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INFORMATION, COMMUNICATIONS & ENTERTAINMENT

Mobile Payments in Central & Eastern Europe

KPMG CENTRAL AND EASTERN EUROPE

AuthorshipThis report is the combined effort of the Information, Communications andEntertainment industry group in KPMG Central & Eastern Europe. The followingindividuals contributed to this report:

Pavol Adamec – KPMG in Slovakia

Jaroslav Burilicev – KPMG in the Czech Republic

Tamas Hegedus – KPMG in Hungary

Valentin Ivanov – KPMG in Bulgaria

Greta Kozma – KPMG in Hungary

Veiko Kullaste – KPMG in Estonia

Kirils Maksimovics – KPMG in Latvia

Tom McDaniel – KPMG in Central & Eastern Europe and the CEU Business School

Andrea Nestor – KPMG in Hungary

Mihai Rada – KPMG in Romania

Wojciech Zawada – KPMG in Poland

Preface 4

Introduction 5

Business models and the m-payments value chain 8

Emerging business models in CEE 10

Regulations, interoperability and security 19

The road to somewhere? 24

Conclusions 28

Appendix: Adoption of EU regulations in CEE 31

Contacts 34

Content

4 Mobile Payments in Central & Eastern Europe

To better understand what’s changing business in the21st century KPMG continuously analyzes the key

drivers effecting the Information, Communications andEntertainment industry (ICE) - ranging from consumerpreferences and new technologies, to new business modelsand the evolution of human capital. Our practice is currentlyfocused on the convergence of the most significant sectors,products and services, all of which are enabled by advanceddigital technologies.

This report “Mobile Payments in Central & Eastern Europe”attempts to provide a closer look at the development ofmobile payments in the Central and Eastern Europe (CEE)region. This promising and innovative service combines theadvantages of both modern banking andtelecommunications technology to bring a variety of mobilefinancial services to both consumers and businesses.

In order that our clients and business partners can trulyunderstand the development of this dynamic new market,KPMG has analyzed the key initiatives which are drivingmobile payments in the region. Our goal is to summarizethe current state of development of m-payments in theregion identifying some common trends as well as themajor differences among the different local markets withinCEE. To accomplish this goal we studied the leadingexamples of m-payments services in the followingcountries:

• Bulgaria • Lithuania

• Czech Republic • Poland

• Estonia • Romania

• Hungary • Slovakia

• Latvia

In looking at the wide variety of initiatives present in theregion one of our key objectives is to identify those serviceswhich are either the most successful across all markets inthe region, or which are deemed more likely to succeedthan others. At the same time, we attempted to delve intothe root causes for why the same or similar initiatives,which were successful in one country, tended to fail inanother.

Ultimately, however, this report is not aimed at providing afinal judgment on which players, products or markets willultimately fail or become the most successful. Rather abasic lesson from our analysis is that similar initiatives maysucceed or not in a market largely due to the localconditions (e.g. the stage of development of the bankingand telecom sectors) and adopted business models.

We have also briefly surveyed the regulations for thosecountries covered in the report. Although the EU regulatoryregime forms the underlying framework for all the countriesand provides directions for all the local laws to follow, thereare - and probably always will be - differences in localregulations among CEE countries.

Finally, when considering the different m-paymentsapplications, we were not surprised to see that CEEmarkets tend to follow the fundamental trends observedworld-wide. This is true for both the main drivers of successas well as for the hurdles facing each of these initiatives.

While surely many questions regarding the development ofm-payments are left unanswered in this report, we hopethat it brings the topic closer to the reader interested notonly in m-payments, but also in the development of the CEEmarkets.

Kind regards,

Preface

Jerzy Kalinowski Wojciech Zawada

Partner, Advisory Senior Manager, Advisory

Head of ICE CEE Group

Mobile Payments in Central & Eastern Europe 5

M-payments are payments made using mobile handsets and other devices,either to directly purchase or to authorize payments for goods and

services. Such devices are playing an increasing and evolving role in the widerdevelopment of electronic payment systems world-wide.

There are currently two distinct m-payment channels:

• Pay-as-you go or ‘contactless card’ technologies

• Text messaging systems using the so-called “Over the Air” technology.

The first are used mainly for in-store payments (i.e. in shops, restaurants etc.),when a POS reader is required. Due to the ease of use and the swift executionof transaction, the technology is gaining a wide acceptance of customers. Thissystem is witnessing increasing availability and user acceptance among publictransportation providers. Contactless cards work as “e-wallets”, where money isstored on a virtual account. Text messaging systems are suitable for remotepayments and applied both for micro- and macro-payment solutions, byindependent service providers, content providers as well as banks.

The mobile payment market is segmented into categories that are combination ofdifferent purchase places (local and remote) and amount size (low and high amount):

Remote payments cover the online payments in which a mobile phone is used asa device to authenticate personal information stored remotely. Remote paymentscan be used for transactions that take place locally i.e. face to face, parking andvending machine transactions. Low-value transactions usually are recorded on theuser's mobile bill and the merchant is reimbursed by the mobile operator. Thisway of payment is mainly used for small transactions as the level of security islow – i.e., network authentication only. High-value transactions are processed indifferent ways using debit/credit card or wallet/stored value accounts. Securityrequirements for this type of payments are an important issue that's why

Introduction

Low Amount High Amount

Local Purchase Place Face-to-Face Retail Shopping (with or withoutPOS terminal)

Parking Person-to-Person (P2P)

Vending Machines

Remote Purchase

Place

Content Purchase(Ringtones, Games, News)

Bill Payment

Fund Transfer (P2P)

Internet Payments

Mobile Shopping

Prepaid Accounts Top-up


1 More information can be found in KPMG Report 2007, Mobile Payments in Asia Pacific.

authentication via PIN code is required. The transport of high-value transactions isencrypted over WAP, IVR or SMS.

Overall, member countries of the European Union (EU) are a very diversifiedgroup, and this is equally true with respect to the m-payment sector. Thedevelopment across the EU has not been homogeneous, and is unlikely to be soanytime soon. Among the countries in the CEE region only Estonia is perceivedas being beyond the initial stage of development. The majority of CEE countriesare at the bottom of the ladder.

Initiatives which have been driven globally show that there is no onecomprehensive m-payment marketplace representing the bulk of the “Initial” or“Not Developed” stages. Because m-payments represent the furtherdevelopment of electronic payments, there is a wide range of opportunities form-payments across different industries as well as applications. In our opinion m-payments in the CEE region has seen promising developments in sectors such astransportation, retail and media, and can include commercial transactions on-lineas well as off-line, selling content via mobile phone or even advertising1. Althoughthere is a significant number of varying mobile payments initiatives across theglobe, the mobile payments market in Europe is still quite fragmented.

There are both positive and negative aspects of this decentralized approachreflected in the development of standards. On one hand, carriers can still goahead with their own individual offerings based on local needs and businessenvironments. On the other hand, the lack of a common platform causesinteroperability problems in inter-platform and international transactions, limitingthe markets for each service provider.

Though it is clear that Central and Eastern Europe is perhaps a step behind themore developed nations of Western Europe, the pace of change in the ‘NewEurope’ is extremely dynamic on all fronts including the commercial, regulatoryand political arenas. For this reason, our goal when carrying out this research isnot only to identify the most interesting initiatives for our client and businesspartners, but also to uncover those trends which will provide insights into thepotential further developments in this unique marketplace. Additionally, as mostpayment solutions are targeted at specific countries and driven by localrequirements, this report also identifies the distinct patterns of adoption that canbe seen in the different markets within the region.

The main questions we attempt to answer in this report are as follows:

• What were the most interesting initiatives relating to the m-payments in the region?

• Which business models are driving these initiatives?

• How are these different models developing, and in which countries?

• Who are the key players along the value chain?

Note on methodology: This report, which focuses on mobile payments in Central & Eastern Europe, isan extension of an earlier study on mobile payments in Asia. In carrying out thisresearch an international team of practitioners from local KPMG offices, workingwithin the Information, Communications and Entertainment industry carried outsecondary research with the local markets mentioned in the introduction of thisreport. Our final analysis and interpretations are based on publically available datafrom market research firms, the media and KPMG International, which were usedto supplement KPMG’s proprietary industry knowledge and provide qualitativeexamples in support of the analysis. We would also note that our research wasconducted in the Spring and Fall of 2008, prior to the full scale unfolding of thefinancial and economic downturn of 2008. This is a potentially limiting factor toour survey.

Business models behinddifferent transaction types2

This section outlines five types ofmobile payments, each driven bydifferent incentives and revenueearning opportunities.

Business-to-consumer (B2C) mobile

payments

The B2C model is the business modelwith the highest potential to enhancecommerce through mobile payments.B2C m-payments can rely on either anoperator-centric or bank-centric model.The key features of B2C m-paymentsare integration onto (or access from) amobile handset interface, and apayment for the direct acquisition ofgoods or services. The handsetinterface is the crucial business driver,allowing consumers to use theirhandsets to pay for everything fromgroceries and lottery tickets toinsurance premiums and tax bills. MostB2C solutions provide an alternative tocash transactions and are, therefore,gaining more and more attention dueto their potential to fundamentallychange consumer behavior. The designof the handset interface is animportant success factor for many B2C

initiatives.

