Mobile Payment: The
Linchpin of the Mobile
Commerce Economy

Author’s note

Mobile   devices  are   revolutionizing   how   consumers   monitor  their  financial  resources,   make   important purchasing  decisions  and,  perhaps  most notably,  pay  for transactions.  As part  of First Data’s  series  on the ongoing  development of mobile commerce solutions, this paper  focuses on mobile payment—which is really at the heart of all commerce. It is my hope that this paper  will help you continue the important planning within your organization  and with your strategic partners  that will position all of us for success in mobile commerce. None of us can afford  to sit by and wait while others  define  the  standards, suggest common practices and divide revenue streams.


All Commerce Is About Payment

Commerce is making payment and receiving payment.  If there  is no payment, there  is no commerce.

This statement is every bit as true for mobile commerce as it is for traditional commercial activity. But how does payment actually  work in a mobile commerce economy? Let’s  take  a look, and pretend you are a commuter taking the Bay Area Rapid Transit (BART) to work every  day.

On a typical day you race out of the house and head to your transit station, wave your phone at the turnstile’s electronic reader,  dash down  to the platform and just make your train. Perhaps  you read  the morning paper as you pass  under San Francisco  Bay. The train pulls into your stop,  and as you step  off,  you notice  a panel advertisement for a Jack in the Box®  mango  smoothie.  The ad has a logo  signifying  it’s a smart ad—an advertisement that transfers information to your phone when you tap it on the logo.

You  tap  the  smart  ad  and  your  phone  displays  the  nearest   Jack  in the  Box  location:  there’s one  on San Francisco’s  Mission Street,  right by your station. You leave  the station, step  around the corner and order that smoothie. You pay for it by tapping your phone  at the checkout stand.  You remember  that, because of your enrollment in a loyalty program,  you also downloaded a 10 percent discount  coupon  when  you tapped the smart ad. That amount was automatically  deducted from the price of the smoothie.

What does  this simple transaction  mean to you as a merchant  or financial entity? What will it cost  you?  How does  it affect the  shopping  experience and your ability to build customer  relationships?  And what  does  it mean to traditional credit and debit  card payments?

To answer  these  questions and understand how  central  mobile payment is to the  entire  mobile commerce ecosystem, let’s  take  a closer  look at  what’s behind  a simple mobile  purchase. Later  in this paper,  I’ll talk more about  the  technology that  made  this transaction  happen, but  for now,  take  a look at the  transaction itself, because this is at the heart of commerce—exchanging value for value and receiving payment from the customer.  In this case,  the  merchant  produces the  mango  smoothie,  and you enter  a code into your phone, wave the phone near a reader,  receive a 10 percent discount, see a display of the transaction  details and then are on your way.

What was special about  this transaction?

First, it was  fast.  The merchant  did not need  to ask if you had  a coupon  or a discount  card  or some  other customer-loyalty incentive.  Nor did you need  to dig  around  for a coupon  or punch  card.  If you had  signed up for these  incentives,  they  would  already  be in the mobile device and automatically  calculated during the transaction.  Also, the merchant  did not need  to receive cash or make change, nor did the merchant  need  to handle a debit  or credit card. Just as significantly, you as the customer  did not have to deal with cash or cards. It was a faster  and simpler transaction  for both the merchant  and you.

Pilot programs  in Europe have shown that mobile purchases cut the average transaction  time in half. A study recently conducted by First Data demonstrates this as well. The study, carried out in several corporate cafeterias around the country, measured  factors  related to the use of prepaid  contactless stickers. A contactless sticker is like a miniature adhesive gift  card  with a Near Field Communication  (NFC) chip inside. The study  showed that  contactless payments are typically two  to three  times faster  than cash or no-signature card payments, and about  five times faster  than card payments requiring a signature.

The second big difference between this mobile transaction  and a more traditional payment is that there  was no leather wallet full of cash and credit cards involved. You left your traditional wallet at home.

Third, just  before swiping  your  phone  near  the  reader,  you  entered a  short  personal  security  code that enabled the  transaction.  The phone’s purchasing  capability automatically  locked  as soon as the  transaction was  complete. This means  that  if you lost your phone,  nobody would  be  able  to use that  mobile device to make unauthorized purchases. This provides  a markedly higher level of security  compared to credit  cards  or other payment methods  that typically reside in the leather wallet.

