The Delta Perspective

July 2012

Mobile Financial Services:

A fading opportunity for mobile operators
Authors Joao Sousa - Partner - js@deltapartnersgroup.com Daniel Pimentel - Senior Associate - dpi@deltapartnersgroup.com Filipe Barros - Analyst - fb@deltapartnersgroup.com Pavel Duzhnikov - Research Analyst - pd@deltapartnersgroup.com

KEY HIGHLIGHTS

The M-Payments ecosystem is a US$120-130 billion opportunity, driven by NFC and digital payments, of which emerging markets represent only 10% Financial inclusion and smart devices enable Visa, MasterCard and OTT / Internet players to capture most of the M-Payments opportunity, limiting the opportunity for operators to US$40-50 billion (about 4-5% of global mobile operators revenues) Most operators have lost the window of opportunity for controlled M-Payments Wallets as their initiatives lacked ambition, focus, resources as well as a thorough understanding of the payment industry dynamics and stakeholders NFC M-Payments and digital payments are still untapped opportunities in most developed markets but require operators to partner with OTT / Internet players, banks, and payment networks such as Visa or MasterCard The M-Banking opportunity, powered by smart devices, enables operators to achieve similar objectives as with M-Payments, without having to deploy expensive agent networks

Overview
Mobile Financial Services (MFS) is a broad concept that includes M-Payments, M-Banking and M-Insurance. M-Payments are a hot topic, with multiple worldwide conferences, industry announcements and declarations of intent from mobile operators. The Kenyan, Philippine and Japanese M-Payments success stories as well as the battle between Visa and MasterCard for partnerships with operators and Internet companies are fuelling the interest. Mobile operators across emerging markets believed that capturing the US$120-130 billion M-Payments opportunity was going to be as easy as growing mobile penetration. Everyone has been talking about the billions of unbanked people who already have SIM cards and the distribution advantage of operators versus banks. These and other factors led operators in emerging markets to roll out controlled M-Payments Wallet1 platforms, targeting the unbanked consumer, with minimal investment commitments. According to Gartner, there are currently more than 160 million M-Payments subscribers in the world2. However, most operators simply do not disclose performance of their respective M-Payments initiatives and the few that do, focus on subscribers3 rather than financials. Could it be that most subscribers were forced into M-Payments contracts as part of the SIM registration process, and do not use the service? Or, perhaps the impact on financials is negative, as the revenue from the M-Payments services does not justify the substantial distribution and operational back-office costs? The reality is that the controlled M-Payments Wallet window of opportunity for most operators is either closed or closing fast. The banks, rising to the occasion and helped by governments policies, have significantly increased the worlds banked population while Visa and MasterCard are driving electronic payments growth across the world. The positive news is that not everything is lost. There are already 2.5 billion banked adults, 0.8 billion credit card users, 0.6 billion online banking users and more than 0.5 billion iPhone and Android users. The rapidly growing base of banked smart-device users creates three opportunities: 1) Digital payments; 2) Near Field Communication (NFC) payments; and 3) M-Banking, including access to bank services through apps and joint operator-bank commercial approaches. Operators interested in capturing these opportunities need to, in the nearest future, commit adequate resources and establish partnerships with payment network players as well as banks banks to explore M-Payments, M-Banking and M-Insurance. The white paper has three main objectives: Assess and size the M-Payments landscape and the current approaches of the mobile operators Zoom in on M-Banking as key area of opportunity within the MFS landscape for mobile operators Define a cooperation framework for mobile operators and banks to seize the MFS opportunity

1 2 3

Based on trust account model Gartners Mobile Payment Forecast 2009-2016, May 2012 Except for Safaricom, which provides information on revenues and transactions

1. M-Payments potential has placed operators on a collision course with banks and top Internet players
1.1 M-Payments are currently a hot topic in the telecom industry, though most operators have achieved little traction

