins may reside has yet to be worked out.

Dave: I wanted to drill down a little were your final comments in the quote, about data fees, advertising and so on.
Nick: My understanding is that the operator stands to make money on over the air provisioning of cards, an uptake in data revenues and maybe handsets subsidised by an issuing bank or card network.

Dave: What I’m curious about is whether any of the operators put those ideas forward to you, or are those your own feelings from looking at the market?
Nick: These were questions that I put out to the operators rather than fielding the operators first.

Dave: So did any of the operators agree with you (ie, were there any resonances with what I would classify as the more sophisticated mobile payments business model) ?
Nick: My quote was about my own perceptions of revenue opportunities than that of the operators. As we previously alluded to, they seemed blissfully ignorant of m-payment pretty much.

Dave: I think the idea of using mobile proxmity services (not just payments) to boost ARPU through data take up seems entirely plausible to me. The idea of of charging for over-the-air provisioning also makes sense (since the banks would have to pay to issue plastic anyway) but I wonder if you feel this is close, or are the complexities of OTA just to great for early deployment?
Nick : No, I think OTA is a distinct possibility for revenue generation for operators.

Dave: Does OTA need to become more commoditised, more productised to work or can early adopters grab some share by pushing ahead on their own?
Nick: The difficulty is going to be in getting to a point where there are sufficient card readers at merchant locations to make the case for OTA provisioning.

Dave: Is that close in North America? How many readers are out there as of now?
Nick: It just so happens that I’m currently working on some research relating to the NFC tipping point. Depending on who you speak to, there are anywhere between 32,000 and 60,000 merchant locations where you could use a contactless card in the US. My hunch is that it’s much closer to the lower figure. In short, not enough. Certainly not enough for a mobile operator to justify bringing NFC handsets to market.

Dave: That sounds a way from a tipping point, even if my vague theory about the positive feedback loop between mobile and contactless is correct.
Nick: I’d totally agree. And conversations with handset vendors indicate that the timeline for some sort of ‘cameraphone’ type level of ubiquity will be similar to that of bluetooth – 5 to 6 years.

Dave: In Japan there are, what, something like 250,000+ merchant locations, so an order of magnitude more, not just a few more.
Nick: Yes, 10x the number of terminals at least. Hence, I guess, the lack of clear thoughts from mobile operators relating to the business case. But there’s a paradox. The same survey asked operators about expectations for market penetration for contactless mobile payments. Admittedly a small sample size, but the expectation was that almost 13% of subscribers would be using their phones as payment devices by the end of 2009! Obviously, I was surveying tech evangelists at these operators!

Dave: If the NFC tipping point for payments is still some way off in the U.S., do you think the operators will be looking at NFC for other (ie, non-payment) applications that might have borad appeal (I’m thinking about smart tags, smart posters, that kind of thing) and then let payments come on board later, or do you think payments are such a central, critical application that the mobile sector will track them in some way?
Nick: I see payments as critical. Smart tags – not a likely driver of adoption. Do our phones have UPC scanners today?

Dave: Last question, and I know it’s kind of a big one, but generally speaking the track record of operators and banks working together has been patchy. For an NFC ecosystem to come together to benefit payments, the banks and operators have to find better ways of co-operating. There has to be a more mature kind of co-opetition.
Nick: Exactly. There is also, IMHO, something of a clash of egos when it comes to the FI’s and MNO’s. Both expect all the cake.

Dave: Also a fair point, and something I’ve observed in person, so I concur entirely. Have you seen any positive signs of coperation, or at least the potential for cooperation? Are you optimistic about this or do you think the technologists (like me) are still too “rose tinted” about the many levels of rich co-operation needed to make it all work?
Nick: From my perspective, there have been a number of pilots that have involved banks, card networks and mobile operators, but these are just pilots. There are also bodies such as the NFC forum that have an impressive roster of vendors, banks and the like, but really, I just don’t see a real case for the MNO given the disintermediation that they will have in the transaction process with NFC until the NFC tipping point is reached. And I do see that happening. But not anytime soon. I really think a 6-or-so year timescale for the tipping point is possible.

Dave: What is the URL for your report if readers are interested to learn more about it?
Nick: http://www.aitegroup.com/reports/200712031.php

Dave: Thanks for taking part in our first e-interview Nick, much appreciated. E-talk to you again soon!
Nick: Cheers Dave. My pleasure.

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

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