Market Analysis and StatisticsG00226636

Market Trends: Mobile Payment, Worldwide,2012Published: 30 May 2012

Analyst(s): Sandy Shen

Mobile payment services are growing fast in some markets, but still facechallenges in others. Services with value propositions that resonate withlocal markets have the best chance of success.

Key Findings■ Communications service provider (CSP)-led mobile payment services will align with existing

financial systems and regulations to ensure adequate risk and fraud management mechanismscan be deployed.

■ The only way to make a success of Near Field Communication (NFC) payment systems is todevelop an ecosystem to support services ranging from ticketing, couponing and loyaltyschemes to campus and city services, for which payment is the enabler.

■ Mobile retail payment using technologies such as card reader attachments is gaining fastertraction than NFC payment, and this will remain so between now and 2015, as NFCtechnologies are still maturing and an NFC ecosystem is still being developed.

Recommendations■ Mobile payment providers in emerging markets should conduct field studies and pilots to find

out the best go-to-market strategies for local conditions. Just because an operating modelworks in one country does not guarantee that it will work in others.

■ Mobile payment providers in emerging markets should focus on one key value proposition, anddesign marketing and offerings around that proposition to drive market traction. They shouldavoid getting into too many offerings at the beginning, as doing so will dilute the valueproposition.

■ Governments with ambitions for NFC services should coordinate the efforts of key industryplayers to encourage them to agree on a common set of specifications and infrastructure, andfoster participation of, and interoperability between, various application providers in order toenable a range of use cases.

■ NFC service providers should work with a wide range of business partners to enable a variety ofservices where payment is the enabler. Payment alone is not enough to spur adoption of NFC.

■ Merchants and brand-name companies should investigate the business case for mobile retailpayment using non-NFC technologies. They should run small pilots to see how the solution canenhance capabilities in retail and field services.

Table of Contents

Trends in the Market..............................................................................................................................3

Market: The Market Is Moving in All Directions........................................................................................3

Regions: Each Market Requires Its Own Development Model.................................................................5

North America..................................................................................................................................5

U.S.............................................................................................................................................5

Western Europe................................................................................................................................6

U.K.............................................................................................................................................7

France........................................................................................................................................7

Spain..........................................................................................................................................8

Germany....................................................................................................................................9

Asia/Pacific.......................................................................................................................................9

Japan and South Korea..............................................................................................................9

China........................................................................................................................................10

India.........................................................................................................................................10

Bangladesh..............................................................................................................................11

Pakistan...................................................................................................................................12

Eastern Europe...............................................................................................................................12

Russia......................................................................................................................................12

Poland......................................................................................................................................13

Middle East....................................................................................................................................13

Turkey......................................................................................................................................13

United Arab Emirates................................................................................................................13

Africa..............................................................................................................................................14

Nigeria......................................................................................................................................14

Tanzania...................................................................................................................................15

Latin America.................................................................................................................................15

Brazil........................................................................................................................................16

Mexico.....................................................................................................................................16

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Technology: Mobile Retail Payment Is Gaining Traction........................................................................17

Contrarian View: Large-Scale Adoption of Mobile Retail Payment Technologies Will Further Delay NFC

............................................................................................................................................................18

Vendors to Watch................................................................................................................................19

Conclusions.........................................................................................................................................20

Recommended Reading.......................................................................................................................20

Trends in the MarketMobile payment services (see Note 1) have experienced ups and downs in the past year, and overallwe expect the market to maintain an average annual growth of 42% through 2016 for bothtransaction volume and value.

Positive aspects of the past year include:

■ Mobile carriers and financial institutions continuing to invest in mobile payment services, withmajor deployments being announced and rolled out. Examples include Telefonica's pan-European launch of NFC services and progress with mobile payment deployments in 12markets in Latin America, and Vodafone's plan to launch NFC payment across its 30 markets.

■ Major card networks and solution providers entering the market with major initiatives. Examplesinclude MasterCard's mobile money partnership program intended to push into developingmarkets, and Ericsson's launch of mobile commerce solutions centered around a convergedwallet solution for mobile carriers.

■ Major merchants pushing for mobile payment services. Examples include Starbucks rolling outits mobile payment app nationwide in the U.S., and McDonald's launching marketingcampaigns in the U.K. to promote contactless payment.

Disappointing aspects of the past year include:

■ Slow adoption of NFC payment services, with early casualties. Google Wallet saw slowadoption due to a lack of NFC phones and limited merchant coverage. Bling Nation, a pioneerin NFC payment, folded for similar reasons.

■ Mobile payment services not being easy propositions, even for big companies. Nokia retreatedfrom a mobile money service less than two years after launch, indicating big challenges indeveloping the ecosystem and educating the market.

Market: The Market Is Moving in All DirectionsEmerging Markets Continue to Do Well but Require Localized and Differentiated Models.Mobile payment services continued to see strong growth in numbers of users and transactions

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during the past year. However, not all services had a smooth ride as service providers are still tryingto determine the best go-to-market strategies. The success of M-Pesa in Kenya cannot simply becopied to other markets — each market needs a model that works for its local conditions. In somemarkets, such as Pakistan, there are a number of innovative models as service providers try todifferentiate services, based on their existing user base and businesses. Such differentiation willhelp maintain a healthy level of competition and sustain growth.

Regulations Take Different Paths But Will Align Mobile Payment With Existing FinancialSystems. Some regulators take a friendly and flexible approach. Others are more conservative intheir efforts to open the market progressively:

■ Friendly regulations set clear guidelines from early on, setting the boundaries and facilitatingservices such as bank agencies and know-your-customer (KYC) processes, and allow forflexibility in operations. For example, they allow proportionate KYC processes, based ondifferent types of accounts, and they allow various service providers to participate, such asbanks, telcos and third parties. Friendly regulators also revisits their policies from time to time toact on market feedback.

■ Cautious regulations tend to place banks at the center of the ecosystem and exclude othersfrom obtaining e-money licenses, connecting to the payment network, or even providingpayment services at all. They tend to have little flexibility for things such as KYC requirements,transaction modes, cash-in/cash-out and security. Some also lack clarity on key issues such asthe agency role and tariff caps.

