THE ELECTRONIC WALLET :

STORY OF A COMPLEX CHALLENGE

MATTEO AINARDI ALTA SCUOLA POLITECNICA

4TH CYCLE

ABSTRACT

The paper analyzes the innovation process carried out in the payment industry, due to the introduction of enabling technologies such as contactless smart cards and mobile phones. Complexity theory is used as the key to understand and explain the success of the Japanese, Korean and Western experiences, focusing on the quality of relationships among heterogeneous agents.

Mobile phone as a wallet. This is the revolutionary challenge that recently captured the attention of mobile operators, financial institutions and IT companies. The debate between all the different players is drastically increasing month by month and different models of cooperation and relationship among firms are emerging in several countries. From the technological point of view, everything is ready: current mobile phones offer a broad range of channels through which it is possible to implement an electronic wallet. Payment industry is at the beginning of a transition that promises to drastically break down the current static scenario totally controlled by banks and financial institutions. Up to now cash money and credit cards have practically been the only payment methods, for that reason credit card issuers and banks were the only players. New agents are starting to emerge: phone operators, mobile phone manufacturers, and non-banking IT firms are looking at the niches that web and smart phones have created and are trying to fill them offering new services and new concepts of payment to worldwide users. Different countries and cultures result into different landscapes in which firms must develop new kinds of collaborations and relationships to offer services that can be successfully adopted by users. Technology provides phones that are able to work as web browsers, to exchange data with other devices via bluetooth connectivity and, in the most recent developments, to implement RFID technology. This last feature makes it possible to integrate into a mobile phone the functionalities of a contactless smart card and of a smart card reader. A mobile device, by implementing this technology, becomes a powerful interface between the human and the digital world, creating the technological layer on which it is possible to design and offer a potentially infinite set of new applications and services. A rich set of building blocks is available to firms to imagine, design and create. Dealing with uncertainty is the key to approach this variable and complex challenge.

The debate among the agents that are looking at payment system is strongly characterized by uncertainty. Semantic uncertainty emerges when new services are proposed: the introduction of these new technologies, for example, implies revisiting the meaning of the word payment. Some firms focused on the differentiation among micro payment and macro payment and aim to offer electronic wallets to substitute cash money in micro payments, where small amount of money are involved. Others focus on macro payments, allowing to perform mobile banking operations characterized by a bigger amount of money and, more in general, to control a bank account from a mobile phone. A further interpretation may lead to an “universal wallet” capable to perform both micro payments and, for example, to work as a public transportation ticket. The continuous availability of new technologies introduces a strong ontological uncertainty in the innovative process: new devices, new interfaces among devices and consequently new user needs and services. Firms must constantly deal with an incessantly changing future scenario that is critical to forecast. A solution to actively approach this uncertainty is to develop the capability to enact stories that narrate in detail a future world in which moving and operating. Narrating stories generates action and supplies to missing events that must be known in order to make crucial strategic decisions. However agents must constantly monitor how the current situation is evolving and then, whether their story does not cohere with the actual context, they must be flexible in re-embedding the actual situation into a new narrative. The leading countries in introducing and adopting a mobile payment paradigm have been Japan and South Korea. Prior to 2004 the primary means of initiating mobile payments in Japan was remotely using device’s web browser and paying by credit card. Today, mobile “proximity payment” (locally, at point of sale) using contactless integrated circuit (IC) chips has become more prevalent. In July 2004, NTT DoCoMo, the largest mobile phone operator in Japan, began spreading mobile devices containing the FeliCa contactless IC chip developed by Sony. The FeliCa chip makes it possible for mobile devices to contain multiple forms of data including personal identification, bank account numbers and balances, credit account information, transit passes, and more. As a result, apart from facilitating remote payments, NTT DoCoMo phones enabled consumers to use their devices as a substitute for cash and cards at vending machines and merchants’ point of sale. In 2005, the two other main mobile phone carriers in Japan, KDDI and Vodafone, also adopted FeliCa. Several other businesses developed platforms that enabled acceptance of mobile proximity payments, mainly acting as consortiums of credit card companies, mobile phone carriers and electronic retailers. In terms of consumer use, almost all the mobile proximity payment options can coexist on any carrier’s mobile device: consumers can download the application for each distinct payment platform and make purchases using any of the different services with one device. In contrast, merchants need to have readers that correspond to each specific platform. In South Korea, mobile payments were introduced earlier than in Japan. In late 2002, the two largest mobile carriers, SK Telecom and KTF, launched post-paid mobile proximity payment programs, Moneta and K-merce, based on infrared technology. This attempt was not successfully adopted firstly because the user interface was not user friendly in performing simple operations. Furthermore merchant point-of-sale were not interoperable with both carriers’ devices, and banking and credit card industries were not enthusiastic about the programs

