Tag: mobile money

NTT DoCoMo: The Digital Pathfinder

The need for telco transformation

Shrinking revenues in voice and data mean telcos need to change

Telcos are facing difficult times; as we wrote in a recent report – Which operator growth strategies will remain viable in 2017 and beyond? – the days of meteoric growth are in the past, and telcos need to find a new approach to prevent a dramatic decline in their revenues. This is not a new story; STL Partners has been writing about this phenomenon and the need for business model change since 2006. In the afore-mentioned report we discussed seven different growth strategies used by telcos between 2009 and mid-2016, and came to the conclusion that only one, which involves developing or acquiring new businesses and services, is viable for 2017 and beyond if the industry is to reignite sustainable growth.

Digital services are an important part of this growth strategy. In fact, as Figure 1 shows, STL Partners estimates that digital business should represent 25+% of Telco revenue by 2020 to avoid long-term industry decline.

Figure 1 – Transformation priorities are different for every operator

However, the move to digital is difficult for telcos, who have traditionally relied on an infrastructure-based business model. Digital businesses are very different, and to be successful here telcos will need to make a fundamental shift from their traditional infrastructure-based business model to a complex amalgam of infrastructure, platform, and product innovation businesses.

One of STL Partners’ global observations is that all operators have different goals in the pursuit of transformation. This was also true with the group in Singapore, as shown by the following chart of a vote on the priorities assigned to different transformation objectives.

NTT DoCoMo – an example for other operators

With this in mind, telcos need to think about how they will develop new businesses and services. NTT DoCoMo provides a useful example for other telcos because it has done more than any other operator globally to develop digital services.

However, some people claim that the Japanese mobile market is so unique that it does not provide a useful role model for telcos in other markets. STL Partners disagrees with this point of view. Although the Japanese mobile market does have some unique characteristics, in some cases what was originally thought of as “unique” has just been proved to be “advanced.” An example of this is the popularity of apps and the iPhone – before this it was claimed that Japanese consumers were more engaged than those in other markets with mobile games and gadgets – however, the worldwide popularity of the iPhone and smartphones has disproved this.

In fact, although not advanced in every area, the Japanese mobile market has experienced several key phenomena earlier than other countries, such as an early peak in revenues and market disruption from non-telcos. Therefore, STL Partners thinks telcos should be examining the Japanese market to help them prepare for the future challenges of their own. Examples of this can be found in NTT DoCoMo’s annual reports – as early as 1999 the company was talking about the need to develop new sources of revenue (such as digital services and machine-to-machine communications) because of the inevitable decline in voice.

We therefore think that, although telcos in different markets cannot replicate NTT DoCoMo’s strategy in Japan like-for-like, they can certainly adopt similar practices to help them succeed in the digital telco world.

 

  • Executive Summary
  • Introduction
  • Objectives
  • Methodology
  • The need for telco transformation
  • Shrinking revenues in voice and data mean telcos need to change
  • NTT DoCoMo – an example for other operators
  • A snapshot of the Japanese mobile market
  • NTT DoCoMo’s history
  • A mature home market…
  • Softbank disrupts the market
  • NTT DoCoMo’s digital journey
  • Early recognition of the telco challenge, but regulation dictates the direction of evolution
  • An incremental journey to digital success
  • Adapting to the post-iPhone world
  • Can NTT DoCoMo’s digital success work overseas?
  • What was i-mode and why did it fail outside Japan?
  • What can other operators learn from NTT DoCoMo’s digital journey?

 

  • Figure 1: Traditional telco revenues forecast to continue declining
  • Figure 2: NTT Corporation, NTT DoCoMo’s parent company
  • Figure 3: Japanese mobile subscriber data, 1999-2015
  • Figure 4: Japanese mobile operators’ annual revenues, 1994-2014
  • Figure 5: NTT DoCoMo quarterly revenue – by business segment
  • Figure 6: NTT DoCoMo’s digital innovation milestones
  • Figure 7: Before and after DoCoMo ID
  • Figure 8: +d’s social value in health, education and agriculture
  • Figure 8: i-mode subscriptions – a runaway success in Japan

Understanding Fintech: Why Interest and Investment Has Exploded

Introduction

Why should telcos care about fintech? Telecoms operators have long been interested in financial services, especially consumer-facing financial services. STL Partners has discussed the relationship between telecoms and financial services in a range of prior reports, from Digital Commerce: Show Me the (Mobile) Money, to Apple Pay and Weve Fail: A Wake Up Call, and from Telco-driven Disruption: What NTT DoCoMo, KT, and Globe Got Right, to Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Companies.