Whichever approach regulators takes, we expect most countries to include mobile payment underthe existing financial regulations, with some degree of flexibility to cater to the nature of the service.

Distribution Network and Agency Management Are Important Success Factors in EmergingMarkets. In emerging markets service providers will rely on their distribution networks to reach outto users, most of whom are in rural areas. Therefore network coverage and availability in remoteareas have a direct impact on service uptake. In addition, agencies need to be recruited, trainedand managed on an ongoing basis to ensure quality of service. Candidates need to go through aqualification process to ensure they have the financial standing, equipment and technicalcapabilities to conduct mobile payment business. Agencies need to be trained to help themunderstand the business implications, such as cash float management, process compliance anduser education. Sometimes a tiered agency structure needs to be adopted to ease the managementload for service providers, as well as to offer financial and technical support to the retail agency. Thesmooth operation of the agency network has a direct impact on the user experience and servicequality.

Free Bank Fund Transfers Can Become an Alternative Payment Method. In February 2012Barclays launched its peer-to-peer (P2P) money transfer mobile app, which allows any bank user inthe U.K. to send money from his or her bank account free of charge. Barclays reported 500,000downloads in the first three months. Some small businesses and eBay users are using the servicefor payments. If it catches on in a big way, it could become an alternative payment method to rivalPayPal, but with an easier process as users can transact directly from their bank accounts. Therewas a similar move in the U.S. called clearXchange (CXC), formed by three U.S. banks aiming for a

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commercial launch in mid-2012. But this service has been very quiet since its announcement in2011, partly due to a lack of clarify about the fee structure and partly to the lack of participation bymore banks.

NFC Services Require Coordinated Efforts Encompassing a Number of Use Cases WherePayment Is the Enabler. Worldwide, NFC still has a very low uptake after many years ofdevelopment. We looked at the case of France and identified it as a model for countries that havethe ambitions for NFC services. It is necessary to establish an industry alliance early on, one thatinvolves as many players as possible, to agree on a common set of specifications so thatinteroperability can be achieved. It is also important to support a variety of use cases, fromcouponing, loyalty schemes and ticketing to personal ID and city services. Only by enabling manyservices on a single device will users see the value of NFC. Payment can be the enabler for all theseservices, but on its own will not be enough to spur market development.

Mobile Payment Acceptance Using Card Readers Shows Big Potential in Retail and FieldServices. These services require minimal investment by the merchant and minimal change in userbehavior, and they address the pain points in the purchasing process. Small and midsizebusinesses (SMBs) can accept card payments without investing in expensive equipment or beinglocked into long-term contracts. Retailers can mobilize in-store payment and offer better in-storeservices. Big companies with a large field force or distribution network can collect payments fromthe field more conveniently. We have seen significant growth in this sector, with investment bymajor companies. These services will fill the void until NFC services are widely available.

Regions: Each Market Requires Its Own Development ModelThere is no one-size-fits-all solution for every market, as the drivers and requirements of eachmarket are different. Below we outline the market trends, key players and technologies for eachregion and major market.

North America

U.S.

Mobile commerce remains the biggest contributor to mobile payment transactions in the U.S.,driven by shopping via mobile phone and media tablet. eBay expects its mobile sales to reach $5billion in 2011, up from $2 billion in 2010. We expect at least half of the associated sales to comefrom the U.S. We expect mobile commerce to continue to drive mobile payment transactions in theU.S. through 2016.

In contrast to the hype about NFC payment, actual adoption is growing much more slowly thanexpected. That is prompting service providers to look for new partners and business models:

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■ Isis, a joint venture between Verizon, AT&T and T-Mobile, has expanded all major cardnetworks, which include Visa, MasterCard, American Express and Discover, and added newissuers, such as Capital One, Chase and Barclaycard.

■ Google Wallet is now being supported by AT&T and T-Mobile, in additional to its launch partner,Sprint. It is also rumored to be considering sharing service revenue with Isis to speed adoption.

If these two schemes do collaborate, it will be good for the market as users would have access to agood selection of card brands and issuers, and the potential interoperability might encouragemerchants to upgrade their point-of-sale (POS) terminals.

Transit operators are in the process of migrating from closed-loop ticketing systems to open-loopsystems that support contactless bank card payment. Utah Transit Authority in Salt Lake City is thefirst to complete the migration. A number of other operators, such as those in Chicago,Philadelphia, New York and Washington D.C., have also begun the process. This will providecontactless infrastructure for NFC payment. Isis plans to launch its NFC services in Salt Lake City inmid-2012, and transit payment will be an important element of that.

At the same time, there is a variety of non-NFC mobile retail payment offerings coming to themarket, and merchant adoption of these is quite strong. Square, the pioneer of mobile paymentacceptance using card reader services, reported that it was processing transactions at anannualized rate of $5 billion ($13.7 million per day) in April 2012, two years after launch. It also hadmore than one million merchants on board by the end of 2011. These technologies (see theTechnology section below for details) are mostly targeting SMB merchants and individuals, butsome big companies with large field forces and distribution systems are also starting to showinterest. Mobile retail payment using non-NFC technologies is seeing faster adoption than NFC, andthis will remain the case through to 2015 as NFC technologies are still maturing and an NFCecosystem is still being developed.

At the same time, we expect to see a number of merchant-branded mobile payment schemescoming to market. The early success of the Starbucks Card Mobile app demonstrates thecapabilities of mobile apps for delivering a good user experience and engaging customers. Moremerchants will follow suit with their own mobile payment schemes. Not all of those will besuccessful, however, since only those that enhance the shopping experience, eliminate the painpoints and deliver a good user experience will last.

Western Europe

Similar to the U.S., mobile payment in Western Europe is primarily driven by mobile commerce,where people shop from "e-tailers" via phone. There has also been an active market for NFCpayment for the past few years, but most NFC services are still in the trial stage, with only a fewcommercial deployments. There are also a few services offering money transfers and onlineshopping using mobile phone numbers, but these are sporadic and give no clear indications ofgrowth.