because the mobile carriers demanded a relatively large share of the card issuer’s revenue from a transaction. In 2003, the third-largest mobile carrier, LG Telecom, partnered with the largest bank in South Korea, Kookmin Bank, to launch BankOn, South Korea’s first IC chip based mobile banking service. This technology did not actually provide payment services; on the contrary enabled its customers to use their mobile as a substitute for an ATM or transit card. BankOn resulted to be extremely successful in increasing significantly LG Telecom market share and this induced the other mobile carriers and banks to offer mobile banking services using IC chips. SK Telecom collaborated with smaller banks and launched a new mobile banking service, called MBank. Some other consortiums between financial institutions and mobile operators followed offering services based on IC chip. However, because each card is issued by the credit card issuer, customers have to change IC chips whenever they use a payment card from a different issuer. To avoid this inconvenience, in 2007, SK Telecom launched a new service that enables its subscribers with certain device models to download credit card applications over the air to a SIM card. In addition to credit card applications, consumers also will be able to download mobile banking and public transportation applications onto the chip, so they will no longer need to change those chips each time they use different bank or transit applications. Approaching innovation from the complexity point of view implies analyzing the current scenario as an agents-artefacts space. New artefacts emerge as consequence of single agents activities and moreover of their capability to relate and interact with other agents. It is possible to indentify two peculiar processes within innovation: the generation of new attributions and the establishment of communicative relationship among agents. Agents, for example, can generate new attributions by giving new functionality to existing artefacts or by improving the quality or the speed of a productive process by revisiting it. Then, by communicating and by interacting with different agents, they can revisit and align their attributions, sharing ideas and problems. Some common peculiarities can be noticed in relationships that resulted to be successful: analyzing interactions between agents focusing on these characteristics allows to locate relationships with an high generative potential. Aligned directedness, heterogeneity of agents involved, mutual directedness, appropriate permissions and action opportunities are the features that characterize generative relationships. Firstly agents must be aligned in pursuing similar transformations in the same zone of agents-artefact space, and they must be characterized by a significant heterogeneity. Heterogeneity among agents imply differences in attributions about important artefact and agents in their common world, the progressive discovery of these attributional differences can weaken their mutual directedness, if these mutual discoveries of semantic uncertainty are not properly solved and explored. Japan and South Korea experiences offer two examples where the development of a successful innovative products and services reflects the quality of relationships among the different agents involved in the market. In Japan, mobile carriers and other nonbanks have been determinant in proposing these new concepts to market without much, if any, involvement from financial institutions.

Sony created a new niche introducing FeliCa platform and spreading the concept of universal payment platform where credit cards and transportation tickets become software applications to download on a mobile phone. The partnership between Sony and the phone operator NTT DoCoMo made FeliCa a de-facto standard by enabling all NTT DoCoMo customers to adopt it on their mobile phones. This successful co-operation presents some characteristics that positively influenced its generative potential. Firstly the heterogeneity of the two agents: Sony provides its immense technical know how and experience while NTT DoCoMo has a direct access to a large number of mobile phone users and, moreover has their complete trust. The trust of the customers in a mobile phone operator is a Japanese peculiarity: it is the key of FeliCa platform success in offering a financial service even if the firms involved had almost nothing to do with financial world. Another feature of Japanese experience is the aligned directedness of the parts involved, since their complementary roles and markets allows them to work on the same goal and to enforce their partnership in promoting FeliCa. In South Korea the first attempt that was made in offering a proximity payment program resulted into a failure. In 2002 the two largest Korean mobile carriers, SK Telecom and KTF, launched two distinct post-pay proximity payment programs, Moneta and K-Merce. Their failure reflects the lack of relationships and directedness alignment between these two operators and other agents involved into the market. Customers were not satisfied about the complexity of the user interface. Merchants were reluctant in buying two different payment systems that were completely not interoperable Furthermore banks and credit card issuers, who actually provided the financial payment, were disappointed by the large share demanded in the value chain by phone operators. SK Telecom and KTF were not able to establish generative relationships between themselves and other market agents and this lead to a failure of both their services. When, in 2003, LG Telecom and Kookmin Bank partnered and succeded in offering BankOn, the mobile banking service based on IC chip, a new cooperation model appeared in Korean scene. Phone operators started to collaborate with small financial firms to offer new mobile banking and payment services. Mobile banking resulted to be the “killer application” that allowed the successive introduction and adoption of mobile proximity payment services: Visa Wave and Mastercard PayPass, for example, have been successfully operating since 2006. The heterogeneity in the kind of players involved in these partnerships, as well as their complementary know-hows and market sectors, has been peculiar for the Korean success. In Europe and in the United States, mobile payments are still very much in their infancy. At present, mobile payment initiated remotely either through mobile Internet access or via text messaging is dominant, and, in the case of the latter, non-banks institutions such as Obopay and PayPal Mobile are the providers of such services. While there is strong interest in mobile proximity payments, bringing them to fruition is a challenge given the complex nature of the Western payments and mobile landscapes. According to a survey of leading mobile and financial firms, conducted by the Smart Card Alliance Contactless Payments Council: “eighty-six percent of industry stakeholders believe NFC-based proximity payments will be adopted and it will happen with a “Collaboration Model” bringing together banks, mobile operators, handset manufacturers and other service providers”. This enthusiasm, however is moderated by full knowledge of the difficulties ahead, due to the number and the variety of agents who must agree on standards and business models.

Most survey participants agreed that the Collaboration Model is most feasible because it focuses stakeholders on their own core competencies, opens the door for new revenue from incremental services, drives customer retention and loyalty, and responds to fundamental demand of flexibility from customers. This model presents features that would result into a positive generative potential due to the heterogeneity of agents and their complementary action opportunities. Collaborative efforts are under way or have been announced such as those of Wells fargo and Visa; Discover Financial Services and Motorola; Citigroup, MasterCard, Cingular and Nokia; and Cellular South, Kyocera, and VIVOtech, all of which illustrate the magnitude of interest as well as the effort that is being spent to approach the current landscape, recognizing and facing its complex nature.

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