When European mobile operators launched their first (GPRS-based) data services in the early 2000s, they targeted payments as a major opportunity. A spate of early innovations left a trail littered with failures (for example, Simpay and Mobipay). The mood shifted quickly: They came to understand that payments worked within ecosystems that were just too complex to move. Focus in the mid-2000s then shifted to East Asia, and in particular Japan and South Korea, where operators continued to push on mobile payments, with reasonable success.
By the later part of the 2000s, the main action in mobile payments was occurring in developing countries. The epicenter of innovation was Kenya, where M-PESA showed how simple mobile phones could be used to catch up with and in some ways to leapfrog over slower payment mechanisms and costlier infrastructures prevalent in Western countries.
In the last couple of years, the baton of innovation has clearly been passed back to developed countries, and in particular the US. Every month seems to bring news of a new mobile payment device, platform, consortium or scheme. A “war of the wallets” is brewing. What is most breath-taking is the wide range of players weighing into the space. It’s banks such as Barclays with its Pingit mobile payment service. It’s payment networks, such as Visa and MasterCard, getting ready to bail from plastic with their new range of contactless and virtualized cards. It’s PayPal scheming to associate an account with every email address and every phone number. It’s mobile operators, such as AT&T, Verizon, and T-Mobile through the Isis consortium in the US, seeking to leverage their huge customer bases and their cost advantage in mobile messaging. It’s Apple and Facebook enabling their ecosystems of developers to dip into customer pockets to monetize their games and apps. It’s Amazon and Starbucks striving to create quicker checkout experiences online (across multiple devices) and in-store. It’s Google Wallet, offering to make sense on your behalf of the ever-increasing set of payment options, store loyalty schemes, coupons, and special offers that characterize the modern shopping experience—and that their own online advertising and e-commerce engines will increasingly drive. It’s mega-retailers banding together, for instance through the MCX consortium that includes Walmart, Target, and Best Buy in the US, to see to it that this time they don’t get stuck footing the entire bill for the m-payment bonanza through forced merchant discounts.
But I make it sound too neat: These players are competing and partnering with each other in hard-to-figure-out ways.
Why this sudden burst of activity? It has to do with the explosion of smartphones, triggered in large part by the public’s sudden love affair with the tactile screen. The proliferation of smartphones drives innovation because it allows more types of players to do more types of things on people’s phones. Application designers have more freedom to build appealing, easy-to-use, and differentiated customer payment experiences. It’s not just a matter of presentation; they can integrate payments data with other data streams such as check-out baskets, gaming, or budget visualization services. And, crucially, smartphones give developers the chance to deposit their own secure applications on mobile handsets without requiring the carrier’s permission. The threat of competition and the possibility of differentiation is responsible for unleashing this apparent madness.
So is the developed versus developing world payments divide going to get worse again? Not necessarily. Now more than ever we can imagine a not-too-distant future in which the vast majority of mobile devices will be smartphones, even in developing countries. Two powerful forces will push in that direction. On the supply side, the strong demand for such devices in developed countries and the inexorable force of Moore’s Law will push down manufacturing costs of smartphones, just as it has for every generation of mobile phones. On the demand side, the vertiginous rise of social networks in developing countries reveals the yearning of their youthful populations for communication and self-expression; they’ll want those devices.
In the meantime, we have to continue to push the envelope of mobile money using basic phones, but let’s accept that during this period innovation will be more the exception than the rule. Both because the scope for building truly exciting and intuitive applications will remain very limited, and because telcos will continue having substantial control over who plays in the game. Proliferation of smartphones will open up the space, as it seems to be doing in the US right now.
But let’s not get too carried away: Even with smartphones, large hurdles will remain for innovative entrants into the payments space in developing countries. Two things they won’t want to do themselves: to establish proof of clients’ identity (Know Your Customer, or KYC) and touch physical cash. For that, they’ll rely on banks (and increasingly telcos) to reach out to customers to collect photocopies of IDs, original signatures, and their cash. Don’t lose sight of the fact that if you don’t have a bank account (or its derivative product, the credit card), none of the new-fangled schemes I mentioned above will be available to you. They all run on top of bank accounts and infrastructures, though many do seek to dilute the nature of the relationship between banks and their customers.
These innovative mobile payment schemes will be no substitute for banks in developing countries, and we will continue to have to rely on banks to want to bank customers. But they might contribute decisively to the cause of financial inclusion indirectly by creating more of a value proposition for customers to want to join the ranks of the banked, in order to take advantage of these convenient payment mechanisms.