What is mobile payment?

A mobile payment is the transfer or payment of funds typically to a person, merchant or business for bills, goods and services, using a mobile device to execute and confirm the payment. The payment tool can be a digital (virtual or e-) wallet, mobile browser, or SIM toolkit / mobile menu.

Mobile payment is one of the many mobile financial services (MFS) available today and is seen as a gateway to other mobile financial services such as, mobile banking, insurance, credit/lending and investment products. More recently consumers are adopting cryptocurrency for payments, trading, savings and investing.

A mobile payment can be person to person (P2P) or consumer to consumer (C2C) transaction as well as consumer to business (C2B), business to consumer (B2C) or business to business (B2B) transaction. A P2P payment can be referred to as a mobile money transfer (MMT) while more commercial C2B, B2C and B2B transactions could be more strictly defined as mobile payments.

Forms of mobile payment: Proximity and remote

Mobile payments can be classified as proximity or remote payments in that they occur within a proximity location (distance and range) such as a point of sale (POS) or remotely when paying a bill online, sending money to someone (e.g. to split a bill) or when sending a remittance.

With proximity payments the customer’s mobile phone and the merchant’s physical POS or mobile POS are in the same location. The merchant POS location may be attended (in-store) or unattended (self-check-out, vending machine, unmanned store).  Both parties communicate and transact using a proximity mobile payment technology such as near field communication (NFC) wallet, QR barcode or Bluetooth low energy (BLE). Announced in 2021, Samsung smartphones will no longer feature magnetic strip technology (MST) with its Samsung Pay wallet as Mastercard, a major card issuer is planning to remove magnetic strips from cards starting in 2024 as the more secure EMV (Europay, Mastercard, Visa) chip and pin cards become standard.

Remote payments are made over a fixed or mobile (internet) telecommunication network irrespective of the customer’s location. Remote payments can support bill payments and merchants that don’t have physical POS such as a street vendor but also online merchants that don’t have a physical presence or sell digital products and services.

Mobile Payments location, size, technology, funding

Source: Source: Smart Card Alliance / Mercator Advisory Group, STL Partners

The Secure Technology Alliance (formally Smart Card Alliance) highlight “remote mobile payments can be implemented using the existing financial payments infrastructure or a closed loop mobile payments system.”

A closed loop system provides services directly to both payers and payees and an example of this would be a mobile money service for domestic payments such as M-PESA in Kenya, WeChat Pay and Alipay in China. As such, remote mobile payment systems can be ideally suited to underbanked markets where consumers and merchants are not part of the formal financial baking system and where P2P payments are relied on more heavily. See Understanding the unconnected. Remote mobile payments can be made through mobile menu, a mobile browser, in-app or through e-wallet app.

Explaining mobile money, electronic money and mobile banking

Mobile money or m-money as defined by the IMF “is a pay-as-you-go digital medium of exchange and store of value using mobile money accounts which is typically offered by a mobile network operator (MNO) or another entity in partnership with an MNO and often independent of a traditional banking network”. A bank account is not necessary to use mobile money services as customers can use a basic mobile phone and register with a mobile money agent. The mobile money agent offers a virtual account / mobile wallet linked to the customer’s mobile phone number and allows customers to perform transactions with minimal physical contact using a mobile money menu system such as the SIM toolkit with SMS notification delivery, USSD or through a mobile App.

Mobile money has high levels of market penetration in many low- and middle-income economies, particularly among the unbanked and underbanked populations.  The mobile money entity is serviced by a large agent network and exceeds the distribution and reach of the traditional branch banking network in that market. According to the GSMA there were 310 live mobile money services in 96 countries as of 2021.

Electronic money or e-money is a digital alternative to (fiat) cash (essentially pre-paid money) stored electronically on cards, devices or online systems which can be used to make cashless payments to individuals and businesses. Examples of e-money included funds stored in a mobile money account, a prepay card or an online account like Paypal or Revolut. Safaricom’s M-PESA, Orange Money, MTN Mobile Money (MoMo) are just some examples of mobile money and e-money solutions. Safaricom’s M-PESA in Kenya alone serves over 30 million customers and in 2021 it was announced that half of Kenya’s GDP is now transacted on the M-PESA platform.