Business-to-business (B2B) mobile

payments

B2B and C2C solutions are largely beingdriven by the telecommunicationsindustry’s fixed-to-mobile convergenceand therefore mobile transactions aresimply supplementing, or extending,existing transaction practices. B2Bsolutions are focused upon facilitatingbusiness processes rather than on end-payment for goods or services. Thisencompasses specific industry solutions(for example, logistics processesutilizing technologies to track and payfor shipments and inventory), and thirdparty platform aggregation and billingsolutions (including payment gatewayswhich do not themselves own content,but provide platforms for accessingcontent). These types of m-paymentsare still relatively small-scale at present.

Consumer-to-consumer (C2C) mobile

payments

C2C transactions occur directlybetween end-customers, across abusiness platform specificallyestablished to facilitate the exchange.One example that stands out inparticular is eBay. The company’spayments arm, Paypal, has greatlyfacilitated C2C e-commerce by holding

buyers’ money in escrow accountsuntil the customer confirms receipt ofgoods, thus removing the risks of non-delivery or of faulty goods. With such asubstantial platform to build on, Paypalhas also been the leading playerglobally in C2C m-payments. Locally,however, an increasing number of newplayers have been springing up in thelast few years, but mainly they provideeasier payments made over theInternet. These smaller players haveyet to enter the m-payment market,but expect that to change in thecoming years as the technologybecomes more ubiquitous.

Person-to-person (P2P) mobile

payments

P2P m-payments are privatetransactions between two individualsand are typically SMS-based. This mayinvolve the dissemination of top-upcredits (for example transferringminutes or minutes-value in exchangefor a good or service), an m-bankingtransfer of funds, or digital barter suchas in the exchange of content orvirtual world goods. Thus, commercialplatforms may be involved in thetransaction, but the transaction is adirect one from one person toanother.


2 Presented classification of business models is based on KPMG’s 2007 Report, “Mobile Payments in Asia Pacific”.

Business models and the m-payments value chain

Peer-to-peer lending models have alsobeen springing up on this basis, led bythe likes of Zopa in the UK, Prosper(US), Smeva (Germany) and Boober(Denmark). A similar service, PPdai,was also established in China.

Remittance mobile payments

Remittance can be viewed as a subsetof P2P payments, since it is usually aone-way P2P transaction. Examplesinclude a parent using their mobile toremit a taxi fare to their child acrossthe city, or a domestic worker remittinghis monthly wages to his familyabroad.

These five models are more generallycategorized as either commercialtransactions (B2C, B2B, C2C) or privatetransactions between individuals (P2P,remittance).


C2C systems can be a subset of either B2C networks(such as is the case with Amanzon) or B2B networks(such as is the case with Global Sources).

Remittance is categorically a subset of P2P transactions,but the business models emerging around it are worthyof their own categorisation.

B2C

Commercial-based transactions Private transactions

RemittanceC2C

B2B

P2P

We have focused our research in theCEE on both m-payment serviceswhich predominate in the market placeas well as those which represent theleading edge of new business models.Therefore we have purposely tried toavoid overly focusing on services suchas mobile phone pre-paid account top-ups3, content downloads, and PremiumRate services that can be found anyplace in the world, and have beenwidely described in numerouspublications. Our attention is thereforeon other m-payment initiativesdeveloped across CEE, in order tounderstand the following:

• whether or not trends in the CEEregion follow specific trendsobserved in different regions acrossthe globe;

• which group of players is the mostactive in this region (e.g. financialinstitutions, mobile operators orindependent providers);

• to what degree there are similaritiesin m-payment trends among thedifferent CEE countries.

Predominant initiatives inthe region

Premium Rate SMS (added value

services)

An obvious first step into m-paymentsfor the mobile operators has been tooffer “top-up” of pre-paid cardsthrough m-payments, bypassing theneed for producing and distributingscratch cards. As the voice marketmatures, mobile operators are movinginto data services in order to increasemargins and average revenue per user(ARPU). Currently, most of the m-payment systems in CEE concentrateon the so called “Premium Rate SMS”.Mobile operators are very active in thissector by providing services which aregeared toward purchase of digitalgoods such as ringtones, wallpaper,and games. Progress is driven also bythe web-based entities. These servicesuse MNO (Mobile Network Operator)networks and have agreed uponrevenue sharing with mobile operators,where the end-customer is billedthrough the MNO’s monthly phone bill.Among all the initiatives, the revenuesfor these services are the highest.

Transportation solutions

Due to convenience and ease of use ofsuch cards, they are a dominant4

m-payments solution in CEE marketsand will most likely continue to grow.They are present in all countries and fallunder the jurisdiction of municipalities.As yet, it is the most successful and themost widespread initiative. Slovakia’s“Čipová karta”, for example, is acontactless card launched in February2001 by the Bratislava Transport Office,which gained popularity in the capital,Bratislava, and later spread to othermajor Slovakian cities. Additionally,paying for tickets on publictransportation in Bratislava by SMS hasjust been introduced.

Just recently, Orange in Slovakia andthe Slovak Rail company are offering aservice enabling their customers tobuy train tickets via mobile phone. Theonly requirement is to activate the“Orange Teleplatba” service.

The PR SMS ticketing system launchedlast year by the Prague public transportsystem is another example of new m-payment services. Users can send anSMS and within 2 minutes they receivean electronic ticket in the form of anSMS. The Czech Railways is planningto launch a similar service in 2008.


Emerging business models in CEE

M-payment services were launched for the first timein the CEE region in the late 90s. Since then differentinitiatives have expanded in the markets and businesssectors across the region.

3 The emergence of digital top-ups has enabled these digital credits to be transferred between users, thereby creating also avirtual remittance market.

4 Not surprisingly, we have found several similarities to m-payment patterns observed elsewhere in the world. One service thatstands out is the wide and fast acceptance of transportation contactless cards, the first m-payment solution offered in CEE.

Since 22 November 2007, it has beenpossible to pay for Prague publictransport tickets via SMS. Onlyinterchange tickets for CZK 26, validin the inner city zone (P), are availableat this time. The ticket is valid for 90minutes for all types of publictransport -- busses, trams and metro.The new ticketing system enablescustomers to bypass inconvenientticket vending machines, benefitingboth customers and the transportproviders, who might otherwiseexperience invalid fares for thosecustomers unable to purchase aticket. To buy a ticket, the user mustsend an SMS with the text, “DPT”, tothe number 902 06 26. Within twominutes he receives an electronic

ticket in the form of an SMSconsisting of a number with theencoded time of purchase andvalidity. In case the user accidentallydeletes the ticket, he can apply for aduplicate by sending DPTA to thenumber 900 06 06. The systemcharges CZK 6 for the duplicate.Some critics stress that the operatordid not bring added value to the SMStickets as they cost the same price aspaper ones. For instance a similarsystem in Helsinki offers theelectronic tickets 10% cheaper thanthe regular ones, which reflects thedifference between the actual costsof the paper tickets compared to theelectronic ones.

Prague Public Transport SMS Tickets

Poland has also adopted SMS ticketingsystem provided by Transport Authoritiesand Projekt & Parking Serwis Polska Sp.z o.o. under the brand name moBILET,firstly in Poznań, later in other cities. Sofar, these contactless cards are the mostpopular in the Polish transportationsector. The function of contactless cardsas e-wallets is so widely accepted it isencouraging providers to extend thecards’ functionality to include paymentsfor parking, and other goods andservices. Such functionality has beenlaunched by Mennica Polska in Poland.

M-parking

Using m-payments for public car parksis gaining wide acceptance by users inCEE. The model for m-parking is mostlythe same in all countries. Typically,customers receive a password andthrough their mobile phone they canstart and stop the parking payment bysending an SMS. In some cases, suchas Estonia, customers initiate a phonecall. The system will automaticallyregister the duration of the parkingtime and compute the cost which isinvoiced regularly to the client.

M-parking is a definite success story forEMT telecom and Estonia. Starting in2000, nowadays 55-60% of parking salesacross Estonia are generated throughmobile handsets. It has also spread toother Baltic states. According to RigasSatiksme (a state-owned organization,which provides parking places and parkingservices in Riga, the capital of Latvia) thevolume of m-payments grew from 333clients per day in January 2007 to 547 inDecember 2007, a growth of over 64%.

M-parking is also one of a few m-payments services provided inRomania. Individuals in Timisoara, forexample, can use the TelPark system,offered by TPark to pay for parking

fees. M-parking is also the mostnotable mass scale example of m-payments currently in operation inBulgaria. However, due to the lownumber of parking lots in the blue zonein Bulgaria this type of payment is still

relatively small-scale at present, butholds great potential.

In some countries, the business modelfor m-parking has been dominated byindependent service providers (ISPs).

