R-18-1818

Overview of the Mobile Payments Market 2002

Through 2007
Published: 22 November 2002

Analyst(s): Bradford Adrian

Participation in the m-payments market requires understanding how much it

will and must change before it reaches maturity. Few aspects of the market
have developed beyond infancy; however, drastic changes will be observed
from 2002 through 2007.

Table of Contents

Analysis.................................................................................................................................................. 2
Management Summary.................................................................................................................... 2
1.0 Introduction................................................................................................................................ 3
2.0 Definitions...................................................................................................................................3
2.1 M-Payment Market Size....................................................................................................... 5
2.2 Challenges of Market Size Estimates.................................................................................... 6
2.3 Regional Market Size Estimates............................................................................................ 7
3.0 Drivers of the M-Payments Market..............................................................................................8
3.1 Adoption of General Wireless Data Services......................................................................... 8
3.2 Network Tolerance............................................................................................................... 9
3.3 Appropriate Payment Models............................................................................................. 10
3.4 Mobile Content/Services Availability.................................................................................... 13
3.5 Alternative Payment Methods............................................................................................. 14
4.0 Geographic Comparisons.........................................................................................................14
4.1 Western Europe..................................................................................................................14
4.2 Japan................................................................................................................................. 16
4.3 United States......................................................................................................................16
5.0 Recommendations................................................................................................................... 18
Appendix A. Acronym Key.............................................................................................................. 19
 List of Figures

Figure 1. Overlapping Terms Associated With E-Commerce Industries...................................................4

Figure 2. Markets Associated With E-Commerce....................................................................................6
Figure 3. Projected M-Payments Geographic Market Size by Transaction Value.....................................8
Figure 4. Gartner's General M-Payment Models................................................................................... 11
Figure 5. M-Payments Maturity in Western Europe............................................................................... 15
Figure 6. M-Payments Maturity in Japan...............................................................................................16
Figure 7. M-Payments Maturity in the United States............................................................................. 17

Analysis
Management Summary
Gartner estimates that the transaction value of mobile payments (m-payments) performed in the
United States, Western Europe and Japan will reach $80 million, $800 million and $900 million,
respectively, by year-end of 2002. By year-end 2005, those figures will expand to $7 billion, $15
billion and $12 billion respectively.

There will be many factors that contribute to how rapidly people adopt the use of m-payment
systems, but the most important drivers are:

■ Overall adoption of wireless data services

■ Adoption of nontraditional financial services
■ Network tolerance
■ Appropriate payment models
■ Content availability
■ Alternative payment methods

Through 2007, greater than half of all m-payment transactions will be invoiced directly to the
customer's wireless bill (0.8 probability).

An intermediary-based model for m-payment transfer, in which an entity becomes the "glue" that
facilitates commerce between all interested parties, will predominate for non-micropayments in the
long term.

For widespread adoption, an emerging m-payment system will have to overcome the significant
barrier created by entrenched payment methods, especially those that are cash- or card-based.

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 1.0 Introduction
The use of wireless and mobile devices is expanding worldwide; by year-end 2002, there will be
greater than 1 billion such devices in use. With this growing prevalence of mobile devices and
wireless connectivity, there comes a growing eagerness to find new and useful ways to apply
mobile technologies. We continue to find ways to weave mobile communications into our everyday
lives, ranging from placing a simple voice call from school, to viewing e-mail during a morning
commute, to taking photographs and distributing them to friends and family using a single wireless
device.

At the same time, the explosion of Internet-based information has made consumers much more
familiar with nontraditional ways to shop for goods and services. The incredible growth of electronic
storefronts like Amazon.com, eBay and Expedia.com, and the fact that nearly 70 percent of all
North American PC users regularly makes Internet purchases, attest that consumers are very much
interested in shopping and transacting via electronic media.

The progression of these two phenomena has very naturally led to a converged idea: the desire to
initiate and complete transactions via a mobile device. The concept is a very easy one for many
mobile users to accept; there is almost a knee-jerk response that such a portable means of
shopping and payment would be much more convenient than traditional cash-based or card-based
methods. Recent Gartner survey data indicates that approximately 46 percent of Western
Europeans use a mobile device for making some kind of mobile purchase (for such things as news
alerts) and 38 percent of consumers in North America (where m-payment systems are not widely
established) are willing to do so.

