Mobile Payments Whitepaper Q3 2009

RK Consulting

Mobile PaymentsA study on the mobile payments market for 2009 and beyond

Author: Rei Kasai | [email protected] | www.linkedin.com/in/reikasai Q3 2009

[MOBILE PAYMENTS] Q3 2009

RK Consulting | [email protected] | www.linkedin.com/in/reikasai | Introduction 2

Contents Introduction .................................................................................................................................................. 4

Mobile Payment Business Model.................................................................................................................. 5

What is mobile payment? ......................................................................................................................... 5

What vendors participate in the mobile payment ecosystem? ................................................................ 5

Mobile payment is similar to credit/debit payment ................................................................................. 6

Mobile payment that uses carrier billing has a larger addressable market ............................................. 7

Mobile payment that use bank billing has better economics................................................................... 8

Mobile Payment Ready for Rapid Growth .................................................................................................. 10

Market enablers ...................................................................................................................................... 10

Market drivers ......................................................................................................................................... 12

The Remote, P2P, and NFC market segments of Mobile Payment ............................................................ 14

Remote Mobile Payments ....................................................................................................................... 14

• Premium Rate SMS (PSMS) ......................................................................................................... 15

• Carrier Billing ............................................................................................................................... 15

• Mobile Web/Applications ........................................................................................................... 16

Peer to Peer (P2P) Mobile Payments ...................................................................................................... 17

Contactless Mobile Payments (NFC) ....................................................................................................... 19

Market Sizing and Forecasts ....................................................................................................................... 20

Forecast methodology ............................................................................................................................ 21

Forecast assumptions ............................................................................................................................. 21

Selected Vendors in Mobile Payment Segments ........................................................................................ 23

Remote mobile payment market map .................................................................................................... 23

• mBlox company profile ................................................................................................................... 23

• Zong company profile ..................................................................................................................... 24

• boku company profile ..................................................................................................................... 24

• Aepona company profile ................................................................................................................. 25

• ClairMail company profile ............................................................................................................... 25

• Billing Revolution company profile ................................................................................................. 26

P2P mobile payment market map .......................................................................................................... 27

• obopay company profile ................................................................................................................. 27



• Xoom company profile .................................................................................................................... 28

NFC mobile payment market map .......................................................................................................... 29

• Vivotech company profile ............................................................................................................... 29

• BlingNation company profile .......................................................................................................... 30

Conclusion ................................................................................................................................................... 31

Works Cited ................................................................................................................................................. 32

About the Author ........................................................................................................................................ 33



Introduction In most parts of the world, the mobile phone has become a part of daily life. Surveys have shown that consumers are more likely to leave their wallet than their mobile phone at home, and as such mobile payment has emerged as a rapidly growing and evolving market. Mobile payment is an alternative method of paying for goods and services with a mobile phone. Many examples across the globe are in use today ranging from debiting train fares in Asia, purchasing virtual items in Internet games, splitting a restaurant bill with friends, to immigrant workers sending remittances to family members in another country. The adoption of mobile payments is just starting and has significant potential, as it is being pulled through the rapid double‐digit expansion of mobile services across the globe. Wireless Intelligence estimates there are over 4 billion mobile subscribers in the world today, growing at over 20% CAGR between 2003 and 2008. This equates to 1 million new subscribers daily and that over 60% of the world population is a mobile user. This large and very rapidly growing potential customer base of mobile payment users is relevant since less than 25% (1.6 billion) of the world population have bank accounts and 15% (1 billion) have credit cards.

Figure Mobile services subscriber growth This report starts with a review of the mobile payments value chain, stakeholders, and business models. It then explores the market drivers, sizing, and forecast for the opportunity at hand. From there, an analysis of market’s drivers, segments, sizing, and forecast. Lastly, a market map of each segment and selected profiles of established ventures are provided.


RK Consulting | [email protected] | www.linkedin.com/in/reikasai | Mobile Payment Business Model

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Mobile Payment Business Model

What is mobile payment? Mobile payment is a segment of the larger payments market, which is broadly categorized as the monetary transaction between two parties in exchange for the purchase of goods or services.

Figure Payments market

What vendors participate in the mobile payment ecosystem? Executing a financial transaction between two parties using a mobile phone requires many parties and as such the ecosystem is very broad with representatives from mobile device manufacturers, mobile network operators (aka carriers), payment networks, merchants, financial institutions, and payment applications.

Source: RK Consulting

Payments

Paper

Cash Check

Electronic

Credit/Debit Mobile

Device Manufacturers

•Nokia, RIM, Samsung, HTC, Apple

•Provide mobile devices that support payment applications

•Drivers‐ Increase mobile device sales

Mobile Network Operators

•Vodafone, AT&T, China Mobile

•Provide mobile data services to consumer

•Drivers‐Maintain ARPU, decrease subscriber churn

Payment Networks

•Visa, MC•Provide a network to transfer funds from consumer to merchant

•Drivers‐ Increase transactions and membership of network

Merchants

•Amazon, Wal‐Mart, Apple, Facebook

•Provide goods and services to consumer

•Drivers‐ Decrease transaction costs

Payment Applications

•PayPal, Obopay, Zong•Provide payment service to consumers and merchants

•Drivers‐ Increase transactions or transaction value on network

Financial Institutions

•Chase, Barclays, HSBC•Provide financial services to consumers and merchants

•Drivers‐ Increase customer deposits



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Figure Mobile payment ecosystem

Mobile payment is similar to credit/debit payment The value chain for mobile payment is best understood by comparing it with the established credit/debit payment value‐chain. Visa and MasterCard are the two best known payment networks that underpin this model.

