White Paper. Mobile financial services; the evolution of payment. Tom Mowat, Tim Harrabin

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1 . White Paper Mobile financial services; the evolution of payment October 2013 Tom Mowat, Tim Harrabin

2 Mobile financial services; the evolution of payment i Contents 1 Executive summary 2 2 Popular myths of mobile financial services Mobile payment is for those who are not financially included Mobile payment is for prepaid mobile customers 6 3 Opportunities and risk in understanding customer experience 7 4 Setting up for success A compelling customer proposition Sufficient and appropriate investment by the mobile operator An awareness of the challenge 10 About Amdocs Mobile Financial Services 11 About Amdocs 12 About the authors 13 About Analysys Mason 14 Research from Analysys Mason 16 Consulting from Analysys Mason 17 List of figures Figure 1: Drivers of mobile financial services for key stakeholders versus cash... 3 Figure 2: Drivers of mobile financial services for key stakeholders versus cards... 4 Figure 3: Use of traditional online payments via the handset by mobile wallet users... 5 Figure 4: Prepaid/postpaid split among mobile wallet users... 6 Figure 5: Consumer satisfaction levels for mobile financial services... 7 Figure 6: Expected changes in use of mobile financial services by satisfied and non-satisfied users... 8 Figure 7: Perception of security across different age groups Figure 8: Perception of security compared to other payment methods Analysys Mason Limited 2013 Contents

3 Mobile financial services; the evolution of payment 2 1 Executive summary It is not a technology issue; it is changing the way people run their lives Michael Joseph Managing Director Mobile Money, Vodafone (former CEO of Safaricom and creator of M-Pesa) Mobile financial services have commonly been described as a technology that will fulfil the payment needs of those who have no alternative method. Drawing parallels with mobile communications has assumed an inherent need to transact that resembles the need to communicate. This has been a mistake. The industry must evolve its understanding of the role of mobile financial services as a complementary and potentially disruptive technology in the financial market. It must take into account the competitive pressures which exist and the speed of evolution in the financial markets. It must also be understood that challenging the cash market, which is 2600 years old and still the dominant form of transaction in the world today, is as revolutionary a technology change as replacing fire or the wheel. Shifting our understanding does, however, reveal a world of opportunity for mobile financial services. Positioning mobile financial services as a competitor in the financial market highlights both their strengths and their weaknesses. However, it is clear that the way that we conduct our transactions is slowly evolving in a way which will propel mobile into contention. Specifically: increased connectivity, specifically mobility the increasingly migratory nature of the global population the need for increased convenience and ease of conducting financial life While it is reasonable to believe that mobile financial services will one day become the dominant payment model on a global basis, effectively competing with cash, online payments and debit and credit cards, this discussion will focus on the disruption to cash, where the greater short term opportunity lies. Representing more than 50% of transactions even in developed markets like the USA, cash comes with a number of familiar and well documented benefits for consumers cash circulates cash holds value cash is a single point transaction cash is anonymous cash is uncontrolled cash is familiar But from a consumer perspective, cash also has limits. cash is not connected it can only be accessed via a physical network cash is not digital it can t be spent online cash is short range. Analysys Mason Limited 2013 Executive summary

4 Mobile financial services; the evolution of payment 3 Figure 1: Drivers of mobile financial services for key stakeholders versus cash [Source: Analysys Mason, 2013] Consumers a route to financial inclusion provides security and flexibility brings digital to the mass market CSPs closer ties with users; reduced churn direct revenue indirect revenue Government reduces risk provides traceability for payments These drivers are common to all markets, which goes some way towards explaining our findings that the use of mobile financial services is more widespread than we had thought, especially among postpaid subscribers, those in developed markets and those that use credit cards to make payments on their smartphones. Indeed the usage among what we would have assumed to be the least likely user groups has consistently defied expectations in all four surveyed markets. Mobile financial services therefore have a range of features that will appeal to the payments consumer. As outlined above; they do not have to carry a token other than the phone which is already essential as a communications device, they can access digital payments without the necessity of separate registration processes for each payment card or wallet which consumers may be ineligible, and they can opt to conduct transactions remotely. There are others, but all stakeholders in the payments chain, which must now include the mobile networks, should be aware that real competitor is the alternative method of payment and should begin to position themselves accordingly. Analysys Mason Limited 2013 Executive summary

