Payments through the Mobile Looking Glass

Whitepaper Payments through the Mobile Looking Glass sqs.com Authors: Srinivasa Sundar Bandepalli Test Manager Dinesh K Test Manager Sudha Kiran Pentela Principal Consultant SQS India BFSI Limited Published: August 2015 SQS the world s leading specialist in software quality

Payments through the Mobile Looking Glass 2 Srinivasa Sundar Bandepalli Test Manager srinivasasundar.b@sqs.com Srinivasa Sundar Bandepalli holds a bachelor s degree in Electrical and Electronic Engineering and has been with SQS since 2005. Test Manager in the Cards Practice, he has delivered many functional testing projects in the Cards and Payments domain for our global clients. His core competencies includes domain consulting, training, business analysis and developing strategies for EMV testing, payment switches and scheme certification testing. He has also designed the functionality of our proprietary financial card message simulator product FaXimmé. Dinesh K Test Manager dinesh.k@sqs.com Dinesh Kasiviswanathan is a graduate in Electrical and Electronic Engineering and has been with SQS since 2004. Test Manager in the Cards and Payments practice, his core competencies include project management and developing strategies for testing, consulting and pre-sales support. Having worked with global clients across multiple regions, he is involved in various large banking, cards and payments programmes. His current activities include account and test management, predominantly in the Middle East and ANZ regions.

Payments through the Mobile Looking Glass 3 Sudha Kiran Pentela Principal Consultant sudhakiran.p@sqs.com Sudha Kiran Pentela has been with SQS since 2001 and is Principal Consultant in the Cards and Payments practice. His role involves handling various aspects of functional consulting, delivery and presales such as developing strategies for testing, planning, business analysis and design, and providing operational support to ensure the success of various testing projects. As a Subject Matter Expert he has played a key role in many large cards and payments transformation programmes and projects. He has supported major Global 500 companies in the Cards and Payments processing sector, including Barclays Bank PLC (UK), Lloyds Banking Group (UK), Morgan Stanley (UK), GE Money (Germany, Denmark, Switzerland, Russia, UK and Singapore), First Data International (Singapore, Australia, Europe and the Americas) and TSYS International (Europe). Sudha Kiran is based in Chennai and holds a bachelor s degree in Mechanical Engineering from JNTU College of Engineering, Hyderabad.

Payments through the Mobile Looking Glass 4 Contents Management summary...5 Introduction....5 Market current status and outlook...7 Initiatives and key trends influencing m-payments...10 Challenges faced in m-payments...13 Mobile testing coverage landscape...14 Live Example...15 Conclusion...16 References...16

Payments through the Mobile Looking Glass 5 Management summary The ubiquity of mobile devices has had a significant impact on the payments industry. Mobile has emerged as the most preferred payment channel in today s society. Technological advancements in NFC-enabled mobiles, mobile internet along with mobile wallets, and mobile apps, etc. are enabling proximity and remote payments. MPoS offerings have enhanced payments acceptance. The distinction between e-payments and m-payments is blurring with the convergence. Developments on the m-payments front have allowed the entry of new non-traditional players into the payments domain. Banks and financial institutions still have an edge in m-payments due to the trust factor they carry with them. While the initiatives and trends in m-payments point to numerous opportunities and possibilities, the challenges due to fragmented ecosystems and business models still need to be overcome. This whitepaper aims to cover The m-payment landscape and business models M-payment initiatives, trends and opportunities across global markets Challenges impeding the growth of m-payments Considerations in mobile testing Introduction Globally, non-cash transactions amounted to 365.6 billion in 2013, which indicates a 20.2 % increase in developing markets, while mature markets are expected to grow by 5.6 % [1]. Improved payment infrastructures along with regulatory initiatives are aiming to ensure that non-cash usage and the roll-out of new solutions drive growth rates globally, particularly mobile payments (m-payments), as card acceptance improves in the small and medium enterprise sector. M-payment transactions are expected to grow to $1 trillion (by 60.8 %) annually in 2015. M-payments encompasses many different solutions, ranging from near field communication (NFC) contactless solutions and SMS-based payments offline to e-wallets, digital currency and P2P networks online. The World Payment Report 2014 [1] defines e-payments as digital payments that are made over the internet for e-commerce activities and m-payments as a form of payment where a mobile phone is used as the payment method not just as an alternative channel to send the payment instruction, and the payment information flow takes place in real time. Examples of such payments include mobile transactions in P2P money transfers, mobile online payments such as those made on ebay or ringtone purchases, etc.

