Mobile money takes different forms in Africa, Japan, U.S.

Over the last decade mobile payments have started to become a reality in many markets.  According to the TM Forum, depending on the conditions of the market communications service providers operate in, different value chains and opportunities can present themselves.  Below are excerpts from TM Forum’s Quick Insights Report, “Mobile Money in Action: Exploring the Value Chain” which covers markets ranging from M-PESA in Kenya to the Google Wallet in the United States.

M-PESA in Kenya

Over the last decade mobile payments have started to become a reality in many markets.  According to the TM Forum, depending on the conditions of the market communications service providers operate in, different value chains and opportunities can present themselves.  Below are excerpts from TM Forum’s Quick Insights Report, “Mobile Money in Action: Exploring the Value Chain” which covers markets ranging from M-PESA in Kenya to the Google Wallet in the United States.

M-PESA in Kenya

Perhaps the world’s most famous mobile payments solution is Kenya’s M-PESA.  M-PESA is provided by Safaricom, a Kenyan mobile operator that is part-owned by Vodafone. Vodafone owns the M-PESA solution and licenses Safaricom to use it.  M-PESA is currently operationally run by IBM.

 In August 2011, the Wall Street Journal reported Vodafone earned $21 million through its Kenyan subsidiary, with $15.6 million coming from M-PESA in license fees.  As of November 2011 M-PESA had over 14 million subscribers (out of a population of about 40.5 million, according to the World Bank) and more than 28,000 agents across the country versus around 600 ATMs.

About a third of Kenya’ gross domestic product passes through M-PESA and Safaricom earns more money from M-PESA than it does from SMS – although this is in part because SMS tends to be bundled, free of charge, in the payments system.

M-PESA is operator-centric, working through a SIM toolkit application that sits on all Safaricom SIM cards. To put money on your phone, you walk into an authorized agent, hand over your money, then receive an SMS saying that the money has arrived on your phone. To send money to someone, you go to the pay menu on the phone, look for the person in your phonebook, or add their details, then send them the amount. They get a message saying, in effect, “If you have an M-PESA account, you now have 50 shillings [say] on your phone. If you are not an M-PESA account holder, go to any agent and they will give you the money.”

According to TM Forum’s Quick Insights Report, certain industries suffered from the success of M-PESA, including bus drivers, who were previously often paid by city dwellers to take money back to their home villages each week. Other network service providers suffered too, as many people moved to Safaricom because none of the others operators offered a similar service.  For example, before M-PESA, Safaricom had about 45% of the market share; while today the mobile operator has about 70%.  Other service providers have since launched mobile payments services, but none reach the scope and scale of M-PESA, says the report.

Although it is often perceived that the banks suffered the most from M-PESA, some have gained greatly.   According to the report, all revenues from providing the service go to Safaricom, from which it pays its agents, license fees to Vodafone and other operational expenses. Originally, Safaricom had one big bank account (although it now has a second), with the Commonwealth Bank of Kenya, through which all the transactions pass – the bank provides a sort of wholesale service, from which it too makes money.

In April 2010, the Central Bank of Kenya issued new agent banking regulations allowing banks to engage a wide range of retail outlets for transaction handling (cash in and out) and product promotion (receiving account applications, though applications must be approved by a bank staff). This paved the way for banks to start using M-PESA outlets as a channel.

The final point on M-PESA states that if Vodafone and its partners were building the service from the ground up today, one thing they would include is open application program interfaces (APIs) so that applications, including those from banks, could be plugged into the platform more easily.

A good example of where integrating M-PESA with banking applications would provide savings and efficiencies is bars and shops. Subscribers can use M-PESA to pay for goods in supermarkets and buy drinks in a bar. This is because it massively cuts the cost and time involved in handling and banking cash, as well as greatly reducing the risk of robbery. According to the report, it would be hugely convenient for those running small businesses if they could plug M-PESA into a simple payroll application linked to a bank account to pay staff, without having to enter the information manually into separate, typically web-based software.

Including open APIs could enable unforeseen new services, as well as allow banks and individuals to work in concert with other M-PESA-type schemes, which at the moment generally operate in silos.

 It’s no accident that one of the driving forces behind the European Commission’s thinking on payments is ultimately to enable a single, contiguous payments area for Europe, although that still faces stiff competition from embedded national payments systems, such as iDEAL for debits, which is unique to the Netherlands.