No matter how simple an idea the concept of m-payments is, many issues surround the
implementation of m-payment infrastructure as well as consumer adoption. For example, the
technologies required for mobile transaction authentication and authorization, and the models for
payment reconciliation, are all very immature. In addition, even though consumers state a
willingness to adopt m-payments, such a new means of transacting requires adjustment to deeply
rooted behaviors that will not change overnight. Because of this complexity, all parties involved in
the m-payment process — from financial services providers (FSPs) to technology vendors to
wireless carriers — must fully understand the dynamics that will drive the m-payment market.

2.0 Definitions
The terminology surrounding m-payments is often used inconsistently throughout the financial
services and IT industries. Terms such as "mobile commerce" (m-commerce), m-payments and
"electronic commerce" (e-commerce) overlap in some ways and are not mutually exclusive (see
Figure 1).

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 Figure 1. Overlapping Terms Associated With E-Commerce Industries

E-Co mme rc e

Ele c tro nic

M-Co mme rc e
Payme nts

M-Payme nts

Mic ro payme nts

Source: Gartner Research

Gartner defines the terms in these ways:

■ E-Commerce: This refers to the strategies, technologies and methodologies involved in

conducting business transactions through electronic means. This encompasses the sale of
digital and "nondigital" goods and services using any electronic methods, including those
related to the Internet and electronic data interchange. Strictly speaking, e-commerce is
concerned with the actual transaction component of conducting business in these ways, but it
also includes the infrastructure required to enable those transactions, such as applications,
application servers and databases.
■ M-Commerce: This refers to the sale of any goods or services using a wireless data
connection. Because all wireless channels are electronic, the m-commerce industry is a subset
of the e-commerce industry. It is important to note that transactions that are researched or
arranged via a data-enabled wireless device but actually completed via other means are not
part of m-commerce. For example, using a digital cellular telephone to place an order via voice
or even a touch-tone activated interactive voice response system is not considered a part of m-
commerce, but is better described as "mobile-enabled" commerce.

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 ■ Electronic Payments (E-Payments): This refers to the systems and strategies required to
enable the actual disbursement of funds electronically. E-payments is concerned not only with
the electronic transactions themselves, but also with the infrastructure required for such things
as billing and buyer authentication.
■ M-Payments: Strictly speaking, this refers to the use of a wireless device for the payment for
any kind of goods or services. Conceptually, m-payments can be thought of as the intersection
of the m-commerce and e-payments industries; m-payments is the purely transaction-related
component of both of those industries.
■ "Micropayments": This is often mistakenly used synonymously with "m-payments."
Micropayments refers simply to any transaction (electronic, mobile or otherwise) with a value
below some accepted threshold, usually around $10, so the confusion in terminology probably
stems from the fact that most m-payment transactions currently are of relatively low value. This
kind of a fine, definitional edge will be required as m-payments become more prevalent and the
value per transaction increases.

2.1 M-Payment Market Size

Even though the definitions used here effectively outline the interrelationships between the
commerce-related industries, care must be taken to determine exactly which components are
included in market size estimates. Otherwise, serious double counting and misunderstanding
occurs. The important point is to understand whether a particular market estimate has separated
the buy-side elements from the supply-side elements (see Figure 2).

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 Figure 2. Markets Associated With E-Commerce

E-Co mme rc e

S upply S ide M-Co mme rc e

(Infras truc ture )

E-Payme nts

M-Payme nts

Mic ro payme nts

Buy S ide
(Trans ac tio ns )
Source: Gartner Research

The buy-side component of market estimates includes only the value of the transactions that are
completed via electronic channels, or the amount of money actually spent for the goods and
services. On the other hand, the supply-side portion encompasses the value of the infrastructure
required, or the amount spent by sellers and their partners to facilitate electronic transactions.

