KEEPING UP AND PROFITINGFROM THE DIGITAL ECOSYSTEMA Fortumo white paper for carriers

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM

This white paper is aimed at carriers and is intended to give an overview of where the digital payments landscape is moving. Due to a shift in mobile growth from Western markets to emerging markets, digital and physical content merchants are turning their eyes to these regions. Also, the needs of such merchants are becoming more sophisticated from both business and technical standpoints.

Due to underdeveloped banking and credit card infrastructure in emerging markets, merchants need to rely on alternative payment methods to collect money from users. One of the most widespread models in emerging markets is mobile money. According to GSMA’s industry report, mobile money solutions were used by merchants to collect close to $3 billion1 in payments during 2015.

For carriers, this opens up an opportunity to provide digital merchants with their own payment method, carrier billing. With close to 5 billion mobile phone owners, this payment method has the potential to reach more users than any other form of electronic payment. Universal presence of mobile devices makes carrier billing an attractive payment method for merchants.

At the same time, making carrier billing attractive and economically feasible for new merchant segments requires carriers to adjust their technical capabilities and commercial terms to become more comparable to bank based infrastructure. But for carriers who are ready to innovate their offering, the reward can be significant. The top 3 credit card providers in the world process close to $6 trillion annually, so getting even small portion of this can create a sizeable benefit.

Fortumo works together with merchants ranging from streaming services and app stores to digital wallets and mobile commerce companies. As such, we have a clear overview of what merchants expect from carriers and in this white paper, we share that feedback. The topics covered in the white paper are:

Introduction

An overview of changes in the digital ecosystem that force carriers to reassess their business lines

Partnerships with OTTs: a shift in strategy from indirect to direct monetization

Estimated revenue impact of implementing carrier billing in new digital segments

Future potential of partnerships with financial technology providers

Technical and commercial requirements for entering new segments with carrier billing

Fortumo’s role in helping carriers navigate the digital ecosystem

1 Page 47 - value of global merchant payments and bill payments processed by mobile money solutions.

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM

The usage of OTT services (video and music streaming, app stores, social networks, IP-calling) is growing. As a result, mobile data consumption is in exponential growth, requiring carriers to invest heavily into their network infrastructure. At the same time, services such as Skype, WhatsApp and Facebook Messenger are eating into existing carrier revenue. In total, the global telecom industry’s ARPU declined by 4.5% in 2014 and 2.8% in 2015.

The consulting firm A.T. Kearney recently conducted a survey in 20 countries about the shifting needs of the telecom customer. The research shows that a majority of consumers see their carrier as a provider of data connectivity. At the same time, digital services and apps are taking over a lot of the functionality that only carriers used to provide.

With decline in existing business segments, carriers are looking at alternatives for growth. Many are attempting to shift focus from being the data provider to a digital innovator. So, instead of competing with OTTs, telcos look ways for collaborating with them by partnering in marketing, distribution, zero-rated data etc. Or in some cases even investing directly - such as Smart Philippines to Rocket Internet, or TeliaSonera to Spotify.

These initiatives serve the purpose of strengthening the carrier’s value proposition to their customers and positioning carriers as digital players. But they key challenge for carriers still remains how to ensure that the OTT offerings integrate into carrier value chain and form a deeper connection with the consumer.

A shist in the telco industry: broadening of services

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM

For most carriers, working together with digital content providers means joint marketing and promotion activities: indirect monetization. The typical ways how carriers work together with digital merchants are the following:

While indirect monetization has proven effective for carriers (a recent survey says 96% of carriers find these partnerships beneficial), there are several aspects that speak in favor of adding direct monetization strategy to it:

A shist from indirect monetization to direct monetization

Direct monetization of users allows compensating for the weak sides of indirect monetization. Getting a temporary benefit (free trial or free data) from their carrier reduces churn partially, but tying the user up into a billing relationship moves carriers up the value chain. Users are significantly less likely to switch to an alternative network if they lose the following:

Free trials don’t last forever. While users are motivated to stick to their network provider for the duration of the free trial, nothing keeps them from leaving after the promotion is over. In case of music and video streaming services, only 30% convert to a paid package. This means 70% of subscribers are still likely to leave to an alternative network once the promotion ends.

