Mobile payments are frequently discussed and written about, but all too often it is without specificity or exactly "how" mobile payments will work and why. The mobile payment opportunity for the wireless industry, from a simple back of the envelope calculation, is significant. The payment card industry, which is dominated by banks, collected $48 billion in interchange fees alone in 2008 – these are the fees paid by merchants to process card payments.. This is roughly $15 of potential monthly ARPU based on 270 million subscribers.
Today's payment value chain is already well defined and this $48+ billion excludes the wireless industry. How the wireless industry creates and captures value in payments requires an alternative perspective and a look at new payment networks that can redefine the value chain, integrate directly into the wireless ecosystem and deliver better, simpler and more secure payments.
The wireless industry is, without a doubt, one of the most interesting and hottest sectors in the U.S. economy, with extraordinary leaps of progress reported almost daily. Mobile phones are getting smarter, running all sorts of applications to the point where they are more computer than telephone. Simultaneously, the wireless networks are expanding coverage and transmitting increasing amounts of voice and data traffic – and this is before the quantum expansion of bandwidth (and capital) associated with 4G technologies.
In short, it is a great time to be a mobile customer, but to be a supplier in the mobile ecosystem may be a different story. The value created in the industry quickly shifts from the corporate coffers to the consumer. The high-fixed, low-variable cost structure of the industry and the lowered switching costs enabled by number portability has commoditized the core voice traffic. This dynamic threatens to do the same with data traffic as competition will likely continue unabated. Again, it's great to be a customer.
On the device side, technological obsolescence is a growing and real risk. The continuous flow of new devices and capabilities – think iPhone, Android and the flood of apps – that promise to remake the industry and attract (or steal) new customers pose enormous capital allocation challenges. Each new device often requires a carrier-funded subsidy to meet consumer price points and, on top of that, require marketing investments that begin to resemble the launching of a Hollywood movie with potentially the same risks. Is it going to be a hit? A flop? Can I do a sequel?
The prepaid market is also not immune to the forces afflicting the larger postpaid market. As the prepaid segment has evolved, it too has become more competitive. Some carriers are hitting very aggressive price points and others are introducing new combinations of plans and devices to attract and retain subscribers.
Looking back over the last 10+ years of CTIA data, some interesting facts emerge, which then lead to a very big question.
The average local monthly bill has been essentially flat over the last six to seven years while the number of minutes has skyrocketed.
Subscribers largely fueled the revenue growth to create the industry as it stands today. Recently, data revenues have begun filling in as aggregate subscriber count plateaus. However, like talk time, data revenue will fall victim to similar marginal cost pricing, but this time around, there are not 200 million untapped subscribers like there were in 1999.
The Big Question:
So, the big question is: Where is the revenue going to come from to fuel the significant investments required to remain competitive, be it 4G infrastructure or the latest device, or likely both? Adding to the uncertainty is the ongoing encroachment of new non-traditional competitors that are shifting the competitive landscape and delivering disruptive technologies such as voice over IP, broadband Wi-Fi and a myriad of device "apps."
An area that is often mentioned as the answer to the industry's future revenue is mobile payments and commerce. These discussions, at least the ones I know of, all presume an end state of mobile commerce from which everyone is going to make money. It is somewhat reminiscent of the saying, "Do you want to make a million dollars? First, start with a million dollars."
The only area of mobile payments with any measurable volume thus far is the market for low-ticket digital content where the amount is charged to the mobile phone bill. This is a segment that came together quickly, and where carriers presumably make a decent profit, but it is an inherently constrained niche owing to the underlying costs, revenue cycles and monthly charge limits.
iPhone and Android can turn any song you already have into a ringtone with a click, threatening the revenues from one type of product sold "successfully" through today's mobile "bill-to-carrier" commerce models. New products will fill in, such as digital sushi or poker chips, and carriers will continue to profit. Charging products to the mobile phone bill, however, is not going to penetrate the competitive, massive market of payments. Nor will it morph into a broad-based world of mobile commerce where seamless blending of hardware and software enable a wide range of payments with ease and security.
The large market for payments, which we often associate with credit and debit cards, and to a lesser extent paper checks, is dominated by the banking sector. Individual account issuance, transaction routing and merchant acquiring are enormously profitable with comparatively little balance sheet, volatility and risk.
For carriers, this large market for payments is an untapped arena where they can create value for subscribers and generate recurring service fees. For device OEMs, payments represent a brand new competitive frontier where winning designs and engineering will capture both the imagination and market share.
Card companies raked in approximately $48 billion in interchange fees from retailers and service providers in 2008, a 14 percent jump over 2007 (source: Reuters 6/4/09). These interchange fees exclude any related account or service fees and is equal to $14.81 in monthly ARPU ($48 billion/270 million subs/12 months). Not all of that is up for grabs. Interchange is spread across card issuers, merchant acquirers and the associations, e.g., Visa and MasterCard.
The banking industry's efforts around RFID stickers are an effort to circumvent carriers and OEMs in anticipation of any potential consumer demand for "mobile" payments. Likewise, the bill-to-carrier model and past efforts such as Simpay were attempts by carriers to unilaterally get into payments. Simpay was unsuccessful for a range of reasons and, as discussed above, the existing bill-to-carrier model is limited.
The banking sector is well entrenched and extracts significant value in its role in payments. The massive, multi-trillion dollar retail and service industries fight to keep cost of payment acceptance down and the consumer votes every day on what method of bank-provided payment they choose. These three constituencies combine to fully define and occupy the payment market and its value chain. The ability for parties in the wireless industry to profitably penetrate the existing payment value chain is, consequently, limited. To a very large extent the "pie" is fixed and all the slices are spoken for. Why would anyone accept higher prices, concede fee revenue or change behavior?
It is in this large market that mobile payments will succeed, or not. For it to succeed, the payment value chain will need to be disrupted with the mobile companies partnering with payment providers that can alter the economics of the transaction and improve convenience and security. This will provide the necessary catalyst to drive change and the incentives to support massive adoption. Partnering with an alternative, non-card based payment network is the most likely scenario for carriers and OEM's to create and extract value in payments, and disrupt the existing hegemony that protects the payments sector.
Conrad Sheehan is the founder and CEO of mPayy.