Clearly, confusing these two types of market estimates leads to vast over- or under-estimation. For
example, Gartner estimates that the U.S. m-commerce market will exceed $200 billion by year-end
2005. However, careful attention must be paid to understand the difference between the supply-
side and buy-side components of the e-commerce market, so that it is recognized that this estimate
does not include the more than $7 billion in transaction value for that year.

2.2 Challenges of Market Size Estimates

Definitional issues aside, determining the current and future size of the m-payments market is still a
difficult undertaking, and those using such estimates must understand how the data is derived. This
is critical because:

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 ■ There is very little historical m-payments data from which to project, due to the immaturity of
the market.
■ The data that is available is often fragmented, incomplete and ill defined.
■ Pronounced geographic differences in the m-payments market make it difficult to draw
correlations between various locales.

Because of these issues, which arise due to the nascent nature of the m-payments market, a
multidisciplined approach to market estimation must be taken.

Gartner bases its estimates on four types of data:

■ Historical data from geographies with m-payments systems

■ Direct survey data from consumers, FSPs and vendors
■ Leading indicators of future m-payments use, such as wireless device and mobile point-of-
sales hardware sales
■ Proxy indicators, such as patterns of traditional payment method use

In addition, for financial services transactions, only the transaction fee — and not the value of the
transaction itself — is included, otherwise arbitrary over-estimation would result. For example, it
would not make sense to include the full portfolio value of a stock purchase that was authorized via
a mobile device, but it would be legitimate to include the transaction fee in market estimates.
Similarly, the mobile authorization of such things as fund transfers from one demand deposit
account (DDA) to another are not included.

2.3 Regional Market Size Estimates

Based on these parameters, it is expected that the transaction value of m-payments performed in
the United States, Western Europe and Japan will reach $80 million, $800 million and $900 million,
respectively, by year-end 2002. By year-end 2005, those figures will expand to $7 billion, $15 billion
and $12 billion respectively (see Figure 3).

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 Figure 3. Projected M-Payments Geographic Market Size by Transaction Value

(In $ Billio ns )

35

30

25

20

15

10

0
2001 2002 2003 2004 2005 2006 2007
We s te rn Europe J a pa n North Ame rica
Source: Gartner Research

3.0 Drivers of the M-Payments Market

As with most markets, the growth of the m-payments market will not take place in a vacuum. There
will be many factors that contribute to how rapidly people adopt the use of m-payment systems, but
the most important drivers will be:

■ Overall adoption of wireless data services

■ Network tolerance
■ Appropriate payment models
■ Mobile content/services availability
■ Alternative payment methods

3.1 Adoption of General Wireless Data Services

During the past two years, a great deal of optimism has been expressed about the adoption of
wireless financial services and specifically about the use of m-payments. In many parts of the world,
such as Western Europe, that optimism has been well deserved, as the market size figures indicate.

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 The primary reason that the use of m-payments has grown so rapidly in Western Europe and Japan
has little to do with any difference in the basic financial services industries in those locales; it is
more related to the general adoption of wireless data services in general. Experience in areas that
have adopted m-payments has shown that it is only after members of a society have fully embraced
and understand the benefits of wireless data services (as opposed to simply wireless voice services)
that they will make use of more-specialized and sophisticated applications such as m-payments.

There are several forces that drive this general adoption of wireless data services:

■ Availability of data-capable wireless devices — Data-enabled wireless devices must be

widely available at a cost low enough to make their use ubiquitous.
■ Thoroughness of carrier network coverage — If wireless data networks have too many "dead
zones," users will not utilize them. Users are especially sensitive to issues surrounding loss of
connectivity when using devices to make financial transactions.
■ Availability of compelling wireless content and applications — Although the novelty of
wireless data services can attract new users, it will not see long-lived acceptance unless it can
deliver true value and perceived benefit.
■ Cultural and social norms concerning the use of wireless devices — The prestige
associated with using wireless devices and society "rules" for their use in public can wield great
control over how rapidly wireless data services are embraced. In addition, current trends toward
an increasingly mobile workforce will play a role.

