Mobile Payments: A Tool Kit For A Better Understanding Of The Market

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1 Mobile Payments 1 Mobile Payments: A Tool Kit For A Better Understanding Of The Market Jan Ondrus INFORGE - Ecole des HEC University of Lausanne [email protected] Abstract. This paper primarily proposes an overview of the mobile payments market. In order to have a better understanding of this alternative payment method, we review different techniques supported by tools that can be used to analyze the mobile payment and its market. 1 INTRODUCTION With the growing prevalence of the electronic commerce and the widespread use of mobile phones, a new type of channel is emerging, called mobile commerce, or m-commerce. The use of e-commerce has already digitalized the payment process, so physical contact between the buyer and seller is no longer necessary. The conversion from physical to virtual payments has brought enormous benefits to consumers and merchants alike [38]. Moreover, mobile commerce will likely require real-time cashless wireless payments for buying physical and digital goods anywhere at anytime. The immediate consequence is a race between payment service providers such as banks, card companies and mobile network operators to be the first to offer a new successful mode of virtual payments. However, some recent analysis show that mobile payments have not proven to be a source of competitive advantage for neither financial institutions nor for mobile operators [53]. Hence, the current tendency for each actor is to try to pick the right business model to maximize their market share rather than trying to lead the market. Mobile payments, defined as payments carried out wirelessly via a mobile device, are likely to become an important section of the retail payment sector [34]. Gartner Research predicted that the transaction value of mobile payments will expand to $15 billion in Western Europe by year-end 2005 [4]. In an attempt to overbid this forecast, Forrester Research, predicted that mobile payments will amount to only 26 billion in per mobile phone user per year -- and just 0.5% of consumer spending, excluding housing and vehicle purchases [24]. However, mobile payment is confronted with technological and business issues that delay its development. The biggest challenge that mobile payment providers face at this time is convincing European consumers and merchants that they need new payment systems [30]. The current slow start of m-commerce can be attributed to the fact that it suffers from the same problems troubling e-commerce, plus a few of its own [48], such as device and network limitations, maturity of payment solutions, and customers lack of interest [8]. Nevertheless, according to Durlarcher Research, the potential of m-commerce remains enormous, predicting that the market could be worth 23 billion in Europe by year 2003 [39]. This has prompted many mobile and financial industries to claim that it is time to promote mobile payments in order to accelerate the development, acceptance and use of the m- commerce.

2 Mobile Payments 2 Another way to explain the real enthusiasm around m-commerce would be the penetration of mobile phones estimated in Western Europe to reach almost 70% by the end of 2003 [62]. Moreover, the arrival of the new 3G services that will be coming with UMTS may address some disabling problems and deliver more possibilities for new mobile applications, which will need a good payment system. Consequently, we expect that more people might want to make payment transactions over their mobile handset. Some recent Gartner survey data indicates that approximately 46% of Western Europeans already use a mobile device for making some kind of mobile purchase [4] (e.g., news alerts, logo, ringtones). The types of mobile device that can be used for m-commerce range from the classic mobile phone, PDA and laptop, to more surprising devices such as refrigerators and cars. The growing need for ubiquity and mobility promises a bright future for m-commerce, which creates an environment where consumers and merchants are able to conduct business anywhere, anytime and any way they like. Herzberg insists that security and convenience are two essential properties that mobile devices should have [28]. The mobile telecommunication area is subject to an important debate which concerns the current and future successful technology in m-commerce. It has been observed that mobile voice telephony (e.g., GSM, GPRS, UMTS,...) and data communication (e.g., WLAN, Bluetooth, infrared, RFID,...) are converging to offer the same type of services. Sooner or later, the telecommunication market will change in the sense that one type of network will be able to handle voice conversations and data transfers with good quality of service. The objective is to respond to the desire of increased mobility, whether for carrying voice or data. Some mobile network operators are preparing to compete on both markets. For example, Swisscom bought a UMTS license to offer 3G services, but they are also promoting WLAN hotspots. Today, these technologies are different enough to be complementary, especially concerning the speed of transmission and coverage. However, in the future, we cannot be assured that the distinction will be so evident. In this paper, we review different payment mechanisms to obtain a better understanding of the impact of mobile payments. Therefore, we propose to use some description, classification and decomposition tools for existing payment systems. Furthermore, we identify the actors in the mobile payment arena and the various strategies that these actors can choose. In addition, we identify some mobile payment issues that we use for an actor/issue analysis. Then, we try to evaluate the mobile payment s potential as disruptive technology. Lastly to view how mobile payments could be practically applied, we propose two mobile payment case studies; one on Paybox, and another on JoinKey, a fictive infrastructure designed for retail business, which combines a CRM infrastructure and mobile payment possibilities to increase customers loyalty. 2 UNDERSTANDING THE BACKGROUND OF MOBILE PAYMENTS We define a payment as a transaction of a monetary value from one party to another party. This can be done through one or many intermediaries, such as a bank or a card company. By enabling new technologies, especially wireless, we expect to see more possibilities to initiate a payment transaction. The objective is to improve payment systems to approach a more frictionless process. Traditionally, in the real world, the most popular modes of payments are cash, cheques, debit cards and credit cards. With the possibilities created by the Internet, a new generation of payments appeared, such as electronic payments, digital payments and virtual payments. w, with the growing penetration of the mobile phone and the development of m-commerce, the mobile payment will become an uncontested mode for paying goods.

3 Mobile Payments 3 A logical evolution occurred in the monetary value transaction environment due to the progress of technology. In fact, at the beginning, payments were mostly conduct on a faceto-face basis (cash-, paper-, card-based). As technology progressed, remote transactions gained in popularity with the development of data wired networks (credit cards, e-payments). The current trend is now to implement wireless systems that can handle remote as well as face-to-face mechanisms with a single device. A Simple Payment Transaction A simple two-party commerce transaction consists of three basic phases (Figure 1). First, the consumer chooses the desired product by shopping. Then, when the consumer is done with the shopping phase, the merchant gives a bill to the consumer. Lastly, the consumer has to pay the merchant for the good. Figure 1 : The Three Basic Phases of a Commerce Transaction There are many possibilities to extend the number of phases during a payment transaction. However, a payment system has to be very simple. Moreover, the transaction has to remain as transparent as possible for the consumer, even if the backoffice system is complex. With a complicated payment solution, the consumer will be discouraged from using it. A Tool for E-Payment Modeling To fully understand the form a digital payment transaction can take, Weber [61] imagined a simple figure that can represent a payment scenario (see Figure 2). Figure 2 : A Basic Digital Payment Scenario The payer (consumer) makes the payment. The payee (merchant) then receives the payment. The issuer is the third party (bank or service provider) interacting with the payer. The acquirer represents the third party of the payee (the bank or service provider). As defined by [1], payment models classify the digital payment systems according to the necessary flow of information between the participants of an electronic transaction. We first introduce some of these models suggested by [21]. To illustrate an example, we present a

4 Mobile Payments 4 direct cash transaction in Figure 3. Figure 3 : A Direct Cash Payment Model In direct cash systems, the consumer (payer) withdraws the money from the bank (issuer), hands it to the merchant (payee) who deposits the money from the payment to its bank (acquirer). This system can also work with a token money model that we can use with smart cards, for example. This explains the last «optional» phase which is the settlement between the acquirer and the issuer who transforms the token into real money. To demonstrate the flexibility of such representation, we suggest to taking a look at a complex system described in Figure 4. The SET system has been developed by the credit card industry to facilitate secure payment card transactions over the Internet. Figure 4 : A SET Payment Transaction wadays, there are few successful electronic payment solutions. They follow either a three- (e.g., American Express and Discover handle card payments within a single organization) or four- (e.g., Visa and Mastercard have a number of member banks, which issue cards, authorize and acquire the payments for merchant) party models [63] which gather the consumer, the merchant and the payment solution provider. Buhan, Cheong and Tan have described the main phases of mobile payment [8] with the same type of representation tool introduced above (see Figure 5). Figure 5 : M-Payment Main Phases [8] As we can see, we have a four-party network where content provider represents the mer-

5 Mobile Payments 5 chant, the payment service provider is the acquirer and the trusted third party is the issuer. The Payment Dimensions Payment transactions have identified multiple dimensions. A distinction between the different types of payments should be also be described. Therefore, we propose a classification of the payment market s dimensions in this following table adapted from [53]: By means Table 1 : The Different Payment Dimensions Cash, Paper (Cheques, Bankers draft), Card (Credit, Debit, Smart), Electronic (e/ m-commerce, virtual money, e-wallet, stored value account), Tokens/money surrogates By size Micro-payments (generally below 10 Euros), Macro-payments By place of Purchase Real-world or F2F, Remote (Internet, Mail and telephone orders) By Seller/Buyer Origin B2B (rare for m-payment), B2C, P2P By Type of Purchase Physical goods, Digital/electronic goods, Rights (rich media) By Clearing and Settlement Bilateral, Multilateral (joint clearing house), Using intermediaries Method By Type of Transaction Pay Per View (PPV), Pay Per Unit (PPU) By Time of Payment Pay now (debit), Pay later (credit), Pre-pay (against stored value) By Geography Domestic, Cross-border, Single currency, Multiple currency By Location of Payer s Account Network-/server-based, Device (client-based), Chip (client-based) Details Micropayments and Macropayments An important strategic issue for mobile payment system suppliers is to choose the type of payment dimension they want to focus on. For example, micropayments generally represent a payment which is below 10 Euros and is usually supported by cash or debit cards. Merchants are reluctant to accept credit card transactions for small amounts because of transaction fees. Consequently, mobile payments could be an attractive substitute for this type of transaction, especially since most current mobile purchases are news alerts, logos and ringtones. However, most companies promoting micropayments failed because the margins on small value payments are notoriously low, and sufficient economies of scale are extremely difficult to attain [15]. On the other hand, macropayments, which are thus logically every payment above 10 Euros, represent a real challenge for mobile payments. They need stronger security mechanisms because of the large amount of money involved and the greater possibility of fraud. A survey from SpeedFacts shows a very surprising fact: the mobile phone is the preferred payment method between 12.5 and 50 Euros [49]] Figure 6 : Preferred Payment Method of Internet Users if Away [49]