It is fair to say that telcos have found only mixed success in financial services. While certain operators have had great success in recent years providing mobile money services, there have also been many examples of telco incursions into financial services that have not paid off. On the other hand, there have been many instances of successful disruption in financial services – even technology-led digital disruption. PayPal is the foremost example of a digital business that originally found a niche doing something that banks had made quite laborious – online payments for goods between private individuals – and making it easier. But these disruptions have, to date, been limited and individual. Why, then, should telcos pay attention now?

In the last two years, the wider landscape of financial services has begun to change, as the established players have faced disruption on multiple fronts from a large number of new businesses. This has become known as fintech, and interest and investment are taking off:

Figure 1: Google Trends search on ‘fintech’, 2011 – 2016

Source: Google Trends

Fintech therefore represents a potentially huge shift in the status quo in financial services: this short report provides an overview of this shift. STL Partners will follow up with a report that considers options for telecoms operators, and makes some strategic recommendations.

 

  • Executive Summary
  • Introduction
  • Disrupting the Financial Services Industry
  • Defining fintech
  • Why fintech’s time has come
  • The state of the ecosystem: investment is accelerating
  • Key Capabilities and Service Areas
  • Fintech specific capabilities: doing the same, but differently
  • Fintech service areas: Diverse and developing
  • The Future of Fintech
  • Growth ahead
  • …but there are uncertainties around the future evolution
  • The uncertainties could still play out well for start-ups
  • Conclusion and Outlook

 

  • Figure 1: Google Trends search on ‘fintech’, 2011 – 2016
  • Figure 2: Fintech companies are disrupting financial services
  • Figure 3: Global Investment in Fintech
  • Figure 4: VC-backed Investment in Fintech, by Region
  • Figure 5: A framework for understanding fintech
  • Figure 6: Fintech start-ups within each service area

Google/Telcos’ RCS: Dark Horse or Dead Horse?

Introduction

The strategic importance of digital communications services is rising fast, as these services now look set to become a major conduit for digital commerce. Messaging services are increasingly enabling interactions and transactions between consumers and businesses. Largely pioneered by WeChat in China, the growing integration of digital communications and commerce services looks like a multi-billion dollar boon for Facebook and a major headache for Amazon, eBay and Google, as outlined in the recent STL Partners report: WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce.

This report analyses Google’s and telcos’ strategic position in the digital communications market, before exploring the recent agreement between leading telcos, the GSMA and Google to use the Android operating system to distribute RCS (Rich Communications Service), which is designed to be a successor to SMS and MMS. Like SMS, RCS is intended to work across networks, be network-based and be the default mobile messaging service, but it also goes far beyond SMS, by supporting rich features, such as video calling, location sharing, group chat and file sharing.

The report then undertakes a SWOT (strengths, weaknesses, opportunities and threats) analysis on the new Google supported RCS proposition, before considering what telcos need to do next to give the service any chance of seeing widespread adoption.

Google’s strategic headache

To Google’s alarm, mobile messaging looks set to become the next major digital commerce platform. In some ways, this is a logical progression of what has come before. Although neither Google nor Amazon, two of the leading digital commerce incumbents, seem well prepared for the rise of “conversational commerce”, communications and commerce have always been interwoven – physical marketplaces, for example, serve both functions. In the digital era, new communications services, such as SMS, email and mobile calls, were quickly adopted by companies looking to contact consumers. Even now, businesses continue to rely very heavily on email to communicate with consumers, and with each other, and through Gmail, Google has a strong position in this segment.

But many consumers, particularly younger people, now prefer to use mobile messaging and social networking services to communicate with friends and family and are using email, which was developed in the PC era, less and less. People are spending more and more time on messaging apps – some industry executives estimate that consumers spend 40% of their time on a mobile phone purely in a messaging app. Understandably, businesses are looking to follow consumers on to mobile messaging and social networking services. Crucially, some of these services are now enabling businesses to transact, as well as interact, with customers, cutting the likes of Amazon and Google out of the loop entirely.

