Where will the money be made in Mobile Contactless?
[Nick Norman] Whilst many of you have been enjoying the sun, some of us have been slaving over hot spreadsheets trying to model the flow of funds around the value network for mobile proximity payments. I realise that we are slightly obsessed, but we believe that the market is sufficiently mature to justify discussions between interested parties around the levels of risk and reward in that network. From where we are sitting, it would appear that every organisation wants the revenues, but none want the risk. Until parties realise that there may be risks associated with their portion of the revenue and can quantify those risks, commercial discussions will not progress further than the one-to-one relationships (e.g., Orange-Barclaycard) that currently dominate the mobile contactless market.
Recognising our need for more detailed knowledge about the costs and dynamics within mobile network operators (MNOs) in order to develop a better understanding of the risk/reward curves, we brought our good friends at PIRAN Partners into our deliberations. Andrew, Paul and their team have spent the last few years helping organisations to negotiate MVNO contracts with MNOs and helping MNOs to negotiate with each other around potential Joint Ventures, such as sharing networks. To support these activities they have assembled a unique in-depth understanding of the costs and cost drivers within MNOs, which complements our understanding of those costs within retail banks, transit operators and retailers. Together we have developed a spreadsheet tool for analysing the market and supporting decision-making.
Our initial analysis focuses on the UK market. It is based on publicly available information extrapolated in line with our joint knowledge of the drivers within that market. It assumes that the uptake of mobile contactless (by which we mean NFC enabled) services is dependent on the:-
- Availability of NFC-enabled devices.
- Penetration of contactless POS devices (the rails for mobile to run, as Dave Birch recently blogged).
- Penetration of mobile POS devices, similar to (but more secure than) the Square device.
Spurred on by the increased availibility of NFC-enabled handsets (such as the Nokia C7, the Samsung S2 and the Blackberry 9900) and demands for devices from US based MNO’s to support initiatives such as ISIS, all the major handset manufacturers have launched or announced plans to launch NFC-enabled devices (except Apple, who never release details of future products). We believe that this trend will continue and that 2013 will be the tipping point for NFC-enabled smartphones in the UK; in 18 months time more NFC-enabled smartphones will be issued than non NFC-enabled devices. By 2020 all smartphones in circulation, around 38 million devices, will be NFC-enabled.
Deployment of contactless POS devices in the UK has been driven by Barclaycard. However over the summer the major fast food restaurants and retailers either deployed or announced trials of contactless devices at their POS. By 2020 we expect all retail POS to be contactless or NFC-enabled. NFC-enabled terminals enhance the functionality delivered by contactless readers; they facilitate the peer to peer communications, as defined by ISO18042, required to check coupons, remove the value from the total transaction value and add loyalty points. They will enable the standard mobile contactless transaction of “Check for Valid Coupons, Deduct Value from the Bill, Make Payment, Collect Loyalty Points and Obtain Receipt” in one tap.
As we have consistently advised our clients, we believe that the most disruptive mobile contactless application will be using the phone not as a card emulator but as a card reader. In theory by 2020 there will 38 million EMV compatible POS devices in circulation in the UK, compared to the current 1.2 million. Devices like Ingenico’s iSMP, which we understand is currently being used with iPhones in Apple stores in the UK, and the iZettle’s are part of the roadmap to, and key to the success of this market. They will allow consumers, currently using their debit card to buy coffee in their local cafe, to use the same product to pay the window cleaner, stall holder or home party organiser. The early result from Square in the US show just how dynamic this currently untapped market is. The schemes will allow the market to iron out their rules and regulations and understand the needs of the cardholder around validating that the merchant can accept payment card transactions and is not just harvesting card information.
Our analysis indicated that with the correct pricing models and distribution channels Mobile POS will double the number of terminals in circulation over the next two years, and increase it by 10 fold by 2016. We believe that the devices should be sold on a Pay-as-you-Go basis, through similar retail channels as mobile phones, i.e. MNO’s and electrical retailers.
Most NFC business models for MNOs, in the public domain, are based on either sharing transactions revenues or renting space on the Secure Element; it is envisaged that the rental fee will be based on the projected revenue from the application to be loaded on the Secure Element.
Unfortunately for the organisations promoting these models, our analysis indicates that the majority of mobile contactless interactions are unlikely to generate direct transaction based revenue streams. We estimate that the average number of mobile contactless transactions per device per day will be around 1.3 in 2015, rising to 2.2 in 2020. Over 65% of these transactions will not generate direct revenues, i.e. coupons, vouchers, access control and smart posters.
For this reason we believe that differential pricing around SIM rental fees will be difficult to sustain and that the leading MNOs will focus on the secondary revenues that they can generate from the applications on the SIM, e.g. revenue sharing through co-brand deals and selling transit and entertainment tickets which use the access control application. This is where Google Wallet has already shown the way forward.
The tipping point for mobile contactless transactions will be around 2015. This is the date by which the combination of NFC-enabled Smartphones, Contactless and Mobile POS and ‘mobile’ wallet applications will drive the rapid growth in the number of mobile contactless transactions.
By 2020 the average spend per NFC-enabled device will be £1,000 a month. This will include a mixture of payment card payments, payment card acceptance and person to person payments. At current transaction fee rates, the total available revenue to share between the various players in the ecosystem will be less than £15 a month.
The Business Model
We presented our initial version of the business model at the NFC World Summit in Nice last month. It created a great deal of debate and discussion. We are currently engaged with several parties who are interested in expanding its scope and depth. If you would like to part of these discussions please let me know.
This is an exciting time for the industry. We believe that it needs a little less PowerPoint and a lot more of these types of business models discussions if it is to grow.
These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers
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