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U.K.

The country is becoming a competitive market, with a number of launches. The most noticeablelaunch is the Quick Tap service from Orange (now part of Everything Everywhere) and Barclaycard.This service enables NFC payment from a prepaid account loaded on the mobile phone, and can betopped up using Barclays' credit and debit cards or a credit card issued by Orange. The servicewas launched in May 2011, but so far the uptake is very low. One of Gartner's analysts tried theservice and reported his findings in "Lessons to Learn From Early NFC-Enabled Mobile PhonePayment Deployments." A key problem is the lack of training of both the bank's and the CSP's staff,which leads to user confusion during service application and usage. The single-device support isalso a limitation, though we expect the service to roll out more devices in the future. Probably dueto the lack of success of the joint service, Barclaycard has unveiled an NFC tag that its cardholderscan stick to the back of their phones in order to spend up to £15 without a PIN. The service will beavailable to all Barclaycard users by the end of 2012.

Transport for London (TfL) is in the process of upgrading its transit card reader system to supportcontactless payment by credit and debit cards. But has put back the completion date to 2013 orlater, from the original plan of end of 2012. Once the project finishes, it will provide fertile ground forNFC payment using mobile phones, if the technology can meet the speed and usabilityrequirements of the ticketing system. In addition, there are a total of 50,000 contactless POSterminals in the U.K., which is a good starting point for contactless payments. We believe theindustry still needs to raise user awareness and address a few usability issues to promotecontactless payments.

On the other hand, we see banks and operators introducing new initiatives to offer alternativepayment methods. In February 2012, Barclays introduced a mobile application — Pingit — thatenables P2P money transfer between any bank users and is free of charge (see "New BarclaysMobile Payment App May Upset Bank/Telco Status Quo"). The bank reported 500,000 downloadsafter three months of service, and the app is also used by small businesses and eBay users toaccept payments. If the app attracts a larger user base, it could well become an alternative to cashand card payments. On another front, in April 2012 O2 launched a mobile wallet that focuses on agood shopping experience, with payment as the enabler. The wallet enables users not only totransfer money but also to compare prices, receive offers and shop at retail stores with a physicalcard. The operator already offers a number of commerce-related services under the Priority brandthat can fit well into this new initiative. If the wallet offers compelling value by closely integratingpayment into the shopping experience, it could become a strong player in this competitive market.

France

France is on track for nationwide rollouts of NFC services by major CSPs and banks in the first halfof 2012. The country has taken a very systematic approach to NFC services by not just focusing onpayment but also trying to establish an ecosystem for NFC services in which payment is one of theenablers. France is a model for countries that want to deploy NFC services on a large scale. Keysteps that it has taken include:

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■ Early establishment of industry associations (Association Européenne Payez Mobile [AEPM] andAssociation Francaise du Sans Contact Mobile [AFSCM]), which include major stakeholders offinancial institutions, CSPs and technology providers. They take the responsibility for settingtechnical specifications, promoting the specification to members and industry bodies,coordinating trials and helping members launch NFC services.

■ Work with international bodies to ensure the standards are supported by the internationalcommunity. AEPM develops its specification with the support of international standard bodiessuch as the GSM Association (GSMA), European Payment Council (EPC), EuropeanTelecommunications Standards Institute (ETSI) and EMVCo.

■ Early establishment of specifications to ensure all players move in the same direction. AEPMand AFSCM published technical specifications for NFC payments in 2009 and a draftspecification for trusted service manager services in 2010, before the large-scale trial waslaunched.

■ Running a pilot project with a variety of NFC services in a city to test the viability of thetechnical specifications and identify operational challenges and revenue opportunities. TheCityzi project in Nice was the largest pilot before commercial rollouts. It included services suchas payment, transportation, campus services, loyalty schemes, coupons and city services.

■ Provision of government funding to support service deployments and innovation. The Frenchgovernment provided 20 million euros to fund the NFC project in nine cities. This helps establisha nationwide infrastructure for NFC and encourages innovative applications of the technology.

Thanks to these steps, France is on the way to becoming an early-adopter country for NFC. Themore coverage the service receives, the more use cases and applications arise, and the higher theinterest of businesses and consumers in using NFC services grows. This creates a virtuous circle forthe technology.

Aside from NFC deployments, France has also introduced a service promoting the use of mobilephone numbers for online shopping. Buyster, a joint venture between the country's three majorCSPs and a technology provider, aims to enable users to use their mobile phone number and asecure code for online shopping, so eliminating the need to enter payment details. It is unclear asyet how the service will be received by the market, and whether it will benefit online merchants withincreased revenues.

Spain

In contrast to the systematic approach of France, Spain has taken a "freewheeling" approach toNFC services. It does not have an industry association to align the pilot efforts — of which there areat least a dozen — although three CSPs are collaborating on interoperability specifications. Spaindid conduct a citywide trial in Sitges, but it involved only one CSP, one bank and one card network,and it focused only on payment, with no other services. It is not surprising that no follow-updeployments have taken place since the trial, despite the positive results reported by trial sponsors.We continue to hear a lot of pilot announcements, but no commercial rollouts have yet taken place.

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Germany

There is less mobile payment activity in Germany than in other major markets in Western Europe.Cash and direct debits still account for a large portion of Germany's payment market. Changingusers' behavior, so that they make payments via mobile phone, presents a huge challenge for allservice providers.

The CSP-backed mpass is an alternative payment service that enables users to shop online usingtheir mobile phone number. The three CSPs behind the service have plans to introduce NFCpayment on top of the mpass platform. The service will initially use NFC stickers, before moving toNFC phones when they become widely available. So far, Mpass has very low uptake in Germany, sothe prospects for an NFC version do not look very promising.

On the bright side, in April 2012 the German Banking Industry Committee started Europe's biggesttrial of a contactless payment service, enabling 1.3 million cardholders to spend up to 20 euroswithout a PIN. The industry hopes this will encourage people to start using contactless technologyand wider deployment of contactless payment readers.