Largely pioneered by Tencent’s WeChat/Weixin service in China, the growing integration of digital communications and commerce services could be a multi-billion dollar boon for Facebook, the leading provider of digital messaging services in much of the world. The proportion of WeChat users making purchases through the service leapt to 31% in 2016 up from 15% in 2015, according to Mary Meeker’s Global Internet Trends report 2016. Moreover, users of WeChat’s payment service now make more than 50 payments a month through the service (see Figure 1), highlighting the convenience of ordering everyday products and services through a messaging app. In March 2016, Tencent reported the combined monthly active users of the Weixin and WeChat messaging services reached 697 million at the end of 2015, representing annual growth of 39%. See WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce for more on this key trend in the digital economy.

Figure 1: WeChat users find it convenient to combine payments and messaging 

Source: Mary Meeker’s Global Internet Trends 2016

 

  • Executive summary
  • Contents
  • Introduction
  • Google’s strategic headache
  • Winner takes all?
  • Google’s attempts to crack communications
  • Telcos’ long goodbye
  • RCS – a very slow burn
  • VoLTE sees broader support
  • Google and telcos: a match made in heaven?
  • A new phase in the Google-telcos relationship?
  • Building a business case
  • Conclusions
  • Strengths
  • Weaknesses
  • Opportunities
  • Threats
  • Next steps
  • Lay the foundations
  • What will Google do next?

 

  • Figure 1: WeChat users find it convenient to combine payments and messaging
  • Figure 2: Using Weixin Pay to complete a transaction in a fast food outlet
  • Figure 3: Leading communications & media sharing apps by downloads
  • Figure 4: Deutsche Telekom’s RCS app’s features include location sharing
  • Figure 5: All-IP communications services are gaining some traction with operators
  • Figure 6: Google Places aims to connect businesses and consumers
  • Figure 7: SWOT analysis of operators’ IP communications proposition
  • Figure 8: TOWS analysis for telcos in all-IP communications

WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce

Introduction

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing explores the rise of conversational commerce – the use of messaging services to enable both interactions and transactions. It considers how WeChat/Weixin has developed this concept in China, the functionality the Tencent subsidiary offers consumers and merchants, and the lessons for other players.

The report then goes on to consider how Facebook is implementing conversational commerce in its popular Messenger app, before outlining the implications for Amazon, Google and Apple. Finally, it considers how telcos may be able to capitalise on this trend and makes a series of high-level recommendations to guide the implementation of a conversational commerce strategy. This report builds on three recent STL reports, Building Digital Trust: A Model for Telcos to Succeed in Commerce, Mobile Authentication: Telcos’ Key to the Digital World? and Authentication Mechanisms: The Digital Arms Race.

Communications and commerce: two sides of the same coin

For Facebook, advertising isn’t the only fruit. When it hired the former head of PayPal, David Marcus, to run Facebook Messenger in 2014, it was a clear signal of where the social network is heading. Facebook plans to go head to head with eBay and Amazon in the digital commerce market, generating revenues by enabling transactions, as well as brokering advertising and marketing. The ultimate goal is to transform communications services into end-to-end commerce platforms that enable consumers and brands to “close the loop” from initial interaction through transaction to after-sales care.

Facebook is not alone. In fact, it is following in the footsteps of Tencent’s WeChat service. In the STL Partners’ Wheel of Digital Commerce (see Figure 1), the remit of WeChat, Facebook Messenger, Twitter, SnapChat and other digital communications services is expanding to encompass the guide, the transact and satisfy segments (marked in blue, turquoise and green), as well as the retain, plan and promote segments: the traditional sweet spot for social networking services, email and instant messaging.