5 Mobile financial services; the evolution of payment 4 Figure 2: Drivers of mobile financial services for key stakeholders versus cards [Source: Analysys Mason, 2013] Consumers vastly increase availability improves payments on the go provides an alternative channel for digital CSPs increased visibility of users through data partnership opportunities Government reduced cost of public services support for smart initiatives such as connected cities Figures 1 and 2 show the capacity of mobile financial services to compete effectively with traditional payment services based on the three core strengths of mobile, reach, mobility and the ability to work in a digital environment. It is not surprising that cash offers few barriers to adoption, but as the success of payments cards has shown, the combination of a developed ecosystem and an established use case can allow users to rapidly adopt a new method of payment. The mobile ecosystem and specifically the mobile operator community have many well document advantages when it comes to engaging with the mobile financial services market. Statistics showing the number of additional customers available to the financial services industry thanks to the handset are important, but perhaps even more telling is that consumers today would on the whole prefer to leave their wallets at home than their phones. In addition, despite the relative paucity of successful scale mobile financial service operations, there are measurable benefits to the business model of the operators. Revenue in the two most successful M-Pesa markets is approaching 20% of total, and network churn among active users is approaching 0%. There can scarcely be higher incentive for operators to succeed. In order to better understand the mobile payment market, Analysys Mason and Amdocs commissioned a survey of 4000 consumers, with 1000 each in Brazil, Indonesia, the UK and the USA. In addition we interviewed 11 operators from around the world to discuss the strategies in this market. We present some of our findings in the following sections, looking more specifically at how mobile operators should understand and look to compete in this challenging market. Analysys Mason Limited 2013 Executive summary

6 Mobile financial services; the evolution of payment 5 2 Popular myths of mobile financial services Mobile financial services have been the subject of enormous speculation and rumour over the last decade. Only a select few have ever published financial or operational performance data adding to the sense of uncertainty around the viability of mobile as a payment channel. Most operators appear to understand the two key strategic advantages mobile operators have when entering the financial services market, namely that: 1. Together with large scale robust and sophisticated billing systems, they collect billions of dollars annually in recharges and bill payments through a collection network of agents and shops that extends to within one kilometre of 99.9% of the entire world's population. This distribution channel is ideal for customers who wish to deposit cash (known as 'cash in' or 'buying e-money'). 2. They have a flexible, highly secure and direct communications channel to almost six billion mobile phone users and the vast majority of organisations which these people trade (shops, traders, taxis, entertainment etc.). The mobile phone is a far more effective epos terminal than the devices we are familiar with in shops today. Despite this, there are many enduring myths, that our survey has successfully exposed 2.1 Mobile payment is for those who are not financially included Banking the unbanked has been the clarion call for the industry for the better part of a decade. While this is most certainly a laudable goal, attracting the interest of development agencies worldwide, our survey shows a slightly different picture. Across all four countries surveyed, the proportion of respondents who had made a mobile payment was higher for the highest income group. Overall, this income group represented 15% of mobile payment users, compared with just 11% of the overall survey group. Perhaps more surprising is the strong correlation between those who have used their credit and debit cards on their mobile phones (standard online payment using the mobile as an internet connection). Figure 3: Use of traditional online payments via the handset by mobile wallet users [Source: Analysys Mason, 2013] 25% 20% 15% 10% Made debit/credit card payment on phone Not made 5% 0% Made mobile payment Analysys Mason Limited 2013 Popular myths of mobile financial services

7 Mobile financial services; the evolution of payment 6 Consumers with both internet access and credit or debit cards have long been assumed to be beyond the reach of mobile payment services, for simply the reason that they would have no need for it. Our results show quite the contrary, and that users who are experienced in making electronic payments via the handset are more than three times as likely to have used a mobile wallet or equivalent service. This result again highlights that it is the transaction situation that governs the selection of payment method, and not necessarily convention. The popularity of contactless payment for transport services in markets like Japan and specifically the UK, where Transport for London s Oyster card has more than 52 million cards in circulation, is demonstrative of consumer willingness to adopt an alternative payment solution offering greater convenience and functionality. That these services are not widely available on mobile phones shows that the complex partnership models required in developed markets are continuing to delay the widespread growth of the service. 2.2 Mobile payment is for prepaid mobile customers The proportion of users claiming to have made a payment from a mobile wallet or equivalent service across the four markets included in the study was 13%. Remarkably, the overall fraction of those users who were postpaid customers was 52%. Figure 4: Prepaid/postpaid split among mobile wallet users [Source: Analysys Mason, 2013] 100% 90% 80% 70% 60% 50% 40% Postpaid Prepaid 30% 20% 10% 0% Brazil Indonesia UK US Figure two shows the breakdown of this result by country. The UK and Brazil have a reasonably even proportion of users, while Indonesia and the US having very different results. This may partially be explained by the very high proportion of prepaid subscribers in Indonesia, but the results overwhelming show that usage of mobile financial services is not heavily correlated to the payment method for mobile services, leading to the conclusion that operators would be advised to avoid thinking of their payment services as a simple extension of their communications service. Analysys Mason Limited 2013 Popular myths of mobile financial services