NTT DoCoMo iD DCMX in Japan

In Japan, the mobile money market started more than a decade ago when NTT DoCoMo introduced i-mode phones and their supporting payments ecosystem.

Although there are six or seven contactless card payment systems in the market place, there are relatively few debit and credit cards in circulation; Japan is still a heavily cash-based economy. Japanese people typically go to the cash till, take out substantial sums, pay for things in cash and, in the evening, they go and put what is left back in the bank.

The proximity payments sector is very competitive. The transit companies have a contactless card whose use has been extended to enable people to pay in convenience stores, at newspaper stands, other stores and venues such as swimming pools.

The biggest point about the Japanese market is how DoCoMo has navigated the situation. DoCoMo has about 80 million handsets in circulation with near proximity payment interfaces. To achieve this, DoCoMo decided that the portfolio of services that it would run over the phones would be very wide.  Below, David Birch, director at Consult Hyperion, walks through the DoCoMo value chain.

 “I walk into a shop in Tokyo and buy something with my phone – pay using my DoCoMo iD DCMX credit card, issued by Sumitomo Mitsui bank, which is part-owned by DoCoMo – that is, the operator decided to buy into a bank rather than get tangled up in regulation. In Japan, like the U.S., if you want to issue a credit product, you have to be a bank,” says Birch.  “I walk into a store, I buy a dress for the equivalent of $100. The merchant charge is $2.50, so $97.5 goes to the merchant, the $2.50 goes to the acquirer, DoCoMo ultimately, which has to pay about $1.25 in interchange fees to the issuer, which of course is DoCoMo. Then the issuer and acquirer both pay a card scheme to the scheme manager, DoCoMo.”

This is a good example of a simple, closed value chain similar to M-PESA; as both systems control the entire process. NTT DoCoMo has been successful in introducing a credit product into Japan, which is not a credit-oriented society.

 “In Japan you have a phone with iD [wallet], then there are a number of ‘slots’ that consumers can load different services into – so any bank is free to offer a credit product that fits into iD, although most of them are from DoCoMo, called DCMX. When you buy a DoCoMo phone, they all come with the DCMX product loaded into them and ¥100 of credit, which you can call up and extend if you wish,” says Birch.  “To the consumer, it looks like it’s being done by the operator, although it’s all being done by Sumitomo Mitsui. They probably have 15 million DCMX users active now – it’s gone through the roof, relative to the market norm. So if you marry the product to the mobile properly, like DoCoMo, then the predilection of the customer to use those products soars.”

There are two other very interesting elements to this strategy. Contrary to common perception, it appears- according to a Consult Hyperion blog- that the number of mobile proximity payments made in Japan fell during 2010 (with about 10% of all mobile subscribers making a mobile proximity payment during December 2010, or about 9.8 million users). It seems that consumers found that mobile payments involved pushing too many buttons on their phone and having to wait for software to load. This appears to explain why e-payments continue to be dominated by proximity prepaid cards – except that these payments too appear to be falling.

Prepaid cards are generally only used for public transport and convenience stores as all the other shops also accept payments from the credit facility embedded in the card’s integrated circuit. Most of these other stores also award 3 percentage point rewards for credit-based payments, instead of just 1% that is usual for prepaid transactions. Also, these stores often don’t bother to ask for a PIN entry for credit-based payments.

The second interesting aspect of this Japanese example, and perhaps the more important, is that the Japanese aren’t flocking to buy proximity-enabled phones because they want to make payments, but rather because they enable people to do all sorts of other interesting things.

The most striking example is McDonald’s Club: one out of every eight Japanese are members. Every week their mobile phone receives a voucher for extra fries or a free Coke. Club members go to McDonald’s, place their order including the goods covered by the voucher and tap their phone on the terminal. Within 300 ms, the coupon is transferred from the phone to the PoS terminal, where it is instantly accounted for. The terminal then requests the balance, which is paid from the phone.

Google Wallet and Isis in the United States

When Google first looked at providing payments services, it discovered that it’s hard to make money from payments if you aren’t already part of the established processes, something that NTT DoCoMo realized and hence the way it went about introducing credit – through well-established channels.

Secondly, Google also understood that while payments are an essential element of the m-commerce process, the best way to make money is through the other services that can be offered around them, such as vouchers, loyalty programs and promotions.