Data traffic from digital content is overestimated. In markets where streaming services have been available for a long time, paid video and music streaming generate less than 20% of total mobile traffic. In Europe and Asia, real-time entertainment accounts for less than half of the total traffic while paid services only account for 2% of mobile data traffic. VoIP services (voip calls use 300Kb - 800Kb per minute) do not generate enough traffic to exceed a 2% threshold either.

Offering free trials. The carrier partners with a merchant and offers the merchant’s service free of charge for a limited time to their users. The benefit for the carrier is increased user acquisition and reduction of churn with existing subscribers by providing content to the user that other carriers are unable to provide.

Offering free data. The carrier partners with a merchant and does not charge users for data connectivity for the specific merchant’s service. The benefit for the carrier is that in case of a popular service, users will enable mobile data on their phones and become accustomed to using and paying for mobile data.

User verification. The carrier has significantly more information about users available than a merchant with their first-time user. For example, merchants can use carrier subscriber data to verify users and prevent fraud on e-commerce checkout pages. Helping merchants verify users generates additional revenue for carriers by charging merchants for verification requests.

Direct monetization brings more revenue. As analyzed on the next page, implementing carrier billing in parallel to indirect monetization together with app stores and digital content merchants allows carriers to grow their average revenue per user by 25%, on average.

Capability to make payments on app stores

Access to their premium music and video streaming service

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM

The mobile services available to consumers come from two sources: carriers and 3rd party providers:

So in case a carrier decides to implement direct carrier billing for 3rd party providers, how much additional revenue can be generated? To estimate this, let’s look at an average consumer in Western Markets (Europe) and Emerging Asia (Malaysia) and see how much money they spend on average on various services:

How big is the impact of direct monetization?

Assuming a carrier margin of 15% from end-user spend, adding direct monetization to app stores, music streaming and video streaming would contribute an additional $5.4 to a carrier in the UK per month. This is a 23% increase in ARPU.

Assuming a carrier margin of 15% from end-user spend, adding direct monetization to app stores, music streaming and video streaming would contribute an additional $2.6 to a carrier in Malaysia per month. This is a 28% increase in ARPU.

Based on the examples above, we can say that the average carrier is able to increase ARPU by roughly 25% from their users who actively consume digital services. More importantly, revenue from these segments does not threaten the carrier’s own revenue: watching movies, playing games or listening to music does not reduce the amount of calls or messages that users send and actually increases their data consumption.

App store spend: $5 per month

Music streaming (Deezer, Tidal, Apple, Spotify): $4.6 per month

Video streaming (Netflix, HOOQ, iflix): $7.9 per month

App store spend: $16 per month

Music streaming (Deezer, Tidal, Apple, Spotify) : $9.99 per month

Video streaming (Netflix, Amazon Prime, Hulu Plus): $10 per month2

Western MarketsIn the United Kingdom, the average ARPU of a mobile user is around $24 per month. Users also spend money on other services:

Emerging AsiaIn Malaysia, the average ARPU of a mobile user is around $9 permonth. Users also spend money on other services:

2 Price of one VOD service, many users use two or more services as content between services varies (e.g. movies and sports streaming).

Data

Calls

Messaging

VAS

Digital

App stores

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM

Every new segment will peak at some point: users will only make a finite amount of calls, app store activations and spending will reach a peak, digital services spending is limited by the dominant subscription-based business model. Looking into the future, beyond app stores and digital content, what will be next for carriers?

Users consume a lot of other services beside those described previously on their smartphones. For many of these segments, carrier billing as a widely accessible and simple payment method can be implemented as well:

What’s ahead aster digital?Once digital content monetization has reached a peak for carriers, the mobile commerce segment becomes the next priority. Some examples of carriers that have entered this space include Vodafone in Germany where users can top up their PayPal account with carrier billing or Smart in the Philippines where MasterCard virtual card is connected directly to the subscriber’s phone bill.