Source: RK Consulting, Portio Research Ltd., Jeffries & Co.

Figure Debit/Credit payment valuechain The credit/debit payment value‐chain consists of consumers, merchants, acquirers, payment networks, and issuers. Acquirers provide merchants the ability to accept and process payments with software applications, smart‐card and/or magnetic stripe readers. Issuers provide payment devices and/or virtual accounts to consumers to pay merchants, as well as transfer funds from the consumer to the merchant. The payment network provider acts as an intermediary between the issuer and acquirer banks, transferring information and funds between the banks. The payment network primary source of revenue is fees generated by payment transactions executed through its network, as such the payment network promotes its brand heavily to increase participating merchants and card‐members.

Mobile payment value‐chain has similar stakeholders to the credit/debit payment value‐chain, but their responsibilities are slightly different. Mobile payment can be categorized by two business‐models, one

Consumer•Purchases goods/services from Merchant

•Provides payment account information to Merchant

•Owns Credit/ Debit account

Merchant•Generates bill for transaction and sends to Acquirer

•Owns/leases software/hardware to authenticate and process payment account information

Acquirer (Merchant's Bank)•Provides banking services to Merchant

•Contacts Payment Network to check on funds for bill

Payment Network•Intermediary between Acquirer and Issuer that handles communications between banks

Issuer (Consumer's Bank)•Provides Credit/ Debit account to Consumer

•Authorizes or declines payment of bill from Merchant

•Sends payment to Acquirer if funds available

Consumer•Makes $100 Purchase

Merchant•Retains $97.70

Acquirer•Retains $0.30

Payment Network•Retains $0.25

Issuer•Retains $1.75



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that is based on a partnership with a mobile network operator and the other with the financial services industry.

Mobile payment that uses carrier billing has a larger addressable market The significant difference with this model is that the financial services industry is not part of the payment value chain. The acquirer and the payment network are one entity that the merchant works with to process a payment from a consumer. The mobile payment provider bills the consumer’s mobile services account, pays the merchant, and then the carrier pays the mobile payment provider. The advantage to this model is that it leverages the billing relationship between the consumer and the carrier. Since a bank account is not required by the consumer, the potential addressable market is quite large. Currently, there are over 4 billion people world‐wide that own mobile phones, but only 1.6 billion people world‐wide own bank accounts, which represents approximately 60% and 25% of the world population respectively. If this model can get to scale, it has the potential of providing a cost competitive electronic payment service since there are fewer stakeholders in the value chain. In the time being, the revenue model is currently in favor for the carrier, with transaction revenue often up to 50% going to the carrier, 20% to the payment network, and 30% to the merchant. Due to the economics, this model is most suited for high‐margin electronic goods like digital media and micro‐transactions –transactions less than $5. In most markets, carriers face regulatory hurdles that prevent them from acting like a financial services organization to allow purchases of physical goods. Looking ahead, if these regulatory restrictions are lifted, a cost competitive payment service should emerge to support both electronic and physical goods purchases. If carriers wish to pursue this strategy, there will be challenges with this model from a compliance and risk management perspective. The carrier and/or mobile payment provider will need to acquire licenses to be compliant with banking regulation, as well as the know‐how to manage risk with large‐value intra‐country and cross‐border transactions, both of which are non‐issues for most financial services institutions.

Advantages: Disadvantages: • Does not require a bank account • Very large potential customer base

• High transaction fees (20‐70%) • Limited support for cross‐border/ foreign

currency transactions Best used for: Vendors:

• Digital media • Virtual goods • Transactions < $5

• mBlox • Zong • Boku • M‐Pesa



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Figure Carrier billing valuechain

Mobile payment that use bank billing has better economics This model is an extension of the well developed financial services debit/credit payment service. Payment applications will utilize existing financial services processes to transfer funds between a consumer and merchant or consumer and consumer. Similar to carrier billing providers, bank billing providers typically serve both as an acquirer and payment network, and in some cases as an issuer as well to cover the entire payment value chain. Typically, the consumer will have an account with the payment provider and will determine preferences to fund a transaction from the consumer’s bank account, credit account, and/or funds deposited with the provider. The merchant sends the consumer’s payment request to the payment provider. The payment provider will debit the appropriate funding source based on the consumer’s preferences, then transfer funds to the merchant’s account. The benefit to this business model is that existing financial services infrastructure for payments is used, thus requires minimal setup costs. In addition, because consumers have a historical relationship with financial institutions, payment providers have fewer hurdles to overcome consumer confidence when supporting large transactions. Moreover, transaction costs are orders of magnitude more favorable for bank billing when compared with carrier billing. On average, transaction costs are on par with existing debit/credit transaction fees of 3% of transaction value. Lastly, for payment providers that are not issuers (act as a bank for the consumer), there is less concern for compliance and risk management with this model, because the partner financial institution have the appropriate regulatory licenses and core competencies to support payment transactions both small and large, as well as in‐border and cross‐border. The challenge with this business model is that there is more friction in completing a transaction