Asia/Pacific

Japan and South Korea

These two countries have been working closely to promote the use of NFC services within theirborders and for cross-border usage. Early in 2011, CSPs from both countries established cross-border alliances to support interoperability among their services. Later the year same, they set upalliances within their own countries with more ecosystem partners.

South Korea takes a similar approach to France, where the consortium consists of CSPs, cardissuers, technology and service providers and government bodies. It has opened an NFC zone inSeoul to test various NFC services, from couponing, loyalty schemes and advertising to payment,ticketing and ordering. SK Telecom, the largest CSP in South Korea, has also stipulated that all newsmartphones should be equipped with NFC technology.

Japan has been using Felica-based contactless technology, which is not compatible with the NFCstandard. Hence Japan's current focus is to add support for standard NFC technology. Sincecontactless services have been around in Japan for a number of years, the ecosystem is wellestablished, which means the move to NFC is more of a technical issue than a business-relatedone. This explains why the alliance in Japan is only between three CSPs and has a narrowly definedgoal of moving Felica-based services to NFC-standard-compliant services. Each carrier isresponsible for migrating the service with their business and technology partners. For example, arecent launch of NFC services was led by a single CSP, KDDI, supported by a number of cardissuers, technology and service providers; applications included couponing, loyalty schemes,ticketing, smart tags, payment and time management.

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China

China's formal financial system consists of commercial banks, postal offices and credit unions thatcan offer banking services. But the distribution of this system is very uneven, with much densercoverage in the coastal region and sparse coverage in the west. In extreme cases, about 14,000people are covered by a single branch. Given that there are many migrant workers in the coastalregion, many of whom have mobile phones, mobile payment should be a promising business inChina. However, the financial sector is strongly regulated, and pricing is for the most part mandatedby the government, with little competition between the institutions. There is also no guidance as tothe agency role of financial institutions. This significantly limits the potential of mobile payment,which has to rely on a network of agencies to reach the rural market. Some commercial banks haveoffered mobile money transfer services with reduced tariffs, but they are mostly targeting bankusers who want to transfer money to other bank users. The lack of a distribution network and thelack of user awareness have resulted in low uptake of these services.

On the other hand, mobile commerce has seen fast growth in China. Taobao, the leading e-commerce provider, reported $1.6 billion mobile sales in 2011, up from $286 million in 2010. Themajority of Taobao's transactions are conducted via its Alipay payment platform. Mobile commercewill remain the largest driver for mobile payment during the next two years.

CSPs and China UnionPay (CUP), a card network, have been working on NFC payment for the pastthree years, but with little progress. China is an example of a country where standardsfragmentation and a lack of coordinated efforts among players have held back market development.China Mobile, the leading CSP, tried to promote its 2.4GHz contactless standard, instead of usingthe international standard of 13.56MHz, but finally had to retreat due to lack of support from otherplayers and the significant investment required to upgrade the reader infrastructure. A dozen trialstook place in various cities, led by various operators and CUP. To date, there is no recognizedindustry alliance to coordinate efforts. Nor is there cooperation between the regulators of financialservices and the telecom industry. On the other hand, NFC ticketing and campus usage lookpromising, as these services can use existing contactless infrastructure and occur within controlledenvironments where solutions can be deployed quickly.

India

Strict regulations have resulted in slow growth of mobile payment services in India for several years.Regulations require providers of these services to partner with a bank and give banks the mostinfluential role. Banks not only "own" the customers and are authorized to issue e-money, but alsohave exclusive connectivity to the interbank mobile payment system (IMPS), which is the nationwideplatform for mobile transactions. Although the regulator has done several things that favor marketdevelopment, such as introducing the IMPS platform to ensure interoperability and a national IDproject that will make KYC processes easier, there remain several regulatory constraints on themarket's development:

■ The regulations allow only a "semi-open" mobile wallet, whereby users can only deposit moneyinto the account — they cannot "cash out." This dramatically undermines the service's valueproposition, where many first-time users want to cash out to ensure they get the money.

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■ The only transaction modes allowed are P2P and consumer to business, not business toconsumer or business to business. This eliminates the use case of salary and benefitdistribution, which is a large part of the money transfer market.

■ There is no cap on the tariff that the service provider can charge. We hear that some serviceproviders are charging as much as 3% on P2P transfers, which is much higher than what bankscharge. By comparison, in Kenya M-Pesa charges a flat fee for sending money to registeredusers. A competitive fee structure would encourage adoption and increase transaction volume.

We acknowledge that the regulator is taking a very prudent approach to mobile money and wants tohave rigorous risk management and offer the best protection for consumers. We expect theregulations to loosen in areas such as the "semi-open" wallet and transaction mode, and clearerguidance to be offered when policymakers learn more from deployments and market feedback.

There are at least half a dozen mobile payment services in India, but uptake of these has been verylow. One reason is the lack of a distribution network. Because of the regulatory constraints, serviceproviders are not investing in the network or promoting the service. The lack of user awareness andagency training, along with poor management of the agency network (which has led to cash flowproblems), has harmed the service's reputation. Currently many services target banked users, whocan be reached through the bank's existing infrastructure and who have the literacy to use suchservices. However, the value proposition of mobile payment is not appealing enough for theseusers, as they also have access to online banking and payment services.

There is also an attempt to use mobile payment technology for retail purchases. Movida, a jointventure between Monitise and Visa, aims to enable merchants without a POS terminal to acceptelectronic payments that are backed by debit and credit cards. This is an interesting attempt toincrease the volume of electronic transactions, which is still quite low. It remains to be seen whetherthe service is appealing enough to cardholders.

Bangladesh

Bangladesh is another market where mobile payment services have strong potential. The countryhas a high level of mobile penetration, at about 45%, while banking penetration is only about 10%.The central bank published a guideline for mobile payment services as early as in 2008 and updatesin 2011. The guideline covers all major aspects of mobile payment, including business models,custody accounts, the role and selection of agencies, tariff structure (with maximum and minimumlimits), interoperability, security, risk management and consumer protection, while leaving plenty ofroom for service providers with regard to operational processes and responsibilities.