Payments through the Mobile Looking Glass 6 M-Payment Transactions (Billion) 50 47.0 7.0 40 Non-Banks 30 29.2 3.8 39.9 Banks 20 10 0 7.0 6.4 2011 0.6 11.1 10.0 2012 1.1 18.0 2.2 15.8 2013 25.4 2014F 2015F Figure 1: Growth of global m-payments [1] Forrester predicts spending in the U.S. mobile payment market will reach $ 90 billion in 2017, up from $ 12.8 billion in 2012. In the U.K., the Centre for Economic and Business Research predicts that mobile payments will represent 1.4 % of total consumer spending by 2020 [1]. M-payments are gaining momentum, spanning the spectrum from low value to high value payments in one dimension and covering proximity and remote payment modes at another level. Consumer convenience is the top driver behind many mobile payment initiatives. For proximity payments, the payer and payee would be in the same location and communicate directly with each other using contactless radio technologies, such as near field communications (NFC), Bluetooth or infrared for data transfer. In the case of remote payments the transaction is conducted over telecommunication networks such as GSM or the Internet, and can be made independently of the payer s location and equipment. Together with consumer willingness to adopt new payment systems and the evolution of technological advancements in mobile devices such as mobile Internet, mobile wallet and near field communications (NFC), the new m-payment method is on the ascent. From a payment acceptance perspective, numerous MPoS solutions are developing across markets, and with this come more opportunities for non-traditional players with niche capabilities in payment processing, such as retailers, mobile carriers, non-financial institutions, e-commerce players, alternative payment networks and device manufacturers, to play key roles in a traditional payments ecosystem. The mobile payment landscape is depicted in Figure 2.

Payments through the Mobile Looking Glass 7 Payment Size Low Value High Value Payment Type Proximity Payments Remote Payments Parking Vending Machines Tolls Coffee Shops C-Stores P2P Remittance Digital Content Mobile Rewards Retail Shopping (with or without PoS terminal) Person-to-Person (P2P) Bill Payment Funds transfer P2P Internet Payments M-commerce Pre-paid top up M-Banking Mobile Wallets mpos Payment Acceptance Figure 2: Mobile payments landscape Market current status and outlook The mobile payments space has become increasingly competitive, with banks and non-banks striving for insightful data, market dominance and consumer loyalty. Smartphones and tablets have become common devices for bill payments and online shopping: 79.4 million U.S. consumers, amounting to 51.0 % of U.S. digital buyers, are expected to make purchases using a mobile device [2]. This potential rise in m-payments has encouraged many banks to launch their own smartphone and tablet apps as well as dedicated mobile sites in order to gain a competitive advantage. Faced with the penetration of non-traditional players, banks have started to realise that their role in payment processing is becoming marginalised, and it has become inevitable for them to either start new partnerships or compete with these non-traditional players in offering mobile payment services to customers. While banks still play a crucial role in the mobile payments value chain, it is challenging for them to change their business and organisational models significantly in order to remain competitive. Non-traditional players are expected to grow at a faster pace than banks: PayPal processed more than $ 27 billion in mobile payments in 2013, around 15 % of its total payments volume [3].

Payments through the Mobile Looking Glass 8 This situation has led to the emergence of multiple revenue-sharing business models and retained competition within the market. Mobile-Financial institution collaboration Open federation model (common platform shared by alliance of carriers and financial institutions) Third-party intermediation model (Apple Pay, PayPal mobile, MobileLime, etc.) Mobile carrier going solo and competing with other stakeholders Financial institution working independently and competing with other stakeholders Figure 3 depicts the stakeholders including banks and non-bank players who would either have to compete or collaborate in the m-payment space. The Consumer Insights Survey by Ovum [4] indicates that financial institutions still have an advantage over non-bank competitors as the mobile banking and mobile payments user ex-periences converge. Key Assets Banks New Customers Access Servicing Network Access Prime Share of customer attention Customer Data Access Technology Access Influence over POS systems Influence over merchants Regulatory management Industry Players in Mobile Payments Space Mobile Networks Device Manufacturers OS Providers APP Developers Cloud Platforms Credit Bureaus Specialised Security Providers Retailers Payment Networks Figure 3: Stakeholders competition vs. collaboration