Karta Miejska, a contactless transportcard was launched in Warsaw in 2001by the Warsaw Transport Authority(ZTM) and Mennica Polska SA. Thesolution is based on the MiFaresystem (trademark of NXPSemiconductors), a technologyselected for most contactless smartcard projects in Europe. The cardoperates for buses, local trains andunderground which facilitateseveryday travel.

The aim of Karta Miejska is to becomea regional e-administration instrumentthat will integrate city transport withother ventures like parking fees,theatre tickets and others services.Today Karta Miejska enables paymentsfor all means of the public

transportation in the Warsaw area aswell as public parking. In the nearfuture trials for purchasing transporttickets with mobile phones areexpected in Warsaw.

In 2007, the value of sales for MennicaPolska reached about EUR 69 millionwith these types of tickets generatingover 50% of Mennica Polskarevenues. Recently Mennica Polskahas expanded its offering by installingadditional points-of-sale called “StrefaKarty Miejskiej”. These are located inmost underground stations and manykiosks, and allow the users of KartaMiejska to top-up their transport cardsas well as their mobile phones. So far600 points are open, with 400operated by Mennica Polska.

Warszawska Karta Miejska

The public car parks payment systemis the first m-payment initiative inBulgaria facilitating payments for carparks with the use of a mobile phone.It was implemented by the threemobile network operators, theBulgarian TelecommunicationCompany, EBG.BG, Voicecom,Interactive Media Service, Antima andTelelink.

Starting from October 2007,subscribers of Bulgaria's three mobile

operators (Mtel, Globul and Vivatel),started using the simple SMSmessages to pay their parking fee inany of the "Blue Zone" parking lots inthe capital Sofia.

During the last year, the public parkspayment system has been gainingwide acceptance by Bulgarian users.An average of 800 car owners in Sofiause the service every day and futuregrowth is expected to remain strong.

Public car parks payment system – Blue zone project



EME Zrt. defines itself as a facilitatorand developer of m-paymentsolutions. Payments are generatedfrom a separate pre-paid accountwhich can be topped up from theclient’s bank account or with cash. Thecurrent portfolio includes the paymentof parking fees, highway tickets, visitfees and newspaper subscription. Thecompany plans to continue to addmore and more customers as itsservices take on wider acceptance.

The first service provided by EME wasm-payments for car parking. With thisservice registered clients (approx.50,000) can manage their parking viamobile phone in Budapest and another17 Hungarian towns. Clients have pre-paid accounts from which they pay theamount of parking fee when they usethe parking meter zone. At thebeginning of the parking procedureclients send an SMS or give a callwhich activates the account. At the endthey send an SMS or call again. Thismethod is not only easier, it is morecost effective as well. This is becauseusers are able to pay a minute-basedfee for their parking. Moreover, if acustomer buys a ticket for a fixed timeperiod and wishes to extend, the clientneed only send an SMS.

Buying a highway pass is also part ofEME’s m-payment portfolio, a serviceEME has been providing since 2006in cooperation with ÁllamiAutópályakezelő Zrt. (NationalHighway Managing Plc.). Thepayment method is similar to theservice for car-parking: clients sendan SMS and receive permission fromthe Állami Autópályakezelő Zrtthrough EME’s server, and thepayment is again debited fromclients’ pre-paid accounts.

Another service EME introduced is inthe healthcare sector. The Hungariangovernment introduced the so-calledvisit fee in the health care system in2007. The payment of this fee used tobe mandatory for all patients who goto a general practitioner or to otherhealth care providers. EME Zrt.facilitates the paying of this fee byallowing for its clients to pay viamobile phone. Sending an SMS isenough, without going to a physicalterminal, to get the electronic receiptwhich justifies the payment of the fee.Since this introduction however, thefee was waved as a result of a popularreferendum, so this service is nolonger active.

EME Zrt. – micro m-payments

For instance, Rigas Satiksme is thegeneral partner for the CiTYCREDiTCompany generating 90% of paymentsfor Latvian provider. Hungarian provider,EME Zrt., has started to offer m-parkingservices in Budapest and 17 other cities.

The model of m-parking has beendeployed in most other countries inCEE, except Slovakia. After the service

was piloted there in 2006, it proved notto meet the expectations of themarket. Also, the Polish pioneering m-parking initiative, Idea WaPark SMS,has been discontinued, however forreasons related to companyownership. The service returned undera different provider, mPay togetherwith Projekt & Parking Serwis PolskaSp. z o.o (moBILET).

The first m-payment initiative in Polandfacilitated payments for car parks inWarsaw with the use of a mobilephone. The new service, “Idea WaParkSMS” was launched in September2001 with the cooperation of mobileoperator PTK Centertel (a subsidiary ofFrance Telecom and Orange), andWaPark, the company licensed tocontrol public car parks in Warsaw.Access to the service was availableonly for PTK Centertel post-paidsubscribers, who could receive anidentification number to be displayed ina visible place in their car.

“Idea WaPark SMS” operated throughSMS communication with special SMScontent containing a set of commandsfor users to follow. Money wascollected through private, virtualaccounts opened by the mobileoperator upon activation of the service.

The advantages of the solution include:

• availability through any mobile devicecapable of sending and reading anSMS;

• real time payments for parkingaccording to a standard pricelist forWaPark;

• a cashless method of payment.

During the three years when theservice was offered, “Idea WaParkSMS” gained wide acceptance amongIdea users. Nevertheless, in November2003 the service was discontinued dueto the change of ownership structureof the public car parks paymentsystem (the city of Warsaw terminatedthe services of WaPark to manage thevending parking machines itself).

Idea WaPark SMS

M-banking

M-banking is usually implemented as acomplementary channel to banks'existing on-line infrastructure, enablingcustomers to view transactions andbalances, transfer money and makepayments, with the mobile phone alsoused as a communication channelbetween bank and customer.

Since m-payments became available,banks have always been interested inbroadening the use of mobile phonesas a banking channel. However, WAP,which was highly promoted in the earlydays of m-payment development (theWAP browser was launched in 1998),was not accepted by the marketbecause of the relatively slow speed ofservice and its relatively high price. TheSIM Toolkit was the next stage of m-banking development requiring aspecial SIM card with bankapplications, as in the case of SIMInteli-IQ in Poland (a service providedby Inteligo, a company offering Internetbank accounts) or ‘OTP direct aktívSMS’ (launched by the largestHungarian bank). However, all theseinitiatives have largely been regardedas niche solutions and have yet toattract numerous users.

The reasons for the low uptake of theservice are driven by both the supplyand demand side of the equation. Onthe supply side the main barrier is thatany particular application is limited tothe subscribers of a given operator,requiring banks to provide differentcustomized solutions in cooperationwith different operators. This of coursemakes it more complicated and moredifficult to manage the serviceeffectively. On the demand side theinconvenience for the customer of

having to switch SIM cards for thepurpose of executing transactionsformed a significant barrier. For both ofthese reasons m-banking has onlyachieved a low share of electronicbanking in general.

In Estonia, the most advanced marketin the region, three major banks:Swedbank, Hansabank, SEB andNordea, serving more then 80% ofcustomers, provide active m-bankingthrough WAP. At the same time inRomania, just three banks (BRD –Groupe Societe Generale, RaiffeisenBank and Romexterra Bank) out of 29in total, provide such kind of services.In comparison, in 2006 in Hungary,there were 14 banks providing SIMToolkit m-banking service, five of whichoffered active transactions.

For Estonian banks, P2P moneytransfers (mobile phone credit orders)appear to be one of the mostsuccessful applications. In November2007 transaction volume stood at EUR470,000, up from EUR 196,000 inDecember 2004. Average daily volumetypically reaches EUR 9,500, withsome 400 transactions per day. Whilethe volume is still relatively small, theservice has a strong foundation forgrowth.

When it comes to m-banking, theBaltic States are the clear leader andare the only countries with servicesthat go beyond simple transactions.The development of SMS loans is acutting edge service in this sub-regionof CEE. The service is provided inEstonia by a number of private players,which enable individuals to take ashort-term loan of up to EUR 320 bysending an SMS “application” to a

lending company. Such loans are muchmore expensive than those from thebank, however, their advantage is thatthe borrower can receive the cash in afew hours, without a credit check, aftersubmitting the SMS-application. Onone hand the credit for small-sumloans is easier to get; on the otherhand, loans are definitely riskier andthus more costly in terms of loaninterest. There are approximately 15firms in the market who offer loans ofEUR 64 to 320 for durations of 15 or30 days. SMS Laen OÜ, the distinctmarket leader in this area with marketshare of 55%, distributes over 300loans daily.Also, Lithuanian Momentcredit provides such a service. Thecredit is granted up for up to LTL 600(EUR 174) after submitting an SMS to aspecific number. The only requirementis to be registered in the local MomentCredit system and users must havetheir own ID with password.

In-store payments

The Czech Republic was one of thefirst countries in the CEE region thatintroduced m-payments. In 1999,Paegas (currently T-Mobile), launchedvending machines with the possibilityto pay for a Coca-Cola with a mobiledevice. The customer approached thevending machine, dialed the givennumber and followed the automatedinstructions. Shortly after, the offer wasextended to Aral car washing plants.

