Dial 'M' for Mobile Payments

During my time at HBD Venture Capital, I’ve looked a lot at the mobile payments industry. One of HBD’s portfolio companies is Fundamo, a mobile banking and payments service provider, which works with financial institutions and mobile phone operators to create products and solutions in the mobile payments space.

The growth of mobile phones is recognized as one of the few success stories in Africa. Industry watchers mostly attribute the growth of mobile phones in Africa to a lack of infrastructure, creating the demand for communication systems based on mobile technology. The prevalence of mobile phones has already surpassed the prevalence of computers and the internet in Africa. Prepaid cost structures and cheap phones produced by handset manufacturers make mobile devices affordable for the poor. Some even argue that mobile phones could help alleviate poverty by providing the poor with access to services. For example, fishermen are able to use their mobile phone to get pricing information from local markets, creating a better match-up between supply and demand and more profit for the fishermen. See this CNN article for more coverage on the mobile phone boom in Africa.

Therefore, there is a lot of hype over the mobile payments industry and there are several key companies that play in this space. However, because the mobile payments industry is pretty much in its early stages, it is hard to figure out what technologies are hype and what will become the enduring standards. Here is an overview of the industry and where I think it is going:

First thing that is confusing is the terminology. Mobile payments, mobile banking, mobile finance, what does it all mean?

• There are three different categories of products and services your phone can provide: mobile banking, mobile payments and mobile commerce. These services can also be called mobile transactions.
  
• Mobile banking is basically internet banking services extended to the mobile device, such as checking your account balance and paying bills.
  
• Mobile payments includes any products and services for use by the mobile phone to make payments or facilitiate transactions. This includes wallets, domestic transfers, cross-border remittances and proximity payments. None of these technologies are standardized and there is a lot of debate to which ones will take off and which ones will flounder.
  
• Mobile commerce is a catch-all term that includes anything from coupons, advertising, to ticketing (imagine swiping your mobile phone to access the subway system or to fly on a plane).
  

Who are the major industry watchers?

• From what I could gather, the Yankee Group and Juniper Research are the two main authorities for research on the industry. You will find some information on their websites, however most detailed reports costs a lot of money.

What is the current market size and/or growth potential?

• Your guess is as good as mine. Yankee Group and Juniper Research attempt to estimate this, however, even their own estimates vary wildly from month to month. However, the growth of mobile transactions should mirror the growth of internet commerce and its trends (with an obvious 5-year lag). If we were to characterize growth in three stages, emergence, explosion and ubiquity, internet would be coming out of its explosion stage and into its ubiquity stage, whereas mobile would still be in its emergence stage. One thing is for certain, growth is inevitable.
  

What are the "hot" techologies in the mobile payments space?

• NFC or "Near Field Communication" is the use of RFID technology to create a proximity payment solution. What this means is that you will be able to pay for a good at a merchant by swiping your mobile phone in front of a POS terminal, instead of having to take out your debit/credit cards. Only problem with this is that there is a significant amount of capital investment required for this system to be fully implemented. However, a large retailer such as Wal-Mart, fed up with paying fees to Visa/Mastercard, may decide to implement such a system.
• International remittances is a $318billion market currently dominated by MoneyGram and WesternUnion. Due to the ubiquity of mobile phones, even in poor migrant communities, the international remittances solutions may be a big market for mobile payments.

What are the biggest concerns or risk factors for the industry going forward?

• Since the industry is still in its early stages, there is still much need for the standardization of technologies. For example, will the use of SMS to transfer funds be the dominant mode of payments. Or will NFC-enabled devices take off?
• Business model and revenue sharing issues still pose a big challenge for the industry. For example, how will financial institutions and mobile phone operators work together to create a workable business model where both parties benefit.
• Financial regulations of financial transactions, especially cross-border transactions, require legal knowledge and the ability to work with and educate regulators from various countries.

In conclusion, the mobile banking and payments industry presents an attractive opportunity for entrepreneurs, and a possible interesting and innovative way to serve the unbanked in the developing world. Growth is inevitable, although there are certainly a number of challenges that need to be overcome in order to realize this growth. A successful entrepreneur in this space will have the technical expertise and marketing ability to convince consumers to adopt their products and will also have the ability to manage the complicated external environment and various players in the supply chain.