6 Mobile Payments 6 Face-to-Face and Remote Payments The location of purchase is another dimension that electronic payment has already changed. Mobile payments will deliver even more new features to improve the current systems. F2F (face-to-face or proximity payment) transactions are the most common way to purchase goods. However, considering the explosion of e-commerce, remote payments are going to become more and more popular. Mobile payments should revolutionize these two types of transaction. In fact, a mobile phone can replace a wallet for small expenses. So if people were to go to their local retail store they would be able to pay with their mobile handset directly at the POS (Point-of-Sale). Therefore, proximity payment transactions usually involve two parties using an ad-hoc network based on a wireless technologies such as Bluetooth, infrared and radio frequency identification (RFID) which enable short range wireless device-to-device payments [38]. For remote payments, the major benefit for the consumer is that there is no need to be present at the time of the purchase. Another possibility is the payment of goods on the Internet via a mobile device. The problem for the merchant is that there is no payment guarantee. To have better understanding of the different characteristics of the remote payment means, Thomann presents the following table (Table 2). He includes the different risks, the payment time and the transaction costs [59]. Table 2 : Characteristics in Remote Payments (Internet, MO/TO a ) credit risk (merchant) fulfillment risk payment time (cardholder) a. Mail Order (MO), Telephone Order (TO). b. Fulfillment risk for debit/credit is low due to chargeback rights. c. Credit card transaction cost is high due to commissions. transaction cost Check high high later medium Pre-paid low high before medium Post-paid high low later medium Debit card issuer s low b now medium Credit card issuer s low b later high c E-Purse very low high before low Mobile Payment Multidimensional Statistics: Size and Location Forrester s research predicts some values of mobile payment transaction types considering two distinctive dimensions [22]. This forecast was done in 2001 for Europe from years 2000 to 2005 (Table 3). Table 3 Past, Actual and Projected Value of M-Commerce Transaction, Europe Micro Remote <1 mio <1 mio 1 mio 4 mio 12 mio 27 mio Macro Remote 5 mio 24 mio 162 mio 619 mio mio mio Micro F2F 26 mio 87 mio 423 mio mio mio mio Macro F2F 19 mio 67 mio 314 mio mio 5241 mio mio As we can see, proximity (F2F) payments appear to offer the best medium term revenue opportunities. In the short term, micro proximity payments seem to be the more valuable transactions.

7 Mobile Payments 7 The Exploration of Mobile Payments In spite of the differences between the various mobile payment systems, most of them are similarly structured [36]. As we can see on Figure 6, in most cases a customer needs a payment intermediary. Figure 7 : The Structure of Mobile Payments [36] To be successful, we suggest that a mobile payment solution should be able to handle most of the dimensions presented in Table 1. In general, consumers will be more predisposed to subscribe to a very flexible and universal system compared to another that would not offer the same number of possibilities. Furthermore, the payment solution must always be available since consumers want to pay anytime and anywhere. There are different reasons why a mobile phone has the potential to become a payment device in the future. The number of users of mobile phones is already considerable, and mobile payments can be made in all types of payment transactions, such as manned (any merchant), unmanned (vending machines, parking meters,...) POS and e-commerce via a mobile phone [35]. The benefits of using a wireless device to pay are narrowly linked to the convenience of using an easy, real-time, cashless and frictionless payment system. Consumers expect mobile payments to be easy-to-use, fast, personalized, secure and universal. The challenge for a wireless device is that it should be able to conduct any transaction, anytime and anywhere. However, mobile payments also bring many problems to solve. One of the most crucial issues is the price that a mobile payment will be charged. More than ever, consumers are reluctant to pay more without having an added value service; arguments like convenience and security will probably not be attractive enough. Moreover, Dahlberg argues that, from the businesses perspective, SMS and value added services are considered expensive, and operator s and banks transaction fees irritate some consumers [18]. Hence, service providers have to find the right revenue model if they want the mobile users and merchants to adopt their new mobile application. Otherwise, there is no chance that the mobile payment solution will succeed. Technology suppliers also have the mission to design mobile devices that are easy-to-use, fast and reliable in a payment context. Without a convenient device, the consumer will not make any effort. A very popular m-commerce example is the book ordered in 40 minutes using a mobile phone! To summarize the various factors that can lead a mobile payment system to success, Watson proposes a list of four features that can be applied to mobile payments [60]: - Ubiquitous (anywhere, anytime) - Universal (universally usable) - Unique (customized) - Unison (synchronized) This vision is shared by important actors like Visa and Acceture who co-published a white paper on the U-commerce. They introduce universal commerce as an environment where buyers and sellers will literally be able to conduct commerce anytime, anywhere and any

8 Mobile Payments 8 way they like [46]. Moreover, they predict that this new environment will provide more choice, more convenience, and more control over how business will be done with one another. However, this still implies the continued existence of traditional payment means such as cash, checks, debit and credit cards. For them, several global phenomena, such as the pervasiveness of technology, the growth of wireless and increasing bandwidth and connectivity are market drivers that accelerate as technology goes forward. In order to determine the success of a payment system, de Clercq proposes some commercial, juridical and technological requirements [10]. Table 4 : Some Requirements for the Success of a M-Payment System Commercial requirements Juridical requirements Technical requirements Universality Digital signature Network technologies Instant connectivity Current legislation on Service technologies Personalization payment systems M-commerce terminals Convenience M-commerce security Expenses Protection of the privacy mechanisms Security Technologies Enabling Mobile Payments The intention of this paper is not to detail all the technologies involved in mobile payments. Nevertheless, we categorize the different technologies. Therefore, we introduce a mobile payment framework (Figure 8) inspired from a m-business application framework designed by [10]. Figure 8 : Mobile Payment Framework We propose three dimensions to classify the different technologies in mobile payments. First, «Network» gathers the technologies used in a wireless network infrastructure. Then, «Device» represents the user wireless infrastructure. Finally, «mobile application» describes the technologies used mostly by mobile application developers, mobile application service providers and content providers. Further details and descriptions on technologies that enable mobile payments can be found in [47].

9 Mobile Payments 9 Security in Mobile Payments Security in mobile payments is certainly one of the most important problems that providers encounter. In fact, there is no guarantee of total security while sending sensitive information over an open network like the Internet. So far, the two main card association initiatives are Visa 3-D Secure Specification and MasterCard SPA [15]. However, there are some major consortia or forums (e.g. MeT Initiative, Mobey Forum, Mobile Payments Forum and Paycircle) trying to gain the clout that mobile payment players believe they need to create a workable m-payment system [3]. They all want to develop standards to provide secure mobile transactions. Security is also a very critical factor in enabling consumers to trust mobile payments. A mobile payment solution should respond to the five classic security criteria such as: Authentication Availability Confidentiality Data Integrity n-repudiation Since financial services like payments can be subject to fraudulent activities, they require well-secured infrastructure. The potential flaws are that someone can eavesdrop on the communication and that a third-party impersonifies the provider. Therefore, authentication and confidentiality should be implemented in the solution to prevent these flaws. Security can be hardware- or software-based. On the client side, there are at least four [20] or five [13] potential designs for mobile phones to accommodate secure mobile payment (see Table 5). Table 5 : Four Possible Handset Designs to Enable Secure Mobile Payments Multi-application chip card Dual-SIM phone External WIM card reader Dual-slot phone SIM and WIM (Wireless Identification Module) combined in a single chip card Both the SIM and WIM have their own slot inside the mobile phone. An external card reader can be connected to the handset. The mobile phone has a built-in smart card reader. Consumers insert their existing debit or credit card into the smart-card readerslot and type in a four-digit PIN, issued by their bank, in order to authenticate purchases [13]. Payment software built into the phone The functionalities of the WIM would be inside the phone memory. To prevent the fact that consumers have to replace their mobile phones, most current system use a SMS or USSD-based solution for authentication and payment confirmation mechanisms. This is the case for most newcomers and intermediaries mobile payment schemes. The only way for mobile payment mass adoption would be if the client device would not cost too much. As discussed above, security can also be implemented in the network infrastructure. In order to fulfill the security requirements at the network layer, some researchers designed a

10 Mobile Payments 10 functional model of a mobile commerce terminal [63]. Figure 9 : Functional Model of a Mobile Terminal Designed for Mobile Commerce Applications This functional model describes the sophisticated mechanisms and protocols. The designers stress that in addition to transport layer security protocols (e.g., TLS and WTLS), it is important to provide an access to basic cryptographic system from the application layer. wadays, the cryptographic algorithms used are SHA-1 and 3DES. Moreover, in the future, AES might be implemented in the terminal. Public Key Infrastructure (PKI) can also be used in the mobile context. However, the PKI will have to support efficient mechanisms for certificate management (e.g., issuing, distributing, validating and revocating the certificate) [63]. Security is probably one factor of success in mobile payment transactions. For now, the biggest challenge is agreeing on few technology standards that would be able to rally most actors on the payment market. Salvi and Sahai propose that subscribers should be able to specify different levels of security for different amounts [45]. Therefore, they suggest four increasing levels of security which can be applied to the payment service (Table 6). Level 0 Level 1 Level 2 Level 3 Table 6 : Security Levels [45] PIN is required. For making micro payments. PIN to authorize payments PIN + digital certificate signed by a third party on behalf. Digital certificate stored in the mobile and protected by a PIN. 3 CLASSIFICATION TOOLS FOR M-PAYMENT SOLUTIONS The generic dimensions help to classify and describe the different possibilities to build a payment system. However, to overview the real market of mobile payment, we need another classification framework. Currently, mobile payments can be classified into two general types of payment methods, namely devices with payment applications and devices without payment applications [47]. Each type of payment solution is described in the Appendix A. Table 7 An Application Device-based Classification Devices Without Payment Applications - Site wallet - Remote wallet - Distributed wallet - Network operator specific mobile payment Devices With Payment Applications - Personal wallet - Electronic purse - EMV - Network operator specific mobile payment

