Where are Mobile Payments Heading in Europe?

The hype around mobile payments is increasing, once again. What is really happening in Europe? Is the real progress developing according to the hype and expectations? The fact is that globally there have only been a handful of commercial implementations of mobile contactless payments. Why isn’t the commercialisation happening any faster?

Let’s take a step back to the concept of mobile payments. There are two types of mobile payments: local and remote. Simply, local payments mean payments taking place in the immediate vicinity through a contactless card integrated in a mobile phone. In remote payments, the actual payment takes place remotely over the networks. Does the consumer care which method is used? Not really, as long as it works and the user experience is consistent. But the requirements for the mobile handset – and thus for the ecosystem – are different. Therefore, these two streams are developing rather separately and at different speeds.

Mobey Forum has released two white papers during 2010. One of these is providing a ‘cookbook’ for banks wishing to implement local payments, while the other gives guideline recommendations for implementing remote mobile payments. I will include some of the key findings of these industry papers in this article. The original whitepapers are available on the Mobey Forum website.

Local Mobile Payments

Nordea, Visa and Nokia performed the first contactless mobile payment pilot in Europe – and in the world – in Lahti, Finland in 2003-2004. After this, the radio-frequency identification (RFID) technology developed further and was re-named as near field communication (NFC). The first NFC payment pilot took place in Atlanta, US in2005. Since then there have been more than 100 pilots globally. As with all new technologies, market introduction usually happens in phases and NFC is no exception in this regard. The phases of NFC introduction are:

  1. Technical testing 2005-2007.
  2. Consumer acceptance testing 2006-2008.
  3. Ecosystem testing and commercial rollouts 2007-present.

The technology works and the pilot results have revealed the consumer potential. More than 80% of pilot consumers like the NFC payment and ticketing concept, but a broad acceptance infrastructure is needed to encourage uptake. In addition to existing infrastructure, transit systems have a large and frequent user base, which has made them a good starting point. However, transit solutions would need a little more standardised approach. One visible key trend has been the increasing use of general payment solutions for transit. Looking at it the other way around, several transit payment solutions are used for general-purpose payments.

Key lessons learned so far include the need for a rather broad service offering. Payments and transit ticketing alone are not enough to motivate users and form a successful business case. Customer care processes must also be well considered and communicated to customers, and must be easy to use. Service launches and replacements must be smooth and comfortable experiences. Another important lesson is that transport and banking applications must be multi-operator for mass-market acceptance, i.e. the customer must have the freedom to use the services independently of the mobile operator relationship.

Today’s pilots mainly seek to test ecosystem-level co-operation between stakeholders and the business model construction. The business case for each of the stakeholders depends largely on the selected business model, and how the consumers adapt the new services and how much they are ready to pay a premium.

Commercial Services

Although there have been a large number of pilots, there are only a few commercial implementations so far. The first commercial launch of a NFC payment service took place in China in 2007, followed by launches in Germany and Austria during 2008. All of these included only public transport ticket purchasing and related services. A commercial launch occurred in Malaysia in April 2009. In the Maybank and Maxis service, there are multiple services where customers can use the mobile payment option.

The latest addition to the number of commercial services is the Payez Mobile project in France. After three years of planning, the project has now finally launched in Nice. BNP Paribas and Crédit Mutuel-CIC provide the mobile payments. The project aims to entirely cover France by contactless mobile payments. The original aim was to launch mobile payments nation-wide during 2008. This was later changed to Provence and 2009, and now during 2010 the project has finally launched – but only in the city of Nice with around 3000 customers.

The French project is the first one based on a collaborative approach. Most of the banks and operators in the country are participating, and the target is to create an ecosystem where the consumer can choose the payment provider and to change the applications independent of the telecommunications service provider. Another aim is to have a real multi-application solution, which makes the construction very complicated. The fact that it has taken much longer for the French to make it work than originally expected confirms this. Currently Orange’s communicated target is to have 100,000 NFC users by 2012 – which is still not the whole of France, and not even the entire city of Nice. When announcing the Nice launch, French mobile operator group Association Française du Sans Contact Mobile (AFSCM) has projected that about 500,000 subscribers could be equipped with NFC phones by the end of 2011.

We are hearing news of several other pilots in Europe. The latest announcement came from the Netherlands, where the major banks and telcos announced that they have signed a letter of intent agreeing that they will form a joint venture for the purpose of offering mobile payments at the point of sale. We have heard about joint ventures before – you may recall the case Mobipay in Spain. That didn’t quite take off because, as is the usual challenges with joint ventures, when it is everybody’s business, it is nobody’s business. Naturally a joint venture is one way of solving the challenge – time will tell whether the Dutch will succeed in doing it.