On the  merchant  side  of  the  transaction,  the  point-of-sale is equipped with  an NFC chip  reader.  As I  will explain  later,  your phone  is equipped with  an NFC chip. When  the  phone  passes close  to  the  reader,  the reader  is able to pull essential  personal  identification and account information from the phone,  similar to the data  contained on the  magnetic strip of a credit  or debit  card.  The NFC terminal reads  this information in much the same way a credit card swipe is read (although no physical contact is needed to read the NFC chip), and the account information is transmitted to the transaction  processing entity (First Data, for instance).  The payment transaction  is then processed in the conventional way.

One other  critical action  took place  during this transaction.  Before  you passed your phone  over  the  reader, you made  an important  choice.  Because mobile devices will be  provisioned  with several  payment accounts, you can  choose which account to debit  the  cost  of the  smoothie  against.  You may select a credit  or debit card account, or (and this is of great significance to the merchant)  a merchant-specific prepaid  stored  value account—something like a refillable gift card. Commerce-enabled mobile devices today  can manage multiple accounts. This capability puts  merchant-sponsored prepayment incentive  programs  on  exactly the  same footing  as major credit  and debit  cards—or cash—from the customer’s usability perspective. And that opens a whole  new  world  of  opportunity for merchants  to  build customer  loyalty  and  possibly  even  lower  their transaction  costs.

This transaction  has  implications for the  entire  mobile  commerce value  chain,  which  includes  merchants, point-of-sale equipment manufacturers, financial entities and transaction processors, mobile phone manufacturers and mobile carriers who  provide  the  network.  Many people do not realize  that  most of the infrastructure  needed to support  this mango smoothie transaction  is in place  today—all around the world. In fact,  the mobile payment scenario discussed above actually took place  in San Francisco in early 2008 as part of a First Data pilot program.

The Technology behind Mobile Payments

There  are  five  technological building  blocks  essential  for a fully operational network  that  supports  mobile payments. They are:

1. Contactless payment readers.  These are devices at checkouts and other points-of-sale that read mobile commerce-enabled phones,  smart cards, contactless stickers and other contactless payment instruments. They are based on NFC technology and a high-frequency, low-range (a few  inches) transmitting device (see  the sidebar  below for more about  NFC). Turnstiles in the BART system  are already equipped with contactless readers.  Commuters participating in the mobile commerce pilot program could pass through by simply waving  their phones  near the reader.  Many points-of-sale today  are already equipped with contactless payment readers.
2. A network that connects contactless payment readers to transaction processors. This network  exists today.  It is the same network  used by credit and debit  card readers.  It transmits account information pulled from a phone or smart card to a service  provider (like First Data) who validates the account and processes the transaction.
3. NFC-equipped phones.  Mobile phones  equipped with NFC chip sets are able to exchange account information with contactless payment readers,  just like smart cards and contactless stickers.
4. A network for provisioning  mobile devices with personal account information. This network  exists today.  It is the mobile network  provided by phone service  carriers. And the process for placing personal account information into mobile devices, called Over-the-Air (OTA) Provisioning, is in use by mobile phone carriers today.
5. Electronic wallet software that provides a user interface (UI) on the mobile device and a back-end server-based application.  The UI allows users to manage their transactions and accounts, while the server-based applications  do the heavy  lifting of payment processing and managing  account activity. These applications  exist today.  In fact,  many smart phones  being  delivered today  come with electronic wallet applications  already installed.

Although large portions of this infrastructure are in place, merchants at the front lines of consumer purchasing  are likely to be most interested in the prevalence of NFC-equipped mobile devices and point-of-sale readers.

NFC-Enabled Mobile Devices:
The incremental cost of equipping a mobile phone with NFC capability is relatively small, adding perhaps $10 to $15 to the cost of a phone. Some phone manufacturers are already equipping their next-generation phones with NFC chips as part of the standard package. Phones that are most likely to support mobile purchases in the near term are smart phones that have the capacity for full-featured electronic wallet applications. These are also the mobile devices most likely to come with data plans that enable low-cost promotions and target marketing. The cost of building NFC-enabled phones is low, and some phone manufactures are already bringing them to market.