11 Mobile Payments 11 From his point of view, Hennessy thinks that the main types of mobile payment schemes can be classified into two categories: client wallet and hosted wallet [27]. Client wallet A client wallet is stored on the user device. It is a hardwarebased system (SIM Application Toolkit card). Table 8 A Wallet Location-based Classification Hosted wallet A hosted wallet is stored on a server. Self-hosted wallet. A service provider hosts the wallet on his serv- server is managed by a third party. Third party hosted. The wallet ers. A Framework to Classify and Decompose Mobile Payment Solutions As the previous classifications were too restrictive, we introduce another framework to classify and decompose a current mobile payment system. We propose to use a multidimensional table that allows us to get a better overview of the solution s properties. Therefore, we present a table to classify the system in types (client-based, server-based and hybrid solutions), then select who the provider(s) is or are (mobile network operators, financial institutions, newcomers/intermediaries), define the type(s) of relationship that the payment system can handle (B2C, P2P), determine the location(s) where the transaction can happen (face-to-face and remote) and at last the time when the payment is completed (pre-paid, direct pay, post-paid). Table 9 provides an equitable way to compare one system to another. Name Of The Existing System Table 9 : A Simple Table to Describe a Mobile Payment Scheme M-Payment Solution Type Clientbased Serverbased Dimensions Mobile Payment Solution Providers Relationship Location Payment Time Hybrid MNO Financial Institution Newcomer/ Intermediary B2C P2P F2F Remote Pre Direct Post Filling in the table is convenient and fast because it is sufficient enough to put a cross in the columns that apply. The dimensions are not exhaustive. However, there is the possibility to find out what the system s limitations are, especially concerning the relationship and the location. This table is not created to provide an assessment of the quality, but it allows us to judge the flexibility of the system. A similar table was designed by Carat at the end of his report [12]. The only difference is that he selects more dimension. He described over 100 electronic payment initiatives with this table. Some results were especially interesting by helping to deduce the probable evolution of the number of electronic payment offered by different actors (Table 10). Table 10 : Profile of the system providers Initiated by banks /near n-banks Mixed profile All schemes = Introduced before Introduced in or after A similar framework is proposed by a group of German researchers [14]. They call their system a morphological box, which describes the characteristics of a mobile payment solution. Even if this method seems to be complete, it does not allow to decompose the different initiatives into clusters or types. Apparently, one way to classify mobile payment systems

12 Mobile Payments 12 in groups is to choose just one dimension that solutions have in common [e.g., Table 7]. Figure 10 : Morphological box of mobile payments characteristics and instances [33] To examine the Paybox system, the use this morphological box. The result is in Figure 8. Figure 11 : Paybox within the morphological box [33] As discussed above, the need to analyze more deeply the mobile payment system is crucial to discover the limitation of the proposed solution. To measure the potential of a system, we think that all the requirements of a payment system should be taken in account. Some already existing research have been made with the goal to see which payment system answer the best to most requirements. Weber also proposes to describe payment systems with the most probable requirements a solution can have. In his paper, he illustrated many payment system with the use of this table.

13 Mobile Payments 13 Table 11 presents as an example the requirements profile of traditional payment systems, such as cash, cheque and credit card [61]. Table 11 Requirements Profile of Traditional Payment Systems Requirement/System Cash Cheque Credit Card Token System Transaction Atomicity Consistency Isolation Durability Security Double Spending Counterfeiting Overspending n-refutability Unauthorized Use Anonymity Untraceability Interoperability Divisibility Bidirectionality Respendability Acceptability Multicurrency Support Exchangeability Transferability Portability Scalability Scalability Off-line Operation Economical Issues Operational Large User Base Buyer Risk Seller Risk Reliability Conservation Ease of Use Unobstrusiveness Low Latency Micropayments Macropayments Low Fixed Costs Buyer HW Independence Seller HW Independence Some To compare payment solutions, Buhan, Cheong and Tan use a simple table containing the different characteristics that a payment network can have. n.a. Some n.a. Partly n.a. Some n.a. Limited Table 12 : Comparison of Characteristics of Payment Networks Characteristics Transaction criteria Content criteria Level of upgrade/customization needed Pay per view Pay per unit Recurrent subscription Pre-paid Post-paid Direct debit P2P Digital goods Hard goods Tickets Votes euro euros >10 euros For consumers For content provider For Payment Service Provider For Trusted Third Party

14 Mobile Payments 14 An Existing Tool for Inventorying E-Payment Systems An impressive work has been done for compiling most of the electronic payment systems in Europe. The epso (epayment Systems Observatory) database is available on the official website [55]. There are two ways of searching the inventory database: Free text search where the user can search for specific concepts (such as PKI, voice recognition, etc.) or by the e-payment system name. Advanced query is an explicit three-level structure of keywords presented in three list boxes. The first list box indicates the type of payment solution or initiative. The second and third offer additional criteria to refine the search. In addition, the user may input the geographical location and the members of the system. Moreover, another survey on electronic money development has been realized by the Bank for International Settlements [6]. In this digest, electronic money solutions are classified by countries. Evaluate the Potential of New M-Payment Systems As briefly suggested before, mobile payments are a key enabler for m-commerce. However, in recent years, a number of new payment solutions have been introduced with little success. These solutions have been mostly technology driven at the cost of convenience and value to the consumer. Gordijn stresses that when launching an innovative idea, it is crucial to offer a sound value proposition to the customer in order to be a profitable enterprise [25]. One idea would be to find a formula to evaluate the chance of acceptance of a new payment system. Therefore, Dalhberg and Mallat suggest measuring the customer perceived value, which helps to describe how characteristics of products and/or services are related to the adoption of new (payment) technology solutions [19]. For that, they propose to use the following equation first introduced by Grönroos [26]: Core Solution + Additional Services Customer Perceived Value = Price + Relationship Costs Applied to the mobile payment problem, the core solution represents the ability to pay with a specific method. Additional Services are the features offered by the specific payment method (e.g., security, mobility, compatibility). Price refers to the price/cost generated by the payment transaction. The relationship costs are threefold: (i) the investment of the consumer to be able to use a specific technology, (ii) the indirect costs if the system does not function as promised and (iii) psychological costs that are related to the level of trust. The use of this equation will show if the customer perceived value for mobile payments is greater than for payment methods that already exist. The Mobile Payment Case Study The responses from interviews directed by Dalhberg and Mallat [19] show interesting facts. For additional services, the use of m-wallet and smart cards is seen as valuable for small purchases of physical and digital goods. Concerning the price, responses show that interviewees do not want to use mobile payment systems if the price is higher than buying good with the traditional payment solutions. Regarding relationship costs, they estimate that the configuration for setting up a wireless device should not be too difficult. But, they have doubts concerning the security of online wireless payment transactions at the POS. Finally, the most trusted providers of mobile payment solutions were banks and credit card companies, followed by mobile operators, if there were the only one to offer such solutions.

15 Mobile Payments 15 4 THE MOBILE PAYMENT ARENA The first step in this presentation of the actual mobile payment market is to identify the main actors which participate actively or passively. There is a difference made between an actor which can be involved directly in a mobile payment transaction (Players) and another actor which has also an importance but not in the real-time processing (Rulers). Each actor brings its own contribution to enable the mobile payment mechanisms. RULERS Legal framework National Independent Bodies International institutions Governments Regulators Regulators Technological constraints Device makers Technology enablers PLAYERS Network operators Technology Technology suppliers suppliers Newcomers Intermediaries Device retailers Equipment vendors Supply Financial institutions Specific platforms Telephony Data communication Merchants Mobile Payment Banks Card companies Demand Consumers Figure 12 : The Mobile Payment Arena This figure shows that there are two groups of actors: the rulers and the players. Then, each group is classified according to the types to which they belong: legal framework, technological constraints, supply and demand. The triangle can illustrate the number of actor in each group. In fact, they are many more consumers and merchants than regulators. The circle represents the potential «active» links between the players during a mobile payment transaction. As we can see, the five main players in the mobile payment arena are consumers, merchants, mobile operators, newcomers/intermediaries and financial institutions. On one hand, the presence of a demand, represented by consumers and merchants, is essential. However, on the other hand, depending on the system in use, the supply can take on many different forms as network operators, newcomers/intermediaries and financial institutions compete, interoperate, co-operate. Therefore, their presence depends upon if the mobile payment solution asks for an intervention of one, two or all supply actors. A Description of Actors The objective of this overview is to introduce the different actors involved in the mobile payment arena. The demand of mobile payments is generated by merchants and consumers. Merchants want the payment process to be transparent to the user, as this encourages greater usage and/or propensity to complete a purchase. They also want any payment scheme to facilitate swift and easy completion to ensure they get paid on time [38]. They hope that a mobile payment system can also

16 Mobile Payments 16 improve consumers loyalty. Consumers represent the major target of all mobile payment initiatives. They decide if they want to use a mobile device for monetary value transactions. Their main expectation is that their payments have to be fast, easy, personalized, and secure. Most of them already possess a mobile handset. The phenomenal success of the Short Messaging Service (SMS) highlights the appetite for non-voice services on mobile device. Therefore, mobile payments will play a very important role if the consumer asks for new value added mobile applications. The supply of mobile payments is composed mostly of service providers coming from different industries. Network operators, financial institutions and newcomers/intermediaries will try to provide their solution to the mobile payment issue. Network operators manage the mobile communication infrastructure, enable mobile telephony and data communications. Moreover, some of them already provide a wired network for electronic payment transactions between business premises and banks financial systems. A technology distinction has to be made to provide an overview of the different family of actors involved. The convergence of voice and data brought two types of competing or complementary technologies: - Telephony technologies (GSM, GPRS, UMTS,...) - Data communication technologies (WLAN, Bluetooth, infrared, RFID,...). Network operators are natural candidates for providing payment services since they are already involved in billing for voice and data transport services [34]. Moreover, they have the desire to recoup the cost of the UMTS license which makes them very interested in taking over the mobile payment market with the idea of generating revenue with payment transactions. Financial institutions are primarily concerned with ensuring the integrity of the payment system and reducing the risk of fraud. They can be a bank, a card company, a clearing house or all at the same time. Newcomers/intermediaries principally exist because of the missing standard that should have been chosen by network operators and financial institutions. Actually, the technology to enable mobile payment and the demand for such service are there, but the supply is late to emerge. Therefore, newcomers/ intermediaries objective is to propose a well-integrated solution in the current mobile payment market with the current popular technologies in use such as SMS (Short Message Service) and USSD (Unstructured Supplementary Service Data). They use the mobile communication network to transmit the data and control the veracity of the payment process with a bank or card company. Intermediaries usually act as a third-party between financial institutions and network operators. To illustrate the importance of these new actors, we can look at Paybox which already has 10,000 merchants and 750,000 subscribers for its m-payment service across Europe [17]. Other actors are in the background, but they still have their importance. They are the most powerful entities and they can easily influence the market of mobile payments. Despite being totally passive for mobile payments, they can be considered facilitators of the various mobile payment models [4]. They do not affect the real-time transaction, but they draw the future of mobile payments. Regulators have the role of making the rules and controlling their application. The existence of network effects calls for interoperability between the