8 Mobile financial services; the evolution of payment 7 3 Opportunities and risk in understanding customer experience Mobile financial services have something of an image problem with consumers in the four markets we surveyed. This stands somewhat at odds with the statistics from Kenya, where user satisfaction and brand loyalty to the payment system is high. Our survey shows that the overall satisfaction with mobile financial services is low, with more than 50% of users scoring the service five out of ten or less. Figure 5: Consumer satisfaction levels for mobile financial services [Source: Analysys Mason, 2013] 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Extremely unsatisfied Extremely satisfied More troubling still is the relationship between users experience and consumer s plans to change their usage. Analysys Mason Limited 2013 Opportunities and risk in understanding customer experience

9 Mobile financial services; the evolution of payment 8 Figure 6: Expected changes in use of mobile financial services by satisfied and non-satisfied users [Source: Analysys Mason, 2013] 60% 50% 40% 30% 20% Low satisfaction High satisfaction 10% 0% I will use them more I will use them about the same amount I will use them less I will not use them again Grouping consumers responding between one and five on their satisfaction score as Low satisfaction and those responding between five and ten as High satisfaction reveals that almost half of unsatisfied consumers intend to reduce or abandon their use of mobile financial services. This equates to an overall expected churn of almost a quarter, which is a major concern given that mobile financial services have been commonly cited as a sticky service which will help improve consumer loyalty. The two most important factors for consumers adopting a mobile payment service are convenience, and the fact that friends and family are using the service. Price is unsurprisingly also important for Brazil and Indonesia and less so in the UK and the USA. Ease of use, an improved network for making payments and improved security are the factors most likely to increase service. 4 Setting up for success We consider three core strategic issues that will drive success in mobile financial services. 4.1 A compelling customer proposition. In Kenya success was born of the ability of M-Pesa to replace the huge number of long distance (greater than 20km) domestic remittances between family members with a much faster, more secure and cheaper solution for 'sending money home'. Once consumers signed up to the service to benefit from superior domestic remittances, they found a plethora of other uses for the service, many of which would not have been sufficiently compelling in their own right to incentive signing up for the service. Analysys Mason Limited 2013 Setting up for success

10 Mobile financial services; the evolution of payment 9 Starbucks mobile wallet service in the USA is demonstrating again how a simple solution to a widely held problem can lead to mass adoption, even in a market heavily saturated by debit and credit cards. A stored value wallet on the handset is now processing almost three million transactions per week due to its simplicity and ease of use. The wallet is also integrated with Starbuck s existing and highly popular loyalty program, providing users with a direct incentive to migrate from cards to mobile. In Pakistan, EasyPaisa focused on providing a financial infrastructure where none had existed before. By successfully targeting the grey markets which were the only choice for the base-of-pyramid consumers, EasyPaisa has achieved a volume of more than five million unique transactions per month with 45% of unique users having formerly had no access to financial services. Among many success factors for EasyPaisa was simply that Telenor and the other communications service providers were the only organisations with the fixed network infrastructure to support a distributed payment network. This allowed them to offer consumers a proxy for card-like payments where there simply was not the capacity to before. 4.2 Sufficient and appropriate investment by the mobile operator In signing up recharge agents to acquire customers and recharge their payments account; in hiring payments experts from the banking industry and in focussing initially on growth not short term profitability. M-Pesa has shown how heavy early investment leads to medium term market leadership and financial success. Operators from around the world, who have achieved scale, have done so through investment in the network of agents that will support the service. This investment must cover marketing, recruitment, training, incentives and support. Critically, it must be on-going through the life of the service. Security remains the most important issue among all user-groups in the surveyed countries and should be a fundamental part of the marketing strategy for any operator looking to enter the market. Interestingly, security is as much a driver for the adoption of services as it is likely to be an inhibitor, with as many consumers stating that they adopted the service for enhanced security as claimed that they have avoided it for fear of fraud. The perception of security also varies across age groups, with older consumers generally more concerned than young consumers who are more accustomed to digital transactions. Convenience of service use was also very important to survey respondents, with 53% citing it as being one of the reasons they adopted the service, and 54% of users saying the improvements to convenience would increase their usage. Convenience was a considerably stronger driver in developed markets, reflecting the fact that the use case in this market is more based around the ability to make payments easily and on-demand. We want to create convenience for our customers rather than just trying to be a bank Mobile operator Singapore Analysys Mason Limited 2013 Setting up for success

