Wireless Payment – Wallet Share
Introduction
George would do anything to get rid of his wallet. It is heavy and creates an ugly bulge in his pocket. George has been to Japan where he saw locals using phones to seamlessly pay for everything including tolls, fares, groceries, and other expenses. So when Google announced their new Nexus 4 phone with the ability to touch and pay, George got really excited.
George was one of the first people to get a mobile payment enabled Google Nexus phone and promised himself that he would never pick up his wallet again. What’s more, Google even showcased a new vending machine, in San Francisco, where George purchased a Coke using his new Nexus phone. George was on top of the world and very excited. He actively started looking for the universal mobile payment symbol at retailers so that he could plan his wallet-free shopping.
Unfortunately even after owning his phone for a whole year, George is still carrying his wallet.
Mobile payments are a subset of a larger electronic payments ecosystem, where payments are initiated using a mobile device. The history of mobile payments dates back to 1997, when Coke introduced the first touchless vending machines based on Simple Messaging Service (SMS) payments. Initially the system was used for simple tasks like downloading ring tones and buying movie tickets; payments were billed directly to the customer’s mobile account. The big push came from Asian countries like Japan and the Philippines, where commercial mobile commerce platforms were launched, and in Europe where mobile payments for parking, train tickets, and flight bookings were taking form. In 2002, the European Telecom Standards Institute issued the first guidelines, “Mobile Commerce (M-Comm); Requirements for Payment Methods for Mobile Commerce ”. However, these requirements were minimal and basically laid down only the essential features needed to support a mobile payment platform.
Japan took an early lead in mobile platform adoption. With a highly tech savvy population and Internet access via mobile surpassing access via personal computer, combined with early standardization on NTT DoCoMo’s iMode platform, mobile payments experienced rapid penetration and access. Moreover, Japan’s mobile wallet service was developed in partnership with wireless service providers and handset vendors. Mobile wallet features include cashless payment, online shopping, ticketing, check-in, banking, digital keys, loyalty cards, and identity cards. Similar progress has been seen in countries such as South Korea, the Philippines, India, and China where mobile payment markets are usually characterized by a duopoly. The winning formula in each of these successes has been a mix of partnerships, cooperation between multiple entities, and standardization of the payment platform. One of the biggest beneficiaries of mobile payment platforms has been countries in Africa where there is limited access to traditional banking services.
Unfortunately, mobile payment adoption in the United States has not shared the same level of success as seen in Asia and Europe. According to the CTIA -the wireless association, in 2012, the wireless penetration rate, from devices like phone, hotspot, and tablets, in the United States stood at 102%, with 35% of households connecting purely over wireless networks. Yet only 12% of Americans have used mobile as a form of payment and that has been mostly for paying bills, transferring money, or peer-to-peer payments.
The current size of the United States mobile payment market is $12.8 billion annually, which is predicted by the Forrester group to grow to $90 billion by 2017. On the other hand, according to Gartner, the worldwide mobile payment market is expected to increase from $171 billion in 2012 to $646 billion in 2017, or possibly even a trillion dollars according to some estimates. In other words, the U.S. share of the global payment market is only 14% and expected to remain the same over the next 5 years. This is far less than the U.S. share of the world GDP, which is about 22%. | United States | Rest of the World | U.S. Share | Mobile Payments (2012) | $12.8 billion | $90 billion | 14% | Mobile Payments (2017) | $171 billion | $646 billion | 14% | GDP | $15 trillion | $83 trillion | 18.07% | Ecommerce | $231 billion | $1000 billion | 23% | Mobile payment as a percentage of ecommerce | 5.5% | 9.0% | - |
Table 1: Mobile Payment Market
While desktops are still the dominant mode of Internet access, mobile devices are projected to surpass desktop Internet traffic by 2014. With customers preferring to use mobile devices to do their daily chores, the mobile payment market is poised to become even more lucrative. There are many stakeholders vying for a share of the mobile payment pie, but the lack of cooperation and standardization reflects a general economic principal as stated by Dranove and Gandal:
“A monopoly in the bush is often worth more than an oligopoly in hand”.