Figure 1: Communications services move to facilitate the whole wheel of commerce

Source: STL Partners

Facebook, in particular, is following in the footsteps of WeChat, Tencent’s messaging service, which is evolving into a major digital commerce platform in its home market of China. Whereas email, SMS and many other digital commerce services have long carried commercial messages, together with advertising and, inevitably, spam, WeChat goes much further – it also enables transactions and customer care. The central tenet behind this concept, which is sometimes called conversational commerce, is that consumers will become increasingly comfortable using a single service to converse with friends and businesses, and buy goods and services. In some markets, third parties are adding a commerce overlay to existing communications platforms. In India, for example, several startups, such as Joe Hukum, Niki and Lookup, are touting ways to use WhatsApp, SMS and other digital communications services to transact with consumers.

For telcos, the growing integration of communications and commerce exacerbates a key strategic dilemma. Through voice calls and text messaging, telcos led the digital communications market for two decades, but now face ceding that market to over-the-top players using communications as a loss leader to support digital commerce. The question for telcos is whether to compete head-on with these players in both digital communication and commerce (a major undertaking requiring major investments in product development and marketing) or whether to fall back to just providing enablers for other players.

The final section of this report discusses this question further. But first, let’s consider the arguments as to why digital communications and digital commerce are natural bedfellows:

Markets have always combined commerce and conversations

Markets – essentially a concentration of vendors in one physical location – have been a feature of most societies and cultures throughout recorded history. They fulfil two key functions: One is to enable buyers and sellers to find each other easily. The second is to enable the exchange of information, news and gossip: the communications required to help human societies to function smoothly. For many shoppers, a visit to a physical market is as much about socialising, as shopping. In other words, communications and commerce have been intertwined for centuries. Messaging apps could extend this concept into the digital age.

Conversations help build trust

Communication is often a prelude for commerce. In both a personal and professional capacity, people often seek word-of-mouth recommendations or they canvas friends’ opinions on potential products and services. As consumers increasingly use communications apps for this purpose, these platforms are already playing a key role in purchasing decisions across both services and products. The obvious next step is to enable the actual transaction to also take place within the app.

Conversations can drive commerce

People use messaging apps to organise their social lives. They chat with friends about which bars to go to, which restaurants to dine at, which films to see, which concerts to attend and other entertainment possibilities. Once the decision is made, one of the group may want to book tickets, a table or a taxi. If such a booking can be made within the messaging app, all of the group will be able to see the details and act accordingly.

Convenient customer service

After a transaction is completed, customer service kicks in. The buyer may want to change an order, check on delivery dates or make a related purchase. The seller may want feedback. For younger generations growing up with the Internet, messaging apps represent a natural way to interact with customer service representatives.

Messaging has consumers’ attention

Although most smartphones host dozens of apps, few are used regularly. Messaging apps are among this chosen few. In fact, communications apps (social networks/messaging apps) soak up a huge amount of consumers’ time and attention. Data from comScore, for example, shows that social networks accounts for between one fifth and one quarter of all the time that consumers spend on digital services (see Figure 2).

Figure 2: Share of digital time of different categories of apps

Source:comScore

Merchants and brands need to go where their customers are and one of those places is messaging. Messaging apps are typically always running, frequently generating notifications. That means, for many consumers, a messaging app could be a convenient place from which to make purchases – it saves them the hassle of switching to another app or using a web browser. In an interview with Tech in Asia, Joe Hukum co-founder Ajeet Kushwaha noted: “Conversational commerce is going to offer Convenience 2.0 – better and bigger than Convenience 1.0 offered by e-commerce,” adding that Joe Hukum plans to make API (application program interface) integrations with a range of partners in order to enable quick transactions. “We’re at a point where the way we consume and transact is going to change drastically,” he contended.

The success of WeChat and the lessons it holds for other communications players suggests Kushwaha could well be right.

 

  • Executive Summary*
  • Communications and commerce: two sides of the same coin
  • WeChat – the conversational commerce trailblazer*
  • The merchant experience*
  • Muted monetisation*
  • Lessons to learn from WeChat/Weixin*
  • Facebook now following fast*
  • How much money can Messenger make from commerce?*
  • WhatsApp also targets commerce*
  • Takeaways: Facebook needs to work with the medium, not against it*
  • Implications for Amazon, Apple and Google*
  • Amazon – in danger of disruption*
  • Google – down, but not out*
  • Apple – already has the assets*
  • Conclusions and lessons for telcos*
  • How can telcos differentiate?*