11 Mobile financial services; the evolution of payment 10 Figure 7: Perception of security across different age groups [Source: Analysys Mason, 2013] Figure 8: Perception of security compared to other payment methods [Source: Analysys Mason, 2013] 60% 50% 40% 30% 20% 10% 50% 40% 30% 20% 10% 0% % Cash Card Cheque Going to the bank Mobile wallet is less secure Mobile wallet is less secure Mobile wallet is more secure Mobile wallet is more secure Mobile wallet is as secure Mobile wallet is as secure 4.3 An awareness of the challenge It is not an easy thing to get people to make payments on a mobile phone Michael Joseph Managing Director Mobile Money, Vodafone Given the opportunities for organisations across the mobile financial services value chain, the challenge of succeeding where many have failed must not be underestimated. Critical issues that must be addressed include: Engage your network all of the successful MFS providers we have spoken to have cited the successful creation of an active and educated network of agents Retailers are learning, by being a part of the process we have fewer process complaints now. They understanding what documents they need to take. We have given them training. Former sales lead, Pakistan MFS provider Finding the sweet spot for your consumers solving a problem that nobody has will not drive adoption of your services Be aware of regulation many markets, including India and Indonesia require that mobile financial services involve the financial sector; integration of partners can raise costs and damage user experience when onboarding Find the right platform a platform must be able to provide the appropriate security, reliability and flexibility. A successful service will need to scale rapidly, and an inability to manage transaction requests will damage user experience Our roadmap was not clear; new tech being incorporated into our system led to some instability. The vendor must have a clear grasp of the technology it is all cutting edge Former sales lead, Pakistan MFS provider Analysys Mason Limited 2013 Setting up for success

12 Mobile financial services; the evolution of payment 11 Find a leader the most successful mobile financial services are driven from the top. Investment must flow, not only into the constituent parts of a service, but to the organisation, management and talent of the operator itself, integrating into the core strategy and function of the business We put a focus team in place four months ago to focus on domestic remittance and bill payment [for a three year old service] subscribers have increased from around to in that time Mobile operator Indonesia Finally - it is paramount that anyone deciding to start a mobile financial service has a careful understanding of why they are doing so. The most successful services today were not started to drive revenue, but to better engage consumers. Where the service has been successful this aspect has been an unqualified success, with revenue growth a secondary benefit. Operators looking for quick returns and incremental revenue will find it difficult to sustain the required recruitment and incentive investment which have been fundamental to the most successful mobile financial services. About Amdocs Mobile Financial Services By working with Amdocs, we can now focus on the business strategy without worrying about technical and operational challenges. The Amdocs mobile payment solution gives us a more efficient way to integrate and onboard new partners and merchants, while cloud hosting enables us to launch new services faster, Yessie. D.Yosetya, Senior General Manager, Mobile Finance, XL Axiata Indonesia The growing consumer acceptance and adoption of mobile financial services represents a growing opportunity for communication service providers worldwide as they are well-positioned to offer a full range of mobile financial services to subscribers, enterprises and partners. For this, mobile operators need an MFS platform that enables the creation of a sustainable ecosystem of partners and enterprises, and stimulates long-term consumer adoption with an excellent pay, shop, earn, save, remit experience across multiple channels. Amdocs Mobile Financial Services is a secure, financial-grade MFS platform, built to address mobile service providers unique MFS needs and pain points. The platform s built-in intelligence and self-learning capabilities helps service providers accelerate growth, reduce risks, and strengthen subscriber loyalty. The comprehensive solution guarantees best-in-class reliability and security, increased conversions and a seamless and secure user experience. By leveraging Amdocs leadership in BSS and OSS, and 30 years of software expertise, delivery excellence and smooth operations, Amdocs Mobile Financial Services empowers service providers to focus on growing their business. Analysys Mason Limited 2013 About Amdocs Mobile Financial Services