17 Mobile Payments 17 systems of different network operators. This interoperability can only be achieved by cooperation. It contains, however, the possibility of collusive behavior to the disadvantage of customers. Therefore, many network industries are supervised by a special regulator. Traditionally, regulation of payment systems has been a part of banking regulation and/or monetary policy [34]. For example, California has started to regulate the use of mobile phones as payment devices. That regulation, in addition to the expected federal regulation, applies to any non-telecommunications charges placed on a telecommunications bill, including wireless bill [9]. Other institutions, such as standardization groups, are also very important because they will make the market more accessible to their followers. Technology suppliers invent and provide new technologies to the mobile communication market. Their role is crucial because they continuously improve devices that will enable an easier and more secure mobile payment process. To assess the role of the different actors in a selected market, Camponovo and Pigneur recommend to briefly but clearly describe the business model of each actor [10]. They adopted an ontology or framework for e-business models developed by [41] and represented in Figure 13. Figure 13 : Mobile Business Model Framework Description of Actors Using Business Models To succinctly illustrate the use of business models to describe actors, we propose to take the network operators as an example in Table 13. Value proposition Target customers Infrastructure Table 13 : Network Operators Business Model They operate mobile voice and data communication network. They mainly provide mobile telephony to end-users. Surrounding services like messaging (SMS), WAP and other network value-added services (content provider, location-based services, billing for third parties,...) are also part of their offer. Telcos targets are almost everyone from children to grandparents, including professionals such as business men. Telcos main activities are network promotion and contract management, service provisioning and infrastructure operation [11]. Telco s have a typical value network configuration [50]. They partner with technology suppliers, other network operators (roaming), content providers and application providers. Revenue model They earn revenues from different sources such as fees for registration, monthly subscription, airtime, volume of data transferred, the income from other activities like roaming and transaction for other parties. Examples Swisscom, Vodafone, AT&T, Tele2, Globalstar,..

18 Mobile Payments 18 Actors and Roles To describe some strengths and weaknesses of different actors to act as payment service provider, Buhan, Cheong and Tan use Figure 14. Figure 14 : M-Commerce Actors and Roles Four Appropriate Mobile Payment Models Gartner Research proposes four model involving the different actors of the mobile payment arena [4]. These models are based on the needs and roles of these stakeholders. Figure 15 : Gartner s General M-Payment Models [4]

19 Mobile Payments 19 Table 14 describes the different models introduced by Gartner. Table 14 : A Description of the Gartner s M-Payment Models Given names Description Comments A Walled garden Customers buy directly from the carrier and Closed system. Invoices directly to the monthly the carrier servers as the sole provider of the wireless bill. Low value transactions to limit the content or operates as the «storefront» for financial risk for the carrier. Mostly adapted for other merchants. digital goods. B High-value garden Carriers choose to accept payments through Natural extension of the walled garden model. the traditional financial network to avoid the Payment with a debit or credit card. Need for carriers to establish relationships with banks and financial risk coming from values greater than $10. external payment processors. C Buy direct Resembles the way PC-based online shopping Merchants can sell through multiple wireless carriers. and payments are transacted. Customers contract directly and separately with each merchant, Carriers are excluded from any revenue- sharing of the payment. A payment option can be who in turn must deal with the various the reverse-billed SMS. Then the carrier would payment processors. charge the payment on the customer wireless bill. D Mediated The intermediary serves as the broker, forming However, this role is not necessary played by an the needed alliances and connections. The independent entity. A merchant, bank or even the intermediary becomes the «glue» that facilitates carrier can perform the intermediation. commerce between all interested parties. This model minimized the interoperability limita- tions and the number of required relationships. The Bank-dominated Model In this model, banks control the whole value chain, since telcos will only perform the data transport. Actually, mobile device would become another way for consumers to access their bank accounts. Figure 16 : The Bank-Dominated Model [36] The device marked with an asterisk may require the use of a smart card in order to make payments. This card would be issued by a bank to enhance security of data storage and transmission and allow strong identification [36]. Concerning the mobile device, there are two obvious solutions designed, such as the dual-slot phone or a separate payment chip embedded in the mobile phone. In this case, banks have complete control over the customer relationship and the payment process. They will thus keep their supremacy in providing payment services. The Role of Network Operators The potential of mobile payment has already been demonstrated, but the role that network operators have to play is not very clear. They are already offering payment services, but if they want to become a real payment service provider, they will have to manage the financial risk and apply for a bank licence [35]. For this reason, it is legitimate to wonder what net-

20 Mobile Payments 20 work operators will do. Krueger describes three different roles that telcos could play in the mobile payment market [35]. Table 15 summarizes his scenarios. Table 15 : The Potential Roles for Telcos Communication providers Third-party billing systems Pre-paid solutions Telcos simply stick to their current business which is not very profitable. Selling value added services like payment is more tempting to generate some extra revenues. Telcos will probably not stay out of the market. Telcos implement third-party billing on behalf of merchants. Such systems allow customers to rely on a trusted billing relationship with telcos. They generate more traffic but also get commissions on payments. The problem that comes with providing this service is the risk of the credit. In fact, Telcos have to manage the risk if the customer cannot pay for the goods purchased before the end of the billing period. Telcos have to take care of such issues as credit limits to prevent fraud. They have to create mobile payment roaming agreements with other national and international network operators. To reduce the risk, they have to increase the frequency of settlements like banks and established payment providers that clear and settle every day. Telco simply debits payments to a prepaid card/account. This slightly reduces the risk. However, difficulties appear with payment roaming. Telcos have to monitor each other to take into account the type of payment service offered (prepaid or billing), and how credit and fraud risks are handled. To provide prepaid solutions, telcos have to become either an Electronic Money Institution (EMI) or a bank. The use of prepaid cards for payments of goods and services provided by third parties makes it necessary to get an EMI licence. Managing prepaid accounts is equal to managing deposits. Therefore, such payment solution would force telcos to become banks. These roles show mobile network operators going alone in the market of mobile payment. Another possibility would be to team up with a bank, to take advantage of the synergy from the technological knowledge of network operators and the financial experience of banks. The Newcomers/Intermediaries Opportunity Because mobile network operators and banks are not able to launch a successful initiative, new opportunities appear for others. These parties will be primarily intermediaries working with mobile networks and banks. Some of them might acquire an EMI licence or even a banking licence. Therefore, network operators would have the advantage of not being bothered with payment regulations if they would work with financial intermediaries. These intermediaries would take the financial risk that network operators do not want to support. However, for example, Paybox is almost owned by Deutsche Bank. This means that banks are also interested to work with intermediaries that would use their banking system. Figure 17 : The Newcomers/Intermediaries Model [36]

21 Mobile Payments 21 Mobile Payment Consortia, Alliance and Forum To increase the adoption of mobile payments, financial institutions and telcos formed consortia. Their objectives are to address the security and the compatibility issues by developping a standard for mobile payments. Since the various consortia have different focus and some companies participate actively to several consortia, these groups are not opponents. Moreover, Adrian arrived to the conclusion that enterprises must join or track multiple groups and drive them to convergence. Otherwise, there will be multiple and poorly connected standards across the many components that support mobile payments [3]. The Liberty Alliance Project The Liberty Alliance Project was formed in The objective was to develop open standards for federated network identity management and identity-based services. Its goals are to ensure interoperability, support privacy, and promote adoption of its specifications, guidelines and best practices [56]. The Alliance is made up of more than 160 members, representing a worldwide cross-section of organizations ranging from educational institutions and government organizations, from service providers and financial institutions, to technology firms and wireless providers [56]. The management board members are American Express, AOL, Ericsson, Fidelity Investments, France Telecom, GM, HP, kia, vell, NTT Do Co Mo, Sony, Sun Microsystems, Verisign and Vodafone. Many other companies are sponsors, associates or affiliates. PayCircle PayCircle is a vendor-independent non-profit organization. Its main focus is to accelerate the use of payment technology and develop or adopt open payment APIs (uniform Application Programming Interfaces) based on XML, SOAP, Java and other Internet languages [42]. PayCircle ensures that the applications can interface with a multitude of devices, carriers and transaction processing systems [3]. The MeT Initiative The Mobile Electronic Transaction (MeT) Initiative is the oldest and largest alliance[3]. This group was created in 2000 by Ericsson, Motorola, kia, NEC, Panasonic and Siemens. Their objective is to provide a framework to secure mobile transactions across any device or payment type. This is a non-bank consortia. The Radicchio Initiative The members of this group are technology vendors and card companies. Radicchio s goal is to establish a trusted global infrastructure for mobile commerce. The Mobey Forum The Mobey forum was created by world s leading banks in Their objective is to promote financial services using mobile technologies. Their commitment to accelerating the take-off of user-friendly mobile financial services by promoting open, non-proprietary technology standards [57]. The Mobile Payments Forum This forum was established by credit card issuers in Its objective is to make sure that whatever other m-payment systems and standards emerge, they are able to interoperate with the current authentication, processing and billing systems [3].