(* = not shown here)

 

  • Figure 1: Communications services move to facilitate the whole wheel of commerce
  • Figure 2: Share of digital time of different categories of apps
  • Figure 3: The world’s most widely used mobile messaging services*
  • Figure 4: An example of a WeChat Subscription Account*
  • Figure 5: An example of a WeChat Service Account*
  • Figure 6: The key features of WeChat’s official accounts*
  • Figure 7: The main developer tools available to WeChat verified service accounts*
  • Figure 8: WeChat enables merchants to create a distinctive look and feel*
  • Figure 9: Some Chinese nurseries use WeChat to communicate with parents*
  • Figure 10: The WeChat Wallet offers easy access to a suite of services*
  • Figure 11: Tencent’s Red Envelope promotion was hugely successful*
  • Figure 12: WeChat’s depiction of a typical day for one of its users*
  • Figure 13: Tencent remains heavily reliant on online gaming revenues*
  • Figure 14: Facebook Messenger seeks to fill the gap in digital commerce*
  • Figure 15: Facebook follows in Tencent’s footsteps*
  • Figure 16: Hailing a taxi from within a conversation on Facebook Messenger*
  • Figure 17: Facebook Messenger will increasingly compete with Amazon Prime Now*
  • Figure 18: Telcos’ mobile money apps are becoming increasingly sophisticated*

(* = not shown here)

AT&T: Fast Pivot to the NFV Future

Objectives, methods and strategic rationale

AT&T publicly launched its plan to transform its network to a cloud-, SDN- and NFV-based architecture at the Mobile World Congress in February 2014. The program was designated as the ‘User-Defined Network Cloud’ (UDNC).

The initial branding, which has receded somewhat as the program has advanced, reflected the origins of AT&T’s strategic vision in cloud computing and the idea of a software-defined network (SDN) where users can flexibly modify and scale their services according to their changing needs, just as they can with cloud-based IT. This model also contributed to an early bias toward enterprise networking, with AT&T’s first major SDN-based service being ‘Network on Demand’: an Ethernet offering allowing enterprises to rapidly modify their inter-site bandwidth and make other service alterations via a self-service portal, first trialed in June 2014.

Data center-based infrastructure and SDN architectural principles have remained at the heart of AT&T’s vision, although the focus has shifted increasingly toward network functions virtualization (NFV). In December 2014, the operator announced it had set itself the target of virtualizing (NFV) and controlling (SDN) 75% of its network via software by 2020.  What this actually means was spelled out only in mid-2015, by which time AT&T also indicated that it expected to have virtualized around 5% out of the targeted 75% by the end of 2015.

What the 75% target relates to specifically are the 200 most vital network functions that AT&T believes it will need to take forward in the long term; so this is not an exhaustive list of every network component. The list comprises network elements and service platforms supporting IP-based data and voice services, and content delivery, ranging from CPE to the optical long-haul network and everything in between. What the list does not include is functions supporting legacy services such as TDM voice, frame relay or ATM; so the UDNC involves a definitive break with AT&T’s history as one of the largest and oldest PSTN operators in the world.

Correspondingly, this involves huge changes in AT&T’s culture and organization. The operator uses the term ‘pivot’ to describe its transformation into a software-centric network company. The word is intended to evoke a sort of 180o inversion of AT&T’s whole mode of operation: a transition from a hardware-centric operator that deploys and operates equipment designed to support specific services – and so builds and scales networks literally from the ground up – to a ‘top-down’, software-centric, ‘web-scale’ service provider that builds and scales services via software, and uses flexible, resource-efficient commodity IT hardware to deliver those services when and where needed.

AT&T has described the culture change needed to effect this pivot as one of the toughest challenges it faces. It involves replacing a so-called ‘NetOps’ (network-operations) mentality and team structure with a ‘DevOps’ (collaborative, iterative operations-focused software development) approach, with multi-disciplinary teams working across established operational siloes, and focusing on developing and implementing software-based solutions that address particular customer needs. According to AT&T Business Solutions’ Chief Marketing Officer, Steve McGaw, the clear parameters that the operator has set around the SDN architecture and customer-centricity are now driving team motivation and creativity: “A product that is going to fit into the SDN architecture becomes a self-fulfilling prophecy . . . . Because we have declared that that is the way we are going to do things, then there is friction to funding that doesn’t fit within that framework. And so everyone wants to get [their] project funded, everyone wants to move the ball forward with the customer and meet the customer’s needs and expectations.”

