How Big are the Opportunities in Mobile Payments?

Observers sometimes are not quite aware of why there now is so much activity and hype about mobile payments, mobile commerce or mobile wallets. As always, the reason for all that activity and speculation is that some rather-large revenue streams now are poised for potential disruption, precisely at the point that many large entities are casting about for brand-new fields to conquer, because their own legacy revenues are declining, or are about to decline.

Consider the revenue streams potentially in play. Interchange fees, the transaction fees paid by merchants to process a credit card or debit card transaction at a retail location, typically are in the range of tow percent of the transaction for credit cards, less for debit cards and a bit more for many new mobile payment services.

Typically paid by merchants, interchange amounts to tens of billions of dollars across purchase volume of nearly $2 trillion worldwide, according to Caribou Honig, QED Investors partner.

There also are fee elements. Credit card issuers essentially make $600 billion in loans. A mobile payment platform could capture some of the interest and fees currently charged by the credit card banks, though there is at present much less interest in this revenue stream, compared to interchange.  The reason is simply the risk of holding those payment obligations.

Google, of course, eschews any interest in interchange or the lending function, and clearly is interested in the advertising and loyalty business. Total ad spending in the U.S. market alone exceeds $150 billion.

Apple, on the other hand, will likely want to figure out how any mobile commerce, payment or wallet operations allow it to create big new device revenue streams.

In other regions of the world, transaction fees also are the primary revenue driver. Globally, for example,  the World Bank forecasts remittances in developing countries was about $349 billion in 2011. The issue for mobile operators and other application providers is how much of that could be shifted to mobile means. 

The reason that matters is the revenue associated with transaction fees to send money from one person to another, in country or across borders, using the mobile device.


In India, for example. remitting money using India Post costs five percent of the amount sent, and then many respondents reported another one percent in addition for bribes, tips and other indirect costs. Other remittance channels also represent out of pocket costs. 

What Might Apple do in Mobile Wallet, Mobile Payments or Commerce?

Apple is in some ways the contestant in mobile payments or mobile commerce that probably would strike many as the most likely to take an unusual path. Whether Apple thinks it is important to do so probably is the bigger question.

Up to this point, Apple has shaken up device markets. Unless Apple changes tack for the first time, it is likely to approach the whole subject of payments and commerce as a feature that drives sales of more devices.

That arguably means Apple faces more challenges than PayPal, Intuit or Square, for whom transactions directly drive business models built on transaction fees, or Isis and Google, which see advertising and marketing as the revenue model.

For PayPal, Intuit and Square, the revenue upside is immediate, and tangible. When merchants use their mobile card readers in conjunction with their own smart phones or tablets, PayPal earns a fee of 2.7 percent of the purchase price for all types of credit and debit cards  Square earns 2.75 percent of the transaction amount.

For Isis and Google, which eschew such fees, the revenue model has to be created on something else, hopefully advertising and promotion revenues in the form of loyalty offers, targeted advertising or other marketing services provided to third parties. Isis partners and Google sell devices, to be sure, but the revenue model is built on services or advertising enabled by the use of those devices. Mobile transactions create the opportunity for those revenue streams, but transactions, as such, are not the revenue model.

Apple always has taken a different approach, namely creating services and selling content so it can sell more devices. That indirect monetization approach is more akin to what Isis and Google hope to accomplish, and far harder to create, in some ways.

The volume of all types of mobile payments will top $200 billion by 2015, up from $16 billion in 2010, according to research and advisory firm Aite Group. So the direct, transaction fee approach is highly quantifiable.

The aggressive response by MasterCard, Visa and American Express in the mobile wallet and mobile payments businesses is is the latter case an effort to protect existing revenue from market share losses to PayPal, Intuit and Square, and in the former case an effort to build a new advertising or marketing business, an angle that tends to be overlooked.

Like many other big, established businesses, transaction processors face significant gross revenue and profit margin challenges, partly from regulatory action and partly from growing competition.