13 Mobile financial services; the evolution of payment 12 Amdocs Mobile Financial Services solution delivers numerous business benefits to service providers: Increase conversions and minimize risks: automation and built-in intelligence capabilities help increase conversions, while lowering exposure to fraud and risks. Operational excellence and best-in-class reliability: benefit from Amdocs more than 30 years software expertise, delivery excellence and smooth operations, backed by industry-leading service level agreements. Flexibility to introduce new services and business partners dynamically: an adaptable deployment model empowers service providers to introduce new services and business partners, without disrupting current operations as the mobile financial services market evolves. Scale business without struggling with ecosystem integrations: Amdocs guarantees a commitment to flawless delivery and operational support, enabling service providers to focus on their commercial strategy. Create new revenue opportunities with consolidated subscriber view: service providers benefit from a unified view of their subscribers activities across multiple lines of businesses while they topup, shop, pay and engage in financial transactions opening up new revenue streams. Increase platform efficiencies and lower cost of ownership: streamlined platform simplifies integration of various consumer and partner touch-points with the service providers functional entities, such as BSS, treasury, care, legal, etc. About Amdocs For more than 30 years, Amdocs has ensured service providers success and embraced their biggest challenges. To win in the connected world, service providers rely on Amdocs to simplify the customer experience, harness the data explosion, stay ahead with new services and improve operational efficiency. The global company uniquely combines a market-leading BSS, OSS and network control product portfolio with value-driven professional services and managed services operations. With revenue of $3.2 billion in fiscal 2012, Amdocs and its 20,000 employees serve customers in more than 60 countries. Amdocs: Embrace Challenge, Experience Success. For more information, visit Amdocs at For the most up-to-date contact information for all Amdocs offices worldwide, please visit our website at Analysys Mason Limited 2013 About Amdocs

14 1 Mobile financial services; the evolution of payment 13 About the authors Tom Mowat (Principal Analyst Head of research APAC) Tom is the lead analyst for Analysys Mason's Asia Pacific research programme and is based in our Singapore office. Tom re-joined Analysys Mason from PwC in 2012, where he was a Manager in the TMT Consulting team. He has extensive expertise in fixed and mobile broadband services, strategy and forecasting, regulatory issues, cost-modelling and the particular issues affecting telecoms markets in developing regions. His previous role at Analysys Mason was within the Custom Research team, developing project-based analysis for key industry clients. Tom's experience includes leading numerous projects for telecoms service providers, vendors, and regulatory and industry bodies, as an analyst and consultant. Tom has degrees in mathematical and particle physics from the University of Nottingham and the University of Durham. Tom has been writing on mobile financial services since 2007 and has completed a range of projects and reports on the topic, ranging from a strategic report for a major global payment card provider in 2008, to producing international remittance forecasts in 2009 to project managing the development of the GSMA s Mobile For Development intelligence website in 2011 and Tom has also recently led the production of Analysys Mason s major mobile payment report, Mobile payments in emerging Asia-Pacific: business models, case studies and forecasts He has also attended numerous conferences on the topic, recently chairing the opening day of the 6th Mobile Commerce Summit ASIA 2013 in Singapore. Tim Harrabin Tim Harrabin is Senior Advisor at Analysys Mason and an internationally recognised specialist in the field of mobile payment, with extensive direct operational experience of the most widely recognised mobile payment service in the world. Tim has led many complex, pioneering transformations at the forefront of the telecoms industry, including mobile Internet, mobile payments and low-cost handsets, as well as building an impressive track record in prospecting, acquiring and integrating multi-billion-dollar companies. As a non-executive director in many of Vodafone's European and emerging market businesses, he has extensive experience of managing equity joint ventures in high-growth economies, including listed companies. Tim served as a Board Director of Safaricom in Kenya where he oversaw the launch and every key development of the world's most admired mobile money transfer service M-PESA. Within Vodafone, he created the Group's mobile payments strategy and was responsible for its global implementation including procurement, development and operation of the M-Pesa technical platform. 1 Published by Analysys Mason Limited Bush House North West Wing Aldwych London WC2B 4PJ UK Tel: +44 (0) Fax: +44 (0) research@analysysmason.com Registered in England No Analysys Mason Limited 2013 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher. Figures and projections contained in this report are based on publicly available information only and are produced by the Research Division of Analysys Mason Limited independently of any client-specific work within Analysys Mason Limited. The opinions expressed are those of the stated authors only. Analysys Mason Limited 2013 About the authors

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