Mobile Payments

Mobile payments is all that the tech media can talk about lately. Japan is being hailed as an advanced and mature market for mobile payments. People have been using mobile payments before the first iPhone launched. So I dug a little deeper and what I found broke quite a few myths. But before going to Japan, let me first explain the ecosystem of mobile payments (important later).

Key players – What do they want?

There is a well-defined value chain with extremely diverging interests. Here are the big five and their motivations-

1 Banks/ Associations (VISA, Mastercard)
Maintain volume of transactions that happens with cards today. Example: Visa Wallet and serve by AmEx.

2 Retail/ Merchants
* Lower transaction fee and drive costs down
* Leverage mobile technology for promotions and sales

3 Mobile Operators
Grow additional revenue areas. Example: Isis, a US carriers’ collaboration

4 OEMs
Drive sales. Example: Google Wallet

5 Consumers
How is this significantly better than the card?

History of mobile payments in Japan

Japan (Pop. 127 million) has 100 million mobile users, 90%  of which are non-smartphone users. This stat has since come down to 80% during the last year. Mobile payments based on RFID have been around since 2004. Here’s a brief timeline of how mobile payments evolved in Japan-

Late 1980s- Sony developed FeliCa technology (short for Felicity Card) RFID smart card system. After 7+ years of failed field tests, it was finally adopted as a reloadable, pre-paid card in 2001 to be used in train stations. At this stage, phones were not linked to payments. In 2004, RFID-based POS systems started appearing in convenience stores like 7/11 at train stations. Merchants paid 1-4% to receive e-money payments. For majority of non-smartphone users, Japanese carriers sold RFID and NFC stickers which could be pasted on phones to enable mobile shopping. User adoption started slowly.

In 2006 DoCoMo, the Japanese carrier, became part-owner of FeliCa technology and announced Mobile Suica, the mobile wallet service. DoCoMo also entered the credit business by purchasing a bank, eliminating the conflict that might otherwise exist between a mobile carrier and a bank (for example, over who “owns” the customer or which company receives the revenue). User adoption still did not see a major jump. Other companies started adopting mobile payments too. In 2008, McDonalds announced mobile coupons at some outlets in Tokyo.

In 2010, loyalty, coupons, points were introduced into the Mobile Suica. This brought the big adoption change that everyone was waiting for. “If it weren’t for points or promotions, adoption would be drastically lower”, DoCoMo said. “We should have emphasized promotions and other reward programs a lot earlier than we did”. Total userbase for Mobile Suica at this point- 2.5M.

As seen in the graph, handset penetration is faster than user penetration is faster than store penetration.

Summary

1 Consumer adoption takes time, even among a tech-savvy population.
2 Key components is controlled by one company. DoCoMo was the mobile carrier, retailer and financial institution.
3 Retailers do not want to spend millions on an POS system upgrade when there is no user demand.
4 Mobile payments does not need smartphones. Until costs of smartphones come down, OEMs should think of innovative ways to enable most users to enable payments on any phone.

As Gartner’s hype cycle shows below, the expectations for mobile payments is at fever pitch right now. But its still years away from mass adoption. Till that time, companies like Square are doing a great job at showing how to use mobile devices and existing cards for payments.

Companies pushing for NFC should think about new ways of rewarding users for paying through their phone. Here’s another interesting article on Wired on when will phones replace your wallets.

(click on image for larger view)

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