Foreign Service: International m-commerce hits and misses good lessons for U.S.

From the Spring 2008 edition of CTIA’s Wireless Wave article entitled “Foreign Service: International m-commerce hits and misses good lessons for U.S.”:

M-commerce already is de rigueur in many parts of the world. It’s the means by which many people pay for the subway, buy movie tickets and do their banking. Although the United States is making progress, to learn more about m-commerce and see where it has succeeded – and struggled – it’s more illustrative to look abroad, as many other parts of the world are more significantly involved in this technological area than the US.

The article goes on to describe the different forms of mobile payments technology and approaches. m-Via’s own Ken Kruszka was interviewed for this article and is quoted explaining the company’s focus on mobile remittances.

To read this article and view other media coverage, please visit the Media Coverage section of our website.

There’s no substitute for real money

History is replete with schemes and approaches to create substitutes for real (that is, government-backed ) currency. And what they all have in common is that, eventually, they have all failed disastrously. Let’s review some of the more famous debacles that happened in the past and a couple that are playing themselves out presently.

In the 1600’s the Tulip Craze hit Holland. While the craze is usually cited as the stereotypical example of irrational exuberance leading to a market bubble that ultimately is unsustainable, it is also true that during that period the tulip actually acted as an informal currency. A large variety of real goods and services were exchanged for tulips.

Fast-forward now to the dot-com era, during which the online currencies Beenz and Flooz were introduced as alternatives to actual hard currencies. Both failed spectacularly in 2001, with Flooz even garnering the honor of being named one of the Top 10 Dot-Com Flops by CNet.

Even the most successful alternate currency systems, the myriad of loyalty points programs such as those run by the airlines, are fraught with problems. Frequent flier programs are seeing growing discontent from consumers, with industry analysts predicting a wholesale exodus from such programs in the near future.

Despite the failures of all these schemes in the past, new forms of alternate currencies continue to be introduced. For instance, in virtual worlds and massively multi-player games, the practice is common to create an in-world currency: Second Life has Linden Dollars, World of Warcraft has gold. So long as the virtual money remains confined to the systems with which they are associated and is used only to acquire virtual goods within those alternate worlds, these currencies are just “Monopoly Money” and little if any harm can be done. But, as we all know, these currencies are being exchanged for actual, real money.

Back in the real-world, the modern-day tulip is the mobile phone airtime minute, which has taken hold in places such as the Philippines and Africa as a form of cashless currency.

The problems with such informal currencies are many, which can be analyzed in terms of 3 overlapping categories: Trust, Fungibility, and Real-World Issues.

Ultimately the purpose of a currency is to protect the sanctity of a transaction. Back in the ages when bartering dominated commerce, the sanctity of the transaction was not an issue because there was no lag time between when you gave 3 chickens and received a bushel of apples. Introducing currency allowed you to drop off your chickens at the butcher shop and then go next door to the fruit stand to get your apples. But, if the currency can’t be trusted to retain its value for the short period of time between when you to conduct the two transactions, the currency is ultimately worthless. (I’m avoiding a discussion of the time value of money by keeping a focus on short time periods.)

Trust is broken when value is lost (note the currency crisis in Argentina a few years back). Real-world currencies protect trust through government backing, formal monetary and fiscal controls, and regulation. Governments ensure scarcity of the legal tender and act to control inflation, thereby ensuring a stable money supply and value preservation. Who is ensuring the trustworthiness of informal currencies? Do their incentives align with this goal?

Fungibility speaks to the usefulness of the currency. Real-world currencies are highly fungible because they are essentially universally accepted and also convertible into other currencies. Informal currencies are also convertible, to a point. But, the controls and the mechanisms for such conversion are akin to the black market exchanges in the former Communist states, much because informal currencies are not recognized as legal tender by any government. The effect is similar to what happened when the Soviet Union outlawed the possession of US Dollars: it drives the exchange market underground, which ultimately makes use of the currency inefficient.

Informal currencies lack fungibility because they are not universally accepted. The reason for this ties back to the Trust issue and the lack of formal backing. Concentrating on the currency of airtime minutes, obviously this currency lacks fungibility because it’s necessary to find someone willing to accept minutes as legal tender, which has a number of barriers: must be on the same network, must agree on the value of the minutes, must be on a prepaid airtime plan, must be able to further use the minutes as currency to make purchases, etc.

Real-world issues have a profound impact on informal currencies. How are transactions taxed? What are the property-rights implications? Who adjudicates and resolves disputes?

