Coming to a Device NearYou in Summer of 2012:

Mobile CommerceJune 2012

© Copyright 2012 Vantiv, LLC. All rights reserved.Vantiv, the Vantiv logo and all other Vantiv product or service names and logos are registered trademarks or trademarks of Vantiv, LLC in the USA and other countries. ® indicates USA registration.

Mobile

2

Coming to a Device Near You in Summer of 2012: Mobile Commerce

The emerging mobile market changes fast. While merchants are challenged to make sense of the chaos, basic issues must be solved before mobile commerce takes off.

It is too early to predict how this landscape – with scores of companies moving in dozens of directions – will evolve, much less how it will look five years or even two years from now. For merchants, the best course of action for now is to observe how this develops and build an understanding of how they will proceed once the dust starts to settle.

There are now more than 105 mobile wallets in development or in pilots in the U.S., twice as many as just six months ago. Which of those will emerge as the strongest, or the most practical, or the most popular, is anybody’s guess. There are no standards in place, leaving the field completely wide open to everyone from the biggest names in payments and the Internet to small startup companies.

The current wave of mobile wallet contenders can be broken down into six general categories:

• Retailer Wallets. This approach is designed to offer merchants or retailers a way to strengthen their bonds with existing customers and attract new ones. It aims to give merchants a way to leverage coupons and discounts and move from a broad mass marketing strategy to a more individualized strategy. Think of Amazon, which reaches out to its customers to make purchasing suggestions based on what they have bought previously making for a familiar and valuable experience for the consumer. • Banking Wallets. This approach reflects the evolution of banking over the past couple of decades. We have watched the center of gravity shift from bank branches to self-service ATM machines and online banking and, increasingly, mobile banking. The next logical step is use of the mobile device as a payment tool itself. • E-commerce Wallets. This approach moves the online payment systems into the physical, bricks-and-mortar world. PayPal, Amazon, and Apple iTunes are examples of very popular payment tools, with hundreds of millions of users. The strategy here is to leverage this popularity into accepted methods of payment for goods and services purchased offline. • Gatekeeper Wallets. This is where the battle of the giants will rage. VISA, MasterCard, Google, Isis and others are jockeying for dominance in the way that NFC (near-field communications, allowing a consumer to “wave” a mobile device in front of a reader to authorize payment) will be used. We will address this in more detail in the next section. • Aggregator Wallets. Are consumers carrying around too many gift cards, prepaid cards, and loyalty cards with them, either in their physical wallet or on a keychain? Companies in this space think they do, and their solution is to consolidate all of these cards and functions in a single application. It would enable consumers to leverage the value in their cards and accumulate and track loyalty points and rewards. • Single Feature Wallets. These are applications that are designed to be narrowly focused, essentially doing a single task but doing it very well. An example is Dwolla, a closed loop network that emphasizes its low transaction fees.

There are now more than 105 mobile wallets in development or in pilots in the U.S., twice as many as just six months ago.

3

Coming to a Device Near You in Summer of 2012: Mobile Commerce

Where the Action IsThe Gatekeeper Wallet battle over NFC, and the associated NFC Secure Element, is getting most of the attention, in large part because of the clout of the companies that are involved. The issue here is that whoever controls the NFC Secure Element also controls the gateway to commerce on that mobile device and the data that is generated through that commerce.

With that control, the company involved – whether Google, Isis, VISA, MasterCard, or even the large wireless service providers – can then charge banks for the privilege of engaging in commerce via that phone. It can also open up a world of data that these companies have not had access to previously.

Individual and aggregate purchasing data becomes a vast resource that can be mined and put to work both for the company in control and for the many other organizations that would love to have this data for marketing purposes. An unprecedented volume of data becomes available, regarding who made purchases, when they made them, how much they paid, what goods were bought in connection with other goods, as well as countless other categories and parameters. The value of this consumer behavior information to marketers cannot even begin to be measured.

A big part of the Gatekeeper Wallet battle is being waged over the tiniest piece of real estate. That is the NFC Secure Element chip. One side wants it to be part of the mobile device, which gives control to the device’s operating system. The other side wants it to be part of the device’s SIM (subscriber information module) card, which gives control to the wireless service provider, whose network is being used to transmit the data. This is a battle that will continue for some time, particularly in light of the fact that very few mobile devices currently have the capability for an NFC Secure Element at this point. Within three years, that will all change, with NFC likely to be everywhere.