The same year, the leading Estonianmobile network operator EestiMobiiltelefon (EMT, a subsidiary ofTeliaSonera) also launched m-paymentsfor purchasing goods from vendingmachines. This never really took holdand has been quietly phased out bynow.


In 2001 Hansapank (now Swedbank,subsidiary of Swedbank Group) andÜhispank (now SEB Pank, subsidiary ofSEB Group) also entered the mobilepayments field, starting by offeringmobile payments in pubs andrestaurants. Transactions are executedbased on the Bank Card Centre’infrastructure which Swedbank, SEBand Sampo bank set up originally forprocessing and supporting cardtransactions. By August 2003 the BankCard Centre reported 570 merchantsfrom whom it was possible to purchasegoods via m-payments, and by January2008 this number grew to 770. Thisnumber includes mostly smallerservices: post offices, bars, smallshops, health care clinics, flower shops,and some taxis. However, this paymentmethod never really took hold amonglarger merchants (e.g. supermarkets)and is not being actively developed bybanks or bigger merchants. Despite lowuser uptake these initiativesdemonstrate the possibility andsimplicity of m-payments.

In Poland, customers of mPay (anindependent service provider in Poland)and the cooperating mobile operators(currently two MNOs out of four inPoland signed such agreements withmPay), can use a mobile handset to payfor goods and services in McDonald’s,Sodexho, Telepizza and Dominium Pizza,selected coffee houses of theCoffeeheaven chain, as well as at Coca-cola and Nestle vending machines.

Since 2005 Near Field Communication(NFC) technology has been the mostpromising payment method. Thismobile scheme is more successfulthan other physical mobile paymentmethods because of its simplicity.

There are numerous NFC pilotsunderway all around Europe in anumber of countries including theUnited Kingdom, France, Belgium,Finland, The Netherlands, Germany,Spain and Poland. At the end of lastyear, Poland, with the launch ofMasterCard PayPass contactless card,was the first country in the regionwhere the solution based on this newtype of technology has been introduced.

A discussion about MasterCardPayPass implementation also started inSlovakia at the end of 2007. The visionthere is to initiate these newcontactless cards for Slovakianconsumers by the end of 2008 and thishas now been successfully launched.


Founded in 2003, mPay was the firstentity in Poland offering mobilepayments for goods purchased in shopsand in vending machines. In 2007, thecompany was awarded the No. 2position in micro-enterprises category inthe ranking of “The 500 MostInnovative Companies in Poland” *.

mPay operates on the Polish mobilepayment market based on its licenseeagreement with National Bank ofPoland (NBP) acting as a clearinghouse (payment agent) and takingresponsibility for accounting andmonitoring transactions. The companyhas chosen an SMS based modelrather than an e-wallet. Its solutionsoffer mobile operators the opportunityto be active in the financial servicessegment, creating opportunities notonly for additional revenue, but also awhole new range of service offerings.mPay has teamed up with mobileoperator Polkomtel (2007) and P4(2008), gaining access to a potentialcustomer base of 14 million Polkomtelsubscribers and 1 million Playsubscribers.

The possibility of payment using themPay solution is also offered by

Warsaw’s radio taxi company, TaxiPlus, and by the first internet cinemain Poland, Kino.Cineman.pl. InFebruary 2008, it launched parkingservice for its clients.

An agreement with another player inthis sector, Allay, expanded the list ofmobile payment possibilities to on-lineauctions, local cash transfers and billingpayments. So far, the company hasmanaged to encourage about 7,000clients to use its solution, which is lessthan originally expected. There are anumber of reasons for this result, animportant one being the low number ofretail outlets equipped with theinfrastructure to support the solution.

The company estimates that by the endof 2008, about 1 million Plussubscribers will use the service, andlonger term the company expectsabout, 9 million subscribers will join thegroup of mobile phones users, whomake payments via mPay platform.

* Ranking published by the Institute ofEconomics of the Polish Academy ofSciences in cooperation with BREbank, Gazeta Prawna and Dun &Bradstreet.

mPay

Given there has been little or noprogress for either in-store m-paymenttechnology or providers till now, bothPaypass and PayWave (Visa) may wellprove to be the most significantinitiatives in CEE in 2008. However, theincreasing interest of internationalplayers leads us believe that 2008 hasthe potential to be a pivotal year interms of the development of the m-payments market in CEE.

P2P/Remittance

Until now there have been nosignificant initiatives in the CEE regionwhich would deliver P2P or remittance

services to customers. Thus, thisservice area is still in the very earlyphase of development. Given thatthere have been examples ofsuccessful implementation of P2Pservices in other European countries,we believe such initiatives can be introduced in the CEE region as well.This can also be the case of remittanceservices that have been especiallysuccessful in societies with largenumbers of citizens living abroad –which is the case of some CEE nationsthat have recently joined the EU.

Key players on the market

This chapter reveals how differentstakeholders' strengths andweaknesses could affect their role inmobile payments diffusion. It reportson the current status of collaborationamong the main players, and finally,outlines the possible roles of mobileoperators, financial institutions, andindependent providers in successfulimplementations of payment solutions.

As previously mentioned, we havedisected several of these businessmodels, where different parts of thevalue chain play a more or lessimportant role.

The most typical scenario is for mobileoperators and financial organizations tocooperate with each other intensively,in order to stimulate market growth.This is a logical outcome mainly fromthe view point that these twoindustries are complementary; mobileoperators have a billing infrastructurefor processing large numbers ofrelatively small transactions, whilebanks and credit card companies havethe resources to authorize lending forlarger amounts.


Up to 2007, m-payments have nottaken off in Poland and there has beenlittle or no progress. However, themost visible example of new trials form-payments in Poland includes globalMasterCard, which, in cooperationwith BZWBK bank, is launchingcontactless card technology. It is thefirst such initiative in Central andEastern Europe.

Around the world, 80,000 partnermerchants are involved, and in Polandthere are 500 so far includingMcDonald’s, Mercer’s Coffee and EuroApteka. In the near future, retail chainsof newsagents (Ruch, Empik andKolporter) are also expected to takepart in the initiative.

The service is a part of MasterCard’sstrategy to penetrate small volumecashless payments. By usingMasterCard® PayPass, Polishconsumers will be able to pay forsmall transactions of up to PLZ 50(approximately EUR 15) without theneed to use a PIN code. Payments aretransacted by way of close physicalcontact with a specialized POS readerprovided by eService. Higher valuetransactions will need to be authorizedwith a PIN code.

As part of the first trial BZWBK bankissued one type of card – a pre-paidMaestro Paypass. It is a type ofelectronic purse, which can be topped-up by a standard transfer from a bankaccount linked to the card.

MasterCard Paypass

Mobile operators are well positioned tobenefit from m-payments. In mostcases MNOs are the logical choice tolead market development, as theyalready have strong customerrelationships, possess the necessarybilling infrastructure and control thecustomer handset. Typical MNO-centricmodels, mentioned previously, arePremium Rate SMS solutions enablingfor the full participation of operators.However, in the value chain of new m-payment initiatives the MNO’soperating environment only enables m-payment transactions. Except for SMSfees, MNOs play a role as a connectionchannel between customers and otherplayers. MNOs will find it difficult tobroaden their offer of m-paymentsservices by going it alone as they don’thave a merchant network, or thesystems to process transactions andclear payments. For this reason, apartnership with a bank or a credit cardcompany may be necessary to ensuresuccess.

The case of m-payments’ developmentin the Baltic region shows such atrend. In Estonia, banks and a dominant MNOare collaborating in certification, an arearelated to m-payments. The CertificationCentre was established in February2001 by two leading Estonian banksHansapank (now Swedbank) andÜhispank (now SEB) and two telecom

companies, Elion and EMT (members ofthe TeliaSonera group). As such,Certification Centre has the backing ofEstonian and Nordic financial andtelecom sector. Certification Centresupports electronic certifying of ID-cardsand thus enables authenticatingpayments relying on ID-cards. Evenmore related to m-payments, the Centrehas also helped develop and supportsMobile-ID, which enables makingelectronic transactions, just like an ID-card. It makes it possible for a person tolog into internet banks and sign variouscontracts digitally. Thus, Mobile-IDbrings more security and mobility intoauthentication of transactions by usingthe handheld device.

Estonian banks between themselvesalso set up a joint venture (Bank CardCentre) which facilitates cardtransactions between all banks and theirclients. Recently the Bank Card Centrewas sold to Northern Europe TransactionServices (NETS), leading Scandinavianmediator of bank card transactions. TheBank Card Centre’s main success wasearly adoption of card payments inEstonia. Because major banks wereinvolved, the system was interoperatingbetween different banks and thusconvenient for users and merchants.Based on their infrastructure the banksalso offered m-payments at merchantsas the only major difference would bethat the transaction is done using a

mobile device rather than card terminal –authorizing, processing, clearing andbilling would be done using the BankCard Centre’s infrastructure. In the endthis did not prove popular as thetransaction is cumbersome and slowerusing a mobile rather than card terminal,and major merchants (supermarketsetc.) have not adopted it.