•Owns mobile account with Carrier

Merchant•Generates bill for transaction and sends to Payment Provider

•Uses software to authenticate and process payment account information

Acquirer/Payment Network•Provides access to Payment Network to Merchant

•Intermediary between Merchant and Carriers

•Pays Merchant •Bills Carrier for Consumer's purchase

Issuer (Carrier)•Provides mobile services to Consumer

•Authorizes or declines bill from Payment Provider

•Pays Payment Provider with Consumer's mobile account funds



Acquirer/Payment Network•Retains $1

Issuer•Retains $2.50



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as more parties are involved. Furthermore, consumers must have access to banks in most cases for this model to work. This poses a problem for the unbanked consumers that are either too young to have a relationship with a bank or do not have those services available. Secondly, because the mobile service providers are relegated to only providing mobile data services, their lack of attractive economics in the value chain could potentially delay or curb the adoption of this payment method.

Advantages: Disadvantages: • Low transaction fees (~3%) • Full support for cross‐border/ foreign

currency transactions

• Requires a bank account • Limited potential customer base

Best used for: Vendors: • Remittances • Physical goods • Alternative to cash • Transactions > $5

• Paypal • Obopay • Xoom


Figure Bank billing valuechain



•Owns account with bank

Merchant•Generates bill for transaction and sends to Payment Provider

•Uses software to authenticate and process payment account information

Acquirer/Payment Network•Provides access to Payment Network to Merchant

•Intermediary between Consumer and Merchant accounts

•Pays Merchant•Debits Consumer's bank account or stored value account with Payment Provider

Issuer (Bank)•Provides banking services to Consumer

•Authorizes or declines debit transaction from Payment Provider

•Pays Payment Provider with Consumer's bank account funds



Acquirer/Payment Network•Retains $3.15 ‐ $2.70

Issuer•Retains $0.05 ‐ $0.50


RK Consulting | [email protected] | www.linkedin.com/in/reikasai | Mobile Payment Ready for Rapid Growth

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Mobile Payment Ready for Rapid Growth The market enablers and drivers for mobile payments have been categorized to be those that impact the supply and those that impact the demand of mobile payment services. The following is a summary of those factors:


Market enablers Carriers are investing heavily in next generation services that generate new revenue streams such as mobile payment to stabilize declining customer ARPU (average revenue per user). In developed markets, carriers are under considerable pressure to maintain ARPU despite subscriber saturation and downward pricing pressure from the marginalization of their services. Wireless Intelligence estimates North America carrier’s ARPU has been flat at around $51 since 2006, and Western Europe has been falling by 5.4% CAGR over the last three years (Wireless Intelligence, 2009).

Figure Next generation mobile apps needed to sustain ARPU

•Carriers investing in applications to combat declining ARPU•Faster and more ubiquitos mobile data services•Mainstream adoption of smart‐phonesEnablers

•Improved user experience with mobile e‐commerce•Advances in distribution and consumption of digital media•Skyrocketing use of virtual goods in games and social networks

Drivers



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In addition, the rapid deployment and adoption of mobile broadband data services across the globe will fuel growth for a variety of mobile services that will pull mobile payment along. A similar parallel has already been witnessed in the e‐commerce industry, in which its growth was due to the adoption of fixed broadband data services. 3G Americas reports over 60% of all mobile subscribers have access to high‐speed packet access (HSPA) networks (3G Americas, 2009). Wireless Intelligence reports there is currently over 4 billion mobile subscribers of which 200 million use broadband mobile data services. (In contrast, the global desktop PC user market only accounts for 1/3 the global mobile phone user market.) Forecasts project by 2013, there will be 5.8 billion mobile subscribers of which 1.1 billion (19%) will use broadband mobile data services (Wireless Intelligence, 2009).

Figure Mobile broadband to reach 2 billion users by 2014

Lastly, smart phones also play a critical role in the adoption of mobile payment. While there are many mobile payment providers that do not require smart phones, many of the mobile applications that use mobile payment do. Gartner reports 14% of all new mobile phone sold are smart phones (Gartner, 2009), and Ovum forecasts this figure to be 29% by 2014 (Ovum, 2009).



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Figure Rapid growth of Smartphone users

Market drivers Mobile services such as mobile e‐commerce will directly drive the adoption of mobile payment. Mobile e‐commerce is a sub‐segment of the larger e‐commerce market, which is currently growing at 8% CAGR from 2008 to 2013, and represents $451 billion in revenue for 2010. (Morgan Stanley, 2009) The US represents $193 billion in revenue from e‐commerce for 2010, which is 4% of all US commerce. Mobile e‐commerce in the US is not as robust yet, with sales only representing $21.8 billion, which is mainly driven by sales of digital media. Japan is showing significant uptake of mobile e‐commerce and mobile payment, with Rakuten Ichiba, the leading online shopping mall, driving over 18% of its sales through mobile handsets. Japan is the most advanced mobile market and is a leading indicator for adoption of advanced mobile applications for the rest of the world.