So there is a defensive angle to their mobile payments efforts, but also an offensive element to their mobile wallet gambits.

Apple has to figure out how any move into either mobile payments or mobile wallet helps it sell more devices, or create new markets for devices it can sell. As always, Apple will try to figure out how existing processes can be revolutionized, but it also has to figure out how changing the experience of “paying” for things and “buying” things also helps it create new markets for  devices.

To be sure, iTunes and the App Store already have Apple involved in payment operations related to mobile devices that help it sell devices. What Apple has to do is figure out whether some broader approach to mobile payments and commerce could create a significant new product category, or allow Apple to take significant share in some existing product category.

The iPod and iPad essentially created new categories, while the iPhone and earlier Apple and Macintosh devices essentially reshaped an existing category of devices.

It isn’t yet clear whether Apple has a clear vision, yet, of what big opportunities exist, or whether the approach is to create a new category of devices, or reshape an existing category.

Sometimes Apple has created a brand new category, and at other times has reshaped an existing category. Apple’s continually-rumored interest in TVs is another example of “reshaping” an existing category, for example.

If Apple stays true to form, it will try to understand what is “broken” about e-commerce, mobile shopping and payments, and work from there on a solution. In fact, broader e-commerce might be the approach, rather than “mobile payments” in a direct sense.

Mobile Banking Has Passed the Inflection Point

Sometimes one can almost predict an explosion of buzz about certain topics. Over the last couple of years, awareness of the building momentum in mobile banking, mobile payments and mobile commerce has been building steadily. One of the indicators is increasing use of the mobile banking channel by financial institutions.

So we now can predict the next stage. There will lots of hype about mobile banking, and then people will hit a point where the inevitable "has it failed" stories begin to be written, with the angle that the impact has not been great.

That already has happened with "near field communications" as a communication channel for mobile payments, which is conceptually distinct from mobile banking. The current tenor of stories about NFC generally concerns "how slow and how hard" adoption has become. That always was going to happen, as huge new infrastructures have to be built before NFC as a communications channel can drive significant transaction volume.

Mobile banking, and then mobile commerce, will have their own hype waves, the intermediate term disillusionment, and finally mass adoption. But it will take time.

There is a significant difference between developed and developing regions, though.

In developed markets mobile banking primarily is a customer service and convenience tool, with scant opportunity for incremental revenues. But mobile banking is important because consumers increasingly want it, and lack of such features could drive customers to other competitors if it is lacking.

For the most part, mobile banking in developed markets is designed around information access, such as the ability to check accounts, as well as simple transactions, such as the ability to move money between accounts or deposit a check or make a payment.

In developing markets the upside is greater. In regions where the banking infrastructure is undeveloped, the mobile device itself becomes a combination automated teller machine and banking location, allowing users to send and receive money. Typically, at the moment, this involves the use of basic test messaging and third-party retail locations where money is physically deposited and withdrawn, with the information about a payment being sent by text message.

Has U.S. Mobile Business Reached Saturation?

The seven largest U.S. mobile providers, representing more than 95 percent of the market, lost a combined 52,000 subscribers from contract-based plans in the January 2012 to March 2012 period, according to a tally by the Associated Press. The companies have a combined 220 million devices on such plans, accounting for about two-thirds of the total number of devices, according to the Associated Press. 


In a sense, that isn't a surprise. Mobile service providers now bank on mobile data plans to drive growth. But many mobile subscribers also are choosing more-affordable no-contract and prepaid plans.


In the first quarter, some two million consumers bought no-contract servivce. That figure, however, is down from more than five million in the same quarter a year ago.

Location-Based Services Used by 74% of Smart Phone Users

Some 74 percent of smart phone owners get real-time location-based information on their phones as of February 2012, up from 55 percent in May 2011, according to the Pew Internet & American Life Project.

