Mobile Payments

Mobile Payments will revolutionise commerce and banking, facilitating humanitarian economic development in the developing world and catalysing the transition to the 'digital economy' for the West. This paper examines the two opportunities presented by mobile payments, with the aim to promote discussion at American Express and elsewhere.

A bridge to banking

According to the World Bank’s Financial Inclusion Database there are nearly 2.5 billion people without formal banking servicesi, and this lack of formal finance is regularly cited as one cause for the corruption, limited growth and poor household finances that have hindered much of the developing world. SMS Mobile Payments present an opportunity for real improvement, and will provide a foundation for a direct transition to 'modern' (mobile) payments systems.

SMS payments

SMS (simple text) can be used to transfer funds just using standard mobile networks. Users can change cash (or a bank balance if they have one) into a 'mobile balance', which can then be traded with relatives, shop keepers or even employees (in the case of the Afghan Government) through text1; examining the reasons behind the ‘unbanked’ clearly highlights the potential in SMS Payments. Taking the m-Pesa service as an example, this paper will highlight four clear benefits SMS Payments provide: accessibility, direct and secure payments, the possibility to enable additional financial flexibility and a foundation to transfer to modern next-generation payment systems.

The ‘unbanked’ are particularly focused in developing regions such as Sub-Saharan Africa (80% of total population), the Middle East (67%) and South America (65%). Obstructive bureaucracy is one problem; huge amounts of complex paperwork are often required to open an account, and this is regularly compounded by widespread corruption (bribes are often required to ensure the paperwork is completed). However, physical access is often the larger problem. Taking India as an example, villagers often have to travel up to 40 km to access a bank, and as a result only 35% of Indians have access to formal financial services.ii With mobile telephone coverage rapidly expanding (for example at over 50% of rural villages across Africaiii) mobile can unlock huge market segments that previously went untapped – m-Pesa is a prime example. Launched in 2007 in Kenya, the service has exploded with over 17 million accounts registered by

1It is important to note that this 'balance' is more similar to trade-able mobile phone credit than a traditional bank balance. An instance where mobile balance is used to purchase an item would actually be an exchange of assets rather than a traditional monetary purchase. This removes the potential legal issues stemming from how most SMS service providers are Telco's and not licensed Banks.

2012 and now processes over 50% of the nations GDP. It has spread worldwide, and provides an informative case study for the final three benefits SMS mobile payments could provide.

Direct and Secure Payments

SMS payments enable transfer of cash across huge distances (potentially including cross-borders) with full transparency and minimal risk of theft – this paper will examine Nairobi and Afghanistan to illustrate the potential benefits this could provide.

Vodafone (that currently run the m-Pesa platform) identified that many Nairobi locals were depositing credit in one side of the city, before withdrawing it only a few hours later on the other side; m-Pesa provided a 'secure' vault for their money in case they were robbed whilst passing across the city. Reducing the proportion of income that individuals and households keep in cash would reduce the impact of both theft and extortion, whilst reducing the time and risk inherent in manual cross-country payments (ie. to the rural family of an urban worker, or military personnel taking unplanned leaves of absence to trek home.)

Alongside risk of personal theft, SMS payments reduce the chances of institutional theft and corruption; Afghanistan is a good example of this. m-Pesa was deployed in 2008 as a means for the government to pay the police services wages. On the previous cash payment system, at least 10% of payments went to ghost officers and even more was lost to other forms of corruption. The corruption was so systemic that with the implementation of SMS many officers reported a mistake – they appeared to have received a pay rise (when in fact they had never before received their real wages.) This transparency could be extended to aid distribution. Again in Afghanistan, a US government audit of 2010 found that $1 Billion of aid went to the Talibaniv - direct SMS mobile payments are a potential tool to ensure aid (and wages) go where they are intended.

Additional financial flexibility

SMS payments also provide a tool for huge social development, through a potential structure for distributing targeted commercial microfinance. Microfinance is the distribution of small loans (under $1000) that are used to expand or start personal businesses, for covering personal emergencies (such as medical bills) or for personal development (such as house construction or school books.) Despite global interest rates averaging at around 37%, the average payback rate is still 97%.v A 10% increase in Bangladeshi borrowing was found to increase school attendance by over 8% (among other benefits.vi) Mobile payments provide two clear improvements: current 'formal'2 microfinance is limited to those with access to an institution – whereas SMS Microfinance is relatively universally accessible, and has to be assessed individually

2 'Informal' loans are often available from local money lenders, however the risk of extortion is high.

involving a significant degree of paperwork and manual processing – whereas SMS provides the opportunity for significant automation and simplification. With a basic payment history, average balance and liquidity, a simple credit score could be devised – thus significantly improving the possible accuracy and flexibility of loans. Mobile payments infrastructure provides the chance to distribute, monitor and target microfinance to an extent it has never been before.