3.2 Network Tolerance

The frequency with which a data communication is disrupted or fails to reach completion will
continue to have a direct impact on the willingness of buyers and sellers to accept an m-payment
channel. They may be willing to put up with occasional lapses in coverage and completion with
wireless voice calls, but when dealing with the transmission of a financial transaction, such as an m-
payment, lenience is slim.

In 1998, an average of 10 percent of all wireless calls in the United States were accidentally
"dropped;" by 2002, that average had declined to approximately 5 percent. In Western Europe and
Japan, the 2002 average also remains around 5 percent. Although this represents a significant
improvement, it still falls short of the needed mark.

Before there can be any hope of rolling out widespread m-payment systems, vendors and carriers
will need to make sure that lapses in communication are very infrequent and, in the event
communication is disrupted during a transaction, the underlying infrastructure and applications are
resilient enough to "rebuild" the entire transaction once connection is re-established. Of course, the
vendors and carriers must also ensure that this resiliency completely eliminates the possibility of
double charging for those transactions.

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 3.3 Appropriate Payment Models
No m-payments market stands much chance of attaining any kind of maturity and use if the
available payment models do not match the needs of the market stakeholders. Exactly which model
types are brought forth and succeed depends on their ability to achieve a balance of mutual benefit
for four key stakeholders:

■ Customers will only adopt a particular payment model if it is simple and convenient.
■ Wireless carriers are naturally supportive of methods that enable them to be more than simple
transport mediums gleaning fees for the transactions.
■ Merchants prefer models that simplify their ability to initiate transactions with customers and
receive payment from the financial networks. (Throughout this report, the term "merchant"
refers to any kind of content, product or service provider.)
■ Financial networks have a primary interest in assuring that, no matter what types of models
emerge and gain popularity, they are able to effectively interface with those models and support
them to ultimately "own" the transaction.

Admittedly, there are other stakeholders in the m-payments arena, such as device manufacturers
and regulatory bodies, but they can be considered facilitators of the various transaction models.

Based on the needs and roles of these stakeholders, Gartner has identified four general m-payment
models. These models are meant to describe the important roles and relationships of the
stakeholders and do not necessarily illustrate the intricacies of the various payment and transaction
flows/sequences (see Figure 4).

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 Figure 4. Gartner's General M-Payment Models

Cus tome r Ca rrie r MeConte

Conte nt
rcha nts
nt
A PProvide
rovidersrs

Fina ncia l
Cus tome r Ca rrie r
Ne tworks
MeConte
Conte ntnt
rcha nts
B PProvide
rovidersrs

Fina ncia l
Cus tome r Ca rrie rsrs Me rcha nt
Ca
Carrie
rrie rs Ne tworks

Fina ncia l
Cus tome r Ca
Ca
Carrie
rriersrsrs
rrie Inte rme dia ry
Ne tworks

D
MeConte
Conte ntnt
rcha nts
PProvide
rovidersrs
Source: Gartner Research

Model A represents the simplest, "walled garden" approach, which is being embraced by many
wireless carriers. In this model, the customer purchases content directly from the carrier and the
carrier serves as the sole provider of the content or operates as the "storefront" for other
merchants. The key to this model is that it is an entirely closed system, and any purchase made by
the customer is invoiced directly to his or her monthly wireless bill. Carriers typically do not wish to
acquire the financial risk associated with facilitating high-value transactions, so the value of content
is usually limited by the carriers to less than $10. The content delivered is also predominantly digital
in format, such as special handset ring tones, electronic games or alerts, such as daily horoscopes
or weather reports.

The walled garden model accounts for the vast majority of m-payment transactions, and will enjoy
continued adoption by customers and carriers well into the future. Although other models will also
gain popularity, more than half of all m-payment transactions will be invoiced directly to the
customer's wireless bill through 2007 (0.8 probability).