As stated above, much of mobile e‐commerce revenue is driven by sales of digital media. The continued improvements in being able to easily acquire digital media assets on mobile phones will accelerate the adoption of mobile payment. In the past few years, there have been significant innovations around the ability to purchase and instantly consume books, DVDs, music, and games on mobile devices. The carrying medium has been shifting from physical (hardcover book and CD disk) to digital files (Amazon Kindle eBook and mobile app‐store download). The rapid consumption of these digital media assets has been enabled by the adoption consumer electronics that have fixed and mobile broadband data services. Market leader Apple, has reported over 6 billion downloads of games, music, and videos from its iTunes service. While Apple and Amazon have significant market share in digital video, music and publications, there are other segments in digital media such as virtual goods that is rapidly diving adoption of 3rd party mobile payment services.

The skyrocketing adoption of the social games, virtual worlds, and social networks has created a social environment consumers are willing to pay for virtual goods, which are digital items used to personalize and differentiate themselves from their peers. Market traction is strong in Asia, accounting for the bulk of $1.6 billion in revenue for 2009. In contrast, the US is still developing with $600 million in revenue according to Piper Jaffray (Piper Jaffray, 2009). The global market is forecasted to grow 3x to $6 billion and the US market to grow 4x to $2.5 billion in 2014. Much of the innovations in mobile payment have been seen in the social web/virtual goods ecosystem because they are trying to maximize the conversion of paying customers for intangible zero‐COGS virtual goods.

Lastly, the lack of financial services for much of the population in the emerging markets will drive mobile payment services that serve these markets. The success of Vodafone's Kenya subsidiary Safaricom with its mobile money service M‐Pesa has provided evidence in the potential of mobile money services in emerging markets. Since its launch in 2007, M‐Pesa delivered over $3 billion in mobile payment transactions through 8 million registered users. Ovum predicts that the most likely scenario will be a market where service penetration reaches between 30% and 40% of the emerging market's mobile users in 2014 (Ovum, 2009). One of the key assumptions for the uptake of mobile money services in this



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market is the relatively low penetration of access to financial services compared to higher and fast‐growing penetration of mobile services.


RK Consulting | [email protected] | www.linkedin.com/in/reikasai | The Remote, P2P, and NFC market segments of Mobile Payment

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The Remote, P2P, and NFC market segments of Mobile Payment Advances in security, pervasive network access and speed, and NFC (near field communications) enable consumers to use this technology to shop easily and securely on the mobile phone, transfer money to friends and family, or accelerate purchases at retail locations. These use cases segment the mobile payment market into three broad categories of mobile payment defined by the recipient (merchant or consumer) and the location (online or brick & mortar) of the payment. We will examine the mobile payment market based on the following categories:

1. Remote mobile payments 2. Peer‐ to‐Peer (P2P) mobile payments 3. Contactless mobile payments


Figure Mobile payment market segments

Remote Mobile Payments This form of payment is characterized by the use of the mobile phone to execute a payment between a customer and a merchant for goods and services in an online environment such as an Internet e‐commerce site, social network site, or networked video game. This market segment is highly fragmented with participants differentiating on the technology used to execute the payment transaction (Premium



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SMS, SMS, mobile web/applications, and mobile wallet) and the fulfillment of payment (carrier billing, financial institutions, and credit card networks.) The following sub‐segments in remote mobile payments have been identified based on technology and payment fulfillment.

• Premium Rate SMS (PSMS) Premium rate SMS is the most established form of remote mobile payment. Vendors providing low‐value digital assets such as ringtones, wallpapers, and games use PSMS to charge mobile phone customers in the form of premium rate SMS charges on mobile phone user pre‐paid balances or monthly bills. Example companies include content publisher aggregators Allopass and Netsize, as well as SMS aggregator, wholesaler, and billing services companies Sybase 365 and mBlox. This form of payment, while speedy and simple for the end user (frictionless), is highly uneconomical for vendors with much of the transaction value (50%) shared with the carrier. This economic model is similar to carrier billing relationships described next.

Figure How mBlox works with publishers

• Carrier Billing Carrier billing is a method in which a vendor is able to fulfill payment of the purchase of goods and services using the carrier’s billing relationship with the mobile phone customer. Originally used to support the OTA (over the air) purchase of mobile applications such as a solitaire card game, the market has evolved to support payment of virtual goods and services bought during mobile application use such as buying clothing for a character in a network virtual game. Similar to PSMS transactions, carrier billing is frictionless, but the economics are in favor for the carrier. As such, both PSMS and carrier billing based payment vendors are best suited to support use cases for low‐value, high‐margin, and high‐transaction sales environments such as digital assets and virtual goods and services. Example companies in this segment include payment providers Zong and BOKU.



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Figure How Zong works with Facebook

• Mobile Web/Applications With the advancements in mobile data services and handsets, executing payment on a mobile phone for Internet commerce sites is finally a reality. It is widely known browsing commerce sites on mobile phones is an acceptable user experience. However, the conversion of those potential customers to a purchase is quite low due to the cumbersome process of entering credit card information and other order related information on a phone. Mobile web payment solutions are a natural extension of existing Internet e‐tailors’s payment infrastructure. Solutions in this segment are characterized by a stored profile by the payment provider’s online site that a mobile user authenticates and authorizes its use on a mobile phone to provide a frictionless payment experience. Because billing is typically fulfilled through credit card networks that have minimum transaction fees, this payment scheme is not suitable for low‐



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value digital assets and virtual goods and services, nor is suitable for the credit less, including youth and population in certain emerging markets. Example companies in this segment include Google, Amazon, and PayPal.