Foundation for modern payments

The transition from 'plastic' (debit and credit card) payment systems to 'modern' digital wallets and mobile based payments is likely to be long and expensive - establishing SMS Mobile Payments provide the opportunity to transition directly to next-generation payments. By using mobile payments systems from the onset, much of the developing world need never use debit or credit card technology - traditional western ‘branch’ banking may never be required as banks (or other payments processors) would operate solely through the mobile handset. SMS Payments provides an adequate platform to transition to the western mobile-wallet system and 'skip' plastic infrastructure entirely, saving huge capital investment whilst driving modernisation and innovation.

Faster Payments & Digital Wallets

The value proposition from SMS Payments is self-evident; ‘modern’ mobile payments and the Digital Wallet provide an equal opportunity, but their value is masked by a slower-than-expected uptake and potentially costly infrastructure transition. Upcoming legislation will drive Mobile adoption through the need for a complete system overhaul, with Faster Payments the clear successor to the current infrastructure. Consumer Mobile Payments is less clear cut as there are several different models and technologies vying for adoption; despite this, the value opportunity of a complete Digital Wallet is irrefutable and will form the majority of this paper’s discussion.

Current Legislation and faster payments

Most current payment systems are not immediate and this is a huge problem for banks and financial institutions given upcoming legislation – 'faster' payments using mobile provide a possible answer. The Payment Services Directive (expected 2016) and the Basel III laws require significant changes to the way financial transactions are made. In detail, The Payment Services Directive (PSD) requires that Third Party Payment Providers be able to access banking systems, and that the charges for a transaction are transparent and visible at the moment of payment. Basel III requires that Banks and other institutions have a constantly up to date view of their liquidity (cash to hand, outstanding debits and credits). As is stands, banking systems vary significantly and this can act as a significant barrier to new entry. Secondly, most transactions occur across several layers (with clearing and processing banks operating between the two actual participants banks, possibly including any card operators, merchant acquirers and

foreign exchange enables along the way.) Each party is only privy to their own stage in the process, and so it is currently next to impossible to be sure of the true costs of a transaction – let alone knowing before it has taken place. Basel III means that banks cannot wait until clearing has concluded at the close of business to determine their position – they need a rolling minute by minute view of their position, particularly difficult given the aforementioned layers of processing. A solution is required that enables direct real-time payments from person to person and person to business.

PayM (recently rolled out in the UK) is a good example of the coming generation of instant mobile payments. PayM links an account number to a mobile number, enabling direct bank-to-bank transfers (effectively through your banks mobile app.) The system expands on current mobile transfer (previously limited to transfers within the same banks) to allow inter-bank transfers needing only a mobile number. Direct transfers in this way (rather than through cheque or card) do not need to wait until clearing. The transfer is immediate, and does not need to pass through multiple layers of processing. This makes is very simply to identify the charges at each layer (as there is only one), and the banks financial position can be known as soon as the payment is initiated. Run by Vocalink in the UK, Nigeria, Poland and Sweden there is movement towards immediate (mobile) payments in Australia, USA and Ireland – indicating a rapid worldwide shift towards mobile based payments.

NFC vs BLE Instant mobile payments is a crucial development for financial processing, however a more streamlined equivalent is still required for Mobile Payments to fully transition to the high street. There are currently two technologies in this space: NFC (Near Field Communication) and BLE (Bluetooth Low Energy).

NFC is the technology used for current contactless debit cards and will likely be used for purchases in shops that are not regularly visited. Radio frequency waves are used to transfer information between the customer handset and the retailer terminal. In short, the phone transmits a radio signal with the payment information coded into it, which is then picked up by the payment terminal and charged to the owner’s card or bank account. To remove any potential threat from security information being stolen directly out of the handset it is stored in a ‘Secure Element’ .The Secure Element can either be held locally on the device (leading to a number of ownership and access issues) or on the cloud (mandating reasonable internet connection.) Apple’s delayed adoption has stoked fears that the technology will never reach a critical majority, however the expectations is that NFC will be included in the next generation of iOS and given it has already been included in recent Android phones - NFC seems set to stay.

BLE uses the ‘classic’ principle of Bluetooth pairing (through miniature radio wave networks) to estimate the distance between two BLE devices. BLE ‘Beacons’ – stationary devices that emit a BLE signal – are placed at strategic locations in an environment to

interact with the BLE signal produced by (for example) a mobile phone. This interaction can then be used to form an extremely accurate estimate of the distance between the two devices, and thus the location of the individual. This can be fed directly to shop assistants (such as in Apple’s stores in the USA) to notify them (by name) who has just walked in the store (your privacy settings withstanding). The phone need never be taken out of the pocket to be used for payment - pre-loaded payment details are stored in the shop (or an exterior provider’s) app, and the assistant simply sends a payment request to the app in your phone for approval. The elegance of this system is clear; however it relies upon consumers to load payment details into a multitude of different apps, as well as learning how each app works and maintaining them on their phone – enter the digital wallet.

