Foreword
The U.S. mobile telecom sector continues to offer unprecedented opportunities for growth. At its core, an accelerated "open mobile" environment is rapidly changing consumer expectations for wireless services and products. Consequently, traditional incumbents can no longer rely on voice applications to sustain revenues. What will fill this void, however, remains unclear and will undoubtedly be a key strategic challenge for the industry in 2011.
Against this backdrop, the advent of mobile payments continues to generate excitement, provoke debate and raise hopes across a sector jaded by a series of false dawns for mobile commerce in the United States. But with all the pieces now seemingly in place, many are predicting that this will be the year mobile payments finally takes off and provides a new runway for revenue uplift across a wide range of participating industries. However, one challenge remains at the very heart of this new era - the mobile payment ecosystem remains fragmented and underdeveloped as competing technologies and standards increase uncertainty and stymie cooperation among the key players. To compound matters even more, the specter of disruptive innovation emerging from those on the periphery looms ever large in the rear view mirror of the incumbents. Once again, progress threatens to grind to a shuddering halt.
But hope is not entirely lost and a potential solution to this challenge lies in a reorganization of the core payments ecosystem. To explore this further, I am pleased to present the latest report from Deloitte Research in a series of studies exploring the open mobile phenomenon. The report takes an in-depth look at what is required for mobile payments to reach critical mass in the U.S. wireless sector. Building on insights from leading executives across the value chain, the study explores four possible scenarios in the evolution of mobile payments and explores a new concept, in the open federation model, which could provide a viable path to finally unlock value and stimulate growth.
As always, I Iook forward to your feedback as we continue to explore this fascinating topic!
Phil Asmundson
Vice Chairman
U.S. Technology Media and Telecommunications Leader
Deloitte LLP
Unlocking mobile payments
Mobile payments are ripe with potential to offer convenience to consumers, new growth avenues to mobile carriers, differentiation to financial institutions, and loyal customers to merchants. However, the mobile payment ecosystem in the United States will likely remain underdeveloped for the foreseeable future. Developing a vibrant mobile payments ecosystem that brings together mobile carriers, financial institutions, merchants, and a host of others to let consumers use their mobile devices to pay for goods and services is no easy task. Industry players are optimistic, but the challenges are daunting.
The mobile payments ecosystem requires different industries to work together to bring mobile payments services to the market. However, many of the key players — financial institutions, mobile carriers and merchants — do not share the same interests. For example, mobile payments are attractive for mobile carriers as they face declining revenues from voice and all-you-can-eat data plans that fl atten revenues while congesting their networks. On the other hand, mobile payments threaten fi nancial institutions' revenues from merchant fees and existing payment instruments without providing any incremental revenues. At the same time, merchants view mobile payments as a potentially cheaper alternative to credit card transaction fees and a valuable channel to reach consumers — especially Millenials (18–26-year-olds) — that already avidly use mobile phones for more than mere phone calls.
Business models — the sharing of revenues and ownership of the customer1 — constitute the widest part of the strategic chasm that separates key players. The dearth of mutually beneficial business models contributes to the slow progress in developing a viable mobile payments ecosystem in the United States. Remaining on the sidelines while others make the investments in a mobile payment system, however, is fraught with risk. PayPal predicts that in the next fi ve years, a majority of the $5.5 trillion in retail transactions that happen in brick-and-mortar storefronts will be handled by mobile devices.2 Even if such a scenario seems currently far-fetched, it would not be prudent to passively allow potentially disruptive threats to develop that may pose signifi cant challenges for incumbents down the road, especially fi nancial institutions. Already, fledgling mobile payment services that bypass banks and credit card companies have been deployed.3
The open federation model — a common platform shared by an alliance of carriers and financial institutions — seems to be the most viable path toward a mobile payments ecosystem that promotes the interests of all the key players in the value chain.
This report shares insights from a Deloitte survey of 89 senior executives from the mobile payment value chain (see appendix) on the potential of mobile payments in the United States, the key barriers that are preventing mobile payments from taking off, and potential solutions that could help unlock their potential. The report builds on survey results, draws on lessons from mobile payment's foothold in the Far East, outlines four possible scenarios in the evolution of mobile payment and assesses its impact on key players in the value chain.
Mobile commerce in the United States has enormous potential
Mobile commerce encompasses financial transactions enabled by a mobile device and includes banking, retail payments and investing. This report focuses primarily on mobile payment — a subset of mobile commerce where a mobile device is used to make retail payments.
Respondents in the Deloitte survey were optimistic about the growth potential of mobile commerce in the United States. They predict that 24.3 percent of all mobile subscribers will be using mobile banking (73.9 million subscribers) in 2012. Similarly, they predict that the number of mobile payments users who will execute transactions on their phones for mass transit, fast food and digital goods will swell to 21.3 percent or 64.7 million of all mobile subscribers in 2012 (see figure 1).
Turmoil in the financial services industry in the United States has not dampened mobile commerce deployment plans. As of 2010, 696 banks and credit unions offer some form of mobile banking.4 The United States is leading the world in the number of mobile commerce pilots and trials underway.5 Even so, examples of commercial deployment of mobile payment services are scarce. The belief among financial institutions that mobile payment is just another channel to reach consumers is changing, and mobile devices are becoming a more crucial part of competitive advantage.
Mobile commerce has the potential to help financial institutions attract and retain Millenials and cut costs by supplementing brick-and-mortar branches with a personalized, virtual branch hosted on a mobile platform. Millenials make up the fastest-growing segment of the population that uses mobile devices to conduct transactions. Roughly 20 percent of consumers in their 20s and 30s use mobile banking, compared with 10 percent of the general population.
According to the Deloitte survey, approximately 70 percent of mobile payment users will be under the age of 40 (see figure 2). Millenials' annual spending is expected to reach $2.45 trillion by 2015,6 paving the way for a wide array of players in the mobile commerce value chain to target this younger population for growth.
Survey respondents across the mobile payment value chain see great potential in this service, and they are optimistic about its future. Based on where mobile payment deployment stands today, that optimism may be misplaced. Currently, U.S. mobile payment services are at an early stage and encompass digital downloads, peerto- peer (P2P) payments, and loyalty programs. However, mobile devices are already functioning as credit cards for purchases at retail outlets, movie theatres, train stations and parking meters in more mature mobile payment markets like Japan and South Korea. This is far from reality in the U.S. market, mostly due to divergent interests and the absence of a common goal among key players from different industries.
Case study: Japan
In countries like Japan, where mobile commerce has taken off, the creation of a standardized platform led by NTT DoCoMo resulted in a developed mobile payments ecosystem. Despite being dominant in the telecom sector, NTT DoCoMo had to make strategic investments in key players across the value chain (card issuer, "megabank," prepaid wallet provider, retailers and technology platform) to create the ecosystem. NTT DoCoMo's earlier experience of working together with content providers for their lucrative mobile Internet platform, i-mode, may have helped them forge partnerships more easily.
The situation in Japan — shrinking revenue streams from voice communications and the need for new avenues for growth — was strikingly similar to the one currently afoot in the United States. In 2003, the Japan Credit Bureau (JCB) launched QUICPay" (Quick and Useful IC Payment), a contactless credit card solution available on a mobile phone or a plastic card, which assigns part of the credit limit to a contactless chip.7 By 2004, NTT DoCoMo launched the fi rst "Osaifu- Keitai" (mobile wallet), which incorporated contactless payment technology.