Focusing on Retailer, Banking WalletsBut in Vantiv’s view, the most interesting areas today are the Retailer Wallet and the Banking Wallet. Mobility itself, and the use of a mobile device for payment, aren’t really solving a payment problem; they are merely changing the way that payments are made.

What mobile payments do, however, is to open up a new world for consumers. Paired with permission-based marketing, it positions customers and potential customers to take the best advantage of the existing shopping environment.

4

Coming to a Device Near You in Summer of 2012: Mobile Commerce

When you look at the buying patterns of the majority of consumers, the bulk of their purchases are made at a small number of retail outlets. Most people do the majority of their spending at just one or two grocery stores, coffee shops, electronics outlets, clothing stores, and other such locales. With these new forms of mobile wallets, stronger relationships between consumers and their favorite merchants, as well as their banks, are made possible.

Merchants who are observing the mobile wallet ecosystem are understandably overwhelmed. For most, the sensible reaction is hesitation. Few are willing to place their bets on any one of them, especially if there is cost involved. For example, merchants would have to purchase readers that can interface with NFC elements, and these can cost up to a couple of hundred dollars per reader. There is no standard interface to NFC, which complicates matters further by raising the possibility that a merchant would need more than one type of reader, pushing up costs and risking consumer confusion.

Summer of Mobile CommerceFrom a retail and banking standpoint, the fact that few players are taking sides is a good thing. Without any dominant player emerging, the field is wide open. The summer of 2012 should be the summer of mobile commerce, with the market starting to coalesce. Merchants will definitely be able to make more sense of the landscape by the fall of this year. They will probably still choose to sit this out for a while longer, but the picture will at least be clearer.

Vantiv anticipates that cloud-based or E-commerce Wallet will outpace NFC at least for this calendar year. Because of its momentum among consumers and broad brand familiarity, it is the most likely of the various players to show much acceleration. For many merchants, it is also the easiest of the approaches to warm up to, since it does not require a physical adaptation at the point of sale, or even a mobile device, to facilitate.

This is the ideal time for merchants to evaluate how they will take advantage of this new mobile wallet landscape. With its new technology, new applications, new business models and the changes it will bring in consumer behavior and sales channels, the mobile wallet represents a fresh start. In one form or another it is inevitable, so the wisest course is to look at it optimistically, with the chance to reinvent one’s business as needed to take full advantage of it.

How, for instance, will the merchant deal with all that consumer data? The term “Big Data” is an apt one for the deluge of individualized and aggregate information that mobile wallets will generate. Mining that data in order to predict consumer behavior is essential to merchant success. Why did customers buy that product? What else did they consider before buying it? When did they buy it? What else did they buy with it? These are just a few of the essential questions that must be answered if a merchant wants to build sales, build customer loyalty, and grow their customer base.

5

Coming to a Device Near You in Summer of 2012: Mobile Commerce

Company size will dictate some of that response. For the top-tier retailers, a true Big Data strategy will be required, along with multiple systems for consolidating and mining the data, and lots of employees whose job it is to analyze data and help leverage it. For mid-sized companies, the data analysis and subsequent actions, whether reactive or proactive or a mix, will be done by third party integrators or value-added resellers. For small businesses and mom-and-pop retail outlets, the solution will be an off-the-shelf data consolidation and analysis tool.

The data features of the mobile wallet revolution can add tremendously to a merchant’s business. Merchants need to be thinking about that aspect of mobility.

The Shifting ParadigmWhen the Apple iPad was introduced to the market, it was perceived, and positioned by industry observers, as a small personal computer. That was the easiest way to explain it, because people did not realize at the time it was creating a new user model. We referenced the world we knew – the PC – before moving forward. Now iPads and other tablets are used by airline pilots as their primary tool or by physicians for diagnostic purposes, and in myriad other ways that a “small PC” would never have been used.

The rise of mobile commerce promises an even greater paradigm shift. Our tendency today is to look at the mobile device and mobile wallet in certain ways: as a self-service tool, an ATM without the cash withdrawal, a mobile version of online banking, or a device-based version of the traditional debit or credit card.

A mobile wallet is much more than that. It is a key intersection between the consumer and the bank or merchant. With it, we are taking the first big steps on a bold new journey from mass marketing to individualized and permission-based marketing, changing the face of shopping and banking forever.

Any of the trademarks, service marks, collective marks, design rights or similar rights that are mentioned, used or cited in this white paper are the property of their respective owners. This white paper is neither endorsed by nor affiliated with any of the holders of any such rights and as such Vantiv cannot grant any rights to use any otherwise protected materials.