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 Model B can be considered the "high-value garden" approach, which is emerging as carriers
determine to provide new types of nondigital content and content that valued greater than $10.
Rather than accept the risk involved with allowing customers to purchase high-value goods and
services and pay for them via their wireless bills, some carriers are choosing to accept payment
through the traditional financial networks. For example, a customer can purchase MP3 music files
for wireless download and pay for them using a DDA or current debit or credit card account.
Although this enhances the convenience to the customer, it requires the carrier to create more-
complicated customer enrollment programs (to obtain DDA or current information, for example) and
establish relationships with banks and external payment processors.

Although the high-value garden model is a natural extension of the walled garden model, its use will
probably be much more limited, especially in the long term because:

■ Many carriers do not have the desire, tools or financial relationships needed to manage this
type of credit-intensive model. Simply establishing the credit-worthiness of a customer during a
transaction adds a degree of complexity and expense that the average-revenue-per-user-
sensitive carriers shy away from.
■ As the number of merchants multiplies during the next 18 months, they will opt to align
themselves with intermediaries to reach customers of multiple carriers.
■ Customers will become dissatisfied with restrictive "garden" models and gravitate toward
models that provide access to a greater number of merchants.

In the end, this model will survive in the hands of only those very large carriers willing and able to
create a walled garden offering the variety of content analogous to that of America Online.

Model C very closely resembles the way most PC-based online shopping and payments are
transacted. With this "buy direct" approach, the customer contracts directly and separately with
each merchant, who in turn must deal with the various payment processors. And, if buy direct
merchants are to have access to a broad range of customers, they also have to ensure that they sell
through multiple wireless carriers. In this model, the wireless carriers are mere "bit pipes" and are
excluded from any revenue-sharing of the payment, just as landline carriers are not a part of PC-
based Internet payments. The mobile version of the Amazon.com Web site serves as a good
example of how this model can operate.

There is a subtype of the buy direct model that is worth noting. In that subtype, the customer
contracts directly with the merchant, but one of the payment options offered by the merchant is
premium, reverse-billed short messaging service (SMS). The carrier still does not "control" the
content, but the process is similar to the walled garden because the payment is charged to the
customer's telephone bill. An example of this type of direct billing for digital content can be found at
this site for downloading video clips: www.classiccomedy.net/about.asp.

North American customers and vendors will more readily embrace the buy direct model because
they are most accustomed to the PC-based online shopping model. This will also be facilitated as
online vendors continue to create mobile versions of their Web sites. However, this model does not
work well when a wide variety of carriers, merchants and financial networks are involved. For
example, for a merchant to serve many customers, it may need to operate well through the Verizon,

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 Sprint PCS and British Telecom carrier networks, be able to process payments through the Visa,
MasterCard and American Express networks, as well as through direct debits from many banks. As
the number of carriers and payment options increases, the direct buy model grows less feasible for
all groups involved.

Model D describes the way many types of m-payments can be controlled and routed by an
intermediary. With this "mediated" approach, many of the difficulties found in the other models are
mitigated. Instead of requiring customers, carriers, merchants and financial networks to establish
working relationships with each other, an intermediary serves as the broker, forming the needed
alliances and connections. This intermediary role need not necessarily be played by an independent
entity, however. For example, a bank, merchant or even the carrier can perform the intermediation.
The important point is that this role serves the purpose of enrolling the many target customers,
merchants and financial networks so that interoperability limitations and the number of required
relationships are minimized.

This model, in which an intermediary becomes the "glue" that facilitates commerce between all
interested parties, will account for more than 50 percent of all nonmicro m-payments by year-end
2006 (0.8 probability). It still requires considerable enrollment efforts on the part of the intermediary,
but it provides the greatest flexibility and extensibility.

It is important to remember that these four models represent a simplification of the roles that m-
payment stakeholders can and will play; there are many variations and permutations of these four
types that can develop. For example, carriers and merchants can and will have very complex
overlapping relationships; carriers can create content, aggregate content from other creators and
serve as intermediaries with FSPs. In addition, different types of content from the same provider
may be billed differently, such as when a customer subscribes to a Web site (which may be billed to
a credit card) and also receives daily SMS alerts (which may be invoiced directly to the customer's
wireless bill).

