Payment Paradigms – Part 4b

Now that we have some grounding on the payment network industry, let’s go a little deeper. Why would these guys be interested in mobile payments?

Very simply, it’s money. Prior to the internet era, the payment networks had limited revenue channels and depended mainly on retail outlets. Some networks, like AMEX created an aura of exclusivity with all sorts of attendant benefits for the big spenders and as a consequence developed other revenue streams. The advent of the mass internet and the subsequent opening of the eCommerce channel broadened the reach of the payment networks. E-Commerce in 2011 is expected to net around $600B of spend. It’s a cash free world and payments are rendered typically using credit cards, debit cards, direct deposits, fund-transfers, PayPal  etc.

Time for some graphs.

Here’s the comparison between the outlook for eCommerce and mobile eCommerce (Commerce facilitated via the mobile phone). Mobile eCommerce is a small fraction of eCommerce in the U.S. Turns out that the US eCommerce market constitutes around 30% of the worldwide eCommerce spend. We could potentially use this number to compute the worldwide mobile eCommerce spend as well. As a consequence, by 2015 the world will see more than a $1 Trillion of consumer spending.

Now, let’s look at the market share (again US only) for credit cards. As mentioned before, Visa by far has the largest installed base globally and is accepted in more than 170 countries.

This graph would look different and will be skewed towards AMEX if we slice the pie based on revenues – but for now we are only looking at credit card volumes (members).

That said, let’s now look at potential estimated e-commerce revenues for each of the key players based on some assumptions.

  1. Discount fee – 1.5% on average
  2. e-Commerce growth rate – 19%
  3. e-Commerce shopping using credit cards – 40%
  4. e-Commerce shopping using debit cards – 35%

These assumptions have been garnered by reading credible reports and may be a conservative estimate. Here are some views that highlight the potential incremental revenue opportunity for the payment networks based on their current market share.

The goal here is not to share with you pretty graphs. It’s to highlight the potential opportunity the payment networks are chasing after to justify their current levels of investment and interest in mobile commerce. BTW, this is also the pie the carriers (AT&T, Verizon etc) are chasing after.

A few insights –

  1. The total incremental spend via mobile or the internet is not much. I don’t have hard numbers to prove this, but intuitively the end-customer is not going to spend-spend-spend as new channels open up. They are merely going to divert their spend to more convenient channels. Sure, there will be incremental spending –but it’s not going to be 2X of what the current spend levels are.
  2. One for the main reasons why these guys are after the mobile transactions is to tap into the micro-payment space. In plain speak – CASH transactions! Now, those are incremental revenues – and  lot of it BTW.

Let’s do a quick compute. The cash market is worth around $2 Trillion annually. And unlike the internet, mobile phone are in pretty much everyone’s pocket these days. With almost a 1 to 1 connect rate with the cash economy, there are millions of reasons to go after this market. A 5% penetration rate would give access to $100B in annual transactions. With a 1% discount rate, you are looking at an ‘incremental’ annual revenue stream of $1B.

I believe that Visa and MasterCard have the most to gain with this. They have a very large worldwide network and with cash being the major instrument for transactions in the developing world, there’s a lot at stake here. That also explains why, these two networks in particular have shown an acute interest in NFC and other forms of mobile payments.

The case for mobile commerce is quite strong and as a consequence, Visa and MasterCard have been making significant investments in this arena. The payment networks enjoy a home court advantage as they have established infrastructure already available. All they need to do is to enable an external ecosystem (NFC or otherwise). So, the case for a payment networks led mobile payments schema is very strong. The question is – will the consumers swing this way?

I also believe that there will be some unintended side effects as mCommerce begins to infiltrate the cash economy.

a. Security – Assuming that the transactions are secure, less cash in the till will mean more security. A gas station will not be robbed as much or bar-tenders going home at 2am will not be mugged as much. Why? They’ll all be carrying less cash than usual.

b. Price Increase or Inflation – This is a long shot, but I’ll throw it out there anyways. A convenience store such as the 711 or the Plaid Pantry depends on these micro-payments that are quite frequently made in cash. Cash is king and Cash is revenue. Mobile transactions would take away 1-3% in revenues from these stores. And to compensate, over time, these stores may increase prices of convenience products.

eCommerce opened up new channels for customer spending and it directly benefited the payment networks as it was cashless. Mobile payments represents yet another lucrative channel for them – more importantly this will be incremental revenues not just redirected spend.

I’ll rest my case on the payment networks led payment paradigm. The case is strong and the key players are preparing for battle. Thus far we have covered the following schema’s – MNO led, Bank led, Payment Network led. In the next post, I’ll cover other alternate paradigms – these are much smaller players but have the potential to disrupt the market.

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