Mobile Money 2.0: strategic lessons from top case studies
Cutting through the hype, two presentations at the 8th Telco 2.0 Brainstorm held in Orlando gave real examples of how telcos are making money today from mobile money services by utilising and building on their existing assets.
Keith McMahon, senior analyst with the Telco 2.0 Initiative dispelled some of the myths surrounding mobile money services, saying it was neither technology nor demographic choices that dictate the success or otherwise of mobile money services. From our work developing the Mobile Money Use Case Research Keith cited two very different examples - Safaricom's M-Pesa service in Kenya and NTT Docomo's Felica mobile wallet service in Japan. He explained that the common success factors were in fact based on scale and control of the platform.
The mobile money solutions offered by Safaricom and NTT Docomo have one very important thing in common - they are both profitable. Safaricom has 8 million M-Pesa users, accounting for 50% of its customer base and is operating on margins around 20%; Docomo has 10 million users, around 20% of its total customer base and a decent sized credit card-like business in any market.
It is the scale that makes their mobile money businesses attractive and that scale is based on two factors.
Scale, scale and scale
Firstly, both are leaders in terms of subscribers in their own sizeable markets. As McMahon observed, their high market share enables their standalone leadership positions. The jury remains out as to whether an operator without such dominance can establish profitable services. The alternative for operators in less powerful positions is to consider collaboration but that takes away the massive churn reduction benefits of the service that were a major influencing factor for Vodafone's board in deciding to develop the system for Safaricom.
Secondly, both have managed to build scale in their distribution or merchant networks. While Safaricom did this by utilising its existing pre-pay merchant network, Docomo went on a spending spree buying shares in a major card issuer and merchant acquirer and in merchants themselves. Without such investments, Docomo would have struggled to convince merchants to support the NFC PoS capability essential for the service and it would not have gained the required scale.
So where do these examples leave operators in mature markets excited by the concept of mobile money? Firstly, with a reality check, says McMahon.
Mobile Money, like many two-sided business opportunities, isn't a high margin business. PayPal, for example works on 20% margins. Visa does manage to reach the mid to high forties but that's with a different brand-based model in which it charges both users and merchants, so does not provide a representative baseline. Safaricom's 20% margin has taken four years to reach and has been built by adding extra capabilities, such as transfer, app and content payments, airtime for friends/family etc.
Keeping control of costs is paramount. In particular, costs associated with cash in and out need to be reigned in. And here lies an important lesson for mobile operators - that to use the cost structures of pre-pay top up would be inadequate. The cost of paying cash for mobile top up runs at 3-6% (double that for cash out as well) and that is too high for a low margin business. It is a lesson that Apple is learning, said McMahon, who questioned the profitability of Apple's iTunes wallet which uses pre-pay cards, a method which operators have found too expensive for their own top up services.
McMahon did identify two possible markets that represent 'low hanging fruit' for mature market telcos - youth and immigrant populations. He suggested the UK's 5 million immigrants keen on sending money home might represent a marginally profitable business, as would this audience in Italy, and also cited Telefonica O2's recent payment card aimed at the youth segment as an example of targeting a ripe market opportunity.
Youth Virtual Target
The youth market was very much a focus for Rodger Desai, Co-founder and CEO of Payfone, who argued that there is a pent up demand for an alternative payment method for buying virtual goods - online apps and content. He said only 1.5 billion of the 4 billion mobile phone users worldwide has a credit card but even more significantly, in the all important 13 to 22 year old age group the number of credit card holders falls to a mere only 200,000.
Premium SMS Broken
But, he claimed, the current alternatives to credit cards are broken. On one side, payment systems outside of credit cards cannot deal with the cross border, cross currency payments that are an important part of the virtual world and, on the other, existing mobile payment systems for content such as premium SMS are outdated, expensive and flawed.
Roaming Looks Like Financial Transactions
A far superior alternative already exists for operators in their roaming structures and Desai described a roaming call as looking very much like a credit card transaction. It does a credit check, mediation, clearing, settlement and billing and the roaming structure just needs to be adapted so that it supports transactions between operator billing systems and retailers and brands, not just other operators.
Payfone believed in the possibilities of extending the roaming function so much that it became an operator as it was the only way to access the roaming systems. Payfone's precedent would also suggest that operators and carrier service divisions should at least examine the roaming-based payment services opportunity in earnest.
(Ed. Further information and analysis from the Brainstorms will be made available to attendees and members of the Telco 2.0 Executive Briefing Subscription Service. For future Brainstorms and Virtual Events, please see here or email firstname.lastname@example.org.)