Figure How Amazon works on mobile

Strengths Weaknesses • Capital efficient • Challenging to gain economies of scale due

to highly fragmented emerging market with many niches

Opportunities Threats • Online publishers/merchants and

consumers looking for more efficient and economical alternative to debit/credit payment networks

• Publishers and merchants developing proprietary payment features

Peer to Peer (P2P) Mobile Payments P2P Mobile Payments are distinctly different from remote mobile payments given recipients of P2P payment are individuals rather than merchants. Example of a P2P payment is a group of friends splitting a bill of a restaurant bill using their mobile phones to send money to each other. Typically there is a concept of a stored value account/e‐wallet payment scheme. Similar to a bank, vendors provide customers the ability to credit and debit an account hosted by the vendor. Payment is typically



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supported by existing banking infrastructure. Customers can send a payment through not only mobile web/applications, but also SMS messages. Due to the low transaction fees associated with executing transactions on banking infrastructure, this payment scheme could support both low and high‐value goods and services. However, similar to mobile web schemes, P2P schemes have challenges to support youth and certain emerging markets due to these customers being under‐banked/un‐banked. Example companies in this segment include Obopay and Paypal.

Figure How to send money with Paypal

A sub‐segment of this market is mobile remittances where immigrant workers send money to their home country using their mobile phones in place of Western Union and other money transfer services. Recently, a variety of Internet and mobile services have launched to support this market and partner with these transfer services to execute the funds transfer. While the P2P mobile payments and P2P mobile remittances models of transferring money are similar, P2P mobile remittances are different due to cross‐border nature of the transactions and the associated money currency exchange that is typically required to consummate the transfer. Examples companies in this segment include Western Union and Xoom.

Strengths Weaknesses • Large and well‐defined existing market • Requires local knowledge and

local/international presence due to regionalized requirements

Opportunities Threats • The lack of viable alternatives to financial

services for the unbanked in both developed and emerging markets

• Existing remittances leaders (Western Union and MoneyGram) have significant economies of scale to create competitive barriers



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Contactless Mobile Payments (NFC) Contactless Mobile Payments is well established in Japan and is being tested in pilot deployments in the U.S. by the major credit card networks. This payment method involves the use of NFC (near field communications) technology in which a mobile phone or a thin plastic card with a radio frequency emitting chip sends payment information to a nearby receiver placed at a physical payment location such as a gas station island, market checkout stand, or train station turnstile. This solution allows customers to experience a frictionless payment by waving their phone or card, which automatically pays the merchant with credit or debit funds. It is ideally used as a replacement for cash purchases. Japan has successfully deployed this solution countrywide for several years, but other western economies have lagged due to resistance by retailers to upgrade their existing credit card processing terminals. Example companies include ViVOtech who supply the NFC chip technology and NFC POS (point of sale) terminals, Nokia, and Visa, American Express, and MasterCard.

Figure Completing a POS transaction with a NFC enabled mobile phone

Strengths Weaknesses • Large and well‐defined existing market • Requires a hardware component that must

be distributed and setup for both consumers and merchants

Opportunities Threats • Merchants looking for alternatives for

high‐transaction costs for current debit/credit payment networks

• Existing payment network leaders (Visa/MC) have significant economies of scale to create competitive barriers


RK Consulting | [email protected] | www.linkedin.com/in/reikasai | Market Sizing and Forecasts

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Market Sizing and Forecasts The mobile payment sizing and forecast includes estimate for the remote, P2P, and NFC market segments. We estimate the total addressable market for mobile payment is $13 billion in 2010, growing to $27.9 billion in 2014.

Source: RK Consulting, Morgan Stanley, Piper Jaffray, Juniper Research

Figure 2010E to 2014E mobile payments market forecast

Mobile Payments Forecast

(In millions) 2010E 2014E

e‐Commerce Physical Goods1 $415,000 $554,000

X Mobile Market Share 2% 10%

Total Mobile e‐Commerce Transaction Value $8,300 $55,400

X Commission Rate 3% $249 3% $1,662

Mobile Digital Media2

Add Music $12,000 $15,000

Add Games $7,500 $10,000

Add Video $5,000 $9,000

Add Infotainment $5,000 $5,000

Add Adult $3,000 $5,000

Add UGC/Social Media $2,000 $5,000

Add Gambling $500 $3,000

Total Mobile Digital Media Transaction Value $35,000 $52,000

X Commission Rate 20% $7,000 20% $10,400

$249

$7,000

$124

$5,280

$350

$13B 2010ERemote‐eCommerce

Remote‐ Digital Media

Remote‐ Virtual Goods

P2P

$1,662

$10,400

$180

$12,000

$3,750

$27.9B 2014E

(In Millions $)



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Virtual Goods Total Transaction Value3 $3,100 $6,000

X Mobile Market Share 20% 30%

Total Mobile Virtual Goods Transaction Value $620 $1,800

X Commission Rate 20% $124 10% $180

Total Remote Payments Addressable Market $7,373 $12,242

Mobile Transfers and Remittances Total Transaction Value4 $44,000 $100,000

X Commission Rate 12% $5,280 12% $12,000

Total P2P Payments Addressable Market $5,280 $12,000

Mobile Tickets, Food, and Beverages Total Transaction Value5 $7,000 $75,000

X Commission Rate 5% $350 5% $3,750

Total NFC Payments Addressable Market $350 $3,750

Total Addressable Market $13,003 $27,992

1Morgan Stanley State of e‐Commerce 2009, 2Juniper Research Mobile Entertainment in a Recession 2009, 3Piper Jaffray Pay to Play: Paid Internet Services 2009, 4Juniper Research Mobile Money Transfers & Remittances 2009, 5Juniper Research NFC Mobile Payments & Marketing Opportunities 2009

Source: RK Consulting, Morgan Stanley, Piper Jaffray, Juniper Research

Table Mobile payments market forecast model

Forecast methodology The basic model used to estimate the total addressable market for mobile payment was top‐down calculation of estimating the total transaction value of each market segment executed on a mobile phone then multiplying a commission rate to determine the total revenue the mobile payment market could generate.