Bangladesh is the seventh-largest recipient of international remittance, which contributed to 9.6%of its GDP in 2010 according to The World Bank. Money transfer, especially international transfer, isa key application for mobile payment services, along with bill payment and the purchasing of traintickets.

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Pakistan

Pakistan's regulator has been friendly to mobile payment services in that it has set clear rules andresponded to market challenges in order to remedy shortcomings. Although it mandates bankpartnership for all service providers, the regulations do allow telcos to take ownership of banks andreduce the KYC requirement for low-value accounts. It has recently removed the requirement totake fingerprints at the time of registration, and replaced it with digital photo, which is easier andless expensive to capture. It also recently introduced a "level 0" account with a very low value andtransaction limit. Level 0 accounts can be opened electronically with no physical paperwork.

The country will become one of the most competitive markets for mobile payment, and also onewith a number of innovative business models. Easypaisa is the best known and largest mobilepayment service in Pakistan, with about 1 million users in 2011. The second-largest is UnitedBank's Omni, which targets both government and nongovernmental organizations to distributebenefits to citizens. Besides these two live services, at least six other branchless banking licenseshave been issued to banks and CSPs, which are running pilots; other players are consideringapplying for a license. In the pilots, we see providers developing innovative business models builton their customer bases and existing businesses. Some examples follow. First MicroFinance Bankhas partnered with the Pakistan Post Office to enable it to place loan officers at post offices todistribute and collect loan payments. Dubai Islamic Bank Pakistan targets high-net-wealthindividuals, rather than the mass market. TCS, the country's largest logistics and courier company,is considering setting up its own bank and using its motorcycle deliverymen to offer bankingservices to people's doorsteps. Askari Bank, which is 50% owned by the Army Welfare Trust, willstart by offering salary distribution to soldiers and their families. These business models willdifferentiate services from various providers, and help maintain a healthy level of competition, whilefostering innovation.

Eastern Europe

Russia

Uptake of mobile payment services is very low in Russia, largely due to a lack of trust in electronicpayments. The Postal Office is the leader in the domestic remittance market with a 30% to 50%share, and it also has a mobile money transfer service. Commercial banks and money transferoperators such as Western Union are present in the country, with good service coverage. Theycompete with CSP offerings. All three major CSPs have deployed their own mobile paymentservices, but it was not until January 2012 that they agreed to make each other's services availableto their own users. Interoperability will encourage the adoption of mobile payment services andincrease transaction volume.

There is also a rush to deploy NFC services, especially for public transportation networks. The goodinfrastructure in major cities offers an opportunity for NFC. A number of trials have been carried outin Moscow and St. Petersburg, with the aim of launching NFC ticketing in 2012.

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Poland

A number of trials of NFC payment systems have been conducted in Poland, and there was onecommercial deployment by a CSP in 2011. Poland has good contactless reader infrastructure, withabout 35,000 contactless POS terminals in 2011. There are also several million contactless debitand credit cards in circulation. Despite the favorable conditions, the NFC payment sector has notdeveloped quickly and faces several obstacles:

■ Limited support for mobile devices. Many services support only one mobile phone, and someservices require people to use a NFC attachment for their mobile phone.

■ Lack of nonpayment applications. In many services, payment is the only service supported.There is, however, also one trial by the National Museum that enables people to get moreinformation about exhibits via smart tags.

■ Technology bifurcation. CSPs prefer the SIM-based approach, while banks prefer NFCaccessories such as phone attachments. There is no common specification or interoperabilitybetween services.

The limited range of mobile devices is a problem for all service providers. But we think Polandshould do more to enable more services and encourage interoperability in order to scale up servicesquickly. Payment services alone are not enough to spur market adoption.

Middle East

Turkey

Turkey is one of the countries most advanced with NFC deployments. It benefits from goodcontactless reader infrastructure: 60,000 merchants are equipped with contactless POS terminals. Anumber of banks and CSPs have deployed NFC payment services. Turkcell is the most successfulin terms of user adoption, although it is the latest provider to enter the NFC service market. Turkcellhas not only gained support from four banks, each of which has deployed its own mobile paymentservice, but also achieved 17% penetration of users equipped with NFC phones after 10 months.Turkey has used various form factors for the secure element of NFC services. We expect the SIM-based approach to become the main one in this country.

United Arab Emirates

CSPs and banks have both launched mobile payment services in the United Arab Emirates (UAE),but uptake so far has been lackluster. On the other hand, the UAE government is a key force inpromoting electronic payments, for which mobile is an important channel. The Government of Dubairecently established a partnership with CSP Etisalat to upgrade its eDubai portal, which offersonline access to government services. The partnership will see the government use Etisalat'selectronic and mobile payment solutions for all government payments, which include topping up oftoll charges and paying for utility bills and traffic fines. This will make Dubai a test bed for e-government services that can be replicated in other UAE cities and even the wider Gulf region, if runsuccessfully.

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The federal government is running a project to embed the national ID system into mobile phonesusing NFC. The Emirates Identity Authority (EIDA) has commissioned Etisalat to assess thefeasibility of the project, and will be followed by a pilot before proceeding to commercialdeployment. This approach will help build the infrastructure for contactless readers, and encourageusers to upgrade their mobile phones. Previously, several NFC trials have been conducted, with onecommercial launch in late 2011. But the country's limited NFC infrastructure will be a key hurdle tothe service's development. In 2011 there were only 600 outlets supporting NFC in the UAE.

Africa

Africa is the most active market for mobile payment services. The best known and most successfulservice is M-Pesa in Kenya. This service had about 14 million users at the end of 2011, while thewhole region had 45.5 million users. The fast growth of mobile payment services in the region canbe partly attributed to the lack of a regulatory environment for mobile financial services, whichmeans service providers can scale services at the expense of proper risk control and fraudmanagement. This situation is slowly changing, though, as more regulators are becoming aware ofthis issue and putting in place regulations to ensure sustainable growth and align mobile paymentsystems with existing financial systems.