This increase coincides with a rise in smart phone ownership overall (from 35 percent of adults in 2011 to 46 percent  in 2012, which means that the overall proportion of U.S. adults who get location-based information has almost doubled over that time period, from 23 percent  in May 2011 to 41 percent  in February 2012, Pew says.

Is "Toll-free" Video Streaming a Net Neutrality Violation, or Just Retail Packaging?

Verizon Communications CTO Tony Melone now has floated the idea of "toll free" data access. "There is room for an 1-800-type of service where certain destinations could offset the cost of the network to get customers to those destinations," he said. AT&T also has talked about the concept.

Basically, the offering would work as toll-free calling now does, where a third party pays for calling charges. In principle, the idea, as applied to video content, would be that a content provider would subsidize the bandwidth charges incurred by an end user, rather than having the consumption count against that user's bandwidth cap.

In principle, that is simply a retail charging mechanism; one of many service providers might embrace. The rub, of course, is that such practices strike some as violations of network neutrality, even if the deals might be offered to all video streaming providers, without exception.

The argument requires a bit of stretching. The proposed "toll free" plans would not necessarily require any packet prioritization at all. The only innovation here is that a video provider could ensure that use of a particular video service did not count against a user's normal bandwidth cap.

Verizon has not said it would offer packet prioritization, only that video suppliers would defray the usage on behalf of their customers.

Comcast has stirred similar concerns by considering a similar plan whereby customers of its video subscription services also could view some of that same content using streaming, without likewise having that usage applied to the customer's bandwidth cap. The issue is whether the methods used to identify such streaming usage are, in and of themselves, a violation of network neutrality, if in fact Comcast does not provide any prioritization on those packets, but only identifies them for charging purposes.

Current network neutrality rules prohibit the use of packet prioritization for consumer broadband access services. But Comcast and Verizon do not seem to be proposing to do so, only to identify packets for purposes of charging.

Nor would network neutrality rules prohibit any lawful charging mechanisms modeled on "toll free" principles, or even advertising-supported principles.

How Much Demand for Superfast Broadband?

BT's "Openreach" fiber to the home network now has reached about ten million premises across the United Kingdom, ahead of schedule. This is some months ahead of the original deadline for this figure that was the end of 2012. The FTTH network is expected to enable access speeds up to about 80 Mbps.

By some estimates, there have been 570,000 sales so far, both by BT and all wholesale partners, representing penetration of 5.8 percent. Of course, early in the deployment of any new fixed network, sales efforts necessarily are circumscribed as most of the work goes into physical construction.

To be sure, some will argue that BT and others have not moved fast enough. 


But making "superfast" broadband available is only part of the adoption story. There has to be demand, at prices consumers think are "fair," and that suppliers can afford to offer.


Only about 14 percent of respondents to a survey currently see a need for speeds of 50 Mbps or higher, about five percent of the total 3,000 customer sample, and would imply a total nine percent penetration of super-fast broadband when added to the four percent who already have speeds over 50 Mbps, the Marketing Directors says.

Among the 35 percent who want a higher broadband speed, there was only a modest willingness to pay more. Around 42 percent of those who want a faster speed would not be prepared to pay more for it. 


Another 25 percent would be prepared to pay up to €5 a month for their desired faster speed. About 15 percent would be prepared to pay over €15 a month for their desired faster speed. 

Only about 35 percent of broadband owners currently see a need for faster broadband speeds, and only 20 percent are prepared to pay more for it.  Of the 35 percent who do want faster speeds, about half would like to see their broadband speed double within two years.


Keep in mind "doubling" would generally be from about 7 Mbps, a typical capability for many customers. 


Only 15 percent of respondents said they were dissatisfied with their current broadband speed, as well. That doesn't mean expectations will not change in the future. Almost nothing is more certain than a gradual increase in bandwidth consumption over time. Perhaps it is certain that users will demand more access bandwidth over time, as well. 


The point is that the market now appears to be more of a supply push than an end user pull.