Vertical integration of the mobilepayment sector represents anotherscenario for the development of thebusiness model. Independent serviceproviders look for their chance to graba part of the cash and non-cashpayments market, traditionally servedby financial institutions (issuers, banks,etc.). They can eliminate other playersby obtaining a license to process andclear transactions. Such players havenot been present in all surveyedcountries. However, in some of thesemarkets the ISPs have dominated themarket as they possess the one andonly m-payment platform. Polish m-Pay,Lithuanian M-Pay, Bulgarian SEP,Hungarian EME Zrt, or LatvianCiTYCREDiT have all been designed tocomplement existing credit cardsystems by adding the ability toprocess m-payments. The system hasbeen adapted to mobile operators toenable them to enter the m-paymentmarket with micro- and macropayments.


Contopronto, a Norwegian m-paymentprovider that was also present inPoland is one clear European exampleof such integration. Contoprontolaunched an independent paymentsolution in 2002. The company has alsoreceived a license from the NorwegianRoyal Ministry of Finance to becomeEurope’s first e-bank, thus eliminatingthe traditional financial institution fromthe value chain.

The mobile initiative of Polish internetbank, mBank, is another example inthe region. In December 2007 mBankstarted offering mobile telephonyservices under its own brand (mBankmobile), linking mobile telephony andbanking services. This effectivelyallows the elimination of directparticipation of an MNO in the valuechain when providing m-paymentservices. Such a strategy was alsoapplied by Rabobank in theNetherlands when the first WesternEuropean bank, MVNO, wasintroduced in 20065.


SEP Bulgaria is the third licensedpayment operator in the Bulgarianmarket, offering an alternative to theexisting card payments, using themobile phone not only as acommunication tool, but also as aninstrument for electronic transactions.

SEP’s license to operate a paymentsystem was granted by the BulgarianNational Bank in November 2007.

Partners in this project are the privateequity fund, Advance Equity Holding,

and the technological partner, SirmaSolutions, a leading softwaredevelopment company in the country.

The main objective of the operator is toset up, develop, and maintain a unifiednational system for electronic paymentsbased on mobile telephones and GPRSpoint-of-sale terminals in Bulgaria. TheSEP's pilot project for implementationof mobile payments is still underdevelopment.

SEP – System for Electronic Payments inBulgaria

The ISP-centric model is alsopredominant in Latvia. SIACiTYCREDiT is an electronic moneyinstitution (EMI) registered with theBank of Latvia and it is regulated bythe Law on Credit Institutions.CiTYCREDiT was established in 2003to enable payments for parking in Rigausing SMS messages to transactpayments. The range of merchants

with whom the Company is partneringhas now expanded. It includestransport payments, content downloadfrom DoReMi music portal, and payingbills in restaurants. In 2006, theenterprise was acquired by a group ofprivate investors from Latvia who aredeveloping CiTYCREDiT into acomplete micro payment solution.

CiTYCREDiT

5 Forrester Research “Case Study: Rabobank Reduces The Supply-Side Barriers To MobileBanking” by Alexander Hesse with Benjamin Ensor, Michelle de Lussanet, and Bill Nagel;March 17, 2008

One of the biggest questions facingthe future developments of m-

payments, including both threats andopportunities, is how and where todraw the line between the variousplayers of the financial services chain.As MNOs become more involved inprocessing third party transactions andcross border remittances all players -regulators, MNOs, banks, third partiesand consumers - will want to ensure astable environment exists to supportthe many benefits m-payments willpotentially bring.

MNOs and other third party providershave an opportunity to move into theretail, and possibly commercial,financial services business – a clearthreat to the banking industry. On theother hand, should MNOs and othersmove too aggressively, they riskbringing down the heavy hand of localand EU regulatory bodies that typicallytend to err on the side of caution. Thiscould cause bottlenecks as newservices try to come to market.

For these reasons regulations andsecurity issues are crucial for m-payments. Since the development of

m-payments is at a relatively earlystage and not yet a substantial marketin terms of volume, most economies inEurope are approaching the subjectwith caution. Many have introducedlaws and regulations governing e-payments, but not specifically coveringm-payments. The following listsummarizes some of the mostpressing issues and questions that willneed to be dealt with:

• When, where, who and how to taxm-payment transactions?

• How to apply prudential requirementsto capital requirements, insurance andlicensing issues for deposit takingactivities?

• How well do existing laws functionwith respect to commercial theft –particularly when cross border issuesarise?

• How to determine liability andminimal standards with respect toidentity theft?

• How to handle customer and datatransaction recording issues as theyrelate to privacy, money launderingand funding other illegal activities?

At the moment MNOs typically do notrequire special licenses when theyserve as access and transmissionnetworks for banks to provide m-banking services. However, as volumegrows and the sophistication of thetransactions increases, they may berequired to apply for licenses underdomestic legislation and regulations. Inthe European Union, MNOs are, forthe most part, offered exemption fromlicensing, but this situation is onlyprovisional.

MNOs as Banks

In many ways MNOs are already defacto banks, taking deposits, in theform of prepaid calling cards or as m-wallets, and creating credit in the formof billable services through post paidcalling plans. While this form of assetsand liability management is currentlynot a core business it would not be thefirst time an industry moved stronglyinto financial services from its originalcore business. Previous examplesinclude the automotive industry(providing car loans), retail businesses(providing credit for consumer goods


Regulations, interoperabilityand security

and providing cash desk services), andindustrial companies, (who finance thepurchase of their equipment throughleasing arrangements).

Because of this opportunity, regulatorswill need to consider how and whetherto apply financial services regulationsto MNOs. Considering the viewpoint ofthe different stakeholders, there aredifferent reasons and approaches fordeveloping such a regulatoryframework. From the point of view ofthe licensed and operating banks,these stakeholders will stronglysupport higher levels of regulation forMNOs citing a number of factors; notleast will be the possibility of a non-level playing field, which would be adisadvantage to the banks. The MNOswill likely argue that the currentvolumes of business, and limitedlegitimate banking activity pose lessrisk and therefore require lessregulation, which if overly or wronglyapplied could have adverseconsequences on the development ofthe market. Finally, the regulators willwant to ensure that they have a clearview on the actually money supply andthat it is properly under theirsupervision. As electronic moneyincreasingly replaces cash this is a veryreal issue in many countries.

Despite the early development of them-payments market, governments inthe region and across Europe arecertainly aware that the developmentof the regulatory framework has asignificantly large potential to influencethe development of the market, as wellas those ancillary industries andbusiness models that will follow m-payments development. For this

reason individual governments areeager to maintain a certain amount ofautonomy when setting the standards– both to ensure stability but also tomaximize the opportunity. At the sametime it needs to be recognized that acohesive framework that can beuniversally applied will be necessary ifthe market is ever going to reach itspotential. For these reasons EUpolicies will have a significant influenceon the m-payments market, both at thecountry level as well as across the CEEregion and all of Europe.

Legal framework in the European Union

The following three EC Directives andthe debates around them will likelyprovide the most influential guidancefor countries in the CEE region that arestill developing their own policies andpolicy instruments.

• The E-Money Directive (EMD)2000/46/CE relates specifically to e-payments, and “seeks to open themarket for the issuance of E-money tonon-banks through the creation of‘Electronic Money Institutions’ (ELMI)regulated under a lighter prudentialregime than that required of creditinstitutions.” Up to now, MemberStates have exempted MNOs and m-payments from ELMI licensing.

• The Payments Services Directive(PSD) 2007/64/CE sets out levels ofinformation access, obligations andliabilities on the payment processors,such as banks and credit cardcompanies. PSD is part of the directaction in the aid of creating acommon market of payment services.


• The Single European Payment Area(SEPA), which launched in January2008, opens cross-border credit andcredit-card services to EU widecompetition, but not so for m-payments. The rules and regulationsgoverning ELMs, including m-payment systems, have beendelayed until 2009.

The arguments for and against eitherstricter or looser regulatory stancesvary when all the issues areconsidered. At the moment there arecertainly concerns, for example, oversecurity and the level of compliancethat ELMIs can and should achieve.However, because m-payments at themoment typically constitute micropayments, there is a generalconsensus against imposingregulations that are too strong.

In addition to security, there are otherissues such as whether MNOs need topay deposit insurance for moneyreceived for prepaid cards, or whetherMNOs can or should pay interest onsuch monies. Licensing for bankingactivities is yet another realm thatneeds to be considered. Consensus onthese and other issues varies and a keydriver on the regulatory side is to whatdegree regulatory bodies need tobalance between an easy but inflexibleone-size fits all regulatory frameworkversus the time consuming approachof considering issues on a case-by-case basis.

The key issue at the moment is that ofproportionality. In other words m-payments should be regulated inproportion to the risk that such

payments present to the generalpublic. Because at the moment the riskappears very low, in large part due tothe volume and nature of thetransactions, a relatively low level ofregulation would seem to be sensible.

Regulatory environment in CEE

There are no particular institutionsregulating service of m-payments inthe CEE region. M-payments aretreated as a method of payment, whichis to be provided by an eligible entity.In general the regulatory environmentin CEE is considered neither strict norparticularly developed. In accordanceto the directive 2007/64/EC, therelevant regulation on paymentproviders must be adopted in regionallaws by 2009.

