How To Be A Successful Mobile Operator

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1 THE CHANGING LANDSCAPE OF PAYMENT PROCESSING AND HOW MOBILE NETWORK OPERATORS CAN CAPITALIZE A report from NewNet Communication Technologies, LLC

2 The Changing Landscape of Payment Processing and How Mobile Network Operators Can Capitalize Mobile Network Operators (MNOs) seeking new sources of revenue have innate characteristics which favorably position them to venture into the processing payments arena, especially the growing area of mobile payments. With the combined strengths of an established mobile subscriber base and knowledge of mobile applications, the MNO has potential to play a larger role in the existing payments system. Now is the time for mobile operators to take on a larger and more active role in the financial transaction channel. The MNO could become a Transaction Network Service Provider (TNSP), offering offer secure transaction transport and routing. Or they could become a Trusted Services Manager (TSM) or a full-fledged payments processing acquirer. Beyond Providing the Pipe Historically, the MNO s role in this process has been limited to passively providing the backhaul channel for financial transactions for banks. This role, providing the pipe through which transactions are sent from the merchant s POS system to the acquirer and then on to the consumer s bank, continues today for the mobile operator. The MNO providing the backhaul network does not share in the revenue distributed among the banks, acquirers and processors. Although every step of the payments processing process uses the mobile operator s network, the MNO currently generates revenue only by providing connections. This is true whether the network includes older fixed fixed-line POS terminals or new POS terminals that use General Packet Radio Service (GPRS) to transport data over the MNO s cell network. With enhanced possibilities for revenue generation, mobile operators are now ready and able to fill more than the backhaul provider role due to a number of factors: 1

3 Changes in the communications market where traditional barriers between vendors are breaking down and new relationships and partnerships are forming; The growth in mobile payment processing, which is expected to explode over the next several years; The surge in mobile wallets (a combination of a smart phone with credit card functionality) and other mobile devices used by consumers; The MNO s ability to build devices with mobile wallet capabilities, thereby assuming some of the functions previously handled by the traditional payment processing acquirer; Secure infrastructures and end-to-end solutions are now available from experienced partners that give the mobile operator the complete system needed to be a TNSP or acquirer; By partnering with an experienced infrastructure company, the MNO can offer a complete, secure payment processing system. For example, a mobile merchant such as a home repair contractor needs a solution for handling mobile payments. The MNO has the advantage. Instead of charging the contractor a set fee for a mobile device and another fee for data capabilities, the mobile operator can offer the on-the-go businessperson a customized plan for a mobile POS device. The business owner now has a customized device and plan that meets their needs. The MNO, meanwhile, has reduced the customer s entry cost for the mobile POS, and offsets that reduction by sharing in the revenue from the customer s ongoing data usage. In addition to retail, there are opportunities for the MNO in virtually any other market that requires secure electronic transaction mechanism including insurance, health care and pharmaceutical industries, among others. 2

4 Promising Market, Major Challenges and Opportunities The mobile payments marketplace presents challenges to both the MNO, which seeks a larger role, and to the established financial transaction acquirer and processor. The complexity of the payment processing industry is staggering. Newer technologies such as Near Field Communications (NFC) and mobile wallet solutions continue to emerge, taking root alongside traditional credit card purchases through fixed-line POS terminals and bank transactions made via ATMs. Traditionally, banks and other financial institutions payment transaction acquirers and processors have built networks that supported the efficient and secure payment and transaction processing. Despite the emergence of the mobile payments processing system, these traditional dial-based platforms continue to support the majority of current transactions. The need to update and support the evolution of dial-based platforms to hybrid dial-internet Protocol (IP) systems or IP-based systems alone intensifies each year. As IP-based systems increasingly enter the marketplace, the incumbent acquirer is experiencing headaches in the complex integration of numerous established systems and the newer systems. Consequently, incumbent acquirers face challenges on both expansion and interoperability fronts. For the established market player, there is an additional need to provide more eco-friendly systems and the capability to expand. As IP traffic has increased, traditional fixed carriers have responded slowly to the changes in the marketplace. To fill the gap, payment processors, acquirers and now including MNOs, with expertise in securely routing financial transactions have grabbed market shares. These payment processors and acquirers have moved into an area that fixed-line carriers could have capitalized on had they responded more aggressively to the development of IP networks. The mobile operator s solution must support a host of industry standards for security, transaction protocols and routing to and from authorizing banks. By offering a solution that supports both established and emerging protocols, the MNO can offer an attractive solution for the mobile payment processing marketplace. The ability to provide secure transaction of data and fraud detection capabilities are paramount in the payment system. The payments processing industry demands fully integrated transaction protocol processing, security and Secure Sockets Layer (SSL) processing and transaction routing from an acquirer. These key functions are critical for the mobile operator to achieve key objectives, such as eliminating the complexities introduced by multivendor systems. Despite the advantages of a sizeable established subscriber base and familiarity with mobile apps, 3