But how big is the opportunity? The markets are very different in size. The following estimate for current market sizes is based on 2014 data and a forecast for mobile commerce growth:

Mobile commerce is a 10x bigger market than app stores, music and video combined. Based on our experience working with app stores and streaming providers, carrier billing generates approximately 30% of revenues, while card-based payments bring in the other 70%3. Based on the 30% presence of carrier billing in existing segments, digital commerce has the theoretical potential to generate $188 billion in additional volume through carrier billing annually.

At the same time, unlocking the mobile commerce segment involves the need to review commercial terms. In general, mobile commerce merchants are looking at payouts of 90%-95% and above. It is different for emerging markets where prepaid distribution costs limit the payouts - there it, can be solved by applying user surcharge.

App stores: $24 billion (Apple + Google)

Digital music and video: $32 billion (video + music)

Mobile commerce: $626 billion (source)

3 This is varied by markets (generally higher credit card spending in Western markets due to better access to bank-based payments; higher carrier billing spending in emerging markets due to its better accessibility).

Covered by all

Covered by some Covered by some

Telco services

VASCalls

TextData

Ticketing(events, movies)

Ride-sharing & Transportation

Insurance

Delivery services(e.g. food)

Servicesapps &app storesDigital

Digital musicand video

Digitalcommerce

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM

But despite the higher payouts for merchants, carriers still stand to gain a significant amount of additional revenue compared to the app stores and digital content business:

How to estimate the future growth potential?

Enabling payments to the mobile commerce segments results in a significant increase in user stickiness for carriers. Enabling access to high-quality mobile commerce merchants reduces the pressure of pricing competition with carriers. Even if telecommunication service prices are higher with carrier A, they are unlikely to switch to carrier B if that means they are not able to order taxis, insure themselves or top up their virtual credit card any more.

Revenue

Growth potential

30% MarginLegacy segments, gaming & social networking

$2.4 Billion Annually

15% Margin

$2.5 Billion Annually

5% Margin

$9.4 Billion Annually

5% Margin

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM

For carriers, enabling payments for mobile commerce merchants is a significant challenge due to several reasons:

But there is an alternative solution: instead of partnering directly with the mobile commerce merchants, carriers can work together with financial technology providers. For example, by partnering with a digital wallet provider, financial institution or regulated bank to enable payments for ridesharing or with a virtual credit card vendor in order to enablepayments in an m-commerce marketplace.

How will the mobile commerce and carrier partnerships look like?

Legislation and regulation: carriers are not financial services providers

Business development costs: carriers have not established partnerships with mobile commerce merchants

PCI compliance: mobile commerce merchants are used to cred-it-card grade compliance which direct carrier billing does not currently fit with

Spending limits management and fraud control

Higher amounts per transaction

Using custom spending limits for different user categories ensures that who want to pay for mobile commerce services in large quantities. At the same time it allows avoiding potential problems with users in more risky segments and for example when their device is stolen or an underage person is making payments on someone else’s phone.

Relying on the expertise of the chosen partners for the payments

Historical risk scoring of users when implementing their spending limits

Segmenting users to different spending limit categories

Adjusting spending limits based on real-time payment behavior

One of the key concerns that need to be resolved in order for such partnerships to happen is managing bad debt. While losing revenue due to a customer not paying their call, messaging and data bill is negative, bad debt becomes significantly more problematic in case delivery of physical goods or services is involved. But this challenge can be resolved by implementing the same spending limitations as with app stores and digital content:

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM

How will the mobile commerce and carrier partnerships look like?

