Advisory Report: Report Date: Analyst: Service: Market:

Evolving Market Segments: Mobile Operators & European MPayments Services

July 12, 2011 Rybak, Natasha Consumer Services Europe Mobile Media

Summary
Issue Whether referred to as m-payments, mobile payments, mobile wallets, online payments, remote payments, e-commerce or something else, the market targeting newer, non-traditional payment methods for content, goods and services is a fast developing segment in which many diverse players have a keen interest, from financial institutions to large retail chains to OTT operators and, of course, mobile providers. The latter are involved in varying kinds of payments initiatives, many truly mobile (for example, contactless, via NFC, or SMSbased) and some that cannot be so clearly labelled (such as co-branded credit cards or billing of online purchases to a mobile account). This report examines the European mobile payments space from the mobile providers point of view, taking a snapshot of the current market landscape and highlighting recent and emerging trends, as well as key takeaways for mobile operator participation in, and influence on, the evolution of mobile, remote and contactless payments. For further information and analysis, please see: Everything Everywhere, Telefnica UK & Vodafone UK Jointly Tackle Mobile Marketing & Payments, June 20, 2011 MWC 2011 Trend Round-Up: Contactless Mobile Payments Arrive, February 22, 2011 MWC 2011: Deutsche Telekom Targets Mobile Payments, February 16, 2011 Everything Everywhere Plans Mobile Contactless Payments Push, January 27, 2011 NFC, or New-Fangled Collaboration, December 28, 2010

Perspective
Current Perspective Landscape Much of the focus of new mobile payments initiatives spurred by MNOs centres on the use of contactless NFC technology, in two main categories: SIM-based (via a secure SIM card in an NFC-enabled handset) and cardbased (via a secure chip and antenna embedded in a credit or debit card). In both cases, the device or card is brought into close proximity with a contactless reader at point of sale to affect purchase. The same technology can, and is, used for non-payments applications: as keys for buildings, hotel rooms or vehicles, or as ID cards, for example. While 2011 is seeing a significant ramping up of European NFC-based plans and deployments, commercial launches have already taken place elsewhere in Europe and neighbouring countries. In Turkey, a contactless, SIM-based NFC system was commercially launched late in 2010 by mobile provider Avea, the Garanti Bank and MasterCard supporting payments at 35,000 retailers in Turkey and at 265,000 locations worldwide, as well as Turkish transport ticketing and sports venue access. Alongside a prepaid account and credit card payment functionality, mobile marketing also underpins the deployment, offering loyalty points, discounts and rewards, while initial take-up was incentivised with the offer of free prepaid account credit on SIM activation. For a sampling of launches taking place in 2011, please see Table 1: Recent Developments below. While NFC gets much of the attention, MNOs are encroaching on the payments segment in various other ways as well, which are continuing alongside newer contactless schemes. Mobile SMS-based payments systems have