Figure Topdown model of mobile payments market

Forecast assumptions The remote payments market is an aggregate of purchases of physical goods through e‐commerce, digital media and virtual goods. Using Morgan Stanley’s forecasts for global e‐commerce and subtracting the digital media and virtual goods markets, we estimate global e‐commerce total revenue to be $415

Total Transaction Value

Total Mobile Transaction Value

Total Transaction Fees



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billion for 2010 and $554 billion in 2014 (Morgan Stanley, 2009). We estimate that mobile payment should grow from 2% to 10% market share, using Asia’s current metrics as a proxy of what is to come world‐wide. This represents an estimate of $8.3 billion in 2010 and $55.4 billion in 2014 for total value of global mobile e‐commerce transactions. Total transaction fees will be approximately $249 million in 2010 and $1.6 billion in 2014, which represents an industry norm of a 3% fee due to credit/debit or bank billing being the payment pathway of choice.

Digital Media forecast has been separated from the larger e‐commerce market to illustrate its current market traction with mobile payment. Mobile industry research firms Juniper Research and Pyramid Research forecast global mobile digital media total revenue to be $35 billion in 2010 and $52 billion in 2014. Total transaction fees will be approximately $7 billion in 2010 and $10.4 billion in 2014, which represents a conservative estimate of a 20% fee due to carrier billing being the payment pathway of choice.

Similar to the digital media market, the virtual goods market is also exhibiting traction with mobile payment, and as such has been separated from the larger e‐commerce market. This market was non‐existent until recently in the U.S. Piper Jaffray forecasts the global virtual goods market to be $3.1 billion in 2010 and $6 billion in 2014. (Piper Jaffray, 2009). We estimate mobile market share to be significantly higher than other segments due to several key vendors providing payment services to the virtual goods leaders. Based on 20% to 30% mobile market share in 2010 and 2014 respectively, total value of global mobile virtual goods transactions will be $620 million in 2010 and $1.8 billion in 2014. Total transaction fees will be approximately $124 million in 2010 and $180 million in 2014, which represents a decrease in fees from 20% to 10% due to an expected decrease in carrier‐billing commission costs and the availability of more cost‐competitive bank‐billing options for consumers.

The second largest market is the P2P transfers and remittances market. The World Bank forecasts global remittances to developing countries to be $267 billion in 2009 and $341 billion in 2014. (The World Bank, 2008). Juniper Research forecasts mobile global remittances to grow from $44 billion in 2010 to $100 billion in 2014. Total transaction fees will be approximately $5.3 billion and $12 billion in the same time period, which represents a 12% mean fee for existing remittances services.

The NFC market is expected to have the most growth within the next four years. Juniper Research forecasts mobile NFC payments used to purchase tickets, food, and beverages to be $7 billion in 2010 and $75 billion in 2014. NFC transaction fees are similar to credit/debit transaction fees. We estimate fees will be 5% which represents $350 million and $3.7 billion respectively.


RK Consulting | [email protected] | www.linkedin.com/in/reikasai | Selected Vendors in Mobile Payment Segments

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Selected Vendors in Mobile Payment Segments

Remote mobile payment market map The remote mobile payment market has the largest number of participants due to their focus on providing payment solutions for commerce. The following chart depicts the current competitive landscape of the market:


Figure Remote Mobile Payment competitive landscape

The following are selected profiles of market participants:

• mBlox company profile

Company Description Company provides carriers reliable message delivery, financial settlement and billing solutions. Its suite of services allow major corporations to handle mobile billing through WAP and SMS technologies, as well as integrate inbound SMS messages from their clients into existing applications and bulk



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message outbound SMS content. HQ Sunnyvale, CA Investors Trident, BofA, Norwest, Scale, Avanti, DAG Employees/Financials 260/2009P Revenue $100M Customers MySpace, Adidas, NBA and customers around the world in 180 countries Considerations • One of the largest mobile transaction network worldwide with

connection to 500+ mobile operators in 180 countries • Processes over $500M in mobile transaction in 2008 • Formed partnership with MySpace to power the site’s SMS alert

program across a variety of mobile carriers • Low operating margin

• Zong company profile

Company Description Mobile payment solution provider that allows users to pay for digital media and other goods on online gaming and social netwoRKng web sites using their mobile phone number.

HQ Palo Alto, CA/Geneva, CHE Investors Advent Venture Partners, Newbury Ventures Employees/Financials 60/2008 Revenue $38M Customers Facebook, Offerpal, IMVU, Habbo, Meez, Gaia, Super Reward, RockYou,

Playfish, Blizzard Considerations • 10x conversion rate vs. traditional payment methods such as credit

cards • Highly scalable platform that processed over 170M mobile transaction

in 2008 • Direct connectivity to all major carriers in the U.S. and Europe

• boku company profile

Company Description Company enables users to make micropayments for games and applications without needs for credit card or bank account. Users enter their cell phone number on the site, reply to a BOKU text message and then all virtual charges are automatically charged to the user’s monthly cell phone bill.