This trend  will accelerate rapidly, and for a good reason.    Mobile commerce offers  significant  revenue opportunities for phone  service  carriers in the  form of higher-priced data  plans to customers who  want  to have mobile commerce capabilities in their phones,  revenue from advertising carried over their networks  and possible  revenue from transactions.  A key calculation  for the  carriers is Average Revenue per User (ARPU), which is overall revenue divided  by total number of users. A fundamental business strategy for phone carriers is to increase  ARPU, and mobile commerce provides  an opportunity to do that in a big way.

For carriers, though,  the critical question  is this: Will mobile commerce-inspired increases  in ARPU be enough to offset the added cost of NFC-enabled handsets? The tricky part of this calculation is recognizing that until mobile commerce really catches on, a percentage of those handsets—possibly a large percentage—will never be activated for mobile commerce and therefore won’t help raise ARPU immediately. Net gains in ARPU must cover  the costs  of all the commerce-enabled phones,  even  the ones not generating commerce revenue.

Mobile  commerce will ultimately  provide  increased revenue  opportunities for  mobile  carriers,  but  until it spreads more widely  into the  market,  carriers will be  careful  how  they  release  costlier  commerce-enabled phones. They may even adopt lower cost technologies like contactless stickers configured to attach to phones. We’ll return to this and take a closer look at these  “bridge” technologies later in the paper.

Contactless Payment   Readers at  the  Checkout:   Point-of-sale  NFC  readers   present  a  somewhat  different challenge for merchants.  Although  they  are not significantly  different in cost  compared to standard  credit  or debit card readers, traditional card readers cannot be retrofitted with NFC capability. That means merchants will need  to invest in new equipment to support  mobile purchases. Contactless readers  are readily available  today. ViVOtech  is the largest  manufacturer of these  readers,  and units typically cost about  $150 per checkout lane.

It’s not, however, difficult for retailers  to recover this investment.  Because mobile transactions are so much faster  than  cash  or card  transactions, more  customers move  through  the  checkout lane  in a given  period of time, raising the  operational efficiency of the  checkout. There is also a significant  customer  satisfaction benefit. The First Data study  cited  earlier also found  that  40 percent of contactless sticker  users indicated they  visited  the  employee cafeteria more often  when  they  had their sticker,  and 17 percent of users spent more per visit to the cafeteria.

Forward-looking  businesses  most  likely  to  be   affected  by  high-volume   mobile  purchasing   are  already preparing for the  transition. Right  now,  nearly 30 percent of  the  points-of-sale at  leading  chains in high- volume-transaction businesses such  as  quick-service restaurants,  convenience stores  and  drug  stores  are currently equipped with NFC readers.  These  terminals not only work with NFC-capable mobile devices, but also with radio frequency identification (RFID)-enabled  cards being  issued today.  These include devices such as RFID tags  in key chains, smart cards, stickers and other portable formats.

The necessary technological infrastructure  is mostly  in place.  Both  NFC-enabled mobile  devices and  NFC readers  are available,  and they are penetrating the market to the point where  there  is very nearly the critical mass needed to make mobile purchasing  a commonplace form of transaction.

There is, however, one potential  roadblock  to the progress being  made on the technological front.

An Essential Service:
Managing Consumer Account  Information

It is not enough just to have an NFC-enabled mobile device to buy that mango smoothie. The mobile device must also contain all the essential account information that is specific and personal to that customer. Every credit and debit card has a magnetic strip that contains this key information. The process for getting that information onto the card is called  provisioning. Provisioning is a service  provided by companies like First Data that obey strict rules governing the secure  handling of personal and financial information as well as the prevention of fraud.

Traditional provisioning  works  fine  for  credit  and  debit  cards,  but  a mobile  device is much  more  than  an electronic credit  card.  It is a single  device that  can  handle  multiple accounts from many different  issuing businesses, whether they are banks, credit card companies, merchants or even  (in the case  of the BART pilot) a local government agency responsible  for a rapid transit system.  All this account information needs to be in the phone. Furthermore, users will be able to directly manage their accounts. This means the account activity that users initiate must also be “serviced.”