Nigeria

Nigeria is the largest mobile market by number of users. There is a big difference in the penetrationlevels of mobile services and bank services: 54% for mobile services and only 24% for bankservices. According to Gartner's research, this gap points to considerable potential for mobilepayment services in Nigeria. The Nigerian government wants to promote a cashless economy toreduce the use of cash and increase electronic transactions, and to reduce the financial exclusionrate from its current level of 46.3% to 20% by 2020. These are all favorable conditions for mobilepayment services. The Central Bank of Nigeria (CBN) published a regulatory framework for mobilepayment services as early as in 2009, which had both good and bad points.

On the upside, the regulations promote the interoperability of services. CBN requires all mobilepayment services to be connected to the interbanking settlement platform, which can provide real-time settlement, and the telecom operators to open their networks to any other service provider toensure quality of service. This will create an open and transparent environment for mobile paymentservices and encourage adoption.

On the downside, the regulations identify banks as a key service provider for mobile payments,along with corporations, but excluding telecom operators. This is very striking as telecom operatorshas been a driving force behind many mobile payment deployments in emerging markets. CBN saysthat the reason for excluding telecom operators is to ensure a level-playing field for all competitors,so that the market is not dominated by a few big companies that have access to a larger portion ofthe population and the infrastructure. CBN also believes the decision will promote interoperability,so that a few companies cannot maintain a competitive advantage by limiting the service to theirown users.

While we acknowledge that it is important for regulators to ensure an open and secure systemwhere players can compete on a fair basis, it is not necessary to explicitly exclude telecom

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operators, since they could bring the investment, marketing and distribution network that theseservices really need. More importantly, they could bring their experience learned from deploymentsin other markets to help ensure a smooth launch in Nigeria.

CBN issued 11 commercial licenses in August 2011, mostly to banks. As of April 2012, there waslimited promotion of mobile payment services in Nigeria, and most services have only a fewthousand agents in the field. For a market like Nigeria, it requires at least 10,000 agents to cover thewhole country effectively. As a result, uptake has been low, and the leading providers only have afew hundred thousand customers. The lack of active participation by telecom operators meansNigeria is on the slow track to widespread adoption.

Tanzania

Tanzania is one of the world's fastest-growing mobile money markets. The country's mobile phonepenetration is about 50%, whereas its banking service penetration is about 13%. This makesTanzania a highly promising market for mobile payments. The country has a highly competitivemobile payment market with four live services, and CSPs are the driving force behind theirdeployment. Tanzania has seen fast growth since April 2008 when the first two services went live. Itnow has more than 11 million mobile payment users.

Tanzania's market growth had been unregulated, and operators have not been required to partnerwith banks for mobile payment services. This is soon to change, however, as the country's centralbank drafted mobile payment regulations in February 2012. We expect bank partnership to berequired for all mobile payment services, so that proper risk and fraud mitigation mechanisms are inplace. In addition, telecom regulations require all mobile phone users to register using their realnames. This is a positive move for mobile payment services as it will ease the KYC process,requirements for which are similar to those for mobile user registration.

Although Tanzania is similar to Kenya in terms of its stage of economic development, its strategy formobile payment services is very different due to differences in culture, demographics and marketcharacteristics. For example, many heads of households in Kenya migrate to urban cities to earnhigher wages, and send money back to their rural families on a regular basis. So, in Kenya, there isclear demand for services to transfer money from urban to rural areas. In Tanzania, however,population density is much lower and there is no clear pattern of migration to urban areas. Hencethere is less demand for money transfer services in Tanzania, and there is no clear pattern oftransference. Tanzania also has a generally lower level of financial literacy, with many people neverhaving heard of a debit card or ATM (according to the GSMA). Vodacom, which operates M-Pesa,took about a year to realize that the Kenyan model did not work in Tanzania. It then made changesto its pricing structure, marketing campaigns and agent model, and added new services to supportbill payment, airtime purchases and microfinance loan repayments. The service reported 9 millionusers by 2011, up from 280,000 in June 2009.

Latin America

Although this region is generally a developing market, there are only limited activities in the field ofmobile payments. There are some carrier-led deployments that cover multiple markets, such as

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Telefonica's joint venture with MasterCard and Tigo Cash. But the former's service is only just beingrolled out, starting with Brazil. Tigo Cash is live in four countries, but only the one in Paraguayseems to have captured a meaningful number of users (15% of Tigo's user base in 1Q12). There arealso bank-led efforts to offer mobile banking services to their existing customers. The unbankedsector remains underserved by most providers. There are specialized services targeting immigrantsto the U.S., to enable them send money home, but these are also yet to reach critical mass.

Brazil

Although Brazil has a low penetration rate for banking services, with estimates ranging from 30% to40%, the country has an efficient banking sector and well-established informal financial channelsthat make the prospect of mobile payments less attractive. The banking sector is highlycompetitive, with more than 150 banks and over 19,000 branches. It also has a well-developednetwork of agents who work as business correspondents for banks. The central bank estimatesthere were 150,000 registered agents by January 2010. The combination of bank branches andagents gives better geographic coverage than CSPs, including presence in very remote areas thatCSPs cannot reach.

There also appears to be a lack of demand for mobile payments. Banks, ATMs and correspondentbanks can all be used for money transfers and bill payments, and mobile top-ups can be made atcorrespondent banks. Eighty-four percent of the population is in urban areas, so the need fordomestic transfers is relatively low, and most transfers happen within cities. International remittanceis also small: it contributed only 0.3% of Brazil's GDP in 2009 according to the International FinanceCorporation. In addition, bank cards have a high penetration rate, with more than one card perdeposit account for both debit cards and credit cards. Penetration rates for ATMs and POSterminals are also high — on a par with some developed markets such as Germany and France.

This situation leaves mobile payments with only niche opportunities, such as collection ofgovernment benefits, obtaining microloans, P2P transfers for convenience, B2B payments in thefield, and enabling small merchants to accept electronic payments. Oi Paggo, the country's leadingmobile payment provider, is deploying services to enable consumers to pay for retail purchases,and small merchants such as street vendors to accept payments via mobile phone. Given thetechnically advanced status of the banking sector, mobile-enabled retail payment may presentopportunities if it offers a good user experience, the right incentives and a competitive fee structure.