been in place for some time, primarily in areas such as ticketing, public transport and parking, while direct operator billing (where online purchases are made against a monthly mobile telephone bill or prepaid allotment) and co-branded credit and debit cards (often also offering additional mobile top-up credits or rewards points when used) are also becoming more established. Many SMS-based payments deployments facilitate micropayments, or low-cost purchases. A good example is Belgacoms PingPing, a consumer-facing brand launched in 2009, which also supports contactless, NFC-based payments. The Belgian incumbents involvement with mobile payments originated with SMS transport and parking ticketing services (which are still being enhanced and expanded), expanding to library check-outs and small purchases up to EUR 25.00 for use online and in shops, as well as NFC-enabled payments for stores, vending machines and school items such as lunches, and even electric car recharging and public bike rentals. A1 Telekom Austria is another example of an incumbent mobile provider that has pursued the payments segment for some time, specifically via owned subsidiaries, in this case spanning both SMS-based purchases (Paybox, which also supports participants Orange, T-Mobile and tele.ring) and a co-branded credit card (A1VISA). While co-branded credit and debit cards are not a distinct mobile payments offer as such, they do provide the mobile operator partner with entry into the financial services space, extending brand presence and allowing for expanded bonus, loyalty and rewards schemes for mobile customers using the designated card, thus benefiting both the financial and mobile operator partners with cross-promotional drivers to increased card and mobile services usage. The Importance of Partners While some mobile payments rollouts involve a single mobile operator facilitator, in many cases mobile providers are acting cooperatively to create more efficient deployments and enhance appeal to retailers by using a common payments system or methodology, while sharing and defraying the investment and resource load and encouraging economies of scale. Cooperative efforts can be expressed as agreements, partnerships or joint ventures to pursue common standards evolution, support common platforms or launch unified, branded mobile payments deployments, whether for SMS-based, operator-billed or contactless, NFC-based solutions. Last year in the Czech Republic, operators Telefnica O2, T-Mobile and Vodafone came together to promote existing m-payments capabilities to end users and merchants via a new association (the Association of Mobile Network Operators, or APMS), which launched an online information site and joint logo. The effort aimed to underscore the types of mobile purchase methods available in the country, including m-payments for transport ticketing, parking, event ticketing, gaming, travel insurance, donations and TV show voting. The providers are working cooperatively to offer competing payments services using consistent payments systems, supporting remote payments by premium SMS and direct operator billing (debiting prepaid credit, or charged on the monthly mobile phone bill). Similar cooperative payments efforts are in place in other European countries, such as Germanys mpass, which has supported SMS-based purchases for several years and now includes MNO participants O2, Telekom and Vodafone. Many of the launches planned and deployed in 2011 and discussed for later introduction in 2012 and beyond follow a cooperative model, especially at the national level involving most or all of a countrys MNO players. This ensures maximum reach in terms of geography and existing customers that can be targeted with new payments services, as well as presenting a stronger unified front to retailers, financial institutions, advertisers and, in the case of SIM-based NFC programs, handset vendors. Recent Developments: 2011 Mobile Operator Payment Services Launches

Launch

Mobile Operator/Financial Partners Contactless Payments Orange Quick Tap, Orange, Barclaycard UK

Description

Retail Ecosystem

Contactless, SIM-based NFC payments for purchases up to GBP 15.00

Orange Cash, UK

Orange, Barclaycard,

Contactless NFC

Reportedly 50,000 stores, including Pret A Manger, EAT., Subway, Little Chef, Wembley Arena, Wilkinson & McDonalds; Samsung Tocco Lite handset 30 million locations worldwide

MasterCard

O2 Money, UK

O2, VISA

Tap2Pay, Norway

Telenor, DnB NOR, MasterCard Deutsche Telekom

Contactless Mobile Payments, Germany/Poland Contactless Mobile Payments, UK Contactless Mobile Payments Pilot, Czech Republic

payments via credit card for purchases up to GBP 15.00; card usage also offers Orange rewards points Contactless, SIM and card-based NFC payments Contactless, SIM-based NFC payments pilot in Oslo Contactless, SIM-based NFC payments

(credit card); participating contactless retailers

Not cited

250 end users; 12 retail chains including Kaffebrenneriet, Vita and Deli de Luca Not cited

Everything Everywhere, Contactless, SIM-based Barclaycard, MasterCard NFC payments Telefnica O2 Czech Republic, Komercn banka, Citibank Europe, VISA

Contactless Mobile Orange Poland, a Payments Pilot, partnering bank Poland Co-Branded Payments Cards Lycamoney, UK Lycamobile, MasterCard Co-branded prepaid credit 30 million locations worldwide card, also supporting card-to-card transfers; top-ups to Lycamobile using the card offers bonus credit Operator Billing Direct Operator O2 Germany, BOKU Remote payments service Participating BOKU online allowing for direct billing retailers Billing, Germany of online retail purchases up to EUR 30.00 to the customers mobile phone account using the registered mobile phone number M-Payments Telia Mobile Wallet, TeliaSonera SMS-based payment for Not cited purchases such as bus or Sweden parking tickets, or TV show voting; also supports money transfer between wallets Beer Runner Pilot, TDC SMS-based ordering & Roskilde Festival Denmark payment for beer purchase, delivered direct to concert-goers tent within 10 minutes Cooperative Initiatives Cityzi, France Bouygues Telecom, Expansion of original Not cited; original Nice Orange, NRJ Mobile, interoperable contactless participants included local