The role that provides  this breadth of account management service  for mobile devices, which we call Trusted Services  Manager  (TSM), is far more involved than traditional credit and debit  card provisioning. And it just so happens that everybody in the mobile commerce ecosystem wants  to control TSM. Let’s see  why.


Trusted Services Manager:
The Art of Mobile Device Provisioning

The answer  to the question  of why so many are vying be the TSM is easy to see. Whoever  fulfills the TSM role manages access to mobile consumers. The TSM can potentially  have a certain amount of influence  over all of mobile commerce, which one day could represent most consumer spending.

Telecommunications carriers feel that they are the natural entities  to perform this service,  because they own the networks  that provide  access to all the mobile devices. It would be an extension  of the data  services  they already  provide,  as well as (potentially) a significant  source  of revenue for them. There is a catch,  though: Telecoms  have  no  infrastructure  for  handling  the  vast  amounts  of  account data,  nor do  they  have  data centers that  comply  with payment industry security  standards.  Furthermore, they  would  need  to establish many thousands  of  relationships  with  all the  financial institutions  that  hold  personal  accounts with  credit card  companies, processors, regulators  and  other  entities—relationships they  currently  do  not  have.  They would  need  to  completely reconstruct  their own  infrastructures  and  business  relationships  to  fulfill a TSM role—something they are unlikely to undertake.

Credit card associations  believe they are excellent candidates to fulfill the TSM role, and it makes sense  from their perspective. The TSM role would make it much easier for them to issue new credit accounts and expand the  number of accounts they  have.  They already  have  an infrastructure  for handling  their credit  accounts. But there  are problems  with this approach, as well. Credit  card  associations  lack access to a complete set of banking  data,  and they  may not be  able  or willing to reach  agreements to share data  among  competing entities. This would likely force consumers to choose, for example,  a mobile device that could only hold a Visa® card or only a MasterCard® card, but not one that works with both. No credit card association would likely give favorable treatment to merchant  programs  such as stored-value loyalty accounts that completely bypass the traditional credit card instruments and are favored by consumers  and merchants  alike.

Financial institutions like banks would  benefit greatly by serving  in the  role of TSM. This would  put  them in a position  to  serve  their customers with  the  bank’s  own  credit  accounts and  the  ability to  manage other accounts at their institutions. Citigroup  has offered a mobile phone  with just these  capabilities, but  it only works with Citibank accounts and  credit  cards.  If banks  serviced accounts from other  entities,  they  would likely charge a fee  for that service  to encourage use of their own cards and accounts (conceptually similar to the current practice when using non-network ATMs). With thousands  of independent banks all competing for customers, it is unlikely that  the partnerships  and alliances necessary to adequately serve  multiple accounts from multiple banks across multiple carrier networks  could ever work on a large enough scale to be effective. The market would fragment into mobile devices with limited purchasing capabilities, leading to great consumer dissatisfaction and the slowing of mobile commerce adoption.

Existing transaction processors who also engage in credit and debit card provisioning may be best suited to fulfill the TSM role. These companies now serve as multiple-account payment processors and card provisioners, and they  have  extensive relationships with banks, merchants,  credit  card associations  and stored-value account service  providers. They also have an enormous infrastructure  for securely  handling financial and transactional data.  They are agnostic about  the credit  and debit  instruments they service;  therefore, they come  closest to being  able  to offer  a “free  trade” zone  in the  mobile commerce economy. But they,  too,  need  to forge new relationships, especially with mobile carriers, and expanded relationships with banks if they are to fully service consumer account management.

In reality,  the  ideal  candidate for  fulfilling the  role  of  a TSM may  be  an entity  that  does  not  yet  exist,  a consortium of a select few  businesses that offers  complete and secure  service  open  to all organizations that offer  accounts of any kind, and that can process proprietary  customer  data  in a secure,  leak-proof way.  This would  go  a long  way  toward maximizing the  commercial  potential  of  mobile commerce by  minimizing the temptation of major key players to fragment the market as they pursue their own special interests.