Some countries have applied evenmore restricted policy compared to, forinstance, EU Directive 2000/31/EC(opt-in solution) regarding terms forsending commercial information andoffers. Most countries of the EU, byapplying an opt-out solution, allow forsending commercial information andoffers by electronic means ofcommunication unless customers

object. In Poland, for example, it is notthe case – every time commercialcontent is transmitted the consumer’sapproval is required. This significantlylimits opportunities for establishing acommercial relationship by lesserknown customer service operators andprovides an advantage to mobileoperators that have already establishedcommercial relations with their clients.

On the other hand, banking lawimposes significant limitationsregarding the issuing and hostingpayment instruments and processingfinancial transactions. Many of theregulations that apply to banks alsoapply to mobile banking. The view ofthe regulatory bodies is thatunauthorized access, informationleakage or system outages due tomalicious actions can have a severeimpact on banks and on the bankingsector. And some bodies took action.For instance the National Bank ofRomania issued a regulationconcerning the remote accesspayments instruments (such as mobilebanking) which require banks to obtainan authorization from the Ministry ofCommunications and InformationTechnology (MCIT) in order to be ableto offer such an instrument to theircustomers. In order to obtain this


authorization from MCIT, banks have toundertake a yearly security audit of therespective payment instrumentperformed by an independent,specialized auditor.

Generally speaking, CEE countries areplanning further to adopt nationallegislation in the near future in linewith the planned EU Directive forPayment services.

The impact of regulationon m-payments

The regulatory environment willdelineate the market opportunities andthe cost of compliance, and it will alsoinfluence the assignment of risk andobligations between stakeholders. Agood example of this was the ‘liabilityshift deadline’ as it was widely calledwithin the industry – on 1 January2005 when the liability risk arising fromcredit card fraud within the EU wasshifted from the banks to themerchants following the introduction ofnew levels of card security known asEMV. The banks and credit cardcompanies regarded this asencouragement to merchants to invest

in upgrading their card readers tocomply with the new standard,although codes of conduct still leavethe banks with the burden of proof if acustomer’s card is stolen.

The other important issue is the effectof regulation on competition, efficiencyand quality of service. MNOs andpayment processors are notnecessarily competitors to banks andother financial institutions, includingpayments clearing systems, but theycan be. While restrictive financialregulations will ensure they are not,proportional financial regulations aremore likely to bring about the benefitsof potential competition.

Interoperability

Numerous service providers currentlyoffer or plan to implement mobilepayment system, but the servicesdepend on proprietary technologiesand therefore are still limited to themarket. To accomplish fully thepotential of a new payment scheme,interoperable standard-based solutionsthat cover various types of paymentsacross multiple operators and countries

in less advanced regions of Europemust be implemented.

Till now, there has been a lack ofcommon industry approach tostandardization and this is seen as a keybarrier, slowing down mobile paymentsfrom becoming available to the massmarket. In recent years, many industrialbodies have initiated key work itemsnecessary to enable a mobile payments’infrastructure, some of which havealready been considered as essential asthey try to standardize the technicalaspects of mobile payments.

The impact of standardization canalready be seen in a number of mobilepayment services and market trialswhich have been launched in Asia, theUS and, to a lesser extent, Europe,where the primary standard, EMV, isdriven by financial institutions workingtogether on one comprehensive cardsolution.

Security

Without the assurance that theexchange of secure information andsafe electronic financial transactions


over mobile networks can be made,the deployment of the service will belimited. Also, without secure elementsthere would be a high probability ofabuse, fraud and leakage of privatecorporate information, which couldeven reverse the introducing of newservices. It is the Achilles heel of them-payment sector. Therefore, differentmobile security procedures andpayment methods have beensuggested and implemented towardsmobile payments.

A secure mobile payment system mustthen contain the following features:

• Confidentiality - confidentialinformation must be secured from anunauthorized person, process ordevice.

• Authentication - ensures parties withaccess to a transaction that are notimpostors and are trusted. It isusually achieved by using network-based authentication protocols.

• Integrity - the information andsystems have not been altered orcorrupted by outside parties.

• Authorization - verification that theuser is allowed to make therequested transaction.

• Availability - the system must beaccessible for authorized users atany time.

• Non-repudiation - ensures that theuser must not deny that he/she hasperformed a transaction and mustprovide proof if such a situationoccurs6.

With greater infrastructure support form-payments, mobile users will havethe flexibility to make their safepurchases from mobile devices. Thequestion is whether the partiesdeveloping and deploying thistechnology are ready to make a full-scale commitment.


6 S. Kadhiwal, M.A.U.S. Zulfiguar, Analysis of mobile payment security measures anddifferent standards, Ali Bhutto Institute of Technology, 2007.

Similarities, differences…prospects

In an uncertain world there is only onecertainty – constant change. The samecan be said about the m-paymentsmarket. Where it will go is anyone’sguess. What we can say, however, isthat it will continue to move forward.The benefits are simply too strong andtoo compelling for the key players tosit still.

There are many reasons for thedevelopment of m-payment initiativesin the CEE region, both on the demandand supply side. On the demand side,with a continuously rising number ofnon-cash transactions and mobilepenetration exceeding 100%, it seemsthat the environment for thedevelopment of m-payments initiativehas never been better. With mobilehandsets commonly used by themajority of the population and thenumber of POS terminals installed inthe region rising at a very fast pace,the supply side development also lookspromising. Also, a key enabler, NFC7

enabled handsets, will appear on themarket in several CEE countriesalready this year. Global players, suchas MasterCard and Visa that control aglobal network of more than 21 millionmerchant locations and have more than450 million cards in circulation, havedecided that now is the time to launchcontactless payment solutions andstart developing the necessary POSinfrastructure. In some countriesinnovative independent serviceproviders have noticed their chance totake part in the lucrative business ofpayment processing and are launching

competitive m-payment initiatives,targeted not only for the local, but alsoother CEE markets (i.e. mPay inPoland).

It’s easy to imagine that the only thingrequired to develop a particular marketis to clone successful initiatives foundin one country, in cookie-cutter fashion,to all the other markets. But this is notnecessarily the case. All markets aredifferent and such a decision shouldalways be carefully thought through.An excellent example of how thingswork in practice is that of m-parkingsolutions. It is the successful businessmodel for most countries in the region,but not for all.

On the other hand, it is also hard tofind a simple correlation between themobile penetration rates and thedevelopment of m-payments. InLithuania, a country with the secondhighest penetration of mobilesubscriptions in Europe8, the numberand range of m-payment initiatives issurprisingly low.

Looking for similarities in trends canalso lead nowhere. For example, whilein some markets theunderdevelopment of the bankingindustry provided a trigger for themobile operators to launch innovativem-payments services, in others, likeRomania, this has not been the case.The carrier’s objective there was todevelop their network and attract asmany clients as possible andsubsequently to offer value addedservices to their customers such asmobile payments. Only recently, as themarket is soon set to reach the 100%

penetration rate, has it been clear thatgrowing the client base will no longerbe the main income generator; achange in operators’ long termstrategic objectives increasinglyemphasizes the role of innovation andvalue added services as future growthgenerators. Thus, the biggest playerson the market no longer make marketshare their top priority, but areincreasingly interested in broadeningtheir service portfolio. To achieve this,they will have to be even moreinnovative and launch new servicesthat will increase the average revenueper user (ARPU). In this regard, m-payments are seen as one of the keyrevenue generators for the future.

The Baltics provide an excellentexample within the region wherecommon standards and businessmodels are easy to implement due tothe relatively low number of players inthe market. In addition the marketplayers already co-operate in variousforms, and most of them are alsopresent in other Baltic states.Therefore any form of future co-operation will be easier to carry out inthose three states, than among anyother group of countries in CEE.

Another group that one could expect toshow some similarities would beCzech Republic, Poland, Slovakia andHungary, as they are the traditionalVisegrad Four (V4) countries. However,even though similar m-paymentinitiatives can be observed in all thesecountries, there are many differencesamong them making it virtuallyimpossible to adapt a one-size fits allapproach to the markets. These


The road to somewhere?

7 NFC is a short-range wireless connectivity technology that evolved from a combination of existing contactlessidentification and interconnection technologies. Operating at 13.56 MHz and transferring data at up to 424 Kbits/second,NFC provides intuitive, simple, and safe communication between electronic devices (http://www.nfc-forum.org/aboutnfc/).

8 According to survey “Market statistics” performed by Communication Regulatory Authority Lithuanian market of activesubscriptions of mobile services as of September 30, 2007 reached 4,89 mln, with population of Lithuania – 3.2 mln.citizens, which means 145% mobile penetration rate.

countries’ markets are vastly diversifiedinternally. For example, varyingstructures of the primary sectors likebanking make the m-payment marketdifficult to standardize (for instance thenumber of banks in Poland isapproximately 70, with 37 in CzechRepublic, 25 in Slovakia and 38 inHungary).