22 Mobile Payments 22 5 THE MOBILE PAYMENT ISSUES The objective of this section is to identify some mobile payment issues. Therefore, the idea will be to use what Tarasewich identified as a set of issues concerning the mobile e-commerce [52]. He classifies a number of possible issues within five categories 1 that we adapted for mobile payment: 1. Mobile client issues 2. Wireless communications infrastructure issues 3. Other wireless technology issues 4. Mobile payment application issues 5. Mobile payment global issues Using this categorization guides the identification of some issues that could concern the market of mobile payment. Mobile Client Issues The issues in this category concern the hardware and software of mobile clients. The device s physical form The question is to find out which device will be the most successful to support mobile payments. The device can be a mobile phone or another such as a PDA, a laptop or any wireless enabled device that could process securely a financial transaction over a wireless network. The convenience of the device Convenience and ease of use are very important in boosting the adoption of a new technology. People want something that they can easily use. If the device is too complicated, the majority of the potential users will be reluctant to subscribe to the system. Wireless Communications Infrastructure Issues The communication infrastructure enables mobile payment. They are many technologies today that can support wireless data transfers. In this section, some issues concerning the infrastructure are described. The type of network With all the new wireless communication technology available, the choice of using one network technology over another is difficult. Each technology brings its own advantages and disadvantages. Therefore, the infrastructure should support the most suitable technology, depending upon the type of payment. Today, data communication networks (WLAN, Bluetooth,...) and telephony networks (GSM, GPRS, UMTS,...) bring a new dimension to the issue. In fact, telcos are confronted with WLAN technology that could be a real threat for their existing business. Some of the mobile network operators are already anticipating the potential success of this technology by offering hotspots. The network coverage As discussed above, the need for coverage is different depending upon the type of mobile payment. For example, Bluetooth, RFID or infrared are adapted for proximity payments (e.g. vending machine) but not remote financial transactions. Then, mobile payment service providers have to choose the type of network which provides the most adapted coverage to support the payment transaction. 1. The three first points are considered as technology issues

23 Mobile Payments 23 Other Wireless Technology Issues The wireless technology brings its own new problem. The fact that data is transmitted in the air make it more vulnerable to eavesdropping. Security in wireless environments Wireless communications present the obvious problem that even unauthorized parties can access the flow of sensitive data transmitted. There are already some methods that reduce the risk that unwanted people or devices intercept communication. Natural protections could simply come from the complexity of the protocol (i.e. frequency hopping). However, encryption is essential to secure the data. In order to use wireless PKI systems for mobile payment, improvements in device processing power and network bandwidth will have to be made. Mobile Payment Application Issues Technology issues represent a first limit for the development of mobile payment. Then, application is another layer that can slow down the adoption of service. Applications should respond to the expectation of the consumers. Micropayments vs Macropayments A mobile payment solution should be able to support either micropayments, macropayments or both. As discussed earlier, micropayments are a good target for network operators since credit cards are not adapted for small expenses. However, macropayments generate more revenues due to the bigger transaction fee that can apply to them. Therefore, macropayments are very attractive to most mobile payment service providers. The system should be adapted to the size of the payment; micropayments have to be fast and convenient, while macropayments have to be extremely secure. Proximity vs Remote Financial transactions can be done either on a face-to-face basis or remotely. Network operators can benefit from a system that allows remote payments since they offer mobile service such as ringtones, games, horoscopes and other digital goods. Remote payments can also be used for e-commerce. Proximity payments enable classic financial transaction between two parties (B2C and P2P) present at the same place and same time. Mobile payment providers will have to choose the type of payment they want to support with their system. Mobile Payment Global Issues Universality and standardization One way to promote mobile payments is to offer a universal way to pay. The possibility to pay anyone, anywhere, at any time should increase the chance of adoption of a new payment solution. Therefore, financial institutions and network operators are trying to form alliances to offer a standard. Cost The adoption of mobile payment systems depends directly upon who will have to pay the extra fee. Most consumers would not be willing to pay more without a real value added service. It will be very difficult for mobile payment service providers to convince consumers of the benefits if the cost of using their system is higher than classical solution. Trust For financial services, there is nothing more important than trust. People will not use a system if they do not trust it. Therefore, security and chargeback policies are factors that can

24 Mobile Payments 24 improve the confidence of the users. After experiencing a bad situation during a financial transaction, the consumer will certainly drop mobile payments forever. Moreover, it appears that consumers prefer to see their financial data consolidated in banks [51]. This proves that customers care about who control their financial data. Regulation Network operators and newcomers are likely to be the actors most concerned about new regulation. In fact, banks are already strictly regulated. Mobile network operators tend to offer more financial services, so they have the choice of either extending their current billing services, or applying for an EMI licence and becoming a bank [36]. 6 AN ISSUE/ACTOR ANALYSIS The goals of an issue/actor analysis are to rank the stakeholder s positions on many strategic issues, assess the convergence and divergences, and anticipate coalitions and conflicts [43]. This type of analysis can be used to discover perspectives or to support managers to conduct a negotiation. Allas and Georgiades propose a five-tool model to help negotiators take decisions on complex issues [5]. They use the three dimensions of position, salience and clout. The position represents the stakeholder s preferred outcome on the issue. The salience describes how important an issue is to the stakeholder as compared with all other issues. At last, the clout compares how much power the stakeholders have in influencing the decision on an issue. Another important dimension, influence, should be added to the analysis. This dimension allows us to estimate the influence that an actor has upon the behavior of another actor. Some of the above-identified issues will be analyzed under the four dimensions. Tables describing the actor/issue analysis are used for each selected issue. The goal of these tables is not to quantify the dimensions but describe the relationship between actors and the issue. Actor/Issue Analysis: The Device s Physical Form The physical form of the mobile device can be debated by the mobile payment service providers. In fact, depending on the adopted device, some actors will have a disadvantage. Consumers Merchants Mobile operators Table 16 : Actor/Issue Analysis: The Device s Physical Form Position Salience The consumers want a device that is easy to carry, Consumers will not use a device that they do not like. solid and eventually something they are already possess or are familiar with. The form is crucial for innovators and early They have to be somehow attracted to the device. adopters. Merchants want a solution that will not cost too much to integrate to their current system. As long as consumers accept the device, they should not care about the physical form. Mobile operators prefer that the device is a mobile This issue is important for them because if the device phone or a device that would use their telecommunication infrastructure. the mobile payment does not use their network, they will not be part of market. Newcomers/intermediaries They would be content as long as the physical form is compatible with the system they offer. Most of these companies are small and flexible, so if the device s physical form changes, they would be able to adapt. Therefore, they give only a limited importance to this issue. Financial institutions They will be most interested if mobile payments use It is crucial for them to stay on the payment market. a device that can interact with their current financial Therefore, the device form has to be compatible with system. the current payment scheme proposed by financial institutions. Regulators As long as the device is not illegal, regulators have salience on this issue no position on this issue. Technology suppliers Suppliers want their technology to be chosen. If no one is interest in their technologies, then they will have to find another business.

25 Mobile Payments 25 Consumers Table 16 : Actor/Issue Analysis: The Device s Physical Form Clout Influence As consumers are the end users, their opinion is very important concerning the device. They thus have the ability to set the standards for usability and features [2]. Their ability to influence the solution of this issue is great. Consumers can probably influence the other actors since the service is offered to them. If the device supporting mobile payments is not adapted to their needs, then consumers can influence the other actors to make them find a new physical form. Merchants Since the support of merchants is required for any Merchants have only a limited influence on the other kind of adoption to occur [2], merchants have their actors. In fact, they are subject to user preferences role to play concerning this issue. and demand [2]. Mobile operators By promoting the use of mobile phones for other Mobile operators depend upon the will of consumers mobile services such as mobile payment, network to adopt mobile phones as a payment device. operators try to familiarize the users with new options. Newcomers/intermediaries Because these companies are mostly intermediaries, They do not have any influence on the other actors they will adapt their mobile payment solution to the concerning this issue. current device. Thus, they do not really have influence on this issue. Financial institutions Having control of current payment devices such as debit and credit cards, they could have an influence on the demand for payment means. Since some financial institutions dominate the payment market, they could influence the physical form of the device if the consumer wants to continue using their current system. Regulators They could forbid the use of some devices. They do not have much influence on other actors concerning this issue. Technology suppliers If they provide an adapted device, there would be a greater adoption of mobile payments with the physical form they propose. Without providing any technologies, no one would be able to offer mobile payment with any device. So they have a great influence on the business of the mobile payment service providers. Actor/Issue Analysis: Micropayments vs Macropayments Actors can have different opinions on what size of payment they want to support with their system. Micropayments will generate revenues with transaction volume. On the other hand, Macropayments fees depend directly upon the size of the payment. Consumers Merchants Table 17 : Actor/Issue Analysis: Micropayments vs Macropayments Position They want a system which supports both micro and macro payments. Merchants want a system that can handle any size of payment, depending upon what they sell. For example, micropayments solutions are adapted for vending machines, but not for purchasing plane tickets. Salience Depending upon what consumers want to pay, they would probably expect a unique mobile payment system for any amount of money. Depending upon the price of the goods they sell, merchants might want a flexible solution that offers micro and macro payments possibilities. They would accord importance if the system does not respond to their needs. Mobile operators Mobile operators have a hard choice to make. They Mobile operators want to take part in the payment can offer a micropayments mobile payment system to market to generate some extra revenues. Therefore, if compete with cash or a macropayments system that they can benefit from either micro or macro payments they would be happy. However, macropay- competes or uses payment cards (debit/credit). Their position is not clearly defined. ments stay the most attractive option for them. Newcomers/intermediaries They would choose the payment size that gives them Like the other mobile payment service providers, a greater chance to dominate. The market is tight for newcomers/intermediaries are interested to be a part them. They will have to find a way to offer an added of the macropayments market which seems to be value of the mobile payment process. (e.g. security more profitable. for macropayments) Financial institutions Regulators Technology suppliers Financial institutions already dominate the market of micro and macro payments. To evolve with the mobile technology and the threat of new payment service providers, they will try to adapt their current system to support mobile micro and macro payments. For that, they could forge an alliance with mobile operators to benefit from their existing infrastructure and customers. It is very important for financial institutions to stay a major actor on the payment market either for micro and macropayments. Different regulations have to be made depending The importance that regulators could accord to this upon the size of the payment. Consumers and merchants have to be better protected from fraud con- issue is negligible as long as there is no abusive use. cerning macropayments. Micropayments are easier to control and regulate. Technology suppliers have no direct benefits if a system is used for mobile micro or macro payments. about the payment size. Technology suppliers are not directly concerned They just have to provide technologies that support both sizes of payment.