The M-Payments concept has been around for more than 15 years, but has recently matured and became more complex as technology evolved and more multivariate players entered the space. Mobile operators were the first movers to address the M-Payments opportunity. Early on, there have been multiple attempts in Europe to deploy services based on the post-paid bill (e.g. Slovenia) or standalone pre-paid wallets, but little traction was achieved. Japans NTT Docomo deployed the first true M-Payments NFC success story, Osaifu-Keitai, developed on the back of its closed i-mode ecosystem. NTT Docomo invested heavily on developing and growing its M-Payments ecosystem, including the acquisition of a credit card issuer and a 2% stake in Lawson, a major Japanese retailer, in order to force NFC adoption beyond McDonalds - the first key NFC M-Payments partner4. In Africa, a stroke of luck, significant level of financial commitment as well as favourable stance and support from the Kenyan government and commercial bank regulator helped Safaricom create M-Pesa, the most illustrious example of a mobile operator owned M-Payments platform. M-Pesa started as C2C transfer service, but quickly evolved to a B2B urban payment platform, leveraging on Safaricoms market dominance. More recently, many operators, including Vodacom, have tried to replicate or implement similar models, mostly unsuccessfully. Telefonica, in partnership with MasterCard, has introduced a mobile wallet concept across Latin America. The main goal is not to bank the unbanked but to enable a source of funds for digital payments, as recent partnership with Google, Facebook, and Microsoft shows. More recently, Vodafone and Visa announced the worlds largest mobile payments partnership to enable consumers to pay for goods and services using their mobile phones. In Asia, Telenor has acquired Tammer Bank in Pakistan while China Mobile purchased a 20% stake in Shanghai Pudong Bank, in mid-2010, to enter into the M-Money business. While many more significant examples exist, there is little traction or visibility of the impact and results, raising significant questions on the future of operator lead M-Payments initiatives.

1.2 What are M-Payments?

M-Payments revolve around providing the basic payment and transfer functionalities of a bank account and debit card over a mobile device. However, banking services such as interest paying accounts, mortgages and consumer loans, can not be offered under the M-Payments umbrella.
4 McDonalds restaurant were the first adopters of NFC due to the significant productivity increase from reduction of the payment time from 20-25 seconds to 5 seconds

The foundation of M-Payments was initially triggered by the need to reach unbanked customers in emerging markets, and by the need to enable micro-payments in developed markets. However, M-Payments have the potential to become the most convenient payment instrument as it allows digital payments, presence (NFC) payments, e-ticketing, coupons, remote collections/payments and money transfers. Other existing payment instruments (e.g. cash, debit card, credit card, and bank account) currently do not allow access to all payment services in one integrated and convenient way. Ultimately, the goal of an M-Payments ecosystem is to link consumers, businesses and government in an integrated manner with multiple payment and transfer services.
ExHIBIT 1: M-PAYMENTS ECOSYSTEM AND SERVICES
Key M-Payments services Digital payments Presence (NFC) payments M wallet Corporate & NGO
(Retailers, HORECA* and service provider)

Consumer

Remote payments Business Transfers between accounts International transfers Deposit (cash-in)

Government
* Hotel, restaurants and cafe

Withdrawal (cash-out)

1.3 M-Payments services reach out for the banked and unbanked across developed and emerging markets
Two distinct M-Payments value propositions There are essentially two M-Payments value propositions that providers should aim to deploy: 1. Substitute the need for a bank account 2. Replace cash, keys and cards (credit, debit and loyalty) The former targets unbanked customers or banked customers in markets where electronic payments are not common - both primarily found in emerging markets. The latter targets customers that use debit and credit cards on a daily basis. These customers can be found across developed and sophisticated markets. While emerging markets operators may consider bypassing the banks, the developed and sophisticated markets operators need to build partnerships with financial-sector players in order to offer the full value proposition and to comply with commercial banking regulatory requirements. Operators in developed markets have to deploy both value propositions to address high and medium-value clients.

ExHIBIT 2: M-PAYMENTS VALUE PROPOSITIONS

Replace the need for a bank account
Cash-in/out Apps / digital content payments Receive ads & coupons Top up airtime Micro Savings Pay utility bills Loyalty programs Expense Report Fast pay POS (Via NFC)

Replace cash, keys and cards (credit, debit, loyalty)

Cash-in/out Pay bills / airtime

Loyalty programs Transfer money to family / friends

Micro loan receipt & settlement

Pay at POS Advertising & coupons Internet payments

Short-term micro savings Financial alerts / notifications

Electronic menu Share/split bill

Receive salary

Receive payment nationally / Int'l

Send & receive money to/from family / friends

Pay public transport / toll gates / parking

Apps/ digital content payments

Emerging Markets

Developed Markets

Sophisticated Markets

Three distinct market realities across the world The M-Payments opportunity is shaped by five factors, namely financial-services penetration, credit card usage, level of organised retail, iOS / Android / Windows Mobile5 penetration and customer sophistication. Considering these factors, we have clustered the markets into three groups sophisticated markets, developed markets and emerging markets.

ExHIBIT 3: M-PAYMENTS COUNTRY SEGMENTATION

Sophisticated High Payment card usage Developed Growing Payment card usage

Developed banking infrastructure Most financial transactions happen "cashless" Credit/debit cards are a "commodity" High smart-device penetration Average GDP of US$42k and Banked pop. >75%
1) Replace cash, cards and keys

Most people in urban areas have bank accounts, ATMs frequent in cities Some use of credit cards but cash still frequently used Most people with mobile phones, growing smart-device penetration Average GDP of US$5k (US$15k excluding China, India and Indonesia) and Banked population between 40-75%
1) Replace cash, cards and keys; and 2) Replace the need for a bank account

M-money inspiration

M-money inspiration

Emerging Growing bank penetration

Growing bank account

Sophisticated Developed Emerging

penetration on medium income segments Rare or no usage of credit cards & low POS penetration Cost/barriers of opening or maintaining bank account decreasing Most transactions "cash-based", even in business world Average GDP of US$2.5k and Banked population < 40%
2) Replace the need for a bank account

M-money inspiration

Users of these mobile operating systems can effectively use M-Payments apps

Sophisticated markets account for close to 1 billion people. M-Payments are primarily adopted as a comprehensive solution that replaces the traditional wallet and its content. The group of countries in this cluster have high GDP per capita and extensive financial services penetration (75% or more adults are banked). The adult population in these countries is highly banked - 0.7 billion with bank accounts, of which 0.4 billion own credit cards. These countries are also well connected, with an Internet user base of 0.7 billion (over 70% of the population). Developed markets have a population of around 4 billion. Cash is still the main means of payment although payment card penetration is increasing. Hence, the opportunity to drive electronic payments becomes a key objective for M-Payments providers. This cluster is represented by sizeable nations such as Brazil, Russia, India, China, South Africa, South Korea, Turkey, Poland, Malaysia, Indonesia, Thailand, Kazakhstan, Colombia and Saudi Arabia. These countries have 1.4 billion adults with bank accounts, 0.25 billion credit card owners and more than 1 billion Internet users. Emerging markets have a population of around 2 billion. This cluster is characterised by low financial-services penetration (less than 40% of adult population are banked) and low usage of electronic payment. There are 0.4 billion people with bank accounts, less than 0.1 billion with credit cards and 0.4 billion Internet users. M-Payments are a key economic development tool, particularly for the unbanked population, which mainly uses cash to pay for services and goods. This cluster includes countries with low financial services access such as Mozambique, Tanzania, Kenya, Uganda, Ghana, Nigeria, Angola, DRC, Pakistan, Ethiopia, Sudan, Syria, Iraq, Iran, Bangladesh, Mexico and Philippines. In these countries, the size of the informal economy is both an advantage as well as a barrier to M-Payments growth, as cash transactions are free and untraceable.

1.4

M-Payments can potentially reach 4.5 billion mobile users, of which 3.3 billion are members of banked families

The addressable market for M-Payments worldwide is estimated at around 4.5 billion mobile users, comprising of an estimated total of 2.5 billion banked adults, 0.8 billion teenagers in families with banks account, and 1.2 billion non-banked adults (residing mainly in Asia and Africa).
ExHIBIT 4: M-PAYMENTS POTENTIAL (2012)
People
(Billions)

7.0

Population with mobile 0.8 2.5 < 4.51 0.8 < 1.2 2.0

Population without mobile

2.5

World Population
1

Mobile users

Banked adults Banked adults Banked adults with Debit with Credit Card Card

"Banked youngsters"

Not banked w/ mobile

Non mobile users

Accounts for distinct individuals with mobile phone, hence eliminating dual SIM effect Source: World Bank, IMF, WCIS, Delta Partners Analysis

The banked population is increasing significantly due to two major trends - banks reducing the barriers to open and own a bank account as well as governments (only) paying social grants (welfare) by transferring the money directly into bank accounts, thus forcing the bottom of pyramid to open one. However, globally, the unbanked adult population is still significant - 2.5 billion people, with the 10 largest markets accounting for 1.8 million. China and India account for the majority of the unbanked (~1.1 billion adults), while the remaining markets in the top 10 are Indonesia, Pakistan, Brazil, Bangladesh, Nigeria, Mexico, Vietnam and Philippines. One of the misconceptions about M-Payments is that its adoption significantly reduces the unbanked population. However, evidence from African markets shows that: M-Pesa Kenya was initially adopted by banked individuals M-Payments services, targeting the unbanked, are not being widely adopted in markets were more than 30% of adults are banked
ExHIBIT 5: AFRICAN CONTINENT - FINANCIAL INCLUSION (% OF TOTAL ADULT POPULATION)
Have/Use Bank product Have/use informal products only Have/Use formal (non bank) product Financially excluded

M-Payments usage
(% of adults)

RSA 11 Namibia 11 Botswana 09 Ghana 10 Nigeria 10 Kenya 09 M-Pesa penetration Uganda 09 Malawi 08 Rwanda 08 Zambia 09 Tanzania 09 Mozambique 09 41% 34% 30% 23%
2009

63% 62% 18% 7% 6% 18%

2011

5% 5% 3%4% 8% 44% 47% 26% <59% 42%

27% 31% 33%

11% n/a 9% 2% 13%

In SA, bank penetration is increasing fast from 47% in 2005 to 63% in 2011

15% 17%

In Namibia, bank penetration increased 17% from 45% in 2007 to 62% in 2011

33% 68% 30% 55% 52% 63% 56% 78% 27% 1% 4% 5% 23% 3%

<35% 7% 7% 7% 9% 4%

In Kenya, bank penetration increased from 19% in 2006 to 23% in 2009 Banked and other formal products increased from 27% in 2006 to 41% in 2009 M-pesa penetration amongst the adult population increased from 35% in 2009 to 59% in 2011 About 75% of banked population in 2009 also added M-pesa services

21% 19% 14% 14% 12%

19% 27% 14% 28%

12% 1% 9%

Source: FinScope Research (2011); Delta Partners Analysis

1.5 M-Payments potential global revenue totals US$120-130 billion but mobile operators may aspire to capture only US$40-50 billion
According to Gartner, total value of M-Payments transactions will reach US$600 billion by 2016, up from US$170 billion in 2012. Delta Partners analysis shows that M-Payments ecosystems can, in the long term, address a US$12 trillion transaction market, which would be 100 times bigger than PayPals transaction amount in 2011. Total fee revenue6 may reach US$250 billion, but banks and payment networks will capture most of it.

Total fee revenue includes mainly the fee charged to retailers. This fee is shared between the bank that acquires the retail POS, the payment network and the bank that issued the card. M-Payments players compete mainly with card issuers, and thus can only aspire to about 1/3 of total fees generated. To aspire for more the M-Payments player need to replace also the payment network.

Based on the aforementioned figures, we estimate the global revenue that all M-Payments service providers can achieve is approximately US$120-130 billion. Over 90% of this revenue will be generated in sophisticated and developed markets where mobile operators compete with OTT and Internet players not to mention banks and payment networks. Thus, mobile operators can only aspire to globally capture up to US$40-50 billion, which is equivalent to 4-5% of total mobile operators revenues.
ExHIBIT 6: M-PAYMENTS POTENTIAL TOTAL MARKET FORECAST
Total market value
(US$ Trillion)

Small & micro Addressable payment m-payments

Potential Potential transaction fee revenue

(US$ Billions)

Subscribers mix

(weight out of total)

Sophisticated Developed Emerging

Household expenditure Salaries and grants

35.8

55%

34%

1%

67.2

7.0bn 32%

5.5bn 26% 54% 20%

2.0bn 17% 47% 36%

49.6

16%

28%

1.5%

33.1

54% 14%

P2P transfers1

7.2

46%

35%

1%

11.5

Population Mobile subs Internet subs Subscribers and Value mix

Business payments

144.0

6%

24%

0.5%

10.9

(weight out of total)

Sophisticated

Developed

Emerging

Exports

17.0

2%

14%

3%

1.5

2.5bn 15%

0.8bn 12% 33% 56% Credit cards

US$125bn 10% 25% 65% M-Money potential

Workers remittances

0.4

39%

46%

3%

2.2

57% 29%

US$255tn
1

US$40tn

US$12tn

US$120-130bn

Bank accounts

Excludes international remittances Source: World Bank; IMF; Delta Partners Analysis

Our forecasts are consistent with Gartner, who forecasts worldwide M-Payments subscribers to grow from 160 million (December 2011) to 448 million by 2017, with North American and Western European markets contribution increasing from 22% to 32% of the total, while African contribution declining from 28% to 23%.