Romania and Bulgaria appear to be theleast advanced CEE countries in termsof the m-payments markets. This is aconsistent and logical conclusion, giventhey are both relatively less-developedaccording to a number of economic,political and social indicators9. Thesituation in Bulgaria, however, couldsoon change with the anticipatedintroduction of the ‘System forElectronic Payments Bulgaria’, whichmay have the potential to allowBulgaria to leap-frog some of the moredeveloped markets in terms of m-payments. As long as these marketsare still not saturated, they can be

potentially interesting for new entrantsand could very easily soak up newpayment solutions.

Opportunities

Despite the high level of innovationand increasing interest of consumersand businesses, m-payment in Centraland Eastern Europe is still a fledglingmarket. This can change as industryanalysts are sensing the coming of asecond wave in m-payments acrossthe CEE, which might very well make2008 a very significant year in terms ofm-payments’ development.

Since the late 90s several mobilepayment systems have been launched ina variety of European countries, includingsome systems available nationwide. Yetthe choices remain as bewildering asbefore. In order to increase the share ofm-payments there is a need for onecomprehensive solution.

Within the EU, compliance to the EMVstandard is mandatory and the majorcard companies are working togetherto achieve the next generation ofcompatible point-of-sale terminals.However the technical specificationsfor these will not become availablebefore 2009 or even 2010.

M-payments are strategically importantas a part of an overall trend towards theuse of electronic money and limiting theuse of cash which involves high costs forbanks. Although different partners in thevalue chain are maintaining essentiallyseparate m-payment systems today, thisshould not be regarded as an indicator ofgeneral strategic hostility betweenMNOs and banks. In addition to the factthat there are a variety of potentialplayers on each market, a number ofquestions remain: What sort ofconsortium will be formed to take m-payments to larger client groups? Whowill drive it? And what standards will beagreed upon?

9 See KPMG Comparatives 2007

Until recently, one development hadthe potential of changing the dynamicsin the mobile payments standardsconsortia landscape: the formation ofthe Mobile Payment ServicesAssociation in early 2003 (since then,formally launched as Simpay). With thefounding members being Vodafone, T-Mobile, Orange and Telefonica Moviles,and other operators joining in 2004,Simpay could well end up introducingpan-European standards which in turn

would render irrelevant the work ofmany of the standards’ consortia.However, Simpay was dissolved inJune 2005. The reason for its collapsewas partially that participants wereunable to agree on what types ofmobile payments Simpay would offer,but most of all because costs formobile operators were too high.

Estonia, the most advanced m-payment CEE market, shows a lack ofdiversity and the high cooperation ofMNOs and banks. Dominant bankshave cooperated on card payments, byforming a joint Bank Card Centre, andleveraging the Card Centre’sinfrastructure also to m-payments onlimited scale. Dominant banks, MNO(EMT) and it’s telco parent company(Elion) have also cooperated oncertification by forming a CertificationCentre, which provides certificates forauthentication and digital signing toEstonian ID Cards and Mobile-IDs, forinstance maintaining andauthenticating centrally ID-ticket sales.MNOs also cooperate amongthemselves, for instance with leadingMNO EMT developing the m-parkingsolution and other MNOs using EMT’stechnical platform to offer the servicefor their customers.

In order to create a unified solution form-payments in the Czech Republic thethree mobile network operators -Český mobil a.s., Eurotel Praha, spol. sr.o. and Radiomobil, a.s. - incooperation with five major Czechbanks founded the Mobile PaymentAssociation (2003). The MPA is aplatform for coordinating the activities

of its members in the area of mobilefinancial products and services andactively influencing the conditions andenvironment for the provision of theseservices, including macro paymentsystems. The aim of the MPA is toimplement a standardized paymenttool that uses mobile devices.

In December 2007 the four mobilenetwork operators in Poland signed aconsortium in order to create a standardfor m-payment services. The plan is toimplement a solution allowing forcontactless payments through the use ofNFC enabled handsets.

Challenges

When the market becomes saturatedmobile telephone operators will needto look for both new revenue sourcesand customer retention instruments.Independent service providers on theother hand will be looking for theirchance to grab a part of the cash andnon-cash payments market,traditionally served by financialinstitutions (issuers, banks, etc.). Andthis is a prize worth fighting for. InPoland for example, with 25 millionpayment cards issued so far (thenumber growing several percentagepoints quarterly), and 80% of the cardtransactions being small transactions10,the financial institutions will not behappy to share their revenues withnew entrants.

To date, however, the market has faceda handful of key challenges which willneed to be addressed in the near


10 The number of card transactions in 2010 is estimated to reach 615 million, compare to 201 million in 2004.

future if m-payments is to reach itspotential in the region:

• limited range of payment opportunitiesresulting from both limited supply (notenough infrastructure) or limiteddemand (not enough clients);

• difficulties with meeting theexpectations of all parties in thevalue chain, and hence achieving theexpected financial results, thereforemaking the business unsustainableover the longer-term;

• lack of a clear and compelling valueproposition for the end-user (e.g. ifthe service was too complicated touse when compared to traditionalsolutions).

In this complex ecosystem of carriers,banks and other third party providers,every party has a different reason toparticipate in the m-payments market.Regardless of what m-paymentsolution we consider, the examples inour survey suggest that the firstnecessary condition for m-paymentinitiatives to be successful is themutually beneficial cooperation of allthe interested parties – including bothtraditional players in the value chain aswell as the innovators.

Critical success factors

We have identified the following criticalsuccess factors for the successfulimplementation of m-payment solutions:

• The market will need to reach thecritical stage, both from thesaturation of mobile penetration as

well as the maturity of financialinstitutions, to create an environmentwhich is stimulating to allstakeholders in order to aggressivelylaunch mobile payment solutions.

• The initiative must be based on awin-win business model, where allinvolved parties achieve clearbenefits within a defined scope. Asnew payment technologies continueto combine features from both thefinancial and telecoms industries, acentral aim for the future is toidentify the key competencies,natural roles, business models, andstrategies that different players couldhave in the m-payment value chain.

• The proposed m-payment solutionmust offer an improvement overexisting solutions in terms ofconvenience, security and cost for allparties, specifically for customersbut also for merchants and serviceproviders.

• The initiative must achieve a widemerchant adoption and thus becomean attractive payment method forlarge numbers of consumers.However, we can imagine thatmerchants will be reluctant to investin the new payment method beforethey have enough confidence that m-payments will be widely acceptedand therefore will bring additionalrevenues. This is a classic “chickenand egg” type of problem that maybe hard to overcome.

In a case of mobile top-ups andpremium-rate mobile services that are aclear example of successful mobile

payment services, all conditions weremet: the services are useful, easy andsafe to use, the enabling infrastructure,i.e. mobile handsets, are commonlyavailable, and the business model is clearand satisfying for all parties involved.

Also the case of transport contactlesscards is a good example of a solutionthat was able to overcome the mainhurdles. It provides a clearimprovement for consumers over atraditional ticketing system. Because itcan be used in all means of publictransportation it drives consumeradoption. At the same time it offers aviable business model for the playersinvolved – consumers, system operatorand transportation authority. Here thebusiness case for funding investmentsin contactless ticketing rests on thesavings of eliminating cash paymentsand paper tickets.

In the other cases there is less clearevidence of the initiatives being able tomeet all the critical success factors.The difficulty lays either in offering aclear improvement over the existingsolutions for end-users - e.g. in mostsituations paying with mPay is neithereasier nor faster than paying with cashor plastic card - or in building thenecessary infrastructure which woulddrive greater consumer adoption of theservices (e.g. in Poland the POSnetworks of mPay or MasterCard’sPayPass are still very limited), or indeveloping a business (revenue) modelattractive for all parties involved.


As this study clearly shows mobilepayments in Central and Eastern

Europe have a long way to go until theyreach their full potential. The questionremains, however, to what degree doesm-payments present itself as anopportunity for the future? Like the oldjoke about Brazil’s economy – is m-payments an opportunity which willalways remain in the future, or will themarketplace convince virtually everyonethat m-payments is the best solution, inthe same way mobile telephony hasproved itself over the past decade?

Mobile operators around the world arefacing increasingly challengingenvironments with average revenueper user (ARPU) declining andcustomer churn rates increasing11.Therefore operators are desperate tofind new applications and services toreverse these trends. With manypromising applications, such as WAP,failing to live up to their original hype,and the advent of new services onlybeginning to emerge, it will be difficultfor mobile operators to ignore anyopportunity that presents itself.

Nevertheless, differences between theCEE region and other geographies

demonstrate why players here cannotrely on the same factors which havedriven m-payments growth in othermarkets. In Asia for instance, thegrowth of mobile payments in somecountries has been driven by the poorbanking system (the distributionnetwork especially). Mobile paymentshas been introduced in fact as asubstitute for a lack of retail bankingservices. The opposite is true,however, in most developed countrieslike Japan or Korea, where growth ofmobile payments reflects customerneeds and a market that demandsvalue added services and otherinnovative services via mobile devices.

