In the last five years, two fast-growing technologies have dominated and expanded the delivery of electronic financial services: the Internet and wireless devices. While the Internet has had significant adoption rates in North America, wireless financial services has gained more popularity in Europe and Asia-Pacific markets. Within the wireless arena, new technological innovations and lower prices have introduced the ability to use mobile phones for m-commerce, or what can be described as the adoption of cashless payments. Providing mobile payments services to consumers is another way to maintain the relationship with its customers.
Mobile phones are perfectly suited for transactions because they allow users to pay easily and with security. They are also convenient because they are small, and consumers can carry them wherever they go. They create payment opportunities that Internet-based systems cannot address. For example, paying for a taxi with a mobile telephone is much more practical than using a PC connected to the Internet.
Financial institutions around the world are investing resources in mobile payment solutions as a way to expand their suite of offerings to retail customers and find a new medium for interaction. Outside North America, high expectations have been allocated to this new form of payment, but the challenge continues to be increasing consumer interest and adoption so that it will be worth the expenditures.
There are already close to five million mobile payment users around the world. A majority of these users are in Asia, with Europe also accounting for a larger share at about 40% of the total. In North America the numbers are far smaller, accounting for approximately 2% of the total users. By the end of 2001, we expect over 12 million individuals worldwide to use mobile devices, primarily mobile telephones, to initiate payments. By 2004 this number will reach 60 million users. However, North America will remain conservative, with only 2.5 million users by 2004 (Figure 1).
The major reason for the slow uptake in wireless mobile payments in North America has been the existence of multiple wireless standards. This limits financial institutions that are interested in engaging in mobile payments, as they have to partner with a number of carriers and device manufacturers to reach their customers. A number of financial institutions in North America have embraced the wireless channel in the past 6 months (i.e. Bank of America, JP Morgan Chase, and First Union), but, most of the functionality offered to consumers includes checking balances and funds transfer between internal accounts.
In addition, the structure of the US payments industry is at a very primitive stage. Today, checks still account for over two thirds of cashless payments in the US (Figure 2) and check volume continues to increase at a growth rate of two percent per year. Neither the Internet, nor the mobile phone has had an impact in the behavior of how payments are initiated.
Unlike North America, Europe and Asia have adopted wireless technology much more quickly due to the interoperability of networks and devices (i.e. GSM, i-mode). Despite the technological impediments portrayed by the North American market, a few initiatives have been introduced, as outlined in Table 1. Ensuring success will necessitate the cooperation of four major types of participants in the wireless payment scheme: mobile network operators, banks, card associations, and device manufacturers.
Wireless devices will start to challenge the Internet for payment volume. While we do not expect to see wireless channels overtake the Internet as far as payments are concerned, we do expect that the number of wireless payments will increase to about two thirds the volume of transactions initiated via the Internet by 2004. Given that wireless payments are starting from a much lower base, the growth rate for wire-less transactions will be significantly higher (Figure 3).
There are two basic factors that differentiate the various approaches to wireless payments. First, there are a number of approaches for the consumer to actually initiate the payment-- i.e., how does the consumer actually access and transmit the necessary information from their mobile device? Secondly, there is the question of the settlement process for the payment-- i.e., how does the vendor receive its money and how is the purchaser's account debited?
Not all approaches to wireless payments will be successful. There are five basic approaches to initiate a payment and four methods for settling wireless payments (Figure 4). We believe server-based wireless payment methods will be the most successful. For this payment solution, customer account and billing information are stored in an electronic wallet. This allows customers to use their bank account or credit card numbers without entering their account information for each and every transaction. Merchants receive payment directly from the consumer's e-wallet. The user will just need to subscribe to the payment service offered by a bank or a Telco. Only limited hardware and infrastructure changes are necessary for the merchants. In addition, server-based solutions are secure as personal information travels over a secure virtual private network (VPN), without transmitting card or account numbers over the Internet.
Despite the enthusiasm from participants in the mobile payments space, it will take much longer than expected to gain widespread adoption. Banks, Telco's, portals, and ISPs will be in a strong position to drive developments in the wireless payment space. However, we strongly believe the role of banks to be most important as they act as custodians of their customer banking needs.
In North America, we expect less than 5% penetration in mobile payments users due to the various incompatible network technologies. In addition, three main items will drive the growth of markets: application content, security, and the consumer acceptance of wireless devices for payment purposes. Financial institutions will need to support products and services through one single multi-channel architecture and multiple delivery channels, providing a consistent banking experience. Financial institutions will be looking for open systems that will allow easy integration with existing back-office processing systems and customer databases.
For the moment, North American financial institutions will concentrate on improving their Internet technologies. With the arrival of new technologies such as GPRS and 3G, we expect developments in the wireless payments arena to increase in North America. However, a number of issues, such as the existence of multiple wireless standards and the reliance on other forms of payments, will continue to hinder the growth of the North American market in wireless communications for the next few years.