5 the MNO typically lacks expertise in payment processing infrastructure and related technologies. Partnering with a firm that has specialized infrastructure expertise and solid industry experience enables the mobile operator to move beyond providing the pipe in the payments processing arena. The Right Partner with the Right Solution With the right partner and the right solution, the MNO can transition into handling traditional acquirer transactions such as: Performing security (SSL) offloading Validating transactions and routing transactions to another carrier or other third party Providing transaction protocol processing NewNet Communication Technologies is a leading and longstanding communications industry provider that has the expertise needed for the MNO to make this move. Offering a variety of infrastructure solutions for the traditional and mobile payment processing industry. NewNet now handles about 20 percent of the entire global transaction flow in the global market. With over 20 years of industry experience, NewNet serves a customer base that is evolving, while the payment processing system changes to incorporate both mobile and financial worlds. NewNet s TraxComSecure infrastructure allows the mobile operator to offer a complete mobile broadband-based, carrier-class transaction platform. NewNet has the experience and knowledge to handle legacy environments as well as changes in the mobile payment processing space. NewNet s TraxComSecure infrastructure incorporates a transaction routing gateway which provides secure access and protocol routing throughout the entire payment process. These functions, secure transaction and protocol routing capability, are the core of any electronic transaction. Once a payment of any type is received at a wide range of POS terminals, the transaction needs to be routed through to the financial institution and the necessary funds must be secured. In a single platform known as the AccessGuard 1000, the TraxcomSecure system integrates transaction protocol processing, SSL processing and transaction routing with the additional support for Internet Protocol Security (IPsec) required by the mobile payments processing market. The recently enhanced AccessGuard system offers specialized software with several key advantages including faster transaction processing of credit/debit cards, fund transfers and health/other electronic benefits transfers. These are all potential mobile payment processing markets the MNO could target. In addition, the AccessGuard s high-capacity platform means faster transaction times. 4

6 Besides supporting standard and proprietary (custom) transaction protocols, AccessGuard provides required end-to-end security features for mobile and broadband Internet payment transaction processing. The system includes SSL acceleration and offloading; incorporates digital certificates; uses state-of-the-art Derived Unique Key Per Transaction (DUKPT)-powered encryption and decryption; and provides secure connectivity to host processor systems through IPsec. The TraxcomSecure is device-agnostic, it supports mobile payment transaction mechanisms ranging from a variety of mobile wallets and NFC to broadband and Internet-based transactions. This agnosticism allows global MNOs to easily expand their base of POS terminals while entering the mobile payments space. The mobile operator can leverage NewNet s numerous partners for POS devices or provide its own devices. The NewNet system also offers management capabilities that allow the acquirer in this case the MNO to capture network statistics about efficiency and usage. These capabilities further ease the MNO s transition from providing the pipe to playing a larger role in the mobile payments processing industry such as being a full acquirer. While an acquirer typically supports many different, diverse merchants, NewNet system s management capabilities allow the acquirer to provide each customer with specific and relevant data. For example, using TraxcomSecure s management capabilities, a mobile operator could tell a specific merchant how many transactions occur per hour. The system s management capabilities also allow the MNO-acquirer to determine if it has adequate capacity or needs to add more POS systems or leased lines. A third benefit is the acquirer can analyze information generated by TraxComSecure s management capabilities to detect fraudulent transactions. Roles for the MNO Several new roles are within the reach of the MNO targeting the mobile payments processing marketplace and wanting a greater share of the revenue stream. For the mobile operator, taking on the role of a Transaction Acquiring Network Service provider or expanding this to a full-fledged transaction acquirer is easily within reach. As an acquirer or acquiring service provider, the mobile network operator can have a more valuable role in payment system with capabilities to offer client applications on consumer mobiles and smart POS devices. They can also introduce content on the smart POS devices directed at the consumer while conducting transactions, which can generate more revenue than providing the processing pipe. 5

7 Whether the MNO can evolve into the acquirer role depends in part on banking regulations in each country. In some developed nations, mobile operators are prohibited from adopting the acquirer role; in others, there is no such delineation. If the MNO operates in a country that allows a mobile operator to also be an acquirer, more regulations will need to be followed and collaborating with partners in the financial industry to address these regulatory requirements is necessary. The mobile operator that decides to become an acquirer can also receive greater financial rewards. Consumers worldwide own billions of mobile devices that could become POS or payment terminals with an embedded mobile wallet. Today, the MNO provides access for merchants to get approval for electronic transactions, which has been done traditionally in the wireline environment. Mobile payments processing is a variation of that expertise, which is why more than one mobile operator is considering becoming a full acquirer. In the United States, where the mobile carrier essentially owns the end device, the MNO with hundreds of thousands of subscribers is well positioned to gain more control over the mobile payment processing market. By providing consumers with devices that have evolved from mobile phones to mobile wallets, the mobile operator has opportunities to take on a much larger role in the marketplace. Whatever role the MNO assumes, the mobile operator would be wise to obtain assistance from a partner with comparable skills in the infrastructure side of the payments processing industry. This combination of the MNO s subscriber base and mobile app knowledge, and the infrastructure partner s expertise in security, privacy and transportation aspects of the payment processing system offer a winning relationship for both parties. 6

8 About NewNet Communication Technologies, LLC NewNet Communication Technologies, LLC, is a leading provider of innovative solutions for next generation mobile and fixed line networks. NewNet enables global telecom operators and equipment manufacturers to develop and deploy progressive, revenue-generating applications that deliver value added services. Recognized as a trusted leader in the carrier applications market for more than 20 years, NewNet is synonymous with telecom product excellence and development expertise. NewNet is committed to providing unparalleled service to its customers. With installations in major carrier networks in more than 70 countries, NewNet s product offerings include: The WiMAX end to end wireless broadband product portfolio; TraxcomSecure electronic transaction processing solutions; Mercury, the industry s most complete purpose-built, mobile multimedia content delivery platform; the Total Control PDSN platform, which provides delivery of premium mobile data services in CDMA networks; and other industry-leading products. The company is headquartered in the USA, with sales and support teams located around the world. NewNet is a wholly owned portfolio company of the private investment firm Skyview Capital LLC. For more information, visit: