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Smartphones: Tomorrow’s wallet

SCHICKLER COMPACT: PROXIMITY MOBILE PAYMENT

SCHICKLER COMPACT: PROXIMITY MOBILE PAYMENT 2

COMPACT

Turnover via Proximity Mobile Payment grows

by over 50% per year

SMARTPHONES – TOMORROW’S WALLET

The mobile payment market is causing quite a stir. Numerous companies are crowding onto the market with credit card swipe systems. These systems transform a smartphone into a mobile credit card payment terminal. However, this is only an intermediate step on the road to comprehensive mobile payment as the credit card remains a central component. In addition, the extension of the payment chain holds the profi t margins down – this business model is unprofi table in the long term.

For this reason the subsequent step in the mobile payment market is really interesting: Proximity Mobile Payment. It will substitute cash and credit card payments to a noticeable extent and turn smartphones into digital wallets. SCHICKLER forecasts that the turnover generated by Proximity Mobile Payment will grow over the next fi ve years at a rate of over 50% per year. The number of users who pay with their own smartphone via Proximity Mobile Payment at the point of sale, will rise between 2012 and 2017 to an eightfold. Thus by 2017 just under 70 million users will be paying for goods and services for a value of over 40 billion euros, from today’s perspective.

STRUCTURE AND DEVELOPMENT OF THE MOBILE PAYMENT MARKET

The mobile payment market can be structured on the basis of the two dimensions “Locality” and “Participant”. “Locality” differentiates between remote and local payment, i.e. payment from a distance and locally at the point of sale. In the dimension “Participant” one differentiates between person-to-person and person-to-business payment systems (Fig. 1).

Fig. 1: The Mobile Payment market is divided into four segments

Remote payments have particularly succeeded in establishing themselves in Asia and Africa. The most frequent use cases are text message-based payments and money transfers. Especially in Africa, text message-based money transfers are often the only way of transferring money to other people over great distances.

On the other hand, due to the differing technical situations in the grid expansion and the technical status of smartphones, SCHICKLER estimates the potential of remote payment for the USA and Europe as being low.

LOCA

LITY

LOCA

L PA

YMEN

T

PERSON-TO-PERSON

Direct money transfer

between persons

Distant money transfer

between persons

Mobile payment

for goods and services

at the point-of sale

M-commerce

PERSON-TO-BUSINESS

REM

OTE

PAYM

ENT

PARTICIPANT

SCHICKLER COMPACT: PROXIMITY MOBILE PAYMENT 3

COMPACTTechnical development

is gradually accelerating

Instead, numerous start-ups and cooperations are active in these regions in the segment Local Payment – especially for person-to-business payment transactions, i.e. for paying at the point of sale. SCHICKLER forecasts the greatest potential for this segment over the next few years. Due to the large number and diversity of the business models in this emergent sector, SCHICKLER distinguishes the sub-segments Credit Card Swipe, the Acceptance of Credit Card Payments by Smartphone, and Proximity Mobile Payment, i.e. paying via smartphone at the point of sale (Fig. 2).

Fig. 2: The multi-facetted Local Payment segment can be sub-divided yet again (Source: SCHICKLER)

The trends in Mobile Payment follow a logical development. This began with the introduction of money as a means of payment, continued with card-based payment and is now moving on to the NFC*- and cloud-based method of payment. The business models for credit card swipe systems, which were already developed in 2010 and are being extensively implemented today, only represent one evolutionary step on the way to Proximity Mobile Payment (Fig. 3).

The technical development of the payment systems has accelerated increasingly over the past few years. For this reason, one can reckon with further innovations over the coming years. As the barriers for entrance into the Mobile Payment market are comparatively low, the market will still gain in dynamic. Numerous new players will enter the market over the next 3 to 5 years, followed by a consolidation phase of 2 to 3 years. During this time many players will leave the market again. Only then will the future structure of the Mobile Payment market be established.

CREDIT CARD SWIPE PROXIMITY MOBILE PAYMENT

*NFC: Near Field Communication

Transfer standard for the contact-free

exchange of data over short distances.

DEVE

LOPM

ENT

TIME7th century B.C. 1950 1972 2010 Current trends

Cloud-based payment via smartphones

Contract-free payment via smartphones

Physical abstraction of several credit

cardsContact-free payment by cardMobile acceptance of

credit card paymentsCompletely cash-free transactions via POS

terminalsAbstraction of coins/bank notesAbstraction of

concrete goods/services

Smartphone-based credit card terminals

Credit card terminals

First credit cards

Money as means of payment

NFC-/barcode-based payment

All-in-one card with smartphone

Cards with NFC chip

Cloud-based payment

Fig. 3: Payment systems are becoming more and more sophisticated (Source: SCHICKLER)

SCHICKLER COMPACT: PROXIMITY MOBILE PAYMENT 4

COMPACT

More and more solutions are developed

within cooperations

STRATEGIC POSITIONING OF MOBILE PAYMENT PROVIDERS

Whereas early mobile payment solutions were mainly turnover-oriented, current developments place their emphasis on strategic positioning. Major players are now bringing integrated solutions such as “Google Wallet”, “Apple Passbook” or “Microsoft Wallet” onto the market. These products do not involve direct turnover drivers, but are concerned with the strategic positioning as a central point of contact for the payment and administration of fi nances - for example also for the management of tickets and reward programs. These efforts clearly show the long-term strategic signifi cance of Mobile Payment (Fig. 4).

Besides the strategic positioning of providers, it is recognisable that Mobile Payment solutions are increasingly being developed in cooperations and brought onto the market. In particular the coope-ration with mobile communications providers and credit card institutes is being encouraged in this connection. Mobile communications providers on the one hand operate an existing infrastructure for communication and on the other hand have existing contact with and confi dence of the customer. Credit card institutes have the necessary processes, licences and contracts for the transfer of money.

Fig. 4: Strategically oriented providers are gradually appearing on the market (Source: SCHICKLER)

WHY PROXIMITY MOBILE PAYMENT IS SO IMPORTANT

More than 1 billion people possess a smartphone. Proximity Mobile Payment enables the use of these smartphones for cash-free payment at the point of sale. SCHICKLER estimates that by 2017 70 million users throughout the world will be applying Proximity Mobile Payment with their smartphone to pay for goods and services at the point of sale. The value of goods and services paid for world-wide via Proximity Mobile Payment will rise by 2017 to more than 40 billion euros per year. (Fig. 5).

Fig. 5: The use of Proximity Mobile Payment will increase rapidly (Source: SCHICKLER)

STRATEGICALLY ORIENTED

TURNOVER-ORIENTED

TIME2010 2011 2012 Current development

50 billion euros

2012 2013 2014 2015 2016 2017

40 billion euros

30 billion euros

20 billion euros

10 billion euros

0 billion euros

SCHICKLER COMPACT: PROXIMITY MOBILE PAYMENT 5

COMPACT

1.1 billion euros turnover in

Germany in 2017

Of this amount just under 10 billion euros will be allocated to turnover in Europe and more than 10.5 billion euros to turnover in the USA (Fig. 6).

Fig. 6: USA and Europe are important markets for Proximity Mobile Payment (Source: SCHICKLER)

In Europe the DACH countries (Germany, Austria, Switzerland) will be responsible for 15% of the turnover generated via Proximity Mobile Payment. Within the DACH countries 77% of the turnover will take place in Germany. According to estimations this turnover of 1.1 billion euros, will be generated in Germany in 2017 through more than 87 million Mobile Payment transactions. In Switzerland and Austria the turnover in 2017 will amount to 225 million euros and 118 million euros respectively. This will be created with 11 million Mobile Payment transactions in Switzerland and just under 9 million transactions in Austria (Fig. 7).

Fig. 7: Around 1.4 billion euros of the European turnover fi gures are allocated to the DACH countries (Source: SCHICKLER)

OPPORTUNITIES AND RISKS

Mobile Payment offers considerably more opportunities than risks:

Opportunities + New turnover generators and increase in customer spending + Cost reduction in retail thanks to simplifi ed processing of payments and handling of cash + New aspects for customer retention, marketing and targeted advertising + Added value for customers thanks to integrated management of fi nances

Risks - Splitting of the market into isolated solutions and lack of customer acceptance - Security problems and lack of customer confi dence

12 billion euros

2012 2013 2014 2015 2016 2017

10 billion euros

6 billion euros

4 billion euros

2 billion euros

0 billion euros

EUROPE WITHOUT DACH:

8.3 BILLION EUROS

DACH: 1.4 BILLION

EUROS

D: 1.1 BILLION EUROS

CH: 225 BILLION EUROSA: 118 BILLION EUROS

USA

EUROPE

SCHICKLER COMPACT: PROXIMITY MOBILE PAYMENT 6

COMPACTOpportunities for

media and other businesses

WINNERS AND LOSERS

Print – extremely recommendable + New possibilities for the on-the-spot sale of print items.

Digital publishing – extremely recommendable + Increase in confi dence in digital payment and therefore increase in acceptance for digital

contents at a charge.

Brands – extremely recommendable+ Possibilities for brand positioning and marketing.

Retail – extremely recommendable+ Sales drivers through use of Proximity Mobile Payment. + Reduction of costs involved in the payment procedure. + Brand positioning with a target group affi ne to technology.

Radio – conditionally recommendable+/- Low on-the-spot contact to consumers, therefore little possibility of

using Mobile Payment.

E-commerce companies – conditionally recommendable +/- Unclear as to whether increased purchases are effected in the physical world and therefore

substitute e-commerce turnover.

TV – not recommendable - Low on-the-spot contact to consumers, therefore little opportunity of using Mobile Payment.

Conclusion Proximity Mobile Payment has the potential to revolutionise the personal payment market.Cooperations between hardware/software producers, mobile communication providers, credit card institutes and banks are vital for success. Up to now no player has asserted himself in this expanding market. However, in particular the larger players are strategically positioning themselves at present. But, independently of the exact market structure, it is already quite clear: Proximity Mobile Payment will substantially replace cash and credit cards to a noticeable extent in the near future.

We look forward to receiving your queries and feedback.Contact: Alexander KahlmannSCHICKLER Consulting GroupTel. +49 40 376650-0a.kahlmann@schickler.de

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COPYRIGHT SCHICKLER 2013