26 Mobile Payments 26 Consumers Merchants Mobile operators Table 17 : Actor/Issue Analysis: Micropayments vs Macropayments Clout Influence If the payment system is not adapted to the consumers needs, there is no chance that the solution will be from the service providers. Then, the mobile pay- Consumers will probably dictate what they want adopted. ment solution will be adapted. Merchants might be reluctant to accept mobile micro and macro payments if the cost or the risk is too big for them. Moreover, if merchants do not want to adopt any mobile payment system for any size, mobile payments will be only marginal and applied to unmanned POS. Merchants can ask the mobile payment service providers to design a system that is attractive for them. They will not accept to pay and integrate mobile payment terminal at their POS if they have nothing to win. As long as mobile payments use mobile operators Since mobile operators want to take part of the market, they probably need to cooperate with the finan- communication infrastructure, they can control a part of the process and thus ask for a financial retribution. cial institutions. They could influence the way data is transferred over a mobile network. Newcomers/intermediaries Their influence on this issue is almost non-existent. If they prove that it is possible to offer a successful mobile micro or/and macro payments solution, then they could accelerate the adoption of mobile payments. Financial institutions Regulators Technology suppliers The only influence they could have on the other actors would be a well-designed solution that could be either taken as an example or be bought. Having risk management expertise and well-established payment systems, they dominate the micro and other actors. As leaders on the payment market, they Financial institutions have a great influence on the macro payment market. Therefore, they have the can decide to launch their own solution with or without choice to decide which system they want to support. partners. They likely have greater influence on macropayments than on micropayments. They provide the legal framework concerning financial transfers. Therefore, they would draw limits for a payment system that would be offered by mobile operators that are not supposed to offer payment solutions to third-parties. If technology suppliers are not able to design a convenient and secure system that supports well micro or payment service providers would consider using their Depending on the technology they supply, mobile macro payments, the market will be frozen because technologies to build either a micro or a macro payment of the low adoption rate of mobile payments. system. Actor/Issue Analysis: Universality and Standardization Universality and standardization represent one of the most crucial issues in regards to increasing the adoption of mobile payments. For the moment, no real standards have emerged. Still, different actors are likely to have different ideas of how they want mobile payments to be made. Consumers Merchants Mobile operators Table 18 : Actor/Issue Analysis: Universality and Standardization Position Salience The consumers want to be able to pay anyone, anywhere, and at any time. So without a universal sys- great importance to this issue. Consumers expect a standard solution. They accord tem, the would probably not adopt a mobile payment solution. Merchants want the solution that will be the most They accord a non-negligible importance because adopted by their clients. They are thus for a standard. they do not want to integrate many heterogeneous payment solutions in the current systems which would probably cost more. Mobile operators want a standard that is compatible It is crucial for them that the standards enable mobile with their current infrastructure to avoid spending payments through their telecommunication network. money building a new system. Newcomers/intermediaries They do not really want a standard because they are taking advantage of the fact that mobile operators and financial institutions have not yet provided a mobile payment standard. Financial institutions Regulators Technology suppliers This issue is important for them because their presence among the mobile payment process can be optional, even useless. Because they already dominate the payment market, By insuring that the mobile payment standard is their standard is widely accepted for traditional and based on banking or debit/credit cards, they stay digital payment systems. However, mobile payments competitive on the market. Universality in payment are a challenge because they have to compete or is pushed by Visa for example. cooperate with network operators to set a standard. Standardization makes regulation easier to apply. The importance that regulators could accord to this Therefore, the market would be clearer and simpler issue is negligible as long as there is no abusive use. to control. However, the market would lose its competitiveness which could give rise to monopolies. Technology suppliers help to develop standards. The Technology suppliers are working hard in hope that one who will provide the most successful technology their technology will be chosen as the standard. will dominate the market because it will become the Therefore, this issue is very important for them. standard.

27 Mobile Payments 27 Table 18 : Actor/Issue Analysis: Universality and Standardization Clout Influence Consumers Merchants They have the ability to set the standards for usability Since the service is offered to them, consumers can and features [2]. Therefore, their influence on this probably incite the other actors to make an agreement issue is great. on the standards. Since the support of merchants is required for any kind of adoption to occur [2], merchants have their role to play on this issue. Merchants have only a limited influence on the other actors. In fact, they are subject to user preferences and demand [2]. Mobile operators Their clout on this issue is diluted because the others Since mobile operators joined some alliances which actors also take part in the establishment of standards. are trying to provide a mobile payment standard, they can take part on the decision that will be made. In return, they offer the customer base. Newcomers/intermediaries Their influence on this issue is almost non-existent. Their only chance to survive is to find an intermediary position in the standard mobile payment process. The only influence they could have on the other actors would be their well-designed solution that could be either taken as an example or be bought. Financial institutions Regulators Technology suppliers Having control of current payment devices such as Financial institutions created alliances to be more debit and credit cards, they could have an influence powerful on the market that they already control. on payment standards. They allow network operators to take part because of their technology expertise. They could regulate the way companies do their business. For example, the solution could be forbidden if the use of the system goes against the law or is unfair to consumers and merchants. They can provide a legal framework in which mobile payment service providers have to design their standard solution. They could intervene if an actor or a group of actors becomes too powerful on the market. They are the engine for standardization. Without Depending on the quality of the technology they supply, mobile payment service providers would con- their research, no technology would emerge as a standard. Therefore, the quality of their work in very sider using their technologies to build a standard. important. 7 MOBILE PAYMENT AS A DISRUPTIVE TECHNOLOGY Emerging technologies almost always threaten well-established technologies used to offer a product or a service. The real challenge for a company is to predict the successes or the failures of a disruptive technology. Christensen defines a disruptive technology as a technology or innovation that results in worse product performance, at least in the short-term. It brings to the market a very different value proposition than had been available previously. Products that are based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use. They generally underperform established products in mainstream markets [16]. Rafii and Kampas propose a tool that can help to anticipate competitive threats [44]. They identify six stages in the process before disruptive innovations displace the current technology. The six stages are represented in Figure 18. Figure 18 : The Six Stages of a Disruptive Process At each stage, there are various factors that make the disruption more or less likely to succeed. To illustrate some of this factors, we use Table 19 as a summary of the library of con-

28 Mobile Payments 28 tributing factors developed by Raffi and Kampas. Table 19 : A Summary of the Library of Contributing Factors Stage Contributing factors 1. Foothold market entry - population who historically lacked the skill or money to buy Can the insurgent gain a foothold (usually in the market - previously unprofitable low-end markets - underserved segments/geographies below the main one) - opportunity to market stripped-down products - other Incumbent displacement - amount of displacement in current markets Does the innovation displace (as - amount of displacement in future markets opposed to augment) incumbent - diversification by the incumbent to limit financial vulnerability products and revenues? - other... Each contributing factor identified has to be rated with a seven-point scale: - 3 = Highly disabling of disruption - 2 = Somewhat disabling of disruption - 1 = Mildly disabling of disruption 0 = Neither disabling nor enabling of disruption + 1 = Mildly disabling of disruption + 2 = Somewhat enabling of disruption + 3 = Highly enabling of disruption Then, because not all factors have the same level of influence, each factor must be weighted. The weight can range from one to three: 1 = Some influence 2 = Substantial influence 3 = Very high influence Six tables representing each stage should be made (for an example, see Table 20). Each table will have a weighted stage score which can be use to measure the forces disabling or enabling the disruption. Table 20 : Table To Analyze The Disruption Stage Forces disabling disruption N a Forces enabling disruption Factors Factors Rating Weight Weight score Comments Raw column totals Average Weighted stage score a. Neutral This approach allow incumbents to detect a potential disruption early and to formulate a response to prevent it or, better yet, to turn it into a business opportunity [44]. We propose to illustrate the use of this tool with an example: mobile payment versus credit cards. However, Table 21 is simplified since only the stage is approximatly evaluated instead of using the weighted stage score that is calculated in each of the six table containing

29 Mobile Payments 29 all of the contributing factors. Stage 1. Foothold market entry Table 21 : Disruptiveness Profile: Mobile Payment vs Credit Cards Forces disabling disruption N Forces enabling disruption Factors Factors unattractive foothold market(s) 2. Main market entry high barriers to entry 3. Customer attraction 4. Customer switching 5. Incumbent retaliation 6. Incumbent displacement low value added high costs of switch low barriers to retaliation low revenue displacement X X X X X X attractive foothold market(s) Comments M-payments are used in small payment market like parking meters and vending machines. low barriers to entry Financial transactions regulated depending on the service. Credit increases the risk. high value added Lack of standards, not convenient, few POS equipped. Cost not clear. low cost of switching Mobile phone already enable m- payment (reverse billing SMS, USSD, WAP,...). high barriers to retaliation People are not ready to adopt m- payment in mass. It took more that 15 years for credit card companies to acquire a critical mass of users. Credit cards will probably be used in mobile payment transactions. As Table 21 shows, there are many forces that disable disruption, such as the fact that credit cards are well-established, and that financial institutions are already thinking about mobile payments. Therefore, credit cards will probably be used in mobile financial transactions. However, credit cards will only be used for mobile macropayments. 8 MOBILE PAYMENT CASE STUDIES Paybox Paybox.net AG was founded in July After a pilot phase in December 1999, paybox was launched in May 2000 in Germany [23]. Deutsche Bank owns 50% of the company and is responsible for payment clearing and settlement. Companies partnering with Paybox include Deutsche Bank (payment processing), Lufthansa Systems (central computer and data security), Oracle (software), Compaq and Hewlett-Parckard (hardware), and Intershop (ecommerce systems) [14]. Moreover, Paybox claims a world patent on its authentication and identification system for payments to prevent start ups from imitating the Paybox system [7]. Paybox is also available in other countries, such as Austria, Spain, Sweden and UK. Paybox is an open and neutral -- i.e. not tied to a particular network or bank account -- payment intermediary aiming at banks independent from telecom operators [13]. For the moment Paybox only processes direct debits, which is cheaper than to process than credit card payments. Therefore, funds in Paybox transactions are drawn not from credit cards, but from the customer s bank account [14]. Moreover, the system does not depend on PKIstructures and transmits the PIN now via DTMF-procedures (Dual Tone Modulation Frequency), but could migrate to a PKI-structure if widely available [23]. To describe the Paybox scheme, we propose to use the simple table (Table 9) that we designed earlier in this paper. Name Of The Existing System M-Payment Solution Type high revenue displacement Clientbased Serverbased Table 22 : A Simple Description of Paybox Dimensions Mobile Payment Solution Providers Relationship Location Payment Time Hybrid MNO Financial Institution Newcomer/ Intermediary B2C P2P F2F Remote Pre Direct Post Paybox X (X) X X X X X X

