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Eastern Europe will lead Western Europe in mobile payments

Mobile payments could explode into a US$22 billion market within the next three years. The spur will not be mature telecoms markets like Western Europe but the emerging markets or regions such as Eastern Europe. Terence Trench, Senior Vice-President of Commercial Operations at mobile payments specialist Upaid explains his predictions - and asks more-than-justified questions about Western Europe's practices.

Mobile payments, NFC, m-commerce, contactless payments...These are just a few of the buzz words of the moment, being thrown around by mobile operators, card companies, merchants and banks. According to a recent report by Juniper Research, mobile payments will generate transactions worth approximately US$22 billion worldwide by 2011.

So who is leading this cash-free payment revolution? It is certainly not the USA and Western Europe. It is in fact the less "mature" emerging markets of Eastern Europe that are proving to be the innovative leaders and this has left the industry wondering if mobile payments will in fact be able to compete with cash or cards as a viable payment method in Western Europe.

The East...

So, what are the specific forces driving Eastern Europe to be such a pioneer in mobile payments?

It all comes down to payment methods and infrastructure. The payment methods that are so familiar in the West are distinctly absent in emerging markets and electronic banking technologies, e.g., direct debit, do not exist in a large number of Eastern European and African countries. This means that there is a lack of an efficient low-cost monthly payment system, and merchants and banks need to find alternative methods to facilitate payments.

Mobile is able to fill this gap. The majority of customers are on pre-pay accounts and a typical mobile user makes an average of 60 "top-ups" a year. Each of these 60 top-ups is a necessary yet inconvenient payment for the customer to make, yet it creates an opportunity for operators to benefit by offering more convenient payment methods.

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Terrence Trench

In Serbia, mobile operators are working alongside banks to offer customers a direct and simple way to recharge their mobile phone via SMS. The country's operators have joined a consortium of a number of leading banks (ten now in total) who are cooperating to bring a full mobile payments system to the country's 5.3 million phone users. The banks (which include a mix of local and international representatives such as Continental, Komercijalna and Piraeus, as well as Austria's Raiffeisen, France's Société Générale, Greece's Alpha bank and Italy's Banca Intesa) represent over 75% of the banked population with more banks applying to join.

With the service, customers register their debit or credit card to their phone allowing them to recharge their prepaid phone in seconds with a simple SMS message. This seemingly simple scheme may not be very exciting but the foundations of the scheme are unique. There is one sole provider. All of the banks have a single contract and a single connection to one provider, Upaid. This connection allows any bank to register its customers to any operator and similarly it allows any operator to provide the instant SMS Recharge facility to any banked customer. Additionally, a communal marketing plan is being put in place to promote the service.

Once a customer is registered to the service, then more exciting payment opportunities such as utility bill payments and person-to-person transfer can occur via the mobile handset. As a result, Recharge is vital to overcome the barrier that registering a card to phone creates because the benefits of an instant SMS recharge more than compensates a customer registration effort. Once registered, however, the customer can then spontaneously purchase more exciting services such as mobile TV, games, music and so on.

The West...

Why aren't the founding principals of this service being implemented in Western Europe?

Western European operators remain locked in a tedious academic debate over who - the banks or operators - should "own" the customer. That obsession so dominates the thinking of the region's mobile operators that some of them have sought to limit deals with banks to no more than a single partner. To take advantage of these new technologies, operators need to overcome their irrational fear of losing "ownership" of their customers. With a national m-payments system involving all major financial institutions, customers are not "lost" to banks or credit card companies but shared in a mutually beneficial way.

The operator, after all, sells the service to the end-user and the bank merely handles the payment - an arrangement where there is no necessary conflict of interest or threat to the brand or revenues of either party. As soon as operators realise this, they can start taking advantage of the huge benefits that become possible from enabling vast numbers of consumers to pay for mobile services directly from their bank accounts or credit cards.

In countries where established payment systems and postpaid accounts predominate, there only really exist two opportunities to advance mobile commerce: remote transactions and physical point-of-sale transactions. It will have to be a very unique and as yet unidentified transaction scenario for a phone-based payment to be preferred by customers over the cash and cards in the pockets, not to mention to compensate for the cost of the merchant's payment device. This will be even more difficult if the phone based payment actually charges the transaction to one of the cards in your pocket.

As a result, it seems the greatest scope for opportunity is in remote transactions. In the absence of a large prepay customer base, and with direct debit addressing monthly bill payments, the only opportunity for Western operators is to address spontaneous e-commerce-like transactions. However, this is going to prove difficult as operators will be challenged to find ways to encourage customers over the registration barrier without a regular transaction need to motivate the customer. The problem with spontaneous transactions is that you don't know how to value a transaction until you actually need to make it. It is very hard to justify measurable effort for possible benefits.

The real opportunity for remote mobile payments to be successful in Europe will be for use in spontaneous transactions but only at a time when registration will no longer be needed. This can be done now at a secure WAP site, where customers complete their transactions much like a traditional e-commerce transaction but the small screen and limited interface means that this is an attractive experience for only the most dedicated of customers. Developments in NFC, however, promise to be the panacea to this problem. Instead of entering lots of numbers and billing address data, a customer can simply place their NFC bank card against their phone when prompted the merchant WAP site to complete the transaction.

What is perplexing is that operators and banks in the West have been pushing forward with NFC on phones in order to replace the card at the point of sale.

The cruel reality is that it is much easier to deploy a new technology than it is to persuade a large group of people to change their behaviour in order to use the technology. Can Western operators convince customers standing at the point of sale to take their mobile phone out of their pocket or purse in preference to the cards and cash that are already there? And if they can, what is the transaction scenario that will push customers over the registration barrier to allow such a mobile payment?

This is why I believe that existing mobile payment services in Eastern Europe have a greater potential to be successful - they start by allowing customers to do something they couldn't do otherwise.

By encouraging customers to register for a service that they genuinely need (to instantly recharge their phone in a simple way), the operator can then build their trust and confidence in the service so it becomes a lot easier to introduce other m-commerce services such as bill payment and then onto more generic m-commerce.

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