Then, Sony and DoCoMo formed a joint venture called FeliCa Networks. By producing both the mobile phone chip and card reader, the platform managed downloads and applications for consumers and merchants and gained a strong foothold in the mobile payment market. In fact, FeliCa Networks also licensed FeliCa chips to other potential users, including rival telecom providers.8
Once DoCoMo developed a chip for their handset and started licensing it to other operators for higher traction, the company launched its own credit service "iD" in collaboration with a growing number of credit card companies.9 Collaboration across the value chain meant that NTT DoCoMo, merchants and other mobile carriers were able to share a common platform to enable their e-payment brands — Suica®, iD", QUICPay", and Edy — to share the same data center and point-of-sale hardware. Collaboration across the value chain created a mobile payments ecosystem in Japan that achieved scale and provided convenience to customers and merchants who no longer needed to negotiate an ecosystem with competing and incompatible platforms.
Regulatory intervention in the east
Unlike Japan, the telecom sector in the United States is highly competitive and does not have a single carrier with the market power to impose a harmonized mobile payments solution for the entire value chain. Likewise, Singapore's highly competitive telecom sector witnessed familiar challenges when creating a standard ecosystem for mobile payments. Mobile carriers in Singapore made a number of attempts to offer competing but incompatible contactless standards for mobile payments, so the Singapore regulatory and policymaking body, the Infocomm Development Authority (IDA), stepped in.
The IDA estimated that an interoperable NFC environment would create a market size that would be eight times that of a non-interoperable environment.10 It initiated two broad initiatives in 2009. First, it instituted a private organization of members from the public and private sector to develop a standard ecosystem for mobile payments. Second, it funded the deployment of pointof-sale (POS) readers for payments based on Near Field Communication (NFC).11
Mobile carriers and fi nancial institutions in Singapore collaborated on an interoperable deployment of NFC mobile payments using a Trusted Third Party (TTP) infrastructure. The TTP acts as a neutral party that delivers interoperability by providing a single point of contact for all banks, payment providers, and mobile carriers.12
In China, the Ministry of Information Technology and Industry is trying to establish a common payment platform for China Mobile and China Unicom. Policymakers are weighing the option of going with a proprietary system (China Mobile) versus adopting NFC (China Unicom).13 In India, the government is developing a common, interoperable mobile payment infrastructure that includes a switch to facilitate transaction routing between financial institutions and mobile carriers.14
The Federal Reserve Bank of Boston, one of twelve regional banks in the Federal Reserve System, explicitly stated that there is no need for the Federal Reserve or any government body to take the lead in developing shared standards for mobile payments in the United States.15 They recommend that the market should be allowed to develop open or proprietary standards.
It seems unlikely that regulatory bodies in the United States will take the lead in creating a standardized payment infrastructure or mandating cooperation among mobile carriers and financial institutions. For mobile payments to be successful in the United States, critical players in the value chain need to cooperate voluntarily to minimize redundancy and create a harmonized platform to spur merchant and consumer adoption.
Barriers in the United States to mobile payments
The Deloitte survey suggests that key players face four significant barriers that include a lack of consumer knowledge, a dearth of demand, competing platforms in a fragmented market, and the absence of revenue-sharing agreements between critical players in the value chain. If industry is able to iron-out disagreements on revenue sharing first, developing a common technology platform and addressing lack of consumer knowledge and demand are easier to fix.
Financial institutions and mobile carriers in the United States have effectively communicated the value proposition of mobile banking in the recent past, which led to a rapid adoption of this service. Likewise, when the biggest players deploy mobile payment solutions on a large scale, it is likely that they will put their marketing muscles behind a sustained information campaign to educate consumers about the benefits of mobile-based payments. Consumer demand is closely linked to effective consumer education and the widespread availability of mobile payment services at retail outlets.
Most of the mobile payment solutions in the United States are currently niche services in specific geographic markets. Services like P2P and merchant loyalty programs are offered on the mobile device by payment providers, bypassing financial institutions and mobile carriers. The lack of participation in mobile retail payment from financial institutions and mobile carriers coincides with a lack of preparedness. (See figure 3.) The survey indicates that most of the significant players are still in the planning stages of mobile payment deployment (66 percent).
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