Mexico

Regulations in Mexico have moved in a direction that favors mobile payments. The role of bankagent is allowed, and agents can be owned by banks and non-banks. E-money can also be issuedby non-bank providers. The regulations have enabled proportionate KYC requirements thatrecognize accounts at five levels, ranging from anonymous accounts that can be opened withoutany user ID but are capped in usability and transaction value, to fully fledged bank accounts withunlimited transaction value and functions.

Mexico has more than 40 banks with over 10,000 branches. Many major banks have used agents toextend their reach, mostly via retailers and telecom operators. There are some activities ongoing toestablish a shared agent network between retail chains and telecom operators, and banks seem to

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be comfortable with the idea of working with such a shared network. Some retailers, such as Aztecaand Walmart, have obtained banking licenses, and offer financial services targeted at the lower-income segments. Telcel, the country's largest CSP with over 70% market share, has partneredwith banks to offer mobile banking services.

However, there is uncertainty among many industry players, including banks and CSPs, regardingthe business case for mobile payments. The distribution network of the CSPs overlaps somewhatwith that of the banks, making it difficult to reach the rural and unbanked population. Thegovernment mandate to offer free services from ATMs also makes money transfers (which usuallycome with a fee) less competitive. That leaves retail purchase and credit offerings as two potentialopportunities. However, the interest rate for credit products and the service fees charged by bankagents are still relatively high, and affordable products for the unbanked sector are yet to bedeveloped. All of these factors mean that mobile payment offerings are limited so far.

International remittance came to $22 billion in 2010, accounting for about 2.1% of the country'sGDP (according to The World Bank), and the majority of the remittance came from the U.S. Thiscreates opportunities to target immigrants to the U.S. who want to send money back to Mexico. m-Via, a mobile money provider, offers immigrants to the U.S. a mobile wallet that can be used tosend money to Mexico. The service charges a $25 annual fee, but users can send money for free.The recipient can make purchases from 25,000 agents in Mexico, or cash out from the agent or anATM. This model attracts more frequent and smaller remittances, and means lower costs for theuser. Agents can make money from service charges such as cash-in, and increased footfall instores.

It will take major players such as banks and telecom operators to make aggressive investments indesigning and marketing mobile payment services before the market will move forward. We thinkretail purchases and credit offerings are two potential areas to focus on, but there is a need todesign the right user experience and fee structure to appeal to users and agents.

Technology: Mobile Retail Payment Is Gaining TractionAlthough mobile payment acceptance transactions are excluded from our mobile payment forecast,mobile retail payment technology is gaining traction with some merchants and presentsopportunities for service providers and equipment vendors. There are two types of mobile retailpayment service:

1. Ones that do not require any technical changes on the part of payers, who can continue to paywith physical cards, checks and cash, and without using mobile devices. There are twoapproaches:

■ Card readers attached to mobile devices to accept payment. These services allowmerchants to accept card payments by using a card reader that is usually inserted in theaudio jack of the mobile device. The service requires merchants to download a mobile appand register using their bank accounts. Some services require merchants to sign up for amerchant account. These services target individuals and SMBs who do not want to invest in

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POS terminals and get locked into expensive long-term contracts, and whose transactionvolumes are relatively low. They usually charge a flat fee for each transaction, and have noother associated costs. Companies such as Square, Intuit (GoPayment), PayPal (Here),VeriFone (Sail) iZettle and PayAnywhere fall into this category.

■ POS terminals upgraded to support new payment instruments. PayPal is rolling out its POSpayment solution with Tier 1 merchants. Users can pay by giving their mobile phonenumber and a PIN, or using a physical card linked to a PayPal account. The service requiresa software upgrade of the POS terminal and some changes to the merchant's back-endsystems.

2. Ones that require payers to use a mobile app that is supported by the POS terminal. Usersneed to link their card or bank account information to the app, and open tabs for a certainmerchant to pay for the charge. Alternatively, they can let the merchant scan the bar codegenerated by the app that is associated with their card. Merchants will need either a mobile appthat can communicate with the user's app, or to upgrade their POS system to accept paymentsfrom the mobile app. Examples include Square's Pay With Square app, LevelUp's bar codemobile payment app, the Starbucks Card Mobile app, and Tabbedout for hospitalitybusinesses.

Square, the pioneer of mobile payment using card readers, reported $13.7 million transactionsprocessed on a daily basis in April 2012, and had 1 million merchants by the end of 2011. The fastpenetration of mobile payment via card readers into merchants indicates that services that requireminimal investment in and change to merchants' systems and to user behavior stand a betterchance of acceptance.

It is not only SMB merchants and individuals who can benefit from the technology. Big companieswith a large field force or distribution system can also benefit from such technology. They cancollect card payments from customers, suppliers and distributors by using the technology withouthaving to carry bulky wireless POS terminals. Retailers can also use the service to mobilize in-storepayment to increase customer satisfaction by cutting queues.

Contrarian View: Large-Scale Adoption of Mobile Retail PaymentTechnologies Will Further Delay NFCMobile retail payment technology addresses pain points in the purchasing process with minimalinvestment required from the merchant and minimal changes needed in user behavior. It hasconsiderable potential to eclipse NFC payment for retail purchases. Square acquired 1 millionmerchants after two years of launch. PayPal Here signed up 200,000 merchants within its firstmonth. There are already a good number of players in the space, with more to come, andinvestments by major players (such as Visa, Intuit and Ingenico) in those technology and serviceproviders. In addition, we expect to see a large number of merchants introduce their own mobilepayment schemes, many of which will not use NFC. This will encourage consumers to maintain theirexisting payment habits — that is, to stick with cash and cards — or use mobile apps that offer acompelling shopping and paying experience. If this phenomenon proves large in scale, NFC's value

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proposition for fast and convenient payments would be further weakened and its widespreadadoption further delayed.

Vendors to WatchComviva has its roots in telecommunications. It provides a wide range of value-added services tomobile carriers, which are its main customers for mobile payment solutions. Comviva also countsBarclays and Wing (a subsidiary in Australia and New Zealand) among its clients. It recently teamedup with MasterCard to participate in a mobile money partnership program to help the card networkincrease its penetration of emerging markets. The company focuses primarily on emerging markets,such as Africa and Southeast Asia.