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM

Technologically, there is no difference in processing payments for app stores, digital content and mobile commerce. When building out a direct carrier billing platform and considering which features to implement, the following should be mandatory in order to make the platform future-proof:

Merchant expectations for direct carrier billing technologies

Pure DCB API: stable platform

Merchant and trusted partner hosted flows (depending on segment, header enrichment or PIN flows): consumer trust and user experience based on what the merchants know about their users

2-step token-based charging: in order to support delayed and multiple purchases (such as ride-sharing) and seamless user experience for trusted users

Dynamic & flexible pricing: business model of most digital and mobile commerce merchants, who also need to offer free trials for user acquisition

Recurring event management: business model of most digital content merchants

Reporting: ability to understand performance and make changes quickly on merchant side

Payment failure reporting: access to failure reasons and error codes allows merchants to suggest to users the best steps in order to complete the payments

Spending limits: ability to manage risk and reduce bad debt

User black- and whitelisting: ability to manage risk and reduce bad debt

Capability to distinguish prepaid and postpaid users: ability for merchants to segment their offering (e.g. higher ticket value items for postpaid users, lower ticket value items to prepaid users)

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM

Fortumo provides carriers with the most comprehensive payments platform in the industry. Our turnkey solution enables scale without additional overhead:

How does Fortumo help carriers launch app stores, digital content and mobile commerce?

Scalable, clustered and cloud-based infrastructure

Fortumo Insight: an advanced carrier analytics dashboard

Fortumo Risk Management Engine for fraud and refund management

Constant platform development, carrier does not need to make any investments

One streamlined settlement flow for all segments

Merchant on-boarding and support

User churn & recurring event management

Access to the entire digital economy (app stores, gaming, social, music, VOD, software) and financial technology providers

Additional reading

Swisscom case study: how do mobile operators benefit from direct carrier billing?

White paper: Six steps to guarantee a successful Google Play launch

Carriers should not choose between app stores and digital content revenue

Read nowRead now Read now

https://fortumo.comhttps://facebook.com/fortumohttps://twitter.com/fortumohttps://www.linkedin.com/company/fortumo-ltd.

Fortumo is a mobile payments company that enables direct carrier billing with more than 350 mobile operators in 90+ countries. Fortumo's payment products work across a wide range of platforms including desktop devices, smartphones, feature phones, tablets and smart TV-s. These products give end-users a simple, 1-click payment method to charge online purchases to their phone bill. For carriers, connecting to Fortumo enables additional revenue from leading app stores, game developers and digital media companies while Fortumo takes care of the technical infrastructure, taxation, merchant on-boarding and support in post-launch activities. Founded in 2007, Fortumo has offices in Estonia, San Francisco, Beijing, Delhi, Mumbai, Singapore and London and is backed by Intel Capital and Greycroft Partners.

This document is for informational purposes only. Fortumo and the authors make no expressed or implied warranties in this document. Fortumo and the author(s) make no representation or warranty in relation to the accuracy, completeness or reliability of the information contained in this document. Any opinions expressed in this document are subject to change without notice. This document may be based on a number of assumptions and different assumptions could result in materially different results. This document should not be regarded by recipients as a substitute for obtaining independent advice and/or the exercise of their own judgement, and is not to be relied upon by recipients. Fortumo and the authors, and any of their members, directors, employees or agents do not accept any liability for any loss or damage arising out of the use of all or any part of this document. Copyright © 2016 Fortumo | All rights reserved.

Pure DCB API: stable platform

Merchant and trusted partner hosted flows (depending on segment, header enrichment or PIN flows): consumer trust and user experience based on what the merchants know about their users

2-step token-based charging: in order to support delayed and multiple purchases (such as ride-sharing) and seamless user experience for trusted users

Dynamic & flexible pricing: business model of most digital and mobile commerce merchants, who also need to offer free trials for user acquisition

Recurring event management: business model of most digital content merchants

Reporting: ability to understand performance and make changes quickly on merchant side

Payment failure reporting: access to failure reasons and error codes allows merchants to suggest to users the best steps in order to complete the payments

Spending limits: ability to manage risk and reduce bad debt

User black- and whitelisting: ability to manage risk and reduce bad debt

Capability to distinguish prepaid and postpaid users: ability for merchants to segment their offering (e.g. higher ticket value items for postpaid users, lower ticket value items to prepaid users)