The success of M-PESA has led to the roll out of many financial services products (savings, credit, loans) in partnership with traditional national banks. Similarly, Orange Money which started out in 2008 in the Côte d’Ivoire, enables digital payments and money transfers in 18 countries in Africa and in Romania. See STL Partners reports – Are telcos’s smart enough to make money work? and Cashing in on the end of cash.

Mobile banking services on the other hand are linked to a formal bank account with customers using their official bank’s mobile application on their smartphone, mobile browser or a linked (credit/debit card) digital wallet on their phone to access it banking services.

Telecom operators such as Orange are also investing in banking services launching Orange Bank in France 2017 and later expanding into Spain. The operator faces intense competition in Europe but could succeed if the group is prepared to make a sustained investment in turning Orange into a financial services brand.

NTT DoCoMo is another example of a telecom operator establishing itself as a player in financial services. Finance and payment services such as d Payment and d Card have been one of the main drivers behind the success of NTT Docomo’s Smart Life business which also includes content/lifestyle solutions.

Mobile payment technology: Digital wallets and rising super apps

A digital wallet is an application on the smartphone which stores banking credit/debit card as well as loyalty cards and coupon information. Near field communication (NFC) is the most dominant technology linking debit/credit cards to the wallet enabling contactless payments at the POS.  Wallets also offer payment via QR code where customers scan the QR code at the merchant’s POS. Operator wallet apps such as Turkcell’s Paycell and Vodacom’s VodaPay also offer QR payment functionality for their merchant network – where customers pay through funds held on the (mobile) wallet or through a linked banking credit/debit card. QR code has become a popular payment feature across many super apps. In the case of the VodaPay super app, customers can also make payments/partial payments using coupons and cashback rewards.

eWallets are defined by Worldpay, a global payments processor as “an electronic card used for transactions made online through a computer or a smartphone, like a credit card or debit card. When used with a smartphone, consumers store the credentials of their preferred card for payments and use biometrics to authorise the transaction.” Worldpay cites Alipay, WeChat Pay (both strong in China), PayPal (global), Qiwi and Yandex Money (both strong in Russia) as examples of such eWallets. But Apple Pay, Google Pay and Samsung Pay are also a form of eWallet, albeit one that is explicitly linked to a mobile device. With the rapid growth of online shopping, usage of all these wallets is rising steadily. See Cashing in on the end of cash.

According to Worldpay, this growth in digital wallets will be driven by innovation such as improvements to the check-out experience offering advanced credit solutions such as buy now pay later (BNPL) and faster real-time payment infrastructure. BNPL represented 2.9% of global e-commerce transaction value in 2021 and Worldpay expects this to rise to 5.3% of e-commerce by 2025. BNPL players include Klarna, Afterpay (acquired by Square) and PayPal.

Global e-commerce and POS payment methods 2021 and 2025 forecast

Source: Worldpay global payments report 2022 – https://worldpay.globalpaymentsreport.com/en

Worldpay points to the “anchor role”  digital wallets are increasingly playing in e-commerce marketplace ecosystems as local wallets transform into regional and global super apps” and points to wide acceptance and usage of digital wallets in Asia Pacific and in particular, the popularity of super apps such as Alipay and WeChat Pay.  The digital wallet’s share of e-commerce transaction in Asia Pacific is projected to rise from 68.5% in 2021 to 72.4% (over US$3.1 trillion) in 2025.

A super app offers a range of e-commerce (lifestyle) services under one app facilitating payment transactions between users and merchants on the platform and offering a range of financial services beyond payment such as credit, savings, and investment. See Can VodaPay transfer Alipay to South Africa?. While WeChat evolved out of a messaging service in China, and Grab evolved out of a taxi booking service in Malaysia, many of today’s popular super apps have developed out of mobile payment services such as Alipay in China, Paytm and PhonePe in India. The addition of payments and financial services has helped to unlock the success of other such as Wechat, GrabPay, Gojek’s GoPay in Indonesia.

WeChat ecosystem

Source: https://www.octoplusmedia.com/wechat-ecosystem/

Bringing financial services capabilities together

As highlighted above, mobile payment is seen as a gateway to other mobile financial services mobile banking, insurance, credit/lending and investment products. In our April 2021 report, Are telcos smart enough to make money work?  STL highlighted how most telcos have the capabilities required to develop a compelling financial services proposition, except for three – credit/lending and investment products and to address those gaps, most telcos need to partner with specialist fintech players.

Financial service capabilities by service provider

Source: STL Partners