In other words, instead of developing the mobile payment market and competing for a share of the pie through standardization and cooperation, the market players have decided to compete for the pie. Table 2 below shows the different mobile standards and technologies available to consumers. Funding Source | Platform | Examples | Technology | Applications | Bank Account, Cash, Check, Prepaid reloadable cards, Money order MasterCard, Visa, Discover, American Express or any other Credit Card Phone bill, cable bill, or any other direct billing | Hardware-based solutions | Near Field Communication | Extension of RFID, distances restricted to less than 4 inches. Security enabled | Google Wallet,ISIS, Merchant Customer Exchange (MCX) | | | Radio Frequency Identification | Radio transmitters and receivers | PayPassSpeedPass | | | Low Energy Bluetooth Payment System | Bluetooth technology | Speculated to be used in Apple iPhone devices (iWallet) | | | Near Sound Data Transfer (NSDT) | Audio Signal based payment | Tagpay | | | Trusted Execution Environment | Secure area residing in main processor of a smart phone where sensitive data is stored | In development | | Software-based solutions(Mobile Payment Platforms or Mobile Web Payments) | Closed Loop Mobile Payments | Proprietary wallet using barcodes (1D – i.e. UPC or 2D bar codes – i.e. QR codes) akin to gift cards in the physical world | Starbucks payment app | | | Cloud-based mobile payment platform | Payment information is stored in the cloud and apps access the information to allow payments to be made using barcodes or the likes | Paypal, Serve, Venmo | | | SMS Text based paymentIn-App Billing | Simple messaging service and In-App purchasing | Donations, payments, Ringtones, In-App purchases |
Table 2: Mobile Payment EcoSystem
The potential for super normal profits, high fragmentation, and the absence of worldwide standards in the mobile payment industry is attracting more players to the market; making the market even more fragmented and confusing for retailers as well as customers. Recently, Target and Walmart have joined with two dozen other retailers to develop their own mobile payment system to compete with Google. The retailers feel that a system developed by them would foster loyalty and increase their revenues. The retailer’s motivation might be very different, albeit orthogonal, to the motivations of mobile service providers and hand-set manufacturers. While service providers might be interested in the exchange fee generated each time a transaction is processed, retailers might be trying to minimize the exchange fee by owning their own payment network.
With such a range of choices comes customer confusion like that experienced by George. His favorite retailers do not subscribe to his service provider’s payment system. Moreover, George is forced to use Sprint’s network because AT&T, T-Mobile, and Verizon do not support Google’s Wallet. If George wants to switch cellular providers so he can talk for free with his friends and family, he will have to start all over again with the competing ISIS services, supported by Verizon, T-Mobile, and AT&T. But then again, he may not be able to pay at Target or Walmart and may still have to carry his wallet anyways.
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Questions: 1. What is the fundamental reason George couldn’t ditch his wallet? 2. Verify that the facts, assumptions, and data presented in the case study are still valid and applicable. 3. Using Porter’s Competitive Forces Model, evaluate the mobile payment industry. 4. Using SWOT analysis, evaluate the different payment methods. 5. Using BCG matrix with predictive market share and predictive growth rate, evaluate the feasibility of these mobile technologies. 6. Draw the transaction flow from a consumer purchase to the supplier of goods/services. Who gets a cut of the transaction (i.e., transaction fee) and how much is it? 7. Mobile payments do not always mean contactless payment. Newer methods like NFC are credited with incorporating the best of both the worlds. Compare and contrast the different standards of mobile and contactless payments and highlight the superiority of one over the other. 8. Why has adoption been slow in the United States? 9. Why is the Mobile Payment market so fragmented and why are there no clear standards? Can there ever be a single standard? 10. What are the US credit card companies and banks doing to prepare for potentially explosive growth in the mobile payment market? What standards are they backing or developing? 11. Can one of these mobile standard become the de-facto industry standard? Why or why not? Provide an example from the technology industry.

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This case study project was undertaken with the support of a research grant from NIST Measurement Science and Engineering, the Standards Services Group, and the College of Business at San José State University. This case study is distributed under the Creative Commons Attribution-Non-Commercial-Share-Alike (CC BY-NC-SA) license.
Photo Credits: 1. CostanzaWallet by Kyle MacDonald Licensed under creative commons Attribution 2.0 available at http://www.flickr.com/photos/kylemacdonald/62025338/in/set-1339638/ 2. Coke Vending Machine: Source http://www.coca-colacompany.com/stories/tapping-into-taste-pay-with-your-phone-at-the-vending-machine

End Notes