1.6 M-Payments places operators on a collision course with Internet players and banks, with Visa and MasterCard in the driving seat
The mobile operators, banks, payment networks (e.g. Visa, MasterCard and Amex) and OTT / Internet players are on a collision course, each with a unique set of objectives as a consequence of M-Payments ecosystems evolution. Mobile operators in emerging markets aim to increase the share of wallet, gain distribution savings by reducing airtime commissions, acquire new customers, drive brand loyalty and reduce churn. On the other hand, mobile operators in sophisticated markets aim to drive digital and NFC payments. However, the reality is that operators have achieved limited results with current M-Payments efforts. Some of the common reasons include the need to deploy alternative sales channels (agents networks) and the multi-SIMs usage associated with aggressive on-net voice promotions.

ExHIBIT 7: OBJECTIVES OF VARIOUS M-PAYMENTS PLAYERS

Key objectives
1 Obtain savings in distribution Increase share of wallet Drive loyalty & reduce churn Acquisition of new customers Drive digital and NFC payments 2

Mobile operators

Internet players (Apple, Google, Facebook, Ebay)

Drive digital services revenues Link transactions with advertising & premium/discount services Control the transactions in fixed & mobile internet worlds Control retailers (POS) Protect low-end client base from mobile operators Reduce costs (branches and ATMs) Drive electronic transactions Drive transactions in its platforms Offer promotions/ coupons Leverage smart-device to bypass banks for card distribution

Banks

Payment networks (Visa, MasterCard)

OTT and Internet players have recently stepped up their game in the M-Payments landscape. They are deploying payment services and POS networks to generate revenue from suggested transactions while partnering with operators to have access to clients that dont own a credit card. Google, via its Google Wallet offering, is positioning the phone as the new wallet, and deriving revenue from suggested transactions (thus reducing dependency on pure advertising). Initially in partnership with US operators, Google is now considering sidestepping the operators altogether as US operators have been more focused on the integrated ISIS mobile wallet initiative. PayPal, with more than 109 million accounts, is building a reliable alternative to credit card payment. PayPal recently announced it signed 200,000 merchants in one week to its new PayPal Here service.
ExHIBIT 8: KEY OTT AND INTERNET PLAYERS COMPETING IN THE M-PAYMENTS SERVICES
EXHIBIT 7

Allows a mobile phone to act A triangular debit/credit Leverages NFC technology to

transfer virtual credit card details to the merchant as a credit card

Overview

card reader, allowing merchants to accept payments using swipe technology Includes customer & product management software

A debit/credit card reader,

allowing merchants to accept payments using swipe technology

Supports mobile payments

with several technologies such as NFC enabled devices and card readers with partnerships such as that with Google Wallet

Complements its offering

Target to succeed given ecosystem setup

Consumers

Merchants

Bank

Volume transacted Scale to date Number of merchants Transaction fee

N/A ~140k 1.9% + $0.30 per transaction1

N/A ~200k

~5bn ~1m

~1bn N/A 1.95% + $9.95/month or 2.70% per transaction

2.7% per transaction

2.75% per transaction

Source: Bloomberg; OTT websites; Delta Partners Analysis

Microsoft has also recently announced a new digital wallet service that shares credit card information and other M-Payments details. Another contender in this crowded battle space is Apple, as it aims to use Bluetooth technology to enable in-shop, remote payments with the iTunes account. Apple also aims to improve its iTunes business margins by consolidating transactions and therefore minimizing the fees charged by the Credit Card ecosystem. The challenge is that consolidating transactions imply a bad-debt risk (if the model is post-paid). Alternatively, a pre-paid model using the iTunes account eliminates this risk but erects growth barriers. At the moment, however, Apples new Passbook service pulls together loyalty cards, tickets and coupons, but does not link directly to credit and debit cards. Banks across the world are driving bank account penetration and credit card usage in order to grow and protect their transactional business. The commercial bank regulators serve as powerful allies to the banks, applying multiple operational constraints on operator M-Payments Wallet services. For instance, a common restriction coming from the commercial bank regulators is a requirement for a trust bank account (e.g. M-Pesa Kenya, MTN MobileMoney). VISA and MasterCard are the key M-Payments players across most sophisticated and developed markets (more than 90% of world GDP). Currently, both players have extensive agreements and partnerships across the world with operators and Internet players7 to drive NFC, remote and digital payments. This puts Visa and MasterCard in the drivers seat when it comes to M-Payments, with an ultimate goal to increase the number of electronic transactions processed, whether originated by a debit card, credit card or a mobile wallet. Both Visa and MasterCard rely on efficient banking platforms, which they offer on wholesale in conjunction with reliable back-office transaction processing services. Visa is also hedging its efforts by partnering with Samsung, to virtualise its Visa payWave8 into a special edition Samsung Galaxy III developed for the London Olympics. Visas ambition includes emerging markets, as underscored by the recent US$100 million acquisition of the M-Payments platform provider, Fundamo. Essentially, Fundamos business value is driven by the contract with Africas MTN Group, a regional giant with a presence in 22 MEA markets and over 170 million subscribers. MasterCards ambition is similar. Wanda, the joint venture of Telefnica and MasterCard in Latin America, will provide mobile payment solutions to over 87 million Movistar customers in the 12 Latin American footprints. These mobile payment services will be linked to a mobile wallet or prepaid account that will allow for money transfers, mobile airtime reload, bill payment and retail purchases, among other services. In summary, mobile operators, OTT / Internet players, payment networks and banks are all competing for the same customer transactions, but Visa and MasterCard are establishing partnerships with all potential winners.