Ericsson relaunched its mobile payment solution in February 2012 by leveraging its carrier billingplatform. It targets CSPs as primary clients. It offers them a converged wallet with which operatorscan upsell and cross-sell between telecom and financial products. Ericsson also has a mobilecommerce interconnect solution that can link mobile wallets to service providers, which includeoperators, financial institutions, money transfer agencies and merchants. Ericsson's strong brandwith CSPs and the 1.6 billion users it already serves with its billing platform will make it a strongcompetitor in the mobile payment space.

Fundamo was acquired by Visa in June 2011 as a vehicle with which to penetrate emergingmarkets. Fundamo had a very strong presence in Africa through a partnership with MTN, but hasrecently been replaced by Ericsson. The company has extensive experience in emerging marketssuch as Africa, the Middle East and Southeast Asia, and its many deployments will remain a keyasset.

Gemalto provides smart card and personalization services to mobile carriers and financialinstitutions. It has played the role of trusted service manager in many NFC trials and deployments,and has strong presence in Western Europe. Its acquisition of Trivnet gave it a range of mobilefinancial service capabilities, which include banking, payment and wallet capabilities for both banksand CSPs.

Monitise provides hosted and on-premises services for mobile banking and payments. It relies onjoint ventures and strategic partnerships to enter new markets, and connects mobile carriers, banksand merchants to its hosting platform in order to build an ecosystem for mobile payments. Its mainoperations are in the U.K. and the U.S., and also has live services in India and Africa. In addition, ithas a strategic partnership with Visa, the company's majority shareholder, to connect Visacardholders to the Visa network.

Oberthur Technologies provides smart card and personalization services to CSPs and financialinstitutions. It is an active player in the NFC space, working as the trusted service manager forCSPs and financial institutions. It is in the process of acquiring MoreMagic, a mobile paymentsolution provider that offers a comprehensive suite of payment, commerce and marketing products,and has presence in both developed and developing markets. MoreMagic also has a hub service forinternational recharging, which now connects 150 businesses worldwide.

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PayPal powers mobile commerce for a large number of merchants. It also enables P2P transfers,though uptake of this service is relatively low. In early 2012, PayPal undertook a high-profile launchof two mobile retail payment services, one targeting Tier 1 merchants and the other SMBs. PayPalis betting on cloud-based payment for retail purchases as the most immediate opportunity; itexpects NFC to take off much later.

Sybase's mobile commerce solution provides mobile banking, payment and remittance functions,and targets both CSPs and financial institutions. Sybase has been selected by Telefonica to deployits mobile payment service in Latin America.

ConclusionsThe market calls for innovative offerings that cater to local needs and conditions. This reporthas looked at 19 key markets, and there is no single model that will work in all of them. Nor is therea "one size fits all" model that can work across all developed countries or all developing countries.The countries that are successful at driving mobile payment services are those with innovativemodels that leverage the resources and user base of the service provider, and cater to the mosturgent needs of users. There is also a need for differentiated models that focus on different valuepropositions, user segments and products.

NFC services call for an all-encompassing approach in which payment is the enabler. Thisrelates not only to collaboration among stakeholders and a common set of specifications but also tothe inclusion of various uses cases to deliver an appealing value proposition. Payment alone is notenough to stimulate user interest on a massive scale.

Recommended ReadingSome documents may not be available as part of your current Gartner subscription.

"Forecast: Mobile Payment, Worldwide, 2009-2016"

"Lessons to Learn From Early NFC-Enabled Mobile Phone Payment Deployments"

"New Barclays Mobile Payment App May Upset Bank/Telco Status Quo"

"Starbucks' Mobile Payment Application Challenges NFC Mobile Payments"

"Hype Cycle for Consumer Services and Mobile Applications, 2012" (forthcoming)

Evidence

This research is based on interviews with service and technology providers, field trips to India andChina, studies by other institutions, media and company reports that are publicly available, and theauthor's years of experience in the mobile payment sector. In addition, the author referred to thefollowing studies:

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■ "Mobile Money Study 2011" (IFC)

■ "Regulatory Framework for Mobile Payments Services in Nigeria" (Central Bank of Nigeria)

■ "Bangladesh Mobile Payment Guidelines, 2008 (Draft)" (Bangladesh Bank)

■ Andrew B. Morris, "Yes, NFC, That Speeding Train is Headed Your Way"

■ "Branchless Banking in Pakistan: A Laboratory for Innovation" (Consultative Group to Assist thePoor)

■ Greg Chen, "Branchless Banking Gains Momentum in India"

■ "What Makes a Successful Mobile Money Implementation? Learnings from M-Pesa in Kenyaand Tanzania" (GSMA)

■ "CGAP Technology Program Country Note — Mexico" (Consultative Group to Assist the Poor)

Note 1 Definition of Mobile Payment

Gartner defines mobile payments as transactions conducted by payers using a mobile device andpayment instruments that include:

■ Bank instruments, such as cash, bank accounts and debit and credit cards.

■ Prepaid accounts, such as transport cards, gift cards, PayPal accounts and mobile wallets.

Our definition excludes transactions that use:

■ Carrier billing using a telco's billing system and existing prepaid or postpaid mobile phoneaccounts.

■ Telebanking using a mobile phone to call a service center via an interactive voice response (IVR)system. The exception is IVR technology used in combination with other mobile channels suchas SMS and Unstructured Supplementary Service Data (USSD) for enhanced security.

■ Mobile point of sale (POS) payment acceptance by merchants that attach card readers tomobile devices or use the device camera to scan cards and checks

We have included mobile payment acceptance transactions in this report in order to cover overalltrends in mobile payment, on both the paying side and the acceptance side. But mobile retailtransactions using physical cards are excluded from our mobile payment forecast, which focuseson mobile-initiated payments.

This document is published in the following Market Insights:Consumer Services WorldwideMobile Communications Worldwide

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