Payments through the Mobile Looking Glass 9 Payment instruments in m-payments 62.6 % Credit Card Bitcoin (0.5 %) Bill2Phone (1.5 %) ACH (1.8 %) Prepaid Card (1.6 %) Gift Card (3.0 %) PayPal 13.5 % 14.5 % Debit Card Figure 4: Preferred forms of payment for mobile transactions M-payments are implemented in multiple modes such as mpos, M-commerce apps, mobile banking, prepaid mobile wallet services provided by mobile service operators and non-banks, NFC mode (GSM, NFC stickers and in-built features in mobile devices), mobile tokens, etc. Though there are multiple modes of m-payments which are differentiated/identified by their channel of transaction initiation, the associated payments are still based on existing traditional payment instruments such as cards, e-wallets, bank account debit, etc. Figure 4 shows that the credit card is still the most preferred payment instrument amongst m-payment transactions, followed by debit cards and PayPal [5].

Payments through the Mobile Looking Glass 10 Initiatives and key trends influencing m-payments There have been numerous initiatives at different levels and their progress is a key factor that influences the m-payments space. The European Payments Council s Overview on Mobile Payment Initiatives, (12 th Dec 2014), has a consolidated list of 90 initiatives within and outside of SEPA during 2013 2014. The initiatives classification by region is summarised in the Table 1. Initiative Type SEPA Region Non-SEPA Region Total General Initiatives 4 6 10 Mobile Contactless Payments (MCP) Initiatives 21 9 30 Mobile POS (mpos) 7 7 14 Mobile Remote Payments (MRP) Initiatives 16 4 20 M-Wallet Initiatives 7 8 15 Other wearable payment devices 1-1 Table 1: Mobile payment initiatives The GSMA Mobile Economy 2015 report brings an interesting facet to the fore. Whilst mobile money services-related initiatives are prevalent in Sub- Saharan Africa, NFC- and mpos-related initiatives predominate in the advanced payments markets in Europe and the US. Some recent highlights on the m-payments front include [6]: 43 commercial NFC mobile commerce services launched in 2014; total number of commercial and pilot services to date exceeds 300 9 Host Card Emulation (HCE) pilots and commercial launches 22 new services launched in 2014 compared with 60 in 2013 and 58 in 2012 255 live mobile money services in 89 markets by Dec 2014 The number of registered mobile money accounts grew to reach 299 million globally at the end of December 2014 NFC is still the most established technology for mobile payments, supporting secure element services, operator services and Apple Pay, as well as HCE services While there are still questions regarding technological limitations and usage, it is an undeniable fact that Apple Pay has made an impact on m- payments. The number of merchants accepting Apple Pay has been increasing steadily despite concerted opposition from certain stakeholders.

Payments through the Mobile Looking Glass 11 Samsung is the first company to cooperate with Union Pay in a collaboration to launch an NFC payment service on 3.6 million of its smartphones in China, including the Galaxy Note 4, Galaxy Note 3 and Galaxy S4 Billing provider Boku secured an e-money licence and partnered with operators O2, EE and Vodafone to allow customers to charge public transport tickets, takeaway food, cups of coffee and other click and collect physical world purchases to their mobile phone bill AT&T are to use technology from CorFire to power NFC Connect, a new platform that will enable it to offer a wide range of NFC-enabled services outside of the Softcard mobile commerce venture it co-owns with Verizon and T-Mobile Adyen s Quarterly Mobile Payments Index brings yet another interesting trend in the m-payments front, noting that 27.2 % of total online payments were made through mobile devices in Q1 2015 The UK leads with 44.4 % of online payments made using a mobile, while in the US these account for 26.7 % (in Q1 2015) Digital spend online has increased to 28 % and 30 % respectively for desktops/laptops and tablets Europe leads overall with 28.6 %, and the Asian markets have for the first time broken the 20 % barrier for online mobile payments Average Transaction Value (ATV) on mobile devices rose 28.27, tablets: 32.66, desktops/ laptops: 31.19 Figure 5 shows the mobile payments share per industry and the ATV per industry: Mobile payments share per industry Jan Mar 2015 Average transaction value per industry Jan Mar 2015 25 % 20 % 15 % 10 % 5 % 120 90 60 30 28 33 31 82 95 103 0 % Digital goods Retail 0 Digital goods Retail Mobile Tablet Desktop Figure 5: Mobile payments share and ATV per industry

