34 McKinsey on Payments April 2009 Mobile payments: Ringing louder As mobile communication devices grow more prevalent and sophisticated, and as consumers gain comfort in their everyday use, it is time for a fresh look at how mobile payments could impact the payments industry. Monica Adractas In downtown Tokyo, a manager leaving his Japan remains the leader in mobile payments Yran Dias office at day’s end stops for sushi at a nearby implementation (Exhibit 1). Tokyo-based convenience store, and then catches a train Sony, for example, developed a microchip Yves Enkels for home. He pays for the snack and train that when included in cards and handsets en- Diogo Rau fare with a quick wave of his smartphone ables them to exchange transaction data with Hiroko Sasaki over each merchant’s point-of-sale (POS) ter- POS terminals without direct contact. Today, minal. Gone is the need to fumble for cash, 60 million Japanese use the Edy card (named wait for change, sign transaction slips, or for the euro, dollar and yen) and similar linger in long lines. Japan’s penchant for the chip-bearing cards. Sony also worked with latest gadgets, digital technology, and auto- Japan’s leading telecommunications provider, mated vending has clearly helped drive its NTT DoCoMo, to create a payments net- rapid acceptance of mobile payments, but work and introduce chip-bearing mobile progress is also occurring in Europe, South phones: consumers make everyday purchases America, the U.S., and elsewhere. with a simple wave of their handsets over specially equipped POS terminals. About 20 Advancing globally million Japanese now use such phones, and What has changed since mobile payments the technology is now emerging in South emerged a decade ago? Three significant Korea, as well. trends suggest it is time to reassess this grow- In Europe, uncertainty about conversion to a ing corner of the payments landscape. First, Single Euro Payments Area may hinder mo- mobile phones have become ubiquitous in bile payments growth, but progress has oc- markets worldwide. Second, mobile device curred nonetheless. Here, as in Japan, owners can now use them to make secure transportation provided the spark for mobile transactions. And third, consumers have payments development. Early efforts capital- grown comfortable with using mobile devices ized on the popularity of text messaging to for more than simple communications. These create applications such as those for paying and related trends are unfolding in unique parking fees. Transit applications still domi- ways that vary by market and geography. nate the region, but mobile payments players Mobile payments 35 Exhibit 1 Profiles of m-payments platforms in Japan Mobile payments Provider NFC payment Number of holders* Number of accepting merchants* enjoy broad platform Millions Thousands acceptance in Japan bitWallet 7.8 74 NTT DoCoMo 7.07 320 East Japan Railway Company 1.05 34.3 * As of April/May 2008 Source: Credit Industry Whitepaper, ePayment 2006, IR release are exploring more retail-friendly, mi- Google, Apple, and a medley of smaller play- crochip-based applications with several trials ers have started to appear in this arena. now under way. Notably, consumer payment Despite limited progress overall, the mo- preferences vary significantly among Euro- bile payments concept remains appealing. pean countries, which could present further While mobile banking focuses on transac- challenges for mobile payments. tions between consumers and their banks, Turning to South America, we note ad- mobile payments centers on transactions vances occurring in several markets – often between consumers and merchants, or with diverse approaches. Brazilian financial other consumers (see “Mobile payments institutions are testing new business models, and mobile banking” on page 36). The including a mobile device that can function mobile payments value proposition bene- as an inexpensive POS terminal for small fits both parties to the transaction. Con- and mobile business operators. And wireless sumers gain increased convenience, telecommunications leader Oi threatens to transaction speed, targeted offers, and cus- sidestep financial institutions by offering a tomized loyalty programs. Merchants can full range of services, from merchant to con- profit from new opportunities to increase sumer. Meanwhile, Visa is partnering with sales, retain customers, reduce cash-han- Banco do Brasil to offer the bank’s cus- dling cost, and improve checkout produc- tomers mobile payment services via any tivity. Quick-service restaurants can even Brazilian mobile provider. reduce staffing needs by enabling mobile In the United States, often considered a lead- devices to link with order-taking kiosks. ing innovation hub, mobile payments have made less headway. Some financial institu- Contending technologies tions, phone companies and technology de- Two dissimilar technologies have emerged velopers are, however, jointly testing a variety as leaders in mobile payments, each with of mobile payment approaches. Meanwhile, distinct benefits and limitations: the short 36 McKinsey on Payments April 2009 message system (SMS) and near field com- NFC, by contrast, requires a microprocessor munication (NFC). Other technologies, in- with an integral close-range antenna (such cluding some that use mobile phones’ Web as the earlier-mentioned Sony version) that browsers, Bluetooth, or downloaded soft- is included in mobile devices or cards. Such