7 8

All Internet players tend to partner with Visa and MasterCard as it enables them to solve the key problem: get cash into the M-Payments ecosystem with minimal distribution cost Visa NFC system in debit and credit cards Visa NFC system in debit and credit cards

10

2. M-Payments models involving payment networks to replace operators M-Payments Wallets

2.1 Operators M-Payments Wallet model is very difficult to rollout successfully
The M-Payments Wallet is the most common model for standalone rollouts in Africa. The model requires the operator to establish an agreement with a bank, under supervision of the commercial bank sector regulator, that ensures: The operator always keeps a trust account balance equal (or higher) to the total balance of the M-Payments accounts. Usually, the trust account is non-interest bearing and the operator is fully responsible for any imbalance due to operational errors or fraud The operator meets all Know Your Customer (KYC) requirements for each M-Payments account The M-Payments account balance and transactional limitations are met, which constrains the service functionality significantly

This M-Payments Wallet business model faces significant market applicability limitations. Firstly, in sophisticated and developed countries, the payment card users have no real need for a limited M-Payments service. Secondly, in emerging markets where cash is ubiquitous, anonymous and free, M-Payments can only be a relevant solution for remote payments (with relevant implementation complexities) and for C2C transfers (a relatively small market opportunity). Thirdly, operators in emerging markets are burdened financially with expensive cash-in and cash-out agent networks. Fourthly, operators tend to deploy low-cost IT platforms, which are not as reliable as the ones used by the banks and difficult to integrate with the IT systems of the other M-Payments ecosystem players. Finally, operators do not have the experience to manage the transactional back office thus requiring additional staff and active management of internal fraud costs.
ExHIBIT 9: M-PAYMENTS AND AIRTIME WALLETS LIMITATIONS AND REqUIREMENTS
Bank Payments
Bank Account Debit & Credit Card Bank Yes No/Large May have May have Medium / Large May have Yes Small May have May have

Operator Payments
M-Payments Account Trust Bank "Airtime Wallets" Operator No Small/ Micro May have No

Cash

Money Owner Bank Regulated Transaction Size Limits Transaction Cost - Sender Transaction Cost Recipient Key Issues

Person, Entity Yes, but not effective No No No

Requires sender to know recipient bank account number

Minimum fees Fraud

Limits on account balance, transaction value and number of transactions

Cost of Airtime Does not allows cash out

Fraud (Fake currency) Loss (theft, fire,)

All markets All markets

Emerging

All markets All markets

11

But the key barrier for an operator M-Payments solution to replace the bank account is pure human psychology. Poor people need social inclusion, and the bank account delivers much more psychological or social value than a M-Payments wallet.

2.2 Operators can deploy M-Payments services through airtime wallets, by setting up a bank or by partnering with a bank or payment networks
A mobile operator has three options to address the M-Payments opportunity: 1. Uses its airtime wallet 2. Sets up (or acquire) its own bank 3. Establishes a partnership with a bank(s) or a payment network Using the airtime wallet is an easy option. However, most commercial bank regulators do not allow sizeable transactions/balance limits or cash out, so the M-Payment opportunity is limited and the C2C transfer business is not possible. Nevertheless, the airtime wallet should be used in conjunction with the other models, especially to enable digital payments. Setting up a bank enables freedom to address the M-Payments opportunity but requires the development of a viable investment case for the bank. The business plan needs to account for the costs of minimum capital requirements, fraud management systems and of a management team with financial sector experience. An operator will be more successful when establishing a bank in a country with high interest rates and uncompetitive banking systems (e.g. high transaction fees and low card usage). In Exhibit 10, we present the typical M-Payments models evolving partnerships between banks, operators, payment networks and OTT / Internet players.
ExHIBIT 10: M-PAYMENTS MODELS IN PARTNERSHIP WITH BANKS AND PAYMENT NETWORKS
Number of Countries Bank
M-Payments Wallet (trust bank)