Allowing for some degree of marketing gloss, this description nonetheless portrays a considerable change in established ways of working, with hundreds of network engineers being retrained as software developers and systems managers. The same can be said for AT&T’s collaboration with third parties in developing the SDN architecture and virtualizing so many crucial network functions. AT&T is partnering with 11 vendors – both established and challengers – on the UDNC project, co-opting them into its dedicated Domain 2.0 supplier program. These vendors are:

  • Ericsson (multiple network functions, and also integration and transformation services);
  • Tail-F Systems (service orchestration: added to the Domain 2.0 program from February 2014 and then acquired by Cisco in July 2014);
  • Metaswitch Networks (virtualized IP multimedia functions, e.g. routers and SBCs);
  • Affirmed Networks (virtualized Enhanced Packet Core (EPC));
  • Amdocs (BSS / OSS functionality);
  • Juniper (routers, SDN technology, etc.);
  • Alcatel-Lucent (range of network functions);
  • Fujitsu (IT services);
  • Brocade (virtualized routers);
  • Ciena (optical networking and service orchestration);
  • Cisco (routers and IP networking)

In addition, in another challenge to AT&T’s traditionally proprietary mode of operation, the operator is collaborating extensively with a range of open source and academic initiatives working on various pieces of the SDN / NFV jigsaw. These include:

  • ON.Lab (a non-profit organization founded by SDN innovators, and specialists from Stanford University and Berkeley) – working on the virtualization of Central Office functionality (the so-called Central Office Re-architected as a Datacenter, or CORD) and the Open Network Operating System (ONOS) carrier-grade SDN platform. ON.Lab announced in October 2015 that it would partner with the Linux Foundation on open development of ONOS.
  • OpenDaylight (collaborative open source project hosted by the Linux Foundation, and dedicated to developing SDN and NFV technologies – various projects, including a tool based on the YANG data modeling language for configuring devices in the SDN)
  • OPNFV (another Linux Foundation-hosted open source project, focused on developing an open standard NFV platform – works mostly on the ARNO NFV platform).

AT&T’s Architecture – a technical summary

If you want to understand how this all fits together, consider the CORD project’s architecture as shown in Figure 1. CORD is an AT&T research project which aims to transform its local exchanges, Central Offices in US parlance, into small data centres hosting a wide range of virtualized software applications. As well as virtualizing the core telco functions based there, they will eventually also provide edge hosting for new products and services. The structure of CORD is the template for how AT&T intends to virtualize its network and how it intends to work with the three open-source groups ON.Lab, OpenDaylight, and OPNFV. Figure 1 shows how services are created in the XOS orchestration platform out of OpenStack virtual machines, OpenDaylight network apps, and ONOS flow rules.

Figure 1: How the Central Office Re-architected as a Datacenter project works

Source: ON.Lab

What’s the benefit?

This means that AT&T can …

 

  • Executive Summary* 
  • Objectives, methods and strategic rationale (shown in part here)
  • Progress and key milestones*
  • Analysis: proceeding on all fronts*
  • Next steps: getting it done*

(* = not shown here)

 

  • Figure 1: How the Central Office Re-architected as a Datacenter project works
  • Figure 2: NFV means re-organising your product bundles, which is one of the main reasons it’s worth doing*
  • Figure 3: AT&T’s publicly disclosed virtualized network functions (VNFs) as at October 2015*
  • Figure 4: What AT&T is concentrating on versus Telefonica*
  • Figure 5: Functions in line for virtualization by AT&T*
  • Figure 6: How AT&T is doing versus its primary competitor, Verizon in this space*

(* = not shown here)

Full Article: Mobile Payments: Lessons from the world’s leading exponents

Payments technology and how telcos can profit from it is a favourite topic for study by the Telco 2.0 initiative. Fundamentally payment systems are two-sided markets – payers and payees interact not directly, but through a platform to conclude transactions. Pricing, and which side pays, is crucial to maximize participation, volume and liquidity on the platform. Interconnection strategies with other payment platforms also play a vital role, not only in increasing convenience but in determining share of the value chain.