30 Mobile Payments 30 Paybox is a server-based solution because the system links a mobile device or subscription to a separate bank account or credit card that has been pre-registered with the payment service [29]. Since Paybox uses direct debits and Deutsche Bank practically owns Paybox, we have to include financial institution to the m-payment solution provider even if it is indirect. However, we must underline the fact that Paybox represents a perfect example of how a bank is trying to control the entire value chain of mobile payment. In fact, mobile network operators provide their communication infrastructure but do not take any active task in the payment transaction. To subscribe to the Paybox service, consumers have to fill out a form. Once the application is approved, the consumer can use Paybox for a range of transactions, including [14]: Payment for e-commerce Person-to-Person (P2P) transaction (i.e. the user can send money to another individual in any country where Paybox operates) Payments to bank accounts (i.e. for bill payments and P2P transactions with non-paybox users) Payments in the mobile world (e.g. in taxis and for delivery services). The customer s requirements for using Paybox is the possession of a mobile phone, a bank account and a Paybox registration. Figure 19 : The Paybox Scheme The typical payment transaction using Paybox would go like this: 1. The customer gives his or her mobile phone number to the merchant 2. The merchant transmits to Paybox the phone number and the price 3. Paybox calls the customer and a voice message asks for authorization of payment 4. The customer authorizes the payment by entering his or her PIN 5. Paybox informs Deutsche Bank to settle the payment via the traditional payment system (direct debit) 6. The transaction is confirm by an automated voice or SMS. The advantage of such a system is that only the mobile phone number, not the bank account number or credit card details, are transmitted. Moreover, consumers can even request a Paybox alias phone number if they do not feel comfortable giving their mobile phone number to merchants. Therefore, Paybox tries to improve the customer s trust and payment security. The current business model is to charge a small consumer subscription fee (5 euros per annum) and charge merchants for each transaction with an average commission of around 3 percent, which is comparable to credit cards [30].

31 Mobile Payments 31 At the end of the year 2002, Paybox attempted to find new partners to secure its future. In fact, Paybox looked for 10 million euros in external fundings to provide operating cash and potentially to replace Deutsche Bank s dominant holding [32]. On 23 January 2003, Paybox announced that it had failed to find new partners and funding. Consequently, it will wind down its mobile payment processing activities in all countries except Austria, where Mobikom Austria will take on the business [31]. Paybox will actually become a new company (Paybox Solutions) which will supply technology and services for mobile payment systems. Gartner s diagnosis for Paybox s failure is the lack of demand due to the slow growth of m- commerce in Europe, the European economic climate and the fact the mobile payments do not yet offer a sufficient advantage over conventional systems such as credit cards [31]. Moreover, Paybox cited the slow development of the market and the industry s lack of cooperation -- particularly among banks and telecoms operators -- as the major factors behind the decision to exit the UK market [58]. JoinKey In this section, we propose a mobile payment scenario. The solution described offers to retailers a product named JoinKey [40] that integrates the use of a membership device enabling mobile payment and a customer management website following a one-to-one e- marketing strategy based on data mining. The objective of this scenario is to show that mobile payment can improve business processes and customers loyalty. Description of the system JoinKey consists of an integrated mobile payment system that uses Bluetooth wireless technology to communicate to enable cashless proximity payment. Customers will get a small, light device that can be attached to a keyring. This device contains a Bluetooth chip and enough memory to keep an encrypted account number. As Bluetooth consumes very low power, the battery should last, especially because the device will be offline most of the time, and the power switch will only be activated when the consumer needs to use the device to pay. As cash registers become more sophisticated, the possibility to plug a USB Bluetooth antenna or an additional wireless-enabled touchscreen seems to be feasible. Whether the merchant adapts the current system with the addition of antennas and update the software of the current point-of-sale terminals or buy new touchscreens, the benefits will hopefully be greater than the cost of the infrastructure. Most existent point-of-sale solutions are already connected to backoffice infrastructure. Generally, retailers use the data coming from the cash registers to manage the inventory. Some membership programs enable the merchant to offer coupons but also analyze the customers behavior. In sum, the JoinKey system does not require a considerable investment. The solution will integrate the existing network and software infrastructure, but if the retailers do not use any datawarehouse, then the acquisition of such software will be required. The retailers then have to adapt their current website with a dynamic content engine. The information published on the website would be different for each consumer. The role of the website is to access the JoinKey account to update the amount of money charged on the account, to add allowed users of the JoinKey and to see past purchases history. Moreover, there could be some coupons and advertisements available on the website to increase the

32 Mobile Payments 32 consumers loyalty. Figure 12 shows how the infrastructure works. Figure 20 : The JoinKey System JoinKey s Benefits The JoinKey solution addresses a lot of the current problems of mobile payment. We propose a table (Table 23) exposing the main benefits of the JoinKey system. Simple Fast Secure Convenient Personalized Multifunctional Table 23 : Benefits of JoinKey The payment process is very simple with JoinKey. First, the user arrives at the cash registers, then clicks on the power switch. The account number of the consumer will be transmitted to the wireless-enabled point-of-sale terminal. Once the retail employee authenticates the person (photo-based recognition), the cash register gives a receipt to the consumer. JoinKey simplifies the process by decreasing the number of operations the consumer and employee has go through. During transmission, only the encrypted account number will be transmitted. This diminishes the risk of credit card fraud. In fact, the credit card number is only transmitted during the update of the account on the retailers website. Instead of having to have the wallet and credit card ready while packing the goods into bags, the customer only has to press a button. Subscribing to the JoinKey program enables the consumer to get personalized offers and rebates. The retailers will therefore increase the loyalty of their consumers. JoinKey combines a means of payment and a membership card. JoinKey s Limitations A few things can limit the adoption of such a system. For example, privacy could be one problem. Therefore, we think that the fact that consumers can have access to their purchases history and can also take advantage of such a system by finding better offers and coupons, will limit the impact. Another problem comes from the fact that not all consumers are familliar with new technologies such as the Internet. JoinKey is not a universal means of payment, which makes it less likely to succeed in the payment market. However, since retail stores already offer other non-classical payment schemes, there is a market for JoinKey.

33 Mobile Payments 33 JoinKey Summary JoinKey is an ideal infrastructure that retail stores can integrate into their current system. The benefits are great and the cost of implementation is reasonable. This case study had the objective to demonstrate that mobile payment can be a part of the value proposition without being the only value added service from which a customer can benefit. 9 CONCLUSION After reviewing the market with the proposed tool kit, we have a better understanding of what the benefits and the issues of mobile payments are. As we could see, the market for mobile payments is very immature, unpredictable and open for competition or collaboration between mobile payment service providers. The most likely scenario to pass will be that mobile network operators and financial institutions will collaborate to offer a standardized solution. However, it seems as though European customers are not yet ready to adopt en masse such a payment scheme. In the meantime, mobile payments could possibly be offered for some niche services, such as vending machine or parking meters. For now, mobile payments solutions would be most accepted by consumers for e- and m-commerce. Even if most of the current issues of mobile payment are solved, there is nothing that guarantees that consumers will adopt such a means of payment. Therefore, it is too early to predict what is going to happen on this market since even the mobile payment service providers are still looking for a standard solution that would be accepted by everyone.

34 Mobile Payments 34 1 BIBLIOGRAPHY [1]Abad-Peiro, J.L., Asokan, N., Steiner, M., and Waidner, M., «Designing a generic payment service», Technical Report 212ZR055, IBM Zurich Research Laboratory, vember [2]Adrian, B., «Determining Clout Among Emerging M-Payment Models», Gartner Research, SPA , 4 June [3]Adrian, B., «Mobile Payments Consortia: What s the Difference?», Gartner Research, SPA , 22 March [4]Adrian, B., «Overview of the Mobile Payments Market 2002 Through 2007», Gartner Research R , 22 vember [5]Allas, T., Georgiades, N., «New Tools for Negociators», The McKinsey Quarterly. 2: 86-97, [6]Bank for International Settlements, «Survey of electronic money developments», Publications by the Committee on Payment and Settlement Systems, Mai [7]Böhle, K., «Paybox, a new mobile payment product claims convenience and potential for international use», Electronic Payment Systems Observatory, epso-newsletter Nr. 1, July [8]Buhan, D., Cheong, Y. C., and Tan, C., «Mobile Payments in M-Commerce», Telecom Media Networks, Cap Gemini Ernst&Young, September 2002 [9]Caldwell, K., «Federal Governement and States to Regulate Mobile Payments», CommerceNet, The Public Policy Report, Vol. 3,. 7, July [10]Camponovo, G., Pigneur, Y., «Analyzing the m-business Landscape», to appear in Annals of Telecommunications, Hermes Science Publications, January - February 2003, vol. 58, no [11]Camponovo, G., Pigneur, Y., «Business Model Analysis Applied to Mobile Business», Internat. Conference on Enterprise Information Systems (ICEIS), Anger, [12]Carat, G., «epayment Systems database Trends & Analysis», Electronic Payment Systems Observatory (epso), March [13]Carat, G., «Mobile Payments: Alternative Platforms and Players», IPTS Report, Vol. 49, vember [14]Card Technology Today, «M-commerce payment war hots up», March [15]Costello, D., «Preparing for the mcommerce Revolution - Mobile Payments», Trintech White Paper, March [16]Christensen, C. M., «The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail.», Harvard Business School Press, [17]Cullen, D., «Paybox scraps m-payment service», January [18]Dahlberg, T., «Consumers Talk Back: Interview Based Findings about Consumers Willingness to Adopt Mobile Payment Solutions», Helsinki Schoool of Economics, April [19]Dalhberg, T., Mallat, N., «Mobile payment service development - managerial implications of consumer value perceptions», In Proceedings of the Xth European Conference on Information Systems ECIS 2002, Gdansk, Poland, June [20]Dahlström, E., «The common future of wallets and ATMs? Mobile phones!», Electronic Payment Systems Observatory, epso-newsletter Nr. 1, July [21]de Clercq, K., «Dividing the pie of mobile payment revenues: opportunity or threat to the traditional banking sector», Lessius Hogeschool, [22]De Lussanet, M., «Mobile Payment s Slow Start», Forrester Research, May [23]ePSO Inventory DataBase, «Paybox», January [24]Forrester Research Press Release, «European Mobile Payments -- Can't Pay, Won't Pay, Says Forrester», May [25]Gordijn, J., «E 3 -value in a Nutshell», International workshop on e-business modeling, HEC Business School, Lausanne, 2002 [26]Grönroos, C., «Value-driven Relational Marketing: from Products to Resources and Competences», Journal of Marketing Management, Vol. 13,. 5, [27]Hennessy, D., «The value of the mobile wallet», Network365 White Paper, vember [28]Herzberg, A., «Payments and Banking with Mobile Personal Devices», Communications of the ACM, Vol. 46,. 5, Mars [29]Jones, N., «Europeans Need a Reason to Switch to Mobile Payments», Gartner Research, COM , June [30]Jones, N., «Paybox: Pan-European Mobile Payments», Gartner Research, CS , September [31]Jones, N., «Paybox Retrenches, But Its Technology Remains Attractive», Gartner Research, FT , January [32]Jones, N., «Paybox Seeks New Partners to Secure Its Future», Gartner Research, FT , vember 2002.