All these issues, and many more, have already been addressed for real currencies over a period of thousands of years. The banking industry and infrastructure that we see today is the culmination of these efforts. Until such time as informal currencies have the same amount of control, they will continue to be just a shadow of the real thing, and they will always eventually wilt, just like a tulip.

Pay By Touch, an idea whose time has passed

The payments industry is a fast-changing place, where the next great thing can quickly become obsolete. No one knows this better than Pay By Touch. In case you’ve missed the news (here and here), Pay By Touch’s founder, John Rogers, has filed for personal bankruptcy, while the company itself is fighting for its life against an involuntary bankruptcy petition.

Pay By Touch’s pay-with-your-finger approach was an interesting idea. But, let’s explore the reasons why it has failed. First and foremost, the company’s problem stems from the fact that its solution requires specialized hardware at every point-of-sale location. Compare this with Visa’s payWave and MasterCard’s PayPass initiatives. Even with the deep pockets that these organizations possess, convincing merchants to pay for new hardware to process payments under a new paradigm will take years before critical mass is reached.

Second, biometric payments have been bypassed with the emergence of mobile payments. Consumers don’t mind using a device to make purchases; they just won’t accept having “yet another” device that they have to carry around. But, with mobile payments, consumers simply use their mobile phones as the payment mechanism. And, according to recent surveys, people are more likely to forget their wallets than to leave the house without their cell phones. So, the mobile phone is already a must-have device.

Mobile technology also has some great advantages over POS biometrics:

• Mobile payments can be conducted remotely.
• Mobile payments technology can give you more than just payments. You can also do balance inquiries, check transaction histories, take advantage of mobile coupons and more.
• Mobile payments work anywhere you are, anytime you want.

Pay By Touch failed because its solution was made obsolete before it gained critical mass. Pay By Touch failed by trying to build a new consumer brand (a strategy that wasted $300 million from investors). Pay By Touch failed because the value proposition wasn’t great enough to convince consumers to change their behavior.

A Tale of Two Markets

m-Via’s Chris Sorensen tells “A Tale of Two Markets” in the November 2007 issue of Intele-Card News.

“Like many early stage technology markets, the mobile payments market is starting to split into separate sub-markets. The first sub-market includes both m-Banking (checking bank account balances, transferring money between accounts, locating bank branches, etc), and m-commerce (using a bank account, credit or debit card associated with a mobile phone to make purchases from the phone, pay bills, and buy prepaid airtime).

The second sub-market could be termed ‘m-unbanking’ which focuses on using mobile phones to provide financial services to the roughly 70% of the world’s population who do not yet have a bank account, credit or debit card. …”

The full article is available here.

Showing value to overcome consumer doubts

The naysayers are out in droves. This time it’s “Mobile banking must overcome consumer doubts.” Yes, it’s natural for people to have fear and doubt about new things. Such is human nature. People like constancy.

But, mobile payments and mobile banking are no different than any other new technology that has every been introduced. And in that regard, the solution to driving adoption is already known: demonstrate undeniable value.

The value proposition is the key to driving adoption of mobile financial services. And that is precisely where mobile banking fails. Mobile banking, at this moment in time, does not offer enough value for people to look beyond their fears and apprehensions. Mobile banking is just another way for people to access their bank accounts. But, people can already access their accounts almost anytime they want. Therefore, we’re seeing that, in terms of mobile banking, the main benefit seen by consumers is the up-to-the-second balance inquiry ability. Yes, that is a very helpful feature in today’s always-on-the-go world. But, it’s not enough.

The greater value proposition is in mobile transactions, such as mobile remittances. Mobile transactions provide undeniable value to a systematically underserved market segment: the unbanked. There are over 40 million unbanked people in the US alone. And, roughly 70% over the world’s population is unbanked.

Mobile transactions bring the financial services infrastructure to this untapped consumer. Mobile transactions raise this consumer to a first-class financial citizen. Mobile transactions provide necessary tools that are currently unavailable.

So, when pundits debate the readiness of consumers for mobile banking, they are missing the whole point: Mobile banking is a vitamin, but mobile transactions are a pain pill.

Western Union’s entry is good for mobile remittances industry

Western Union, GSM Partner for Global Mobile Money Transfer Service was the headline of a press release a couple days ago.

We expected to see this announcement some time ago (even before the GSMA announcement in February). It will be very interesting to see how Western Union launches a mobile offering without creating conflict for their franchisees.

This is good news for the mobile payments industry – the most difficult and expensive part of building a new market is converting non-customers into potential customers. Western Union will spend a significant amount of money educating their consumers about the safety and convenience of mobile remittances. Once they have done the heavy lifting, it wil be easier (and cheaper) for competitors to lure away the converted users with better services and pricing.