Reportedly 40,500 stores, including Pret A Manger, EAT. & Little Chef Contactless, SIM-based 200 end users; four Globus NFC payments; additional hypermarkets PIN code entry required for purchases over CZK 500.00 Contactless, SIM-based 35,000 contactless readers in NFC payments fast food outlets, cinemas, supermarkets, retailers

SFR, BNB Paribas, Credit NFC payments pilot using Mutuel, CIC, Credit handsets in Nice to eight Agricole other cities; mobile operators target 1 million NFC-enabled handset sales in 2011 Buyster, France (JV) Bouygues Telecom, Common remote Orange, SFR, Atos Origin payments service allowing for direct billing of online retail purchases to the customers bank card using the registered mobile phone number Cooperative NFC BASE, Belgacom, Cooperative development Payments Mobistar, Febelfin of common contactless Development, (Financial Industry NFC payments standard Belgium Federation) Common Payments 3 Italy, Fastweb, Common operator billing Platform, Italy PosteMobile, TIM, platform allowing for Vodafone, Wind direct billing of digital content and services to the customers mobile phone account using the registered mobile phone number Common Open NFC Everything Everywhere, Common & open Payments Platform, Telefnica O2, Vodafone contactless, SIM-based UK (JV, pending NFC payments platform; will also offer single point competition of contact for mobile clearance) advertising interests

retailers and financial, transit, educational and local government organisations

Backed by online retailers Aquarelle, Brandalley, Darty, Rue de Commerce

Not cited

Interest from digital content providers Caltagirone Editore, Class Editori, Monks Guide, Espresso, Il Sole 24 Ore, Microsoft Italy, Mondadori, Monrif/Editorial Poligrafici, Paperlit, RCS, Shenker, LUnione Sarda Not cited

Other Developments: Post-2011 Mobile Operator Payments Services Launches

Launch

Mobile Operator/Financial Partners Orange, Telefnica, Vodafone 3 Denmark, TDC, Telia, Telenor

Description

Timeline

Cooperative Initiatives Cooperative NFC Payments Development, Spain Common NFC Payments Platform, Denmark (JV)
Key Takeaways

Cooperative development Not Cited of common contactless NFC payments standard Common contactless NFC Year-end 2012 payments platform

While the same mobile operators (and financial institution partners) may work together to roll out mobile payments services in more than one country, deployments in Europe to date are characterised by limitation to a single country market. This is not surprising considering differing regulatory and legal requirements (although the European Payments Council is pursuing more standardisation and interoperability for cross-country mobile payments), compounded by varying local market conditions. The complexity and number of parties necessarily involved in launching more advanced, large-scale, SIM-based NFC payments services is another factor limiting practical deployment opportunities to being undertaken on a country-by-country basis. NFC gets much of the attention as regards mobile payments, but this segment is by no means limited to contactless deployments, and mobile operators are not limiting themselves to these types of rollouts. Many of the new launches in 2011 are NFC-oriented, but SMS-based payments, direct operator billing and other remote online payments initiatives are being maintained, expanded and introduced. Given the uncertainty surrounding