Payments through the Mobile Looking Glass 12 ios has a 65 % market share of online mobile payments. The payments share is balanced between ipads and iphones. While ipads accounted for 47.2 % of ios mobile payments, iphones accounted for 52.8 %. On the other hand, the Android market share for online mobile payments is 34.9 %, with the payments share inclined more towards the mobile phones segment. Mobiles made up 78.2 % of the total Android payments while 22 % is covered by tablets Trends that aid m-payments growth: There are over 8 billion smartphone consumers in the market today, out of which transactions are processed from 3+ billion devices. As Mobile is the most preferred payment channel, there is a lot of potential to expand m-payments Increased accessibility to and affordability of data services through the 3G/4G/LTE spectrum, enabling consumers to transact from anywhere Improved efficiency and customer experience Lower card management costs due to phone usage Trends that create business opportunities: M-payments are creating opportunities for nontraditional players: new opportunities for effective collaboration with multiple stakeholders such as multiple revenue-sharing business models have evolved. M-payments have created business opportunities that present innovative mobile applications to the shopping world M-commerce: mobile marketing is leveraged by payment organisations to offer a compelling value proposition to merchants and consumers. A number of mobile commerce initiatives use SMS messaging, optical scanning and wireless web to make online and in-store shopping more interactive, personal and social Mobile marketing encompasses all stages with business opportunities at each level Pre-decision making - generate demand with targeted offers, find local merchant, compare local merchant, contact merchant, arrive at store with point to point directions Decision making - compare prices Check- out - ereceipts Post-visit reviews and loyalty coupons

Payments through the Mobile Looking Glass 13 Challenges faced in m-payments While the proliferation of mobile devices and technological advances have laid the foundations for expansion of the payments ecosystem to include the entry of non-traditional players, there are challenges that emanate from precisely the same factors that lead to the growth and evolution of m-payments. As increasing numbers of digital consumers enjoy making purchases via mobiles, the need to make payments on an international scale is felt by all stakeholders. This is an aspect that both attracts and repels mobile money companies, operators and banks due the challenges involved. Fragmented system payment schemes, banks, MNOs, retailers leading to high transaction fees due to heavy overhead costs and fragmented volumes. Inability to adapt to these situations may result in competitive disadvantages M-payments implementation uses marketspecific models and has technology-specific and implementation-specific limitations. Due to the differing payment cultures and consumer behaviour, success cannot be replicated across markets. What works in the Sub-Saharan market may not produce similar results in South Asia. Similarly, the success or failure of an initiative in Europe and the US may not generate similar results elsewhere Managing the complexity of new payment types and the impact on the existing payment architecture NFC yet to take off as not all device models support NFC and the risks are still to be assessed Acceptance of value proposition by retailers and merchants in offering m-payment services Addressing consumer security concerns with the platform - new processes create new security vulnerabilities. Over-the-air provisioning of payment credentials and applications potentially creates new attack vectors for eavesdroppers to steal and misuse consumer data Fraudsters can steal and misuse data, leading to painful disclosures, adverse publicity, and fines. Failure to understand exactly where and how sensitive account data is stored and transmitted can prevent organisations from clearly defining and implementing data protection solutions Addressing how to manage fraud risks in relation to m-payments is a new challenge 61 % of organisations are uncertain about fraud management methods for m-payments as per the Mobile Payments Fraud Report 2015 [1].