The following illustration shows how the ideal TSM provider fits into the mobile commerce ecosystem:

Bringing multi-account TSM services  to a variety of mobile devices accessed through  a variety of proprietary networks  is the biggest challenge to realizing simple, transparent mobile payments in the mobile commerce ecosystem.

Although   the  big,  market-influencing  players   in mobile  commerce  will be  tempted to  take   proprietary approaches to the  TSM issue to preserve, monopolize  and incrementally  grow  their existing  market shares, in fact,  their greatest opportunity lies in a neutral TSM entity. This is because a neutral TSM opens  the entire mobile  commerce economy to  everyone and  affords  each  player  the  greatest  opportunity to  grow  their positions through expanded service  offerings.

Let’s see  what some of those  opportunities are from the mobile purchasing  perspective.

Accelerating Commerce by Lowering Barriers to
Consumer Acceptance

Think back  to our hypothetical situation in which you’re  a commuter  interested in buying  a mango  smoothie. You selected an account against  which to debit  your purchase, and let’s  say you selected a special  Jack in the Box JackCash™ account that the company has had in place  for some time. By selecting that account, you saved Jack in the Box two percentage points on the cost of that transaction.

One  of the  most exciting  and—for  some  current  providers—frightening aspects  of mobile payments is the ability for new and alternate payment options to take hold quickly. Traditionally, it has been difficult to establish alternate payment methods  because of the almost-insurmountable obstacles of scale. For a payment system to be adopted and come into use, three things must happen:

• The payment mechanism must physically get into the hands of consumers
• Consumers must accept the payment mechanism
• Merchants  must accept the payment mechanism

The infrastructure supporting mobile payments and mobile devices suddenly lowers the threshold to achieving each  of these  objectives.

In the case  of putting  the payment mechanism into the hands of consumers, it’s already there. Each consumer is attached to his or her mobile device. It doesn’t matter  where  they  are; providing  them with a new  kind of account is a simple OTA provisioning process delivered by the TSM.

The threshold of customer  acceptance is also lower. Using the new purchasing  method  is as simple as pressing a button  on their mobile devices. If doing  so is tied  to a simple incentive,  such as a discount  or reward,  the decision becomes even  easier for them.

And finally, there  is a lower barrier to merchant  acceptance because the transaction  is likely to be lower cost (since  it may avoid  credit  card  interchange fees), encouraging the  merchant  to  accept this new  payment method. Further, the mobile device transaction enables special accounts, coupons, incentives or other programs the customer  chooses. The NFC reader  will accept it the same as any other payment method.  Of course,  many more readers  must be placed at retail points-of-sale, but this is already under way.

Because it’s so easy  to  issue and  accept different mobile payment methods  and  programs,  new  ones  will not have  to  reach  such  high critical mass to  be  successful. Indeed,  it’s a simple matter  to  implement  local and  specialized payment plans,  which  open  the  door  to  a world  of  incentive  opportunities for merchants and  purchasing  choices for consumers.  These  include  merchant-specific payment plans, person-to-person payment options,  easy  global  transactions across  multiple currencies  and even  direct  bill paying  at service providers  and non-retail  establishments (such  as municipalities or utility providers).  Consider  also customer loyalty  programs  that  tie  into the  more practical  and  mundane  payment arrangements that  reside  on the customer’s mobile device, such as a child’s lunch fund or bookstore account at college or a “fast pass” account for paying  tolls. The possibilities for accelerating commerce and building customer  loyalty are endless.

Bridge to the Future

Do you have  to  wait  for the  industry to  solve  this TSM challenge? No, you do  not. There are technologies available  now  that  serve  as  bridge  technologies to  mobile  payments. I’ve  already  mentioned  contactless stickers, which can be affixed to the back of mobile phones.

Contactless stickers (like First Data’s GO-Tag™ product) work like gift cards—they store value, and consumers can reload them with money (and soon, the stickers may work for credit and debit  transactions, too). They are totally compatible with the contactless payment readers  now appearing at many checkouts. Some companies offering  electronic wallet applications  also offer  contactless stickers so that consumers  can move money into their  “sticker”  account from their  handset, just as  they  would  move  money  between  accounts with  their computers. In that way, consumers  can always  have money available for a mobile payment.