HQ San Francisco, CA Investors Benchmark, Khoshla Ventures, Index Employees/Financials 30/ Not Available Customers Hi5, Aeria Games, Gambit, Jambool, Meez, Offerpal, Playfish, Slide, Super

Rewards



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Considerations • BOKU was the result of merger between Paymo and Mobillcash • Global presence with services accessible in 45 markets around the

globe, including Europe, North and South America, the Middle East, Africa and Asia

• Strong customer base, and in particular, signed up Hi5 to allow the social network’s user to purchase virtual currencies through BOKU

• Aepona company profile

Company Description Aepona entered the mobile payments market through its acquisition of Valista in July 2009. Valista Operator Payments Service acts as a bridge between external parties and the carrier’s billing infrastructure. It supports multiple payment models including integration with billing and prepay systems, credit card, banking networks, Paypal, and stored value. Developed in partnership with the GSMA, Aepona provides the reference design and implementation of the mobile payments standard for carriers.

HQ Belfast, Ireland Investors Amadeus Capital, Polaris, Trinity, Innovacom Employees/Financials 180 / 2008 Revenue $25M

Customers KPN, France Telecom/Orange, Sprint, E‐Plus, Telecom Italia, Sprint, BT, TELUS Considerations • Recent entrant into the carrier billing space through acquisition of

Valista • Strong relationship with the carriers, including some of the world’s

largest broadband operators • Combined entity provides an end‐to‐end solution for the Network as a

Service business model

• ClairMail company profile

Company Description Provider of 2‐way mobile banking and payments solutions. The company offers a comprehensive 2‐way mobile platform for banking, payments and card services to financial institutions. ClairMail can generate and send mobile alerts with bill payment details directly to consumers and allows consumers to immediately pay by replying to the alert.

HQ Novato, CA Investors Norwest, Outlook Ventures, JAFCO Employees/Financials 75 / Not Available Customers PNC, City Bank, Bank of Stockton, Veridian Credit Union, State Bank, 1st



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National Bank of Scotia Considerations • Mobile payment service similar to PayPal and Google Checkout

• Company’s technology synchronizes with any phone and integrates with mobile devices’ existing software and standard capabilities, making the consumer experience simpler and shortening the learning curve

• Revenue grew by 200% in Q2 ‘09 vs. Q2 ‘08

• Billing Revolution company profile

Company Description Company provides technology that enables secure credit card purchases from a mobile phone. Merchants use Billing Revolution’s proprietary “single‐click” technology to provide a mobile optimized purchase experience, allowing users to make credit card purchases without a user name or pin code requirement.

HQ Seattle, WA Investors SK Telecom Ventures Employees/Financials 10 / Not Available Customers MoVoxx, Kraft, Sears, and 1‐800‐Flowers Considerations • Company charges a 3.5% transaction fee plus 50 cents per transaction

– not ideal for mobile apps that are sold for $1 or $2 • With commerce powered by the company, retailers can bypass large

carrier fees of 40%‐60% • Recently partnered up with MoVoxx, a mobile advertising network

that leverages SMS messaging to place commerce ads on mobile phones



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P2P mobile payment market map The P2P mobile payment market is equally competitive to the remote mobile payment market, as it addresses not only remittances market, but also mobile financial services market. Common go to market strategy for remittance players have been collaboration with money transfer organizations such as MoneyGram and G‐Cash.


Figure P2P Mobile Payment competitive landscape


• obopay company profile

Company Description Company’s solution allows consumers and businesses to purchase, pay, and transfer money through any mobile phone using Obopay’s mobile application, text message, mobile Web, or Obopay.com. The company also has the ability to issue prepaid MasterCard debit cards to as a method of payment.



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HQ Redwood City, CA Investors Qualcomm, Redpoint, Onset, Citigroup, Nokia, SG Employees/Financials 125 / Revenue $1.8M Customers Citibank, Fidelity, MasterCard MoneySend, Tata Indicom, Bancorp, Verizon,

AT&T, YES Bank Considerations • Recreating the mobile version of PayPal’s P2P model for transferring

funds between individuals without the need for a credit processing system

• Company is targeting the unbanked population in India and other parts of the world where a large portion of the population don’t have bank acct

• Obopay’s prepaid MasterCard cards are accepted at 24M merchant locations and over 1.1M ATMs around the world

• Both the sender and receiver of funds must have Obopay account

• Xoom company profile

Company Description Xoom is an international money transfer service that allows users to transfer funds from its website to friends and family who are off line and in other countries. Xoom transactions do not require bank accounts on either side and users can use funds in their PayPal account for the payment.

HQ San Francisco, CA Investors Sequoia, NEA, DAG, Fidelity Ventures Employees/Financials 75 / Profitable Customers Available in 40 countries, including Argentina, China, India, Mexico, Brazil,

Chile, Philippines Considerations • Remittance fees ranging from 4% for small transactions to 1.1% for

large ones, substantially lower than Western Union • 66,000+ cash pick up locations worldwide • Philippines is the company’s largest market today followed by Latin

America • Company is able to predict revenue with <1% error rate



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NFC mobile payment market map The NFC mobile payment market is highly fragmented with existing payment networks, carrier branded services, and niche players.


