Where is the money?

Mobile payments is an interesting concept. I have heard a lot of people talking about how making payments from a cellphone could be earth-shattering - how it would change the way that people shop and do business for ever. And I believe that they are right, but in order to make this vision happen we have to solve a difficult problem... where is the money?

No, I don't mean, how we are going to make money by running a mobile payment scheme. I mean, what are people going to use as money to pay with. If they complete a transaction and they hit "send" (or "pay") where will the money come from to do this payment. To put it in another way: "which account will be debited". Many different solutions have been suggested and implemented, but all have significant challenges. Below is a summary of some of the Value Stores that could be used as the money in mobile payments:

• Using an existing credit card as the source for doing a mobile payment would seem to be the most obvious approach. This has successfully been implemented, but suffers from the following challenges: A relatively small percentage of people with mobile phones have credit cards globally, the transaction can be expensive as credit card fees must be paid before any other revenue can be generated and the rigid (but sound) rules regarding fraud places a very big risk on such an approach.
• Using the mobile operator's billing engine as the source for payments have been proposed, but this approach can even be more expensive than credit card transactions. (See one of my previous blogs) . In addition, expect regulatory problems and significant challenges to extract cash out of the system. It is also unlikely that the mobile operator would be happy with sharing money earmarked for telecommunications with other retailers.
• Utilising existing bank accounts could be interesting, but integrating telecommunication systems to core banking systems can be expensive and time-consuming. Also the strain on a banking system when millions of small transactions starts hitting it, can be outside the design limits of such a system.
• A new dedicated mCommerce account may be the way to go. Remember that when credit cards (a new payment system) were launched in the 1970's, it came with its own dedicated account management system. Why should that not be the case for mobile payments?
  

Value Store System

It is impossible to provide a payment system (any payment system) without connecting (or being able to access) some kind of value store. A credit card based payment system must debit a credit card account and an EFT payment system must debit a bank account somewhere along the line. This is the case for mobile payments too. Without being able to debit (or credit) some kind of value store, it would be impossible to deploy a payment system.

Most mobile payment solutions provide a mobile payment experience that integrate into an existing value store. For instance, mobile banking solutions that provide a mobile channel to existing bank accounts or mobile payment solutions that mobile enable an existing credit card. The challenge with these solutions is to ensure a seamless integration to the existing systems. Some of the challenges is to ensure that the registration process (when a mobile phone gets linked to a credit card for instance) does not create an opportunity for fraud. Also the boundaries and rules related to liabilities and disputes are not always easy to implement consistently.

Other solution providers (only a few) provide the ability to open a new type of value store that can be utilised to perform mobile payment transactions with. This facility is particularly interesting in markets where more people have mobile phones than does have bank accounts or credit cards. The advantage of this approach is that the value-store can be designed in such a way that it is much more tightly integrated with the mobile payment solution. At the same time many challenges must be overcome, like conformance to regulations, compliance with international protocols and the ability to perform audits and reconciliations that will be acceptable to a central bank.

The selection of and deployment of the value store element of the solution is probably the most important decision that can be taken. The different components that must ideally be present in a mobile enabled value store are:

• Real-time clearing
• Push and pull payment support
• Support for a multitude of primitive transaction types
• Security paradigms compatible with mobile enablement
• Ease of use
  
• Transparency

The key to deciding on a value store strategy should not be dictated by available technology, but rather be based on market realities and business objectives.