The Google Wallet, launched in September 2011, uses near field communications (NFC) standard and the economics are essentially the same as if it were a card-based payment. The value chain is not changed by the fact that the transaction is taking place via a mobile phone, but it runs in parallel with a new marketing and promotion value chain, with the payments people capturing the added value. The piece Google is building out is all around the consumer engagement, distributing the coupons, enabling consumers to redeem those coupons in retailers through a single tap of their phones on an NFC-enabled PoS terminal and completing the payment in one go.

The launch partners for Google Wallet were Citi, MasterCard, First Data and Sprint.  To use Google Wallet, a user opens up the application on their phone and enters their 16 digit card number, as well as a small number of identifying features like the year they were born and their ZIP code. Citi then fulfills the request, putting that credit card into the Secure Element on the phone, and the card is now visible in the Google Wallet application, and the consumer is ready to pay.  If a customer does not have a Citi MasterCard, then there’s a Google prepaid card. The subscriber can link any card they have, regardless of the brand or issuer, to fund the prepaid account.

But, how do the operators make money out of the Google Wallet value chain? The short answer is they continue doing what they are doing already, with the economic incentive being just the same as for other phones – getting people to sign up.

One of the big questions that has been asked around mobile money is could operators use their charging and billing systems for payment of goods (regulation allowing), transferring their success at selling digital goods into payments for physical goods? It would seem that the answer is no: being able to take 30% of the cost of a ringtone, for instance, is one thing, but, as many have discovered to their cost, disrupting the existing payment chain is all but impossible.  While customers don’t even realize the operators are taking a 30% cut delivery of a ringtone, neither they nor the merchant are prepared to pay an extra 30% for being able to make or accept payment for a candy bar through a mobile phone.

 “Let’s examine the value chain, so we understand the magnitude of it. I’m walking down the street. I get a message on my phone that says ‘it’s two for one at Taco Bell’. I go in and order whatever, tap the terminal to redeem the voucher or coupon and pay. It costs $5 and I walk out. How much money did the bank get from that? The answer is $0.21,” says Birch.

According to Birch, this $0.21 profit is due to the Durbin Amendment, which was an addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  The amendment came into force on October 1, amid much controversy, capping the interchange rate at 21 cents plus 0.05% of the transaction, with the possibility of an additional cent if certain criteria are met.

“There are a lot of mouths to feed from that $0.21,” says Birch. “How much did Taco Bell pay Google for distributing the offer information/coupon – I’d say about 10 times more than the bank got. So the telcos and the banks are arguing about splitting the difference between a merchant service charge of between 2.75 % and 2.8%, while Google is charging 8 or 9%– and for getting a customer in the door, the retailer will always be prepared to pay.”

Google is not sharing revenue with its launch partner, Sprint, which arguably is doing little more than acting as an NFC-enabled phone distribution channel for Google Wallet.

As one observer remarks, “Whether it will enable [Sprint] to sell more phones or a different kind of phone so they can change their product mix remains to be seen, but probably they are hoping to attract more people to becoming smartphone users. In the U.S., right now, 72 to 73% of the phones sold by telcos are smartphones, and it goes up a little bit more every month.”

Isis was formed on a different basis. It is the joint venture initiated by AT&T Mobility, T-Mobile USA and Verizon Wireless, with partners MasterCard, Visa, Discover and American Express. It will launch in 2012, and has the clear intention of making money from mobile payments by owning the mobile wallet, albeit relying on established payment mechanisms, and the economics and scale they bring.

Whether one model prevails over the other remains to be seen, it seems likely there is room for both models, although one might work better than the other in certain markets. ABI Research reckons mobile operators will own 75% of electronic wallets next year, but predicts this will fall to 63% by 2016, if Google Wallet makes an impact and Apple joins the NFC fray next year, as is widely expected.

This article is an excerpt from TM Forum’s Quick Insights Report, “Mobile Money in Action: Exploring the Value Chain.” TM Forum research and publications help the communications and associated industries with every aspect of their on-going transformation and business evolution. TM Forum research and publications are available at no charge to TM Forum members. Non-members may purchase TM Forum’s research and publications through TM Forum’s website at

Annie Turner is Publications Managing Editor for the TM Forum. She has been reporting on the communications industry since the 1980s. Before joining the TM Forum in August 2010, she worked as a freelancer for 15 years, contributing to many British national newspapers, particularly The Times, The Daily Telegraph, Financial Times and international press such as The International Herald Tribune and The European.