Payments through the Mobile Looking Glass 14 Mobile testing coverage landscape Mobile applications deliver complex functionality across multiple platforms and a plethora of devices with diverse hardware & software configurations and communication intricacies. This diversity in mobile computing environments presents unique challenges in quality assurance and deployment, requiring unique testing strategies. Challenges in testing in such an evolving arena abound, precisely due to the factors that contribute to its pre-eminence. Multiple systems handsets / platforms / applications / mobile network operators / browsers / channels / form factors / languages / date & currency formats / financial and non-financial institutions / technology forums such as NFC / card schemes such as Visa Changing regulatory / compliance requirements and lack of uniform industry standards Reduced cycle time to test and certify, despite the complexities of the multiples involved, along with quality and coverage Extreme market dynamics (frequent upgrade of devices / platforms / browsers) Applications compatibility across channels and handsets Security and performance considerations Various testing modes real devices / emulators The many testing dimensions required in mobility solutions implementation are summarised in Figure 6: Best Practices in MALC Ease of download & installation User friendly messages Re-installation/upgrades Supported device Consistency across channels Record management system Mobile Channels SMS USSD Smart Client Mobile Web IVR Mobile Specific Areas Functionality Compatibility Interoperability Usability Upgrade Network & Interruption Testing Modes Physical devices Emulators Real devices connected to desktop Remotely accessing the handsets hosted on cloud Mobile Testing Coverage Mobile OS Coverage Android ios Windows Symbian Blackberry Domains Coverage Banking Cards & Payments Insurance Capital Market Handsets Coverage Popular handsets domestic & international Testing Categories Functional Test Automation Performance Security Figure 6: M-payments testing dimensions

Payments through the Mobile Looking Glass 15 Live Example A sample business situation A US-based payment service provider has developed an mpos mobile application to offer m-payments services to their customers. They engaged SQS for automated testing of their mpos application. The mpos application enables customers to use their mobile devices as PoS machines in conjunction with a card reader connected to their mobiles and thus make payments or purchases. The solution gives merchants the ability to accept debit and credit card payments and track cash payments everywhere in the U.S., using ios and Android mobile devices. Customisable inventory, tax, sales reporting and staff management settings allow business owners to configure their mobile store exactly as they want. A proven solution SQS has proposed an automated functional testing solution that covers agreed mobile device models, mobile operating systems and their versions, etc., to meet the testing expec tations per the available schedule and ensure test coverage using SeeTest Automation version 8.0.31 and Selenium tools. Coverage is depicted in Figure 7. The automated package was used to test multiple device models and OS combinations from offshore by accessing the device models and mobile applications remotely. SeeTest Mobile Automation Selenium Bluetooth USB Automation Tools Connectivity Mobile OS mpos Testing Coverage Android 4.4 ios 8 Installers Functionality Application Process Flow App configuration and settings Customer profile set up and maintenance Payment initiation Card Swipe/Read User actions on Device User actions on Mobile App Payment completion Gestures Device buttons Reboot, awakening from sleep Shell commands Application reliability and usability Landscape mode Windows Mac Figure 7: Considerations for automated mpos testing

Payments through the Mobile Looking Glass 16 Conclusion The m-payments ecosystem is still evolving, including as it does competing stakeholders, business models, entry of non-traditional players and multiple initiatives at different levels. Mobile devices have achieved full market penetration and rich service levels, thus making this the most preferred channel Mobile phones are changing the way consumers make payments and are also documenting their shopping behaviour, location, etc., thereby facilitating targeted marketing and providing shopping suggestions The challenges in the m-payments space arise due to fragmentation of the ecosystem, lack of uniform standards, and concerns related to security and fraud management Testing of mobile payment solutions poses challenges due to the complexity of having multiple attributes to ensure coverage. The industry is moving towards developing strategies for testing approaches, and new business opportunities including accessing mobile devices on the cloud and designing emulators have evolved. The emergence and the rate of growth of nontraditional players are significantly high when compared to the banks, though banks still maintain the edge due to the trust factor References [1] Capgemini, RBS (2014). World Payments Report 2014. [2] emarketer (2013) Smartphones, Tablets Drive Faster Growth in Ecommerce Sales. [3] http://www.paypal-media.com/about [4] Ovum (2014). Digital Consumer Insights Survey. [5] Kount, The Fraud Practice and CardNotPresent.com (2015). Mobile Payments & Fraud: 2015 Report. [6] GSMA (2015). The Mobile Economy 2015.

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