consumer and retailer acceptance of mobile payments, the practical realities of consumer purchase patterns, the types of transactions subject to remote purchase, and the possibilities regarding future evolution of panEuropean mobile payments standards, experimentation with different models is a logical choice. For mobile operators, the impetus to enter the payments space is not simply to facilitate purchases and open up a potential new revenue stream. Expanding brand awareness into a new service area, enhancing and broadening customer interaction, and forging new touch points in the daily life of the consumer are all integral in maintaining competitiveness and keeping customers for mobile operators and, in fact, any telecommunications service provider. Payments represents an attractive area for these reasons, and because it is a segment where mobile operators can carve out a value proposition hinging on their knowledge, expertise and existing network infrastructure and subscriber relationships for their own benefit as well as retailer and advertiser partners. Many of the recent and soon-to-be-deployed contactless products slated for 2011 have emerged in the UK (Orange Quick Tap, Orange Cash, O2 Money, the planned Everything Everywhere offer and the NFC joint venture), where there is already prevalent use of contactless payments cards at retailers and for transport so both the infrastructure and consumer understanding of this form of payment have already seeded the ground for further, wider-ranging deployments. In other countries, lack of retailer confidence and reluctance to invest in and install appropriate point-of-sale kit, alongside consumer awareness, will present barriers that need to be overcome for these types of deployments to take place. Sourcing NFC-enabled handsets has proven difficult for MNOs, and the ability to offer consumers choice among a range of devices will be key to enabling large-scale, SIM-based contactless deployments. While contactless cards are a useful intermediary step, for the mobile provider the secure SIM is the method that best ensures customer lock-in, while allowing for a variety of transactional applications from different financial services providers and retailers to be accessed. However, as the primary channel to market for mobile devices, mobile operators are well placed to promote and drive demand for NFC-enabled handsets in tandem with services, especially as they begin to act more cooperatively for deployments, presenting a common procurement demand.

Recommended Actions
Vendor Actions Several of the mobile payments initiatives planned or already in place are emphasising the logical alignment with advertising opportunities, and this is a relationship that should be nurtured. As deployments evolve, so will the interplay between mobile payments and mobile advertising, benefiting the interests of participants on both sides of the equation. Product marketing, discounting and couponing and tailored, limited-time location and user profile-based promotions (down to the aisle a shopper is occupying in a supermarket and a history of their recent purchases) are all ways in which mobile advertising can leverage mobile payments systems, and vice versa. Just as there are a variety of different mobile payments methodologies aside from contactless NFC deployments, there are a large number of opportunities for mobile providers to exploit NFC technology outside of the payments space. NFC can be used to support controlled access to vehicles, properties and homes, as well as being a source for remote control and monitoring within these locales. Medical offices and other businesses can use NFC to track and assist patients and customers; car-sharing schemes can be enabled by NFC keys; and check-in and room access can be facilitated by NFC technology, as is being done by Telia and the Clarion Hotel in Stockholm. Mobile operators are not essential to the mobile payments space; online players such as PayPal have no need to coordinate with mobile providers, and merchants and financial institutions can also circumvent them on the contactless side using cards and other contactless devices (for example, although it is also party to cooperative initiatives, VISA is launching a contactless payments trial in France using NFC-enabled iPhone cases). Mobile providers need to make the case for the value they can bring to the payments segment: very specific technical expertise, existing customer reach and experience with mobile services and device management. Unlike some of the other players converging on the mobile payments feeding frenzy, MNOs really cannot do it alone; partnerships are key. Financial institutions and transaction enablers, retailers and merchants, advertisers and manufacturers of secure storage elements and NFC-equipped devices are all participants in the payments segment, and the way in which it evolves. Mobile operators should also be monitoring the advance of Google

Wallet; for Sprint in the US, partnering with Google presents a very quick, high-profile entry into the segment, an avenue that might be of interest to other mobile providers, should the opportunity arise. Security is a significant worry for consumers when payments are involved; for mobile operators, partnering with a well-known and trusted bank or financial services brand can help to allay these fears. Privacy is also a concern for some consumers, and mobile operators moving into payments and targeted advertising need to be aware that the issue of being tracked, monitored and profiled will likely emerge as a key debate even as arguments are made that these actions benefit the consumer with user-specific bargains, alerts and rewards. Ease and ubiquity of use are other important factors; the process needs to be simple, easy, and widely available and accessible.

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