3.4 Mobile Content/Services Availability

Historically, consumers are very slow to make use of a new payment method if it can only be used
at a limited number or type of merchant locations. As a result, user acceptance of any type of m-
payment method will be directly controlled by the list of merchants at which it can be used.

One key is the total number of member merchants; presumably, the greater the number of
merchants, the greater the likelihood that target customers will make use of m-payments. However,
the type of merchants that are subscribed to or compatible with a particular m-payment system is
just as important as the number. For example, providers that are aligned with the needs of a mobile
society, like taxis, ring tone providers or theaters, will attain the majority of m-payment transactions
through at least 2005 (0.8 probability).

Whether a sufficient number of providers participate in the m-payment market can hinge entirely on
one issue: the payback received from enrollment and implementation (that is, "Is demand high
enough to warrant investing in mobile methods?"). If being able to sell via a mobile channel requires
the addition of new point-of-sale-equipment or costly new processing infrastructure, only the

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 largest merchants will even consider it. Schemes that can operate via a simple provider-owned
handset, like the PayBox system, will rapidly propel the number of available merchants.

3.5 Alternative Payment Methods

Within any given locale, the m-payments market will be driven and controlled by the prevailing
payments infrastructure, be it cash-based, card-based or something else. E-payment
infrastructures range from entrenched systems in some areas to virtually nonexistent ones in others,
and there are differences in the nature of those systems where they are well established. The state
of the e-payments infrastructure will highly influence the development of wireless payment systems.
In developing parts of Asia, mobile e-payment ventures face thin competition from underdeveloped
and high-cost, wired e-payment networks. With the proliferation of handheld devices there, the
wireless channel may quickly become the dominant channel for e-payments.

In contrast, in the United States, the e-payment network has near-ubiquitous merchant connectivity,
has high consumer use and runs on low-cost telecommunication networks. Add in an already high
rate of wired Internet commerce adoption, and the outlook for new payment offerings in the United
States is not as promising as in other locales.

In Europe, card-based payment alternatives are less common than in the United States. Combined
with the fact that mobile Internet connectivity is much more common in Europe, this will contribute
to a much more aggressive growth in the use of m-payments.

However, e-payment systems are not the only payment methods with which m-payments must
"compete"; for widespread adoption, an m-payment system must be perceived as being at least as
convenient and valuable as any other type of payment method, including cash. That is not to say
that in all situations m-payments must supplant cash as the preferred payment method, just that m-
payments will succeed only in those situations in which the alternative methods are slower, less
convenient or provide lesser value.

4.0 Geographic Comparisons

The drivers of the m-payments market exhibit various degrees of development for different
geographic regions. As has already been seen, the result is vastly different rates of adoption of m-
payments by various geographies. The overall m-payments market must be considered as a
collection of interrelated components and drivers, rather than a single technology. The relative
status and maturation of the drivers of the m-payments market across geographies can be gauged
and compared by evaluating the evolution of the five primary drivers we have mentioned.

The m-payments market is slowly emerging in many geographies throughout the world. And in-
depth analysis of all of them is not feasible, so only the major markets — Western Europe, Japan
and the United States — are discussed here.

4.1 Western Europe

The Western European m-payment market is clearly the most mature of the major markets (see
Figure 5).

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 Figure 5. M-Payments Maturity in Western Europe

Wire le s s Data Us e

Lac k o f Alte rnative s

Ne two rk To le ranc e

Me rc hant Availability Appro priate Mo de ls

Po te ntial 2007 2005 2002

Source: Gartner Research

Figure 5 represents how close to full potential the various drivers of the m-payments market are. It
illustrates wireless data services are already fairly mature and used by a significant portion of the
population. In addition, this market has high scores along the "lack of alternatives" axis because
card-based payment systems are not as deeply entrenched as in other geographies. This means
that emerging m-payments systems have a very good chance of reaching full potential in the
coming years. Merchant availability and network tolerance, while not currently at full potential, will
progress steadily between 2002 and 2007.