Figure Contactless Mobile Payments competitive landscape


• Vivotech company profile

Company Description ViVOtech provides contactless/NFC payment software, RF chips, over the air card provisioning, promotion, and transaction management infrastructure software, and contactless readers/writers that enable consumers to make payments with radio frequency‐enabled credit cards, debit cards, key fobs, and NFC‐enabled mobile phones.

HQ Palo Alto, CA



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Investors Alloy Ventures, DFJ, Nokia, First Data, Motorola Employees/Financials 80 / Not Available Customers Citibank, VISA, Sprint, Taipei Fubon Bank, Mastercard, Chase, KPN, Jack in

the Box Considerations • Complete software and hardware infrastructure play

• Strong partnerships with ecosystem players including credit card companies and banks

• Widely field tested but commercial roll out isn’t expected until early 2010

• BlingNation company profile

Company Description Bling Nation works with banks in local communities to set up the infrastructure required for its Redi Pay Bling mobile payments service. NFC stickers are provided to customers to be attached to mobile phones and NFC readers are provided to local merchants.

HQ Palo Alto, CA Investors Lightspeed, Meck, Camp Ventures Employees/Financials 28 / Pre‐revenue Customers State Bank of La Junta, Park State Bank of Woodland Park Considerations • Strong Advisory Board including John Reed, former Chairman of NYSE,

as well as former Presidents of American Express and VISA • Requires the deployment of NFC sticker and reader by both the buyer

and merchant


RK Consulting | [email protected] | www.linkedin.com/in/reikasai | Conclusion 31

Conclusion The mobile payments market is characterized by two business models underpinned by leveraging the billing relationship with the consumer for mobile phones or banks. While carrier billing models have a larger potential customer base due to mobile ownership being almost three times more than bank account ownership, the carrier billing economics are unfavorable for most applications. Until carrier billing fees become in line with bank billing fees, carrier billing based payment providers will be limited to high‐margin/zero‐margin digital goods markets. For the rest of the market of low‐margin tickets, food, and beverages, as well as high value big‐ticket items, then a bank billing based payment provider is the only economical solution.

The mobile payment market is split into the remote, P2P, and NFC segments. The P2P and NFC markets are well established existing markets, but are extremely large and thus have tremendous potential. However, each has incumbent players with significant market share to create formidable competitive barriers. In addition, the additional resources required for international presence and hardware deployment for P2P and NFC respectively, make each a challenging market to succeed in. On the other hand, the remote payment market is highly fragmented, but is evolving and growing very rapidly. This segment is the most promising since there is the ability to develop hybrid services that leverage both carrier billing and bank billing, thereby creating a company that can leverage both the large customer base of the carriers with the favorable economic terms with the banks. It is our belief that those companies that can execute this hybrid strategy will be well positioned in the market for explosive growth.


RK Consulting | [email protected] | www.linkedin.com/in/reikasai | <Works Cited 32

Works Cited 3G Americas. (2009, August 20). GSM‐HSPA Achieves Nearly 20 Percent Annual Growth in the Americas Despite Economic Uncertainty. Retrieved from http://www.3gamericas.org/index.cfm?fuseaction=pressreleasedisplay&pressreleaseid=2451

Gartner. (2009, August 12). Retrieved from http://www.gartner.com/it/page.jsp?id=1126812

Morgan Stanley. (2009). Morgan Stanley State of eCommerce August 2009.

Ovum. (2009, July 5). Retrieved from http://www.enterpriseinnovation.net/content/ovum‐smartphones‐lead‐handset‐market

Ovum. (2009, July 30). Mobile money to become a mass‐market service by 2014: Ovum. Retrieved from http://www.thestandard.com/news/2009/07/30/mobile‐money‐become‐mass‐market‐service‐2014‐ovum

Piper Jaffray. (2009). Pay to Play: Paid Internet Services.

The World Bank. (2008). Migration and Development Brief, Outlook for Remittance Flows 2008‐2010. The World Bank.

Wireless Intelligence. (2009). Asia Pacific Anaylst Briefing.

Wireless Intelligence. (2009, 9 11). Reported ARPU Figures Too Low, says Wireless Intelligence. Retrieved from Mobile Marketing Magazine: http://www.mobilemarketingmagazine.co.uk/2009/09/reported‐arpu‐figures‐too‐low‐says‐wireless‐intelligence.html


RK Consulting | [email protected] | www.linkedin.com/in/reikasai | About the Author 33

About the Author Rei Kasai has over 11 years of experience in high‐growth VC‐backed software companies in Silicon Valley. Most recently, he served as a product management lead at Dexterra, an enterprise mobile applications company that raised over $100M in funding and grew to over 250 employees. Prior to Dexterra, he was with consumer mobile web company Net6 (acquired by Citrix for $50M) and internet‐based CRM company Octane Software (acquired by E.piphany for $3.2B). Currently, he is a start‐up consultant on issues of strategy, operations, and technology for mobile and cloud services companies, as well as a venture advisor for mobile and cloud to Sierra Ventures, a venture capital firm with over $1.5B under management. Rei has an MBA from the University of California at Berkeley's Haas School of Business.