In this article, we present four insights from the 2017 edition of our Digital Economy Readiness Index (DERI), which evaluates the success factors and challenges of mobile financial services (MFS) initiatives by telecoms operators, technology companies, financial institutions, device vendors, and over-the-top (OTT) players in Europe and North America, the Middle East and North Africa, emerging Asia–Pacific, and Sub-Saharan Africa.
Insight 1: Payments and digital identity are becoming increasingly intertwined
Identity services are converging in mobile handsets due to the potential to use data to understand users’ behaviour and prevent fraud. In Sweden, Swish, a mobile payments app developed by six of the largest retail banks, is used by nearly two-thirds of adults in the country. Key to Swish’s success is BankID (launched in 2003), an electronic identity platform for financial services issued by banks. BankID is used for authentication and digital signatures by nearly 60% of Sweden’s population. Consumers’ familiarity with Mobile BankID was instrumental in ensuring that they would feel comfortable with transacting through Swish’s app.
Identity and mobile financial services are also converging in developing countries. In Pakistan, Telenor faced the mandatory re-registration of all active SIMs in 2015, and turned this otherwise costly process into an opportunity to provide more-sophisticated MFS thanks to the additional data that it holds on its customers.
Insight 2: Multi-sided markets are challenging, even for established players
In developed countries with high banking penetration, Apple, Google, and Samsung have launched solutions with a focus on contactless payments in shops. This focus met with the challenges inherent to multi-sided markets, and detracted innovators from what we believe is the real opportunity for mobile payments: online transactions.
Apple, for example, encountered delays in establishing partnerships with retail banks in Australia and the UK, while Google had to pivot its mobile payments strategy from contactless payments on Google Wallet to online payments through the redesigned Android Pay platform. In the USA, Samsung Pay has focused on supporting magnetic strip cards, although these may soon become obsolete as US merchants roll out chip-and-PIN-compliant terminals.
In contrast, Tencent (the company behind Chinese OTT platform WeChat) chose not to wait for contactless terminals to become widespread, focusing instead on QR codes, which is a technology widely used in China. In doing so, Tencent sidestepped the issues of NFC compatibility on its users’ handsets, and the availability of contactless terminals at shops.
Insight 3: To succeed against incumbents, some operators are becoming banks
Operators face competition in digital services from players with worldwide reach, and potential disruption from new entrants. For this reason, we believe that the most defensible opportunities for operators are in activities that are highly regulated, nationally bound, and require high levels of investment. Banking is a good example. It is an activity that is increasingly becoming mobile-centric, as customers become comfortable with transacting through their mobile devices, and banks look to reduce costs by moving customer points of contact online. For example, in the UK, several mobile-first banks like Atom, Monzo, Starling and Tandem launched in 2015 and 2016.
Operators have realised that to succeed against incumbents they will need to invest heavily in acquiring financial services capabilities – and maybe even become banks themselves. For example, in France, Orange acquired 65% of Groupama Banque in 2016, and in 2017 plans to launch Orange Bank, a mobile-centric retail bank offering current and savings accounts, credit, and payments products. This initiative comes despite the setbacks of its mobile banking partnership with mBank in Poland, where only 2.1% of its 16.4 million subscribers have used the service at some point after it was launched in 2014. Another example of a telco buying a bank is Telenor Pakistan, which acquired the remaining 49% of Tameer Bank that it did not yet own in March 2016, making it a wholly owned entity within Telenor Group.
Insight 4: Payments joint ventures have a high risk of failure
Joint ventures (JVs) are considered to be a way to gain market share by combining the customer bases of the constituent firms. However, payments JVs between operators and retailers in developed countries have failed due to misaligned incentives – for example, there is no single owner to champion the development of new features, or to carry the cost of launching and marketing the solution.
- WyWallet – a JV between Swedish operators 3, Tele2, Telenor Sweden and Telia – was sold to payments provider Payex in 2015 after operating at a loss for several years.
- MCX, the consortium comprised of Best Buy, Walmart and other US retailers that developed the CurrentC service, shut down in June 2016.
- Softcard (formerly known as ISIS), an operator partnership between AT&T Mobility, T-Mobile USA and Verizon Wireless, was sold to Google in 2015.
Enrique Velasco-Castillo is a lead analyst for Analysys Mason’s Digital Economy Strategies research program.