In this article, we examine in depth two African mobile payments solutions that we consider to be the leading examples of mobile payment, M-PESA and Wizzit. These payment solutions take very different approaches – M-PESA is very much a classic Telco 2.0 style platform business, and Wizzit is designed as an extension to traditional banking. We consider lessons learnt from both for operators worldwide.

M-PESA in Kenya – a star following the ‘Golden Rules’ of platform businesses

There is no doubt that M-Pesa is the star of the current mobile payments landscape, however, one seldom quoted fact is that the platform is not yet profitable more than two years after launch. This was revealed by the CEO of Safaricom, Michael Joseph, in the recent results conference call. This is perhaps the first golden rule of platform business – it requires patience and takes time to build both critical mass and profitability.

The next golden rule of the platform business is that pricing is crucial, especially when deciding which side pays the fees.

kmm-payments.png

The first and perhaps the most important pricing point about M-PESA is that it is free to join – there are currently no membership fees or recurring charges, everything is transacted on a pay-as-you-go basis. While this may seem obvious, it is not always the case with all payments platforms, especially some high-end credit cards. Such is the success of the M-PESA registration scheme that as at end of March-09, M-PESA had 6.175m users which is 46% of the Safaricom base. There was an average of 11k registrations per day during March. To further encourage registrations, there is differential pricing between off-net and on-net pricing: M-PESA users can send money to non-registered users, but it is much more expensive.

The second most important pricing point about M-Pesa is that there are no associated carriage costs (e.g. SMS cost) in using the system – the price of the mobile network usage is bundled in with the transaction costs. Similarly, to deposit money is free – the cost of the “cash-in” process is paid for by the transactions that the cash generates. Also, using cash to buy airtime (either for yourself or someone else) is free – this is paid for by normal voice & text usage charges. The M-PESA system is designed so that the “cash-out” transactions subsidise both the registration and cash-in processes.

The next pricing feature of the M-PESA system is that it is “receiver-pays”, the sender pays a nominal charge but the receiver pays the majority of the transaction cost. This is very similar to how most credit and debit cards operate, but completely different to how voice calls are charged in “calling-party-pays” environments.

Used for paying bills, at ATMs, paying wages, and person to person

M-PESA originally started as a person-to-person money transfer system, but the PayBill features indicates how the capabilities of the platform are growing over time. M-PESA currently has 51 PayBill partners and users can pay a variety of bills from utilities, transport to even school fees through the platform. M-PESA has added these capabilities as the registered users have grown and the payment platform was proven in an adjacent field. Safaricom is in a much stronger position to negotiate the rates now the platform has achieved critical mass – and enforce the “receiver-pays” design of the transaction fee.

Originally the “cash-out” process could only be undertaken at M-PESA authorized agents. Again, now the platform has reached critical mass, an ATM operator, PesaPoint, signed a deal with Safaricom in Sept 2008 to allow cash withdrawals at their ATMs. Again, Safaricom is a strong negotiating position understanding fully the cost of their current “cash-out” process

Even more interesting is that M-PESA is now being used to pay wages, especially of casual workers. The pricing here is not declared, but I’m sure it is not “receiver-pays”. An innovative use of the platform was that Safaricom used it themselves to pay their maiden dividend below KES 35,000 to its 830k shareholders. Safaricom estimated the saving by using M-PESA as KES73m (USD940k) compared to traditional payment mechanisms. A very effective case study of using M-PESA for micropayments.

Key Challenges for M-PESA

The development of M-PESA has been achieved without Safaricom holding a banking licence. The money being circulated is deposited in a physical bank account at the Commercial Bank of Africa, which supervises the daily transactions of M-PESA. Users make their transactions using virtual information.

This is the challenge for M-PESA going forward – ensuring that they get the right support from the banking regulators. The potential problem is that banking regulation could both add additional cost to the platform and hamper innovation going forward. In addition, the traditional telco regulators will probably want to examine at some time in the future if the M-PESA platform is supporting the dominant position of Safaricom in the mobile world – Safaricom themselves estimate they have 85% share of mobile revenues. Also, future interconnection into the existing banking infrastructure needs to be achieved at a rate which does not increase the transaction costs of the platform.