99 Emerging

Developed

47 Sophisticated 35 Operators partnering with banks and / or payment networks 4

Internet Player with Payment Network (s) and Bank Internet Player with Payment Network

2 1
M-Payments Wallet + Payment Player

'Bank Account'

Stakehold ers & MPayments Models

Operator Payment Network OTT Player

Operator partner with bank & Payment network player

M-Payment Wallet (Operators teaming up)

Main Goal

Reduce airtime cost Bank the unbanked Replace banks MoMo (MTN) Airtel Money Africa M-Pesa Kenya Smart Phils. (launch)

Drive loyalty and revenues

Drive bank client base Drive loyalty for operator

Drive Drive revenue transaction from retail revenue transactions Compete with Drive OTT cards & cash ecosystem Isis USA Mpass Germany All operators Netherlands Google + Citibank + Master Card

Drive revenue from on-line transactions Drive OTT ecosystem Paypal Square Google Wallet

Examples

Telefonica LatAm + MasterCard M-Pesa Kenya Smart Phils. (today)

Softbank NTT Docomo M-Pesa SA Telefonica + local bank + Visa

GDP (US$ trillion)

5.1

57.3

12

To succeed in M-Payments, an operator needs to secure a convenient, low-cost access to funds, and the bank account as well as payment cards are the best sources. Thus, developed and sophisticated markets operators can typically deploy four models: M-Payments wallet in partnership with a payment network player (usually MasterCard and Visa), where the partner is responsible for the link with the banks, transactional back office and contributes for regulatory approval Bank Account, where the bank owns the client and the operator acts as channel for customer acquisition and transactions. Some operators have acquired or launched banks to be able to own the client M-Payments wallet in partnership with other operators, requiring agreement with a bank(s) for trust accounts and alignment between the operators, which is usually very difficult to achieve, as the US operators ISIS partnership shows Internet player in partnership with payment network and banks, where the operator sets up a PayPal type of service and partners with payment network and/or banks to secure access to funds and rollout payment POS Kenyas M-Pesa constitutes a clear example of how critical it is to evolve from a pure M-Payments Wallet model to a model in partnership with payment networks and banks. In fact, M-Pesa started as a closed community that aimed to drive C2C transactions, but quickly opened up and partnered with the commercial bank sector to enable money flows and address operational challenges (e.g. reconciliation and settlements with corporations and managing fraud). A major part of M-Pesas success is attributed to its massive sales channel investment9 (i.e. widespread agent network in both urban and rural areas) and comprehensive partners network. M-Pesas partners include ATM networks, retailers, airlines, insurance companies, and banks. Our experience shows that operators tend to benefit more from partnerships with either the payment networks (Visa and MasterCard) or the banks. At the same time, the benefits from partnerships with OTT and Internet players remain unclear, especially for operators in sophisticated and developed markets that have (or will have) a significant base of iPhone and Android users.
ExHIBIT 11: M-PESA ECOSYSTEM EVOLUTION
Closed P2P community
Key enablers: <20% bank penetration 82% market share Regulator facilitated introduction to ease mass market penetration Massive sales channel investment Widespread agents network

Open P2B and B2P community 86 69 52 45 83

Financial services

Full value chain

130

Users

34 15

(index=100)

?
2011

Agents Rev

(index=100)

32 4 2009 2010

(US$ millions)

2008

Drive P2P transfers

Objectives between users

Use M-Pesa as debit card Widespread retail presence Enablement of corporate transactions &
payments

Partnership with
VISA and banks services functionalities

Full value chain

exploit

Add financial

Link with loyalty

and coupon programs

Source: Safaricom institutional website; Annual report

Safaricom invested up to 5% of its revenue, on top of 10%-11% airtime/SIM commission expense, to create a separate distribution network for M-Pesa

13

3. Operators have the opportunity to partner with banks for M-Banking but not for long
Operators have been trying to replace banks with M-Payments initiatives. However, operators and banks are not destined to be competitors. Exploring partnership and cooperation agreements may, in most cases, deliver greater value for both parties.
ExHIBIT 12: OPERATORS AND BANKS PARTNERSHIPS FRAMEWORK
Partnerships M-Banking Bank as telco channel Mobile as bank channel Joint services and offers Cooperation M-Payments Operator "airtime Wallets" Prepaid Postpaid M-Payments account Competition

Cross-promotions / marketing Sell SIM card Prepaid top-up Postpaid bill payment Postpaid credit vetting Mobile access to bank account Secure access PIN delivered to phone Notifications Fraud management support International transfers Transfers ATM withdraw M-Insurance Sophisticated and developed Micro-saving & micro-insurance NFC card payments & ticketing Virtual / limited credit card num.

