Mobile payments beyond NFC: Smart wallets

There has been talk for a long time that mobile payment is the next big thing and that its going to take over the other three channels of payment (cash, credit and check) very soon. However, the adoption hasnt been as rapid or revolutionary as many thought. Some of the reasons include lack of consumer education, reluctance for change and high cost of infrastructure. But the big factor to me is how it failed to address a key consumer issue better consumer experience. There are four major models in the mobile payments sector. They include SMS based payments, direct billing, mobile web payments, and contactless NFC. The current market expectations and trends are revolving a lot around contactless NFC. However, I feel a player in this sector should look beyond NFC to gain a step ahead of others and prepare for rapid changes in this sector since technology is changing at a rapid rate. Some of the alternatives to NFC include digital wallets such as Google wallet, PayPal Here, Passbook by Apple and Square Register. There seems to be no consensus in the market on which technology to adopt or which technology consumers would prefer. If a big player like Apple doesnt show interest in NFC based payments, then there has to be a strong reason against the NFC trend. It could be just that Apple was interested in building a better experience (Passbook - digital wallet) or that it wanted to minimize the number of players sharing the mobile payment pie (retailers, merchants, banks, NFC chip manufacturers, carriers, and smartphone manufacturers) or that it wanted to build its own platform like it did with iTunes. Irrespective of the trends, there seems to be a lot of choice and no clear leader in the market. The major problem with NFC or other mobile payment solutions that put the wallet in the phone or in the cloud is that they dont make the consumer experience any better. If the process involves tapping on to something and selecting a card from many, then it doesnt make the process any better. Its just a replacement. Something that would make things better is smarter management of the wallet and the experience. Imagine if you are walking by a Starbucks and your phone containing the digital wallet vibrates with a coupon for a Cappuccino, which is something you really like. Smart wallets are the next big thing and not digital wallets. I strongly believe that Google is going in this direction with its Google Now service, which delivers notifications (cards) based on your interests and search history. As an example, lets see how a carrier can capture value in this sector in the near future. Mobile payments depend a lot on smart devices like tablets and smartphones. These devices are getting smarter with each day and one common thing that they all need is data connection. And this data comes largely from carriers like Rogers. If Rogers can build a cloud platform/solution that can house all the players under one roof or partner with specific players like banks or retailers and deliver smart solutions like location-based coupons or context-based suggestions, then it can substantially improve consumers shopping experience while capturing value because it can increase the data consumption which I believe is a key revenue generator for carriers. Moreover, it can subsidize the consumers further and charge the other side since they have access to a huge consumer pool. NFC would be useful for everyone if it goes beyond mobile payments, however, mobile payment solutions have to get smarter if they are to be adopted at a higher rate than they are now.

Table 1: Survey results from a group of approximately 100 people Category % of people who look for offers % who like customized offers % who like location-based offers % who like context based offers Answers No 21.23% 12.68% 16.9% 24.29%

Yes 54.93% 77.46% 73.24% 58.57%

Somewhat 26.76% 12.68% 12.68% 20%

Table 2: Willingness to pay Price % interested Free 52.11% At least $0.99 47.89%

Industry overview
The most recent report available from Gartner indicates that worldwide mobile payment transaction value will surpass $171.5 billion in 2012, approximately 62% increase from 2011 values of $105.9 billion. The number of mobile payment users will reach 212.2 million, up from 160.5 million in 2011. In the next five years, the global mobile transaction volume and value is expected to grow by 46%, according to Gartner, Inc. This drive in mobile payments is largely driven by the rapid adoption of smart devices across the world. Even though there is an enormous opportunity in this industry, it is so fragmented because there are different access technologies, business models and regulations. One of the access technologies currently in use in developing countries is SMS for its ubiquity whereas in developed countries it is the Web. But the one that has been gaining traction in the developed markets is NFC for its ease of use and breadth of applications. Some markets such as South Korea have successfully integrated NFC into their business models and can be used as a benchmark by other early adopters. For example, SK telecom in South Korea has developed an app called Hana Card, which is a payment app, and takes a cut for every mobile payment that goes through this app. Another example of successful NFC integration is Olleh Touch (mobile wallet) by KT in South Korea. The interesting thing about this solution is that it supports PayPass and PayWave standards which are becoming quite common these days across the world. KT has partnered with Korean card issuers like BC card. Moreover, KT has also launched Moca, which is a cloud-based mobile wallet service. Moca has been a runaway hit among customers and other key stakeholders. KT has successfully shown that if NFC is presented more as a platform that enhances a customer experience than as a tool, then there is great value to be created and captured in this industry. With its solutions, KT has addressed certain barriers in implementing and adopting NFC. Some of the barriers are change is user behavior, complex collaboration between stakeholders such as banks, merchants, retailers and service providers, and cost of implementation. Also, NFC is not regulated

at this moment and this adds a lot to variability in terms of standards which could compromise user security. Moreover, interoperability and aligned communication across the stakeholders involved is a key barrier at this moment. Most of the stakeholders mentioned above have taken a conservative approach till now considering the uncertain future of NFC which I believe resulted more from this conservative approach. However, KT in South Korea has shown that if the barriers are lowered and NFC is promoted beyond mobile payments for enhancing the customer experience, then one can generate sustainable advantages over a long term period. Lets see in detail how different stakeholders can utilize NFC in generating new value to the customer which is important in generating profitability.

Players
The main stakeholders in this industry are the banks, service providers (network operators), merchants (Visa, MasterCard etc.), retailers (BestBuy), and phone manufacturers. A key stakeholder that is quite proactive in this industry is Google with its Google Wallet service.