Wizzit in South Africa – a mobile extension of traditional banking

Wizzit is another transformational banking service launched in 2005 aimed at serving both the unbanked and underbanked which are estimated to be in excess of 14m people in South Africa alone. Wizzit positions itself as a virtual bank and has no branches of its own. Wizzit uses a combination of mobile and traditional payments technology. On mobile, each user interacts with an USSD-based application for person to person transfers, person to business transactions, pre-paid purchases, any other internet-enabled banking processes, and to let it act as a point of sale device in the informal sector, rather like Oi Paggo. The application works on all mobile phones on all mobile networks. Wizzit also issues a Maestro branded debit card for transactions in the formal sector and ATM cash withdrawals. Wizzit has a banking license through an arrangement with the South African Bank of Athens. Therefore, Wizzit cannot be viewed as pure mobile banking application, but instead as an extension of traditional banking infrastructure. Wizzit has attracted venture capital from the International Finance Corporation.

Building a new route to market

Safaricom in Kenya already had a distribution network of entrepreneurs selling handsets and airtime and a brand well-known for handling balances; Wizzit’s first hurdle to overcome as a start-up was to build this trusted brand, which is essential in banking, and build a sales force. (We discussed the vital importance of this element here after Zain’s ZAP launched as a competitor to M-PESA.)

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Wizzit’s innovative solution was to recruit the jobless, who have an intimate knowledge of the potential customers, and today Wizzit has a direct salesforce in excess of 3,000. The Wizzit Kids are paid a commission based upon both registrations and transactions. Registration is not free and costs ZAR50 (USD6). Although cheaper than opening an account at a major South African bank and a much simpler process, the registration fee represents a significant barrier to entry for the platform.

The transaction fees also appear to be not as favourable to a two-sided business model compared to M-PESA. Rather than a “receiver-pays” type of model, every individual transaction is charged. One of the key lessons from two-sided business model theory is that the ultimate beneficiary of any transaction should be the one who pays. However, the relative cost of banking is much cheaper than traditional banking accounts and the fees are geared to the cost of using the traditional clearing system.

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Wizzit had competition almost from day one with MobileMoney, a rival service with a very similar cost structure. MobileMoney is, a joint venture between MTN, the second largest mobile operator, and Standard Bank launching a rival service with a very similar cost structure. MobileMoney uses a SIM toolkit approach, rather than the more lightweight USSD service.

Wizzit does not advertise its customer base or operating metrics, but a recent article in the Financial Times puts its user base at 250,000. Wizzit has plans to break-even in 2010 and is currently loss-making. The key challenge for Wizzit going forward is not competition from the traditional banking sector, but what happens if a competitor emerges, targeting their demographic with a M-PESA type charging model.

Vodacom, South Africa’s leading mobile operator, is part of the same group that launched M-PESA in Kenya. Vodacom have launched the M-PESA service in Tanzania and it is probably only a matter of time before the service arrives in South Africa.

Lessons from the leaders

Mobile banking solutions will always be a creature of the environment they operate in. Two similar services targeting a similar demographic (the unbanked) have ended up with radically different designs especially in terms of cost and different take-ups. However the trend is clear – mobile payments in emerging markets, of whatever nature, offer a real solution to a real problem with potential for mass market take-up.

For Western operators, like Zoompass, the task is much more complex with most of the population already having existing banking facilities with often multiple providers – operators are not trying to best the deficiencies of cash transactions, but the efficiency of plastic transactions. Western operators also suffer from not having the same low cost, entrepreneurial distribution networks. Most “cash-in” transactions for prepaid mobile users are already served electronically from banking accounts; and even where cash is used, the points-of-sale for electronic top-ups already have a multitude of devices for accepting plastic and have limited loyalty to the mobile operators.

Payment platforms win or lose on four key features: security, availability, simplicity and cost. Mobile payments have a high hurdle to overcome with security and availability, but simplicity and cost is definitely an potential area to innovate in going forward. And crucially, it is vital to design payments platforms on 2-sided business model principles and avoid duplicating pricing models from the banking world.