Digital payments NFC Presence & micro-payments and ticketing Remote Payments / Collections Transfers between accounts International transfers Transfers ATM withdraw Micro-saving & Micro-insurance Developed and selected emerging

Key Services

Geography Competition

All

Emerging

All

Emerging

Partnerships for M-Banking Operators and banks should consider commercial partnerships, as both aspire to drive electronic transaction growth, reduce sales & marketing costs and protect or grow client bases. The major commercial banks are perfectly positioned to act as operator channels. The banks risk management requirements such as the Know Your Customer (KYC) can easily determine if the client qualifies for a post-paid contract or can afford smart-devices. Alternatively, the mobile operator can act as a bank channel to source additional clients or reduce the need for bank branches. The customer can interact with the bank through the use of SMS, USSD or more recently through Apps. Thus, the mobile device becomes key for the bank to communicate with the client (e.g. to send notifications) or to be used as another security layer in online banking. The operator gains easier and cheaper access to airtime recharge, bill payment and VAS services while the bank achieves better financial services accessibility (at lower cost), higher security and more credit/ debit card usage. Finally, both entities may deploy a joint service proposition including, for example, a low-cost bank account that can only be accessed by mobile phone and NFC retail payments. In addition to M-Banking services, operators and banks (or insurance companies) can partner to provide M-Insurance. M-Insurance, is a set of innovative insurance products that leverage the mobile phone/device to customise insurance premiums and increase the efficiency of claim and fraud management processes. 14

ExHIBIT 13: M-BANKING SERVICES ILLUSTRATION

Telco
Telco Bank accounts Bank accounts subs) (2011, '000
(2011, '000 subs)

Apps Apps USSD USSD Secure access (ID, code on SMS) Secure access (ID, code on SMS) Notifications (message and Notifications (message and voice) voice)

190

190

> 30

> 30

Airtime payments Airtime payments Bill payments Bill payments

Bank users M-Banking users (United M-Banking users Bank users States) (United States) (United States) (United States)

Debit / credit cards Debit / credit cards

Airtime payment Digital payments Airtime payment Digital payments Virtual card (NFC) Notifications Virtual card (NFC) Notifications
Cards and POS at POS Cards andretail stores at retail stores

Operator SIM (number) in the center of bank / credit card debits notifications Operator SIM (number) in the center of "Secure" banking if SIM is active bank / credit card debits notifications "Secure" banking if SIM is active

However, as iPhone and Android customer base grows in sophisticated and developed markets, the payment networks and banks have the opportunity to deploy Apps and interact directly with its customers. This reduces the need for banks to partner with operators, except in markets with a fragmented banking sector and where one or two operators dominate.

An alternative cooperation for M-Payments If a partnership proves difficult to establish, banks can cooperate with operators by providing an efficient, yet low cost and convenient solution for pre-paid top-up and bill payment. The benefits to the operators are clear: 1) airtime distribution costs savings and 2) digital and NFC payment services offerings essential in a smart-device world. The benefits to the banks include the added convenience for its customers, additional income from transactions, but more importantly, a disincentive for the operators to establish alternative payment channels. Both will benefit from increasing client loyalty, even though for a bank, services such as credit, savings and salary payment are much more relevant and effective. Which markets should banks and operators cooperate in? Essentially, in markets where credit card usage is insignificant and/or the operator experiences high airtime commission costs (usually above 3% of revenue).

Time for a mindset shift and action Most operators are better off establishing partnerships with banks and payment networks than trying to compete by deploying stand-alone M-Payments wallets or banking approaches. NFC M-Payments and M-Banking are clear opportunities to establish strong partnerships where both entities can address a broader customer base and achieve operation savings. The joint synergies are clear and relevant in light of the global economic challenges. Going ahead alone in capturing this sizable opportunity will be risky and challenging for operators. However, as iPhone and Android devices penetration increases the window of opportunity for mobile operators to establish equitable partnerships with banks and payment networks in sophisticated and developed markets is closing fast.

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