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Wednesday, January 26, 2011

Paradoxes in the notion of mobile billing replacing cash or credit cards

I continue to read supposedly-visionary pieces proclaiming the imminent death of either cash or credit cards, proclaiming that mobile operators will run the banks into the ground. As this wise sage points out, "Banks and credit card companies of the world, be very afraid. The operators will come to take your business away".

Apparently, we'll all be waving NFC-enabled phones at retailers' readers or transport systems' ticket barriers, and can kiss good-bye to the mess of credit and store cards lurking in our wallets.

In fact, we can forget about wallets too - the leather industry is destined for an implosion of catastrophic proportions. The coin industry is, similarly, quaking in its boots, seemingly scared of the "truth" as peddled by the all-knowing T Ahonen and others.

We have, of course, all the reference sites we need, with Safaricom's impressive M-Pesa mobile money platform, and NTT DoCoMo's Felica NFC-style functionality. And of course, the rumours suggest that the iPhone 5 will be NFC-enabled.

So this must all be true.

But just for the sake of argument, and being disruptive, let's have a look at some contrarian observations:

  • 70%+ of the world's mobile subscribers, and essentially all those who are "unbanked", rely on prepay. The most typical way to top up prepay accounts is with scratch-cards or vouchers. Which are usually paid for with cash.
  • There's also quite a lot of prepay credit that's bought with the help of bank cards, at an ATM machine. Probably more, in fact, than we're seeing bank card payments substituted by phone payments.
  • The average mobile prepaid credit balance is something like $5 (much lower in developing countries) and is frequently zero. Not idea for doing your shopping, or even buying a coffee.
  • Even some of the most enthusiastic NFC-promoting operators don't believe in the idea that customers will charge purchases to their phone bill or prepay accounts. They're providing hooks so that they can funnel payments to the user's choice of credit-card account, Paypal or another source of funds. Few customers want a fridge or airfare appearing on their bills at the end of the month. I had a recent conversation with a senior exec in one of the most NFC-friendly operators, and his view is that the bill is fine for small digital goods, but not major purchases
  • Governments rather like cash and seem unlikely to want to permit or encourage its death. It's a bit difficult to do quantitative easing via mobile phone.
  • In the SafariCom example, M-Pesa accounts are distinct from the mobile phone airtime account. It's basically a bank with a mobile-phone front end. Which makes a lot of sense, especially for the "unbanked" who would otherwise have cash stuffed under the bed & would be unable to make payments. But it's not the mainstream view of a "mobile wallet" substituting for cards or cash in developed economies.
  • There are no "payment portability" or "mobile banking portability" laws yet. Given that most (all?) operator mobile payments linked to an access account, users unlikely to lock themselves in & embrace huge switching costs when they want to churn phone provider. Obviously operators want to reduce churn, but assuming your customers are gullible and stupid is not a longterm winning strategy. Loyalty isn't the same as lock-in.
  • DoCoMo has spent rather a lot of money to get its payment solution accepted - including a near-$1bn investment in Sumitomo Mitsui Card in 2005 and the purchase of a stake in Lawson's convenience store chain. I don't see many other telcos stepping up to the plate with that sort of cash or serious intent.
  • Central banking stats generally show "currency in circulation" continuing to rise, despite the presence of many alternative large and successful payment mechanisms such as debit cards. The chances that mobile payments will make a dent? Almost zero.

Taken as a whole, my view is that mobile payments have a very important role to play in markets like Kenya, where there are significant numbers "unbanked", big problems in distributing money such as salaries (eg Afghanistan) or Japan where a combination of culture (eg trusting the telcos) and heavy investment by the likes of DoCoMo can make a big impact.

I can also see some payments being facilitated by mobile phones (and in some cases operators) and being directed to existing channels such as cards, bank accounts, Paypal or iTunes.

But this clamour that "cash is dead", "the wallet is dead" or "credit cards are toast" is complete nonsense, now and for the forseeable future. I'd be more willing to believe that retina-scans, DNA authentication, telepathy or a William Gibson style direct neural interface for payments will happen first.


Martin Geddes said...

What if value shifts from transaction-enabling to passing of customer data (e.g. a token allowing merchant to profile/reach customer) at point of sale? Risk to existing systems of payment is not displacement, but envelopment. "Fall back" to credit card/cash always available.

Dean Bubley said...

Highly unlikely.

Telcos are probably the worst-placed organisations to do this.

If it was a winner, the banks & credit card companies have far better, more reliable, more extractable data on you than a telco.

It doesn't happen - which is why you get the retailers like Tesco doing it themselves via loyalty cards.

Far more likely for Amex or Tesco to sell data to the telcos, rather than vice versa.

I could see Apple or Google doing this, though.

Marek said...

Hi Dean,
I'm sorry, but majority of your arguments are at least 'missing target'.

I will referr to only one about doubt, that governments love cash.
Maybe you missed in Tomi Ahonen piece note, that swedish parliament thinks not if but how to replace cash.

From other side one of 'euro-provincial', our (polish), government just announced few years plan to reduce cash operations/turnover by introducing variety of legal and administrative actions to increase number cashless transactions.

Also, please note, as EU citizen, that there was introduced (implemented in all member countries in 2009, yet except Poland :( ) serious EU legal framework: Payment Services Directive and similarly (forgot detailed name) about 'electronic money'.


Dean Bubley said...

Hi Marek

Thanks for that

I've seen no references to the Swedish *Parliament* or indeed central bank considering moving to a cashless position.

According to various articles, a former member of Abba and some Unions have made some noise about it. See - http://www.numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=13953

That is not "the government". I know Tomi has a bit of a bee in his bonnet on all of this, but I certainly wouldn't cite him as the paramount authority.

In any case, the article refers to debit/credit cards, not phones.

As far as I can understand from this table, the Polish government hasn't had much success at reducing cash in circulation either:


jan.werding said...

Hi Dean,
Thanks for all your refreshing comments.
I certainly agree with your main points on “mobile money”. But the intentions of MobeyForum, GSMA (more wishful thinking ?), VISA, Mastercard and others target a replacement of the plastic card platform and not a new addition to the money supply. A real-time connected platform (i.e. a mobile terminal) may allow better security, facilitate replacement of cash transactions etc. GSMA people seem to believe that this means a profitable business opportunity for mobile operators. Banks do not want to destroy their tight margins (on debit payments) with a new cost item/ fees to operators.
The technology of choice (NFC) however opens up for new services on the same platform, such as ticketing. GSMA, ISIS (Vz, T, T-M) and others of course favor a solution where services “reside” on the SIM card, controlled by operators, while VISA prefers the microSD solution. Existing services in Europe, such as SMS parking, are mainly handled by independent intermediaries and operators are mostly not even involved.
Isn´t it reasonable to assume that contactless/NFC payment transactions will gradually increase their share of physical payments?
Jan Werding

Marek said...

Hi Dean,
Replying for your comment:
I confirm I assumed diretcly what Tomi wrote about swedes plans with no checking (it wasn't that important to me).
Anyhow subject was raised.

As for Poland, I mentioned, that the new governmental plan for increasing cashless operation was only just introduced (jan'2011), so it is hard to expect any results so far.
Statistics you referr to are just good proof or evidence, that there is a lot of space for improvements.