In Spain laCaixa and Telefonica are launching a pilot project in Sitges. Over 1500 consumers in 500 retail locations use mobile as a payment method. The project is preparing for commercial launch by validating the registration and activation processes, user experience and interest of consumers and retailers. In this project, the PIN code is given at the point-of-sale (POS) terminal for payments over €20. In the French project the consumers insert the PIN code in the handset and do a ‘second tap’ to the POS for larger amounts. For cross-border interoperability the consumer experience will have to be similar across Europe and preferably also globally – the future will tell which process will become predominant. Forty percent of the purchases in the Spanish pilot have been bigger than €20, thus requiring a PIN code.

Where do consumers want to use mobile payments then? Surprisingly, the first results from the Spanish pilot show that over 50% of these payments are done in supermarkets. The average of over-€20 payments is €60. Thus, it is not only for fast food, transit and other quick service transactions. Consumers seem to love it and merchants seem to want it.

Why Has it Been so Difficult and Slow?

There is a three-dimensional interdependency in the collaborative business model for mobile financial services. This interdependency means that these three parties – banks, operators and merchants – would need to come to a positive business decision based on their internal business consideration simultaneously. This is a primary requirement for this model to flourish.

Pilot programmes consisting of co-operation between one bank and one operator have frozen in several other countries due to the unavailability of so-called single wire protocol (SWP) handsets. What makes this SWP then so specific? It is a technology standard that has been pushed through, mainly by mobile network operators and card manufacturers, trying to ensure that only SIM (UICC) could be used as the storage for the payment credentials. There are good reasons for this – it would allow mobile operators an excellent control point position in the value chain, which they are hoping to leverage to increase their average return per user (ARPU). It would also make the market for the chip manufacturers to sell new expensive chip cards to all GSM operators in this world.

But will this enable mobile payments to grow? That’s not what we see from the market. Forcing the market to only one solution is forcing a monopolistic market condition, which has never enhanced the development of a free market.

Furthermore, why aren’t those SWP handsets already on the market? The standards were agreed previously. According to Nokia, they cancelled their SWP handset due to lack of demand. It is understandable that handset vendors sell and manufacture based on orders. Why weren’t there orders then?

In the SWP-scenario mobile operators will have to invest in new UICC cards. None of the currently installed base of SIM or UICC cards is compatible with the SWP phones. These UICC cards are expensive. So far it has not been possible to agree on revenue and cost sharing in such a way that it would provide an acceptable business case for both the mobile operator and bank. Depending on the existing market conditions, contactless mobile payment doesn’t often bring the bank new revenues.

In addition, it may be cannibalising the existing card business. Furthermore, banks usually want to serve the entire market. If launching a service requires making a separate deal with every single mobile operator on the marketplace, then managing the business becomes challenging for banks. Thirdly, as long as banks carry the payment transaction liability, they may want to control the end-to-end security of the payment solution.

To make things even more complicated, not only banks and operators are required to work in tandem. In order to provide mass-market services, there needs to be a widely accepted infrastructure in place. This does require that merchants see the value of contactless payments. Today the European retailers are mainly interested in driving the interchange fees down. Many of them have seen mobile payments as one possible way of reaching this goal. Does this make driving this through any easier in banks? Not really.

Future Outlook for Local Mobile Payments

During the past year, an alternative form for the credit storage on a handset, the Secure Element (SE), has rapidly expanded. Using memory cards (SD Card), the handset-based secure elements, or stickers, to quickly cover the market need have become a real option and part of strategy in many banks. The Mobey Forum whitepaper ‘Alternatives for Banks to Offer Secure Mobile Payments’ provides clear guidance for those banks wishing to enter the mobile local payments market. It does explain the value chain options for banks and the impacts of selecting each of these SE options.

Remote Mobile Payments

What is the status in remote mobile payments? The good news is that this area is progressing rather quickly. However, most of the remote mobile payments today take place through premium SMS, PayPal or equivalent, despite the fact that there are existing payments networks widely available. Yes it has been possible to make a credit transfer through your mobile for more than 10 years – but the usability has not been designed for an average consumer. The level of user-friendliness expected by today’s mobile consumer is much higher. The Mobey Forum has worked on this challenge, and provided guidelines for linking the existing payment mechanisms to mobile in an easy way.

The Mobey Forum released the ‘Implementation Guidelines for Remote Mobile Payments’ whitepaper in June 2010. This paper suggests that there should be a network of databases linking mobile phone numbers either to account numbers or card numbers. This combination can be done locally at bank level, or more internationally. It is also makes suggestions as to how to develop the interoperability further in the future. The payment industry does believe that there will be a big change in the processing of payments during the next one to two decades. Today payments are processed in separate networks – will the payment processing move to the cloud? What is certain is that the mobile channel will have an even bigger role in the future of payments, both locally and in remote payments.

What is then happening in practice? There are several remote mobile payment projects ongoing in Europe. There is still some level of fragmentation in the pilot projects, but we can already see that these kinds of databases suggested in the Mobey whitepaper are already under progress in several countries. The good news is that there is much less complexity in the remote mobile payments ecosystem.


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