Here are just a few  things merchants  and carriers can do right now with contactless stickers:

• A major carrier like AT&T, Sprint, T-Mobile or Verizon can issue or co-issue a contactless sticker with any credit card association like Visa or MasterCard.  The carrier can earn revenue from selling that sticker product, and possibly earn a tiny fraction of every  contactless sticker transaction.  This becomes a very low-cost way for carriers to earn a portion of the mobile commerce revenue that they will ultimately receive when everything is in the phone.
• A fast food  business like Dunkin’ Donuts or McDonald’s could issue a contactless sticker that has no affiliation with a credit card association.  It becomes their own branded payment instrument. They could sell it, or they could give it away  in an effort  to lower their cost of transactions at the point-of-sale. When consumers  pay with this kind of closed-loop sticker, the cost to the merchant  is significantly lower than when a customer  uses a credit card or an association-affiliated sticker.

As a merchant, when your sticker is on the phone you get some of the benefit you will ultimately receive when you are inside the mobile commerce-enabled phone. It’s quite possible  we will see near-term  competition for sticker real estate on the  back  of the  handset. That space represents a revenue opportunity for merchants, carriers  and  associations,  and  currently  there  is only room for one  or possibly  two  stickers  on the  phone. Clearly, being  on the phone is the first step  to being  in the phone.

Summary

If you’re  a merchant,  keep  these  key points in mind about  mobile payment.  First, the  infrastructure  is there, the  technology is there,  and  it is advancing very  quickly. More and  more NFC-enabled mobile devices are showing  up  in the  market,  and  more  and  more  merchants  are  adopting contactless readers.  If you  don’t have  a strategy for implementing  NFC readers  at your points-of-sale, you should develop one  quickly. The advantages afforded to merchants who can tie marketing strategies and incentives  to the mobile device used for transactions will be dramatic.

If you’re a financial entity, look to expand your customer base rather than trying to protect yourself with limited, proprietary   mobile  commerce strategies. Strategies designed  to  preserve  customers by  limiting account service  options to only your customers and accounts will cause  you to lose customers in the long run, because those customers will always opt for the service  that provides  them with the greatest options for payment and the most purchasing  power.  The winning strategy for financial entities  will be to build partnerships  that give them the greatest possible  reach among existing and potential  new customers.

I’m always  interested in your  thoughts on  this  or any  other  mobile  commerce topic.  So  please, contact me or any member  of my team.  We not only want  to help,  we  want  to listen. I  can  be  reached directly  at: barry.mccarthy@firstdata.com.

For more information, look for these  white papers at http://www.firstdata.com/about/whitepapers.htm:

• The Risks and Opportunities in a Mobile Commerce Economy
• Going Direct with Mobile Marketing
• Mobile Account  Management: The Mobile Commerce Enabler
• The Role of Trusted Service  Managers in Mobile Commerce

About The Author

Barry McCarthy was appointed to lead the newly formed Mobile Commerce Solutions business unit of First Data in January 2008. He has responsibility for commercializing all First Data assets  globally for use in mobile commerce. In this role, McCarthy  and his team  work closely  with a variety of industry partners, from the largest wireless carriers to young  start-ups, financial institutions, technology providers and terminal manufacturers.

Previously, McCarthy led Global Product and Business Development for  First Data  and  before that,  product development for the Commercial Services  business unit. Prior to joining First Data, McCarthy was Vice President and  General  Manager  of  VeriSign’s  Internet  Payments
& Risk Management business  unit, a NASDAQ 100 technology company.
Before  VeriSign, McCarthy co-founded and later sold MagnaCash, a Silicon Valley micro-payments company that is currently owned by Digital River (NASDAQ: DRV). Previously serving  Wells Fargo (NYSE: WFC) as Vice President  and  General  Manager  of  the  ATM business, McCarthy had P&L responsibility for $110 billion in annual transaction   volume  and  14  million active  ATM cards. McCarthy   started  his  career   at  Procter   and  Gamble (NYSE: PG), where he spent 12 years in roles of increasing responsibility,  first in sales  and sales  management and later  in customer   marketing  and  brand  management. He earned   a  Masters  in Business  Administration  from the Kellogg School of Management at Northwestern University and completed his undergraduate studies  at the University of Illinois, Urbana.