Digital Wallets

A digital wallet performs the same function as its leather bound equivalent – it ‘holds’ your payment options - debit cards and possibly even bank details, but also the apps each retailer uses for payment and loyalty tracking. There are a growing number of solutions available in this space, (such as FlyPay specifically for restaurants) – however Zapp seems the closest to a ‘complete’ digital wallet currently available. Zapp, produced by Vocalink in partnership with Elavon and Worldpay (the other main 'plastic' card facilitators), uses the existing bank apps of five main high street banks (including Santander, HSBC and Nationwide) so that payment requests are approved directly through your banking app's standard authentication screen. Launching in the autumn in the UK, Zapp can be used at both retailers (using NFC, QR barcodes or a 6 digit code) or online (both through desktop and mobile – in both cases a notification is sent to the mobile for authentication). Zapp is a good example of the current market, with most parties simply payment facilitators; it is also moving towards becoming a ‘complete’ digital wallet, through providing users the option of keeping a record of their spending and purchases.

A digital wallet is perfectly placed to capture a complete purchase history, including item details, value, time, location and even any loyalty balances. Aside from serving as a useful personal tracker (for individuals to keep on top of their own spending and various loyalty benefits), this data provides real business opportunities. The value from Mobile Payments is not just from easier or quicker transactions, but comes from the intelligence and detail that can be added to each individuals shopping experience.

Smarter Payments

Every party in the retail chain is trying to get closer to the consumer so they can customise the experience around them – the digital wallet provides the perfect gateway to do so. These improvements come from two combined sources: location based personalization and data driven analytics.

Mobile Payments and big data analytics are an extremely powerful combination for improving the customer experience on the high street. We have already seen shop attendants can greet you by name, pull up your previous purchase history with their store, customer service record and the reviews and ratings you’ve given specific products – just through that shop's app, activated by BLE, GPS or another location sensor. As you walk around the store, your phone can identify where you are standing and provide recommendations or guidance based on your prior habits and preferences (again, through the shop's app) It would even be possible to include personalized discounts and vouchers, targeted to each individual to drive sales and encourage customers towards higher value purchases. When entering changing rooms, tags on the clothing items could match them to your phone (reducing theft as items are linked to the person carrying them) and provide even more guidance and recommendations (eg. This bag would go with that dress) direct to your phone, or a tablet in the changing room. With the correct selection of filters (so as to prevent a flood of app notifications) the possibilities for flexibility and intelligence at every stage in the process are endless; however they are currently limited to purchases within a specific store and through an account with that specific retailer - digital wallets are the final piece.

The data captured in a digital wallet could also be fed back in – enabling deeper and more accurate recommendations across retailers. Your purchase history in H&M could inform your app for New Look – and vice versa. The revenue opportunities presented by increasing customers loyalty, purchase value and range would enable retailers to direct more generous (and personalised) discounts, thereby encouraging consumers to opt-in. This being said, there are clear hurdles around privacy, partnering across multiple different companies with different aims and deciding who actually owns this invaluable data. This paper would assert that since you are simply collecting your own payments profile, the data would in fact belong to the consumer. It would then be their decision who to make it available to, depending presumably on the compensation offered in discounts, other loyalty or even direct financial compensation.

Conclusions

Mobile Payments will revolutionise modern commerce and cause significant disruption: American Express needs to decide on a firm strategy to avoid being rendered obsolete.

SMS unlocks vast portions of the worlds unbanked, and provides opportunities for a huge range of additional products (microfinance, remittances, more ‘traditional’ banking facilities through mobile.) There is a huge opportunity in monetising these relatively unsaturated markets, especially in areas such as Sub Saharan Africa and the middle east where rapid technological development will increase financial participation and rapidly increase the value of these proposed customers. American Express could develop it’s pre-paid debit card to include mobile capabilities to hugely increase the potential customer base in rapidly growing markets.

Faster Payments will revolutionise the payments industry, and American Express needs to adapt to survive. Digital wallets provide a way to build on American Express reputation as the ‘luxury’ card provider, to combine next-generation mobile payments with advanced analytics and customer profiling to create a unique experience for each customer. Aside from the convenience of a universal wallet, the discounts, loyalty and recommendations to drive consumers to opt in - the data generated will provide retailers an unmatched opportunity to ‘know their customer’.

Mobile Payments are one of the key disruptors of the 21st Century, and fully utilising their capabilities will determine who survives and who falls into obsoletion.

i http://www.ibm.com/smarterplanet/us/en/banking_technology/ideas/?re=spfiihttp://www.thehindubusinessline.com/industry-and-economy/info-tech/vodafone-to-take-mpesa-panindia-next-year/article5493459.eceiiihttp://en.wikipedia.org/wiki/Mobile_telephony_in_Africaiv http://www.povertycure.org/issues/foreign-aid/vhttp://www.techrepublic.com/article/10-things-to-know-about-how-microfinancing-is-using-tech-to-empower-global-entrepreneurs/#ftag=RSS56d97e7vihttp://www.economist.com/news/finance-and-economics/21600993-biggest-study-so-far-finds-microcredit-helps-poor-after