ware, have also emerged. They are similar devices can transmit transaction data when to SMS-based approaches in not requiring passed near appropriately equipped POS special hardware. terminals that provide energy through mag- Found widely in Europe, SMS-based pay- netic induction so the microprocessors re- ment systems use the text-messaging pro- quire no other power source and have a tocol to exchange purchase data via brief long life. Passwords can be required for instructions transmitted to payment high-value transactions. NFC transactions providers, which promptly clear and settle can clear via traditional credit networks, or the respective transactions. SMS users can be processed via closed networks. Deploy- securely pay merchants and others, make ment requires that merchants have NFC- deposits, or send remittances. Because any ready terminals and consumers have cards phone capable of text messaging can be or devices with NFC microprocessors (or used to make SMS-based payments, low handsets with NFC-enabled SIM or data cost and ease of deployment are strong storage cards). Unlike the basic memory SMS advantages. However, users must chips some devices use, microprocessors en- correctly complete multiple data entry able more sophisticated data exchanges and steps that can sometimes be frustrating processing, as well as stronger authentica- and time-consuming. Beyond Europe, tion. Speed, accuracy and simplicity in pur- SMS has been successfully deployed in the chasing are NFC’s compelling attributes. Philippines, Kenya, South Africa, and sim- Security must be a vital concern, whatever ilar economies where telecom infrastruc- the technology. In the U.S., Boston’s public ture and inexpensive, readily available transit system introduced the Charlie Card, mobile phones help compensate for bank a stored-value card, in 2006. Recently, stu- branch scarcity. dents from the nearby Massachusetts Insti- Mobile payments and mobile banking People sometimes use the terms mobile banking and mobile payments interchangeably, which may cause confusion. The accompanying article discusses the development of mobile payments, which may be defined as the use of handheld electronic devices to pay for goods and services at the point of purchase. Mobile payments offers increased speed and convenience in everyday purchases and micropayments, such as those for parking and public transportation. Mobile banking, by contrast, involves using mobile devices to gain access to financial services, pri- marily for banking and investing. Bill paying is often a mobile banking feature, but does not occur in real time so is not considered a form of mobile payment. Telephone banking, ATMs, and mobile phones helped pave the way for growing mobile banking acceptance. We expect that consumers will become increasingly comfortable in using mobile devices to make transfers, bill payments and other types of bank transactions, and that this in turn will facilitate growth in mobile payments. Mobile payments 37 tute of Technology hacked the card’s tech- ments could readily accommodate transac- nology, revealing its low encryption level. tion volumes of €185 billion in Europe and Such problems can rapidly undermine con- $200 billion in the United States. These vol- sumer confidence and cause substantial set- umes represent low-value transactions, such backs, especially during the critical launch as parking, transit fares and fast food pur- phase of new products. Security must there- chases. But low-value transactions could be fore remain a paramount concern. just a stepping stone to the greater rewards of the medium-value transaction segment, which includes groceries and other retail Mobile payments can provide items, restaurant meals, and sporting and entertainment events. fresh opportunities for entering or more deeply The nature of markets and opportunities penetrating market segments and for naturally varies by industry. Banks could, for example, introduce chip-embedded cards as bolstering customer loyalty. product-line extensions that deliver customer convenience while reinforcing brand loyalty. Banks could also offer virtual wallets – ap- Assessing markets and opportunities plications added to smart phones that enable Today, most mobile payment transactions account- and card-linked POS payments. are for digital commerce purchases, such as Card companies, too, are recognizing the po- ringtones, games, music and other software tential of chip-bearing cards as evidenced by items that reside on phones. Digital com- the cards’ broad acceptance in some key mar- merce constitutes a market of approximately kets. These companies are continuing their $10 billion in the U.S. and €16 billion in Eu- efforts to advance the technology, enhance rope. The potential for mobile payments is security, and reduce deployment costs. No- much greater, however, in conventional re- tably, while mobile phone service providers tail. Our research suggests that mobile pay- control the distribution of the handsets, they Mobile payments in developing markets The Philippines offers an excellent example of the appeal of mobile payments in developing economies. Here, where much of the popu- lation lacks sufficient financial resources to justify bank accounts, mobile payments provides an affordable alternative. SMART Commu- nications – the nation’s leading provider of wireless services with 35 million subscribers – collaborated with Banco De Oro and MasterCard to launch SMART Money