35 Mobile Payments 35 [33]Kreyer N.; Pousttchi, K.; Turowski, K.: Characteristics of Mobile Payment Procedures. In: Maamar, Z.; Mansoor, W.; van den Heuvel, W.-J. (Hrsg.): Proceedings of the ISMIS 2002 Workshop on M-Services, Lyon (preprint) [34]Krueger, M., «Mobile Payments: A Challenge for Banks and Regulators», IPTS Report, Vol. 63, April [35]Krueger, M., «M-Payments and the role of telcos», Electronic Payment Systems Observatory, epso- Newsletter Nr. 2, October [36]Krueger, M., «The Future of M-payments - Business Options and Policy Issues», Background Paper.2, Electronic Payment Systems Observatory (epso), August [37]Lehner, F., Watson, R., «From e-commerce to m-commerce: Research Directions», University of Regensburg: Chair of Business Informatics, [38]Mobile Payment Forum, «Enabling Secure, Interoperable, and User-friendly Mobile Payments», Mobile Payment Forum White Paper, December [39]Muller-Veerse, F., «Mobile Commerce Report», Durlacher Research, Ltd. vember [40]Ondrus, J., Sebastian, I., «JoinKey - Business Plan», College of Business Administration, University of Hawaii at Manoa, December [41]Osterwalder, A., Pigneur, Y., «An e-business model ontology for modelling e-business», to appear inproc. 15th Bled Electronic Commerce Conference (June 2002). [42]PayCircle s website, accessed in July [43]Pigneur, Y., «Enjeux et influences», Stratégies et technologies de l information DPIO 2003, INFORGE, HEC Lausanne, May [44]Rafii, F., Kampas, P., «How to identify your enemies before they destroy you?», Harvard Business Review, vember [45]Salvi, A. B., Sahai, S., «Dial M for Money», WMC '02: 2nd ACM International Workshop on Mobile Commerce, September [46]Schapp, S., Cornelius, R., «U-Commerce - Leading the New World of Payments», A Visa International and Accenture White Paper, [47]Seah, W., Pilakkat, S., Shankar, P., Tan, S. K., Roy, A. G., Ng, E., «The Future Mobile Payments Infrastructure - A Common Platform for Secure M-Payments», Institute for Communications Research, Work Pte. Ltd, December 2001 [48]Siau, K., and Shen, Z., «Building Customer Trust in Mobile Commerce», Communications of the ACM, Vol. 46,. 4, April [49]Speedfacts Online Research GmbH, «mbanking The Future of Personal Financial Transaction?», Frankfurt, [50]Stabell, B., Fjeldstad, O., «Configuring value for competitive advantage: on chains, shops, and networks», Strategic Management Journal, Vol. 19, , [51]Starita, L., «ISPs, Wireless Carriers and Banks: Friends or Foes?» Gartner Research, COM , October [52]Tarasewich, P., Nickerson, R., Warkentin, M., «Issues in Mobile E-Commerce», Communication of the Association for Information Systems, 8, January [53]Telecom Media Networks, «Mobile Payments: Money in Your Hands», Cap Gemini Ernst&Young. [54]The Economist, «Phone me the money», The Economist from print edition, March [55]The epso inventory, [56]The Liberty Alliance Project website, accessed in July [57]The Mobey Forum website, accessed in July [58]Thomas, D., «Paybox blow to m-payment market», Computer Weekly, February [59]Thomman, H.-R., «All you wanted to knowabout credit cards - but were afraid to ask!», PayServ AG [60]Watson, R., «U-Commerce: The Ultimate», Ubiquity, [61]Weber, R., «Chablis - Market Analysis of Digital Payment Systems», Technical Report TUM-I9819, Technical University of Munich, August [62]Wireless Figures and Forecasts, «Cellular Penetration By Region», EMC's e-searchwireless.com database, Updated June [63]Wrona, K., Schuba, M., and Zavagli, G., «Mobile Payments - State of the Art and Open Problems», presented at WELCOM 2001, Heidlberg, Germany, 2001.

36 Mobile Payments 36 APPENDIX A: CLASSIFICATION WITH TWO DIMENSIONS Devices without any Payment Applications For these devices a mobile payment can be made using the following mechanisms: Site wallet Remote wallet Distributed wallet Network operator specific mobile payment Site wallet Table 1 Device without payment application: Site wallet Description: A site wallet is a personal profile, containing bill-to, ship-to and credit card data that can be used only at individual Web or mall sites. The user is required to register with the merchant with his/her personal profile. Advantages: A site wallet helps frequent visitors by storing the profile data they enter for reuse later. wallet software is needed at the client side. Disadvantages: A site wallet can be accessed only when the user is logged onto the service affiliated with the site wallet. As no site is alike, one needs to remember the user-id and password individually. Sites wallet generally supports only one payment instrument; they cannot support smart cards and PINs. Users must entrust their personal profile to individual site they registered, which increases the risk of profiles being exposed to hacker. Existing Applications: Amazon.com, Yahoo, ebay, Ticket.com, Aether, Verisign (E-Visa) Table 2 Device without payment application: Remote wallet Remote wallet Description: A remote wallet is a payment service that can generally be used only within a community of merchants holding a relationship with a service provider or through specific browsers or service providers. Remote wallet payment is currently the most widely deployed mechanism for mobile payment. Advantages: A remote wallet allows the user to store multiple payment instruments. wallet software is needed at the client side. Disadvantages: To use a remote wallet, both consumers and merchants must be enrolled with the service provider. A remote wallet can only be used only when the user is logged onto the service. Remote wallet does not support smart cards or PINs, as required for many international debit cards. Remote wallets hold potentially thousands of card numbers and as a result are fat target for criminals. Remote wallets are very expensive to establish and operate. Existing Applications: Qpass, PayBox (similar to Work), Paypal (Via ), Fundamo (using telephone number), PayWare (WAP based), InstaBuy Table 3 Device without payment application: Distributed wallet Distributed wallet Description: A distributed wallet uses software on the end-user s machines and on Internet wallet servers to make payments. It is a hybrid of remote and personal wallet. The client functions are limited to negotiating the protocol for connecting to the server and authentication. Advantages: Can support smart cards and PINs. Merchant may not need to subscribe to the distributed wallet service if the wallet client support stand-alone payment transaction using SET protocol. Disadvantages: Distributed wallets are much more complex than remote wallets and depend on longer messaging chains across potentially disparate environments to operate successfully. protocols exist to enable the client portion of the distributed wallet to interface with multiple servers. The current one-to-one approach limits the end-user s payment options. Existing Applications: GlobalSET specification

37 Mobile Payments 37 Table 4 Device without payment application: Telco specific mobile payment Network Operator Specific Mobile Payment Description: Here, the network operator acts as the billing provider. The charges for the service are added to the subscriber s telephone bill. Advantages: Uses existing account for payment. Disadvantages: Network operator specific payment. Roaming issues. Usually small amount allowed Existing Applications: SmartTrust, SingTel (Softdrink vending machine) Devices with Payment Applications For the second type of devices (devices with payment application), to make a mobile payment, the following mechanisms can be used: Personal wallet Electronic purse EMV Telco specific mobile payments Table 5 Device with payment application: Personal wallet Personal wallet Description: A personal wallet is software/hardware that runs on the consumer s device. wallet server is involved and no server operator is required. The personal credit information is stored locally. Advantages: Low cost to implement. Able to perform offline profile management. Can support advance security methods. Can support smart cards and PINs. User controls all card and personal information Disadvantages: Storage size requirement. Existing Applications (e-commerce based): IBM Consumer Wallet (e-commerce, SET based), Gator (Only assist user in filling up forms), ewallet from Ilium Software Table 6 Device with payment application: Electronic purse Electronic Purse Description: Electronic purse is a system, which caters to reduce consumer reliance on cash and check especially for low value purchases. It uses smart card technology to store pre-paid monetary value. Advantages: Ease of use Flexibility - Multi-currency capability, Pay person to person Reducing the handling of cash and cheques for both bank and retailer Disadvantages: Usually only for small amount transaction global standard Bank centric Existing Applications: Proton electronic purse by Banksys, Visa Cash, Mondex, Manmont

38 Mobile Payments 38 EMV Table 7 Device with payment application: EMV Description: Europay, MasterCard and Visa (EMV) is a set of specifications to ensure interoperability between chip card cards and terminals on a global basis. It is used to store payment application. Advantages: Promoted by MasterCard and Visa Smart card based Disadvantages: A payment server is needed to manage the interface with the merchant, client and acquirer. Existing Applications: kia EMPS using ENV/SET, EMV compliance bank card from SUMITOMO Table 8 Device with payment application: Telco specific mobile payment Network Operator Specific Mobile Payment Description: Here, the network operator acts as the billing provider as the bill is added to the subscriber s telephone bill. The payment application is incorporated into the SIM card provided by the network operator. Advantages: A single SIM card is needed only Disadvantages: Telco specific payment. t all the Telco provides such a service Existing Applications: Telecom Italia Mobile (using SAT)