In CEE the already well developednetwork of retail banking creates achallenge for the mobile paymentsmarket seeking to find an opportunityin a saturated market. At the sametime with mobile penetration acrossthe region reaching saturation inrecent years, MNOs looking for newrevenue sources are focusing on morepromising services in terms ofrevenue growth potential, such ascontent and media-related business,the natural consequence of digitalconvergence.

Nevertheless, the idea of the mobilephone replacing the wallet as a day today vehicle for small value transactionsis an opportunity no MNO will want tomiss out on. While the value of smalltransactions currently looks to be aweakness of the m-payments businessmodel, given the potential of futuredevelopments, this is a truly vastmarket encompassing a significantpercentage of consumers’ totalspending, potentially eliminating theneed for cash and eventually evencredit cards.

Ultimately, the demand for m-paymentscan only be achieved if there arenumerous services which can bereached via m-payments, thus creating a“network effect” whereby the moreplayers who subscribe to a particularsystem increasingly bring everyone elsewith them. For this network effect totake hold, a key enabler, namely NFCtechnology, is a must. In the case of m-payments this means the introductionof both NFC enabled handsets as wellas the equipment in shops tocommunicate with them. Given that thisis only beginning to take place in 2008the developments of the m-paymentsmarket is still in its early days.


Conclusions

11 Mark Pickens, M-payments, m-banking and the future o mobile phone banking, Sunday, September 2, 2007.www.technology.cgap.org

Clearly, due to having well establishedpayment infrastructures and bigcustomer bases, global players such asMasterCard or Visa are likely to findthemselves as the largest beneficiariesof transactions using NFC technology.They will also likely have a big role inits emergence as they will be a drivingforce, along with banks, for providingthe equipment needed to make thetransactions. The same can be said forhand set manufacturers such as Nokiawho install NFC technology on newhandsets and therefore drive their ownsales.

For mobile operators who can charge asmall percentage for each transactionthe opportunity is equally appealing,provided of course a reasonablevolume of transactions can beachieved. To date, not only thetechnology has been absent, but alsothe appropriate standards and effectivecooperation amongst MNOs, banksand retailers. With the technology inplace to make mobile payments easierthan cash and credit cards, this couldquickly change.

Real growth of m-payment transactionswill therefore likely depend on a large

number of retailers recognizing thebenefit of such payments. This,however, will require a cleardemonstration of how providers andusers can reduce costs, save time andconduct more transactions. To facilitatethis it will be essential for MNOs totake a proactive stance and beginexperimenting, particularly withretailers. It will also be essential for m-payment service providers (banks,mobile operators and other interestedparties) to cooperate in order toconvince a great number of retailers toapply these solutions. Therefore playerswho expect to benefit mustdemonstrate their willingness to be acooperative partner alongside banks,regulators and credit card companies.Only in this way can m-paymentsachieve its enormous potential andensure that all players benefit.



General

Legislation on

E-Commerce

E-money Consumer Protection

European

Union

E-CommerceDirective 2000/31/EC

Directive2000/46/EC on thetaking up, pursuitof and prudentialsupervision of thebusiness ofelectronic moneyinstitutions

Directive2000/28/ECamending Directive2000/12/EC relatingto the taking up andpursuit of thebusiness of creditinstitutions

Directive 97/7/EECon the protection ofconsumers inrespect of distancecontracts

Directive2002/58/EC onprivacy andelectroniccommunications

Bulgaria Law on ElectronicCommerce

Law of FundsTransfers,Electronic PaymentInstruments andPayment Systems

Law on CreditInstitutions

Law on ConsumerProtection

Law on ElectronicCommunications

Czech

Republic

Act No. 480/2004Coll.

The PaymentSystems Act124/2002 Coll.

Decree No. 547/2002Coll., stipulating theessential elements ofan application forprior

ConsumerProtection Act No.634/1992 Coll.

Act No 101/2000Coll., on theprotection of personaldata in informationsystems

Estonia Information Society Services Act

Electronic Money Institutions Act

Credit InstitutionsAct

Law of ObligationsAct

ElectronicCommunications Act

Hungary Act CVIII of 2001 onElectronicCommerce and onInformation SocietyServices, Act CLXIVof 2005 on Trade,Government DecreeNo. 4/1997 (I.22.)on the Operation ofCommercialEstablishments andthe Conditions forConductingBusiness in theInternal Market

Act XXXV of 2004on SpecializedCredit Institutionsissuing electronicmoney

Act CXII of 1996 onCredit Institutionsand FinancialEnterprises

Government DecreeNo. 17/1999. (II. 5.)on contractsconcluding betweenabsentees;Act CLV of 1997 onConsumerProtection

Act C of 2003 onElectronicCommunications ActCVIII of 2001 onElectronicCommerce and onInformation SocietyServices,Act CVIII of 2001 onElectronicCommerce and onInformation SocietyServices, Act LXIII of 1992 onthe Protection ofPersonal Data andthe Disclosure ofInformation of PublicInterest

Appendix: Adoption of EU regulations in CEE


General

Legislation on

E-Commerce


Latvia November 2004The LatvianParliamentadopts the Lawon InformationSocietyServices,transposing EUDirective2000/31/EC oncertain legalaspects ofinformationsocietyservices, inparticularelectroniccommerce.

Resolution No.98/6 of theCouncil of theBank of LatviaRiga,November14,2002

ONAPPROVINGTHE"Regulation forissuance andmaintenanceof electronicmoney"

Resolution No. 98/6 of theCouncil of the Bank of LatviaRiga, November 14, 2002

ON APPROVING THE"Regulation for issuance andmaintenance of electronicmoney"The Regulation shall containstandards established by theDirective 2000/46/EC of theEuropean Parliament and ofthe Council of 18 September2000 on the taking up, pursuitof and prudential supervisionof the business of electronicmoney institutions and theDirective 2000/28/EC, whichamends the Directive2000/12/EC of the EuropeanParliament and of the Councilof 20 March 2000 relating tothe taking up and pursuit ofthe business of creditinstitutions.

Lithuania Ratified on 17July 2000

Ratified on 27October 2000

Ratified on 27 October 2000 Ratified on 4 June 1997and Replaced on 12June 2005 by “Directive2005/29/EC of theEuropean Parliamentand of the Council of 11May 2005 concerningunfair business-to-consumer commercialpractices in the internalmarket and amendingCouncil Directive84/450/EEC, Directives97/7/EC, 98/27/EC and2002/65/EC of theEuropean Parliamentand of the Council andRegulation (EC) No2006/2004 of theEuropean Parliamentand of the Council('Unfair CommercialPractices Directive')(Text with EEArelevance)”

Ratified on 31 ofJuly 2002 andReplaced on 2 ofMay 2006 by“Directive2006/24/EC ofthe EuropeanParliament and ofthe Council of 15March 2006 onthe retention ofdata generated orprocessed inconnection withthe provision ofpublicly availableelectroniccommunicationsservices or ofpubliccommunicationsnetworks andamendingDirective2002/58/EC”


General

Legislation on

E-Commerce


Poland Act on electronicservices(u.s.u.d.e.) + morerestricted policy(opt-in solution)was appliedregarding terms ofsendingcommercialinformation andoffers

Act on electronicinstruments ofpayments(u.e.i.p.)

Act on electronicinstruments of payments(u.e.i.p.),The Banking Act

Act of theprotection ofcertain consumerrights and on theliability for damagecaused by adangerous product(Journal of Laws of31 March 2000,No. 22 , item 271)

Implementation ofpart of theregulations in Acton electronicservices

Romania Directivetransposed byLaw no.365/2002regardingelectroniccommerce

Directivegenerallytransposed byGovernmentOrdinance no.99/2006concerning creditinstitutions andcapital adequacy,as approved byLaw no.227/2207

Directive generallytransposed by GovernmentOrdinance no.99/2006concerning credit institutionsand capital adequacy, asapproved by Law no.227/2207 and by variousregulations issued by theNational Bank of Romania

Directivetransposed byGovernmentOrdinance no.130/2000concerning theprotection ofconsumers inrespect ofconclusion andexecution ofdistance contracts

Directivetransposed by Lawno. 506/2004 onpersonal dataprocessing anddata privacyprotection in thetelecommunicationsector

Slovakia Act No. 160/2005Coll. whichchange andamend the ActNo. 22/2004 Coll.On ElectronicTrade and onchange andamend of Act nr.128/2002 Coll. onState Supervisionof Interior Marketin Terms ofConsumerProtection andon change andamend ofparticular acts asamended by theAct No. 284/2002Coll.

Act No. 510/2002Coll. on Paymentand Settlementas amended bythe Act No.604/2003 Coll.

Fully transposed by the ActNo. 483/2001 Coll. onBanks as amended by theAct No. 644/2006 Coll.

Act No. 160/2005Coll. which changeand amend the ActNo. 22/2004 Coll.on Electronic Tradeand on change andamend of Act nr.128/2002 Coll. onState Supervisionof Interior Marketin Terms ofConsumerProtection and onchange and amendof particular actsas amended by theAct No. 284/2002Coll.

Act No. 610/2003Coll. on ElectronicCommunication asamended by theAct No. 654/2007Coll. – in completeaccordance


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