The greatest challenge to m-payments reaching their fullest potential lies in the creation of
appropriate models. It is true that in many ways the Western European market serves as a shining
example of how m-payments can be implemented and utilized; however, the difficulty of
overcoming geographic differences even within that region will continue to be daunting.
Interoperability between the many carrier networks will be a paramount concern; however, the
continued emergence of a variety of mediated delivery models will drive this market toward its full
potential by 2007.

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 4.2 Japan
The Japanese m-payment market is very similar to that in Western Europe — wireless data use is
already fairly high and there are few alternative payment methods that could prove to be barriers to
new models (see Figure 6).

Figure 6. M-Payments Maturity in Japan

Wire le s s Data Us e

Lac k o f Alte rnative s

Ne two rk To le ranc e

Me rc hant Availability Appro priate Mo de ls

Po te ntial 2007 2005 2002

Source: Gartner Research

The dominance of the NTT DoCoMo carrier network in Japan has contributed to the overall
adoption and sophistication of the wireless data services available in the locale. However, as in
many types of relatively closed systems, it has thus far created a dearth of appropriate and varied
m-payment models; the walled garden model predominates. As a result, the greatest challenge
confronting the m-payment market in Japan will be the creation of models that facilitate greater
flexibility in remuneration methods and choice in merchants.

4.3 United States

Not surprisingly, the m-payments market in the United States is farther from reaching its potential
than those in Europe and Japan (see Figure 7).

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 Figure 7. M-Payments Maturity in the United States

Wire le s s Data Us e

Lac k o f Alte rnative s

Ne two rk To le ranc e

Appro priate Mo de ls
Me rc hant Availability

Po te ntial 2007 2005 2002

Source: Gartner Research

The U.S. market is so far from reaching its potential because:

■ The use of wireless data services is practically nonexistent

■ The more fault-tolerant 2.5-generation and third-generation networks are still in their infancy in
the United States.
■ Effective models that are more sophisticated than the walled garden have barely reached the
stage of feasibility testing
■ The deeply entrenched, card-based e-payment system serves as a barrier to any emerging
payment model

Even so, by 2007, the use of m-payments in the United States will be commonplace. However, it is
very unlikely that the existing e-payments methods will be supplanted. It is most likely that mobile
devices will simply replace the use of an actual plastic card for making purchases, with the
transaction being processed through the existing card-centric networks.

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 5.0 Recommendations
A tremendous amount of interest is being generated in the m-payments arena, with all stakeholders
wondering just what the market will look like as it eventually blossoms into maturity. In general, the
nascent nature of the m-payment market will require flexibility and great attention to even minor
changes in the market drivers.

Stakeholders should plan in these ways:

Carriers

■ Maintain control over mobile micropayment transactions by making it as simple as possible for
customers to make purchases.
■ If a walled garden strategy is pursued, partner with many merchants to make sure that the
"garden is big enough."

Merchants

■ Adopt delivery strategies that minimize the impact on existing infrastructure.

■ Consider integrating with intermediaries to enhance access to customers through multiple
carriers.

Financial Networks

■ Partner with carriers and intermediaries to protect customer access to existing networks.
■ Recognize that m-payments will likely cannibalize many types of card-based e-payments, and
may not be an additional source of incremental revenue.

Intermediaries

■ Focus on building systems that reduce geographical and cross-carrier barriers.

■ Provide customers many options for how m-payments are reconciled, even on a per-
transaction basis.

M-Payment Application Vendors

■ Provide solutions that leverage existing payment infrastructures, and are simple and convenient
to use.

Regulators

■ Continue to monitor use of models and methods that promote complete use anonymity for
potential money laundering schemes. Conduct a written risk assessment of the role that prepaid
mobile devices can play in illegal funds transfers.

Page 18 of 20 Gartner, Inc. | R-18-1818

 ■ Ensure that the same controls and tracking that apply to traditional payment methods are
extended to mobile systems.

Appendix A. Acronym Key

DDA Demand deposit account

E-commerce Electronic commerce

FSP Financial services provider

M-commerce Mobile commerce

M-payment Mobile payment

SMS Short messaging service

Gartner, Inc. | R-18-1818 Page 19 of 20

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