in 2001. SMART Money effectively provides stored-value accounts that owners manage via their mobile phones or debit cards. The accounts, which are actually coupled to underlying accounts held by Banco De Oro, accept a broad range of transactions, including bill payments, cash transfers, POS transactions and airtime purchases. SMART Load, the platform’s most popular application, enables prepaid reloading of accounts with limited sums – generally about 10 percent of average daily wages for low-end consumers. The company completes 8 million to 10 million transactions daily. A major SMART Load benefit versus prepaid voucher services is its cost savings of approximately U.S. $5.6 million quarterly. SMART Padala, an- other popular SMART Money application, enables international cash remittances via SMS texting, so funds are available immediately. This application is highly popular among migrant Filipino workers. By 2008, SMART Money achieved 20 percent market penetration, substantially exceeding analysts’ projections. As SMART’s experience illustrates, aptly designed mobile payments offerings present lucrative entry opportunities even in developing economies. 38 McKinsey on Payments April 2009 Exhibit 2 Distribution of payment methods at point-of-sale in the U.S. High cash use Percent of transactions, 2006 presents opportunity for mobile payments Cash Transit system 81 8 10 in many segments Check 1 Credit card Fast food 79 7 13 Debit and 1 prepaid card Theaters 74 10 15 1 Movies 41 30 27 2 Drug store 34 12 22 32 Gas station/ C-store 31 35 32 2 Grocery store 28 15 18 39 Discount store/ Warehouse club 27 15 26 32 Source: Dove’s 2005/2006 Study of Department store 18 11 42 29 Consumer Payment Preferences have limited appetite to act like banks for ample room for more sophisticated pay- their consumers. Therefore, cross-industry ment forms in many retail segments where partnerships could be a logical competitive cash still dominates (Exhibit 2). In devel- strategy that financial institutions should be oped markets, for example, micropayments alert for and weigh carefully. for public transit, small business purchases and routine healthcare offer high-volume Creating a flexible mobile strategy opportunities. And many markets, no mat- It is important that prospective mobile- ter how advanced, have significant un- payments players develop strategic plans banked and migrant segments that are yet to address the potential opportunities and untapped (see “Mobile payments in devel- threats mobile payments might well pres- oping markets” on page 37). ent – even if change is not imminent. Any market can present significant hurdles Early involvement could be crucial to to entry. In mobile payments, the need to forging the partnerships and alliances that grow consumer and merchant participation successful strategy implementation re- rapidly and simultaneously are certainly ob- quires. And because mobile payments vious hurdles. While consumers are hesitant technology can change rapidly, flexibility to acquire new devices that few merchants should be a high priority. will accept, merchants are reluctant to in- Mobile payments can provide fresh oppor- vest in technology that consumers might not tunities for entering or more deeply pene- adopt. Timing is similarly difficult. Al- trating market segments and for bolstering though the trade-offs involved in being the customer loyalty. Research shows there is first to market are well understood, they are Mobile payments 39 complicated here by the potential emergence phones themselves, consumers, companies and acceptance of even newer technologies. and investors are enticed to enter markets Mobile payments entrants must also decide that promise ever-increasing convenience whether to create their own closed system or for consumers and profit for providers. join an open system with an established card *** network. Japan Railways (JR) developed a While the future of mobile payments may be closed system for its Suica stored-value fare somewhat unclear, recent advances in key markets tell us now is the time for prospec- tive entrants to reexamine the threats and While the future of mobile payments opportunities on their doorsteps. Consumers seem ready – even eager – to enjoy the many may be somewhat unclear, recent advances conveniences smart cards and phones offer, including mobile payments. And, unlike ear- in key markets tell us now is the time lier efforts, many of the underlying technolo- for prospective entrants to reexamine gies have now been tested and shown effective under diverse scenarios in markets the threats and opportunities on their doorsteps. around the globe. Given these substantial advances on both the consumer and technol- ogy fronts in mobile payments, the pace of card, later extending its application to scores market development and corporate alliances of vendors throughout its enormous station- could soon increase dramatically. retail complexes, as well as to bus, taxi, and other non-JR transit providers. New tech- Monica Adractas is a consultant, and Diogo Rau is nologies, as well as the devices and systems an associate principal, both in the San Francisco office; they depend on, inevitably present both Yran Dias is a consultant in the São Paulo office, risks and rewards for early market entrants. Yves Enkels is an associate principal in the Brussels From photography to computers to mobile office; and Hiroko Sasaki is an associate principal in the Tokyo office.