Financial institutions are falling over themselves to introduce mobile payment services, but so far the results have been a bit underwhelming in most of the world. The industry seems to be waiting for near-field communication (NFC) solutions to become reality outside Japan, fulfilling a science fiction-ish notion that mobile phone users will just wave their phones near secured payment points to authorize transactions.
Although Google Wallet supports NFC payments, the technology suffers from the fundamental disadvantage that it leaves literally billions of cell phones behind: If users want to use NFC mobile payments, they’re going to have to get a new (likely high-end) phones, and they’ll only be able to use it with merchants who have upgraded to NFC-capable point-of-sale terminals from credit card companies. Right now, Google Wallet can use NFC, but only with Citibank Mastercards, a handful of NFC-capable sales terminals, and a single phone (the Nexus S 4G on Sprint). Some industry watchers don’t expect NFC to see serious adoption in the North American market until 2014 or 2015.
Similarly, solutions like Square Card Case rely on GPS and assisted GPS technology to detect when customers are physically close to participating merchants — that’s certainly novel, but it doesn’t help if you’re in an area with poor or no GPS reception or don’t feel like broadcasting to merchants that you’re nearby and shopping. Similarly, unlike well-established credit card companies, merchants have to actively enroll in Square, so it’s not yet something consumers can reasonably expect to use basically anywhere. While services like the Apple’s Apple Store app offer phone based payment and checkout, but they only work in specific retail locations: Try using the Apple Store app to pick up something and walk out of Best Buy, you might get arrested.
Gosh, what if there were a widely deployed mobile technology that can be used securely for mobile payments that was already on the vast majority of mobile phones around the world and was backed by a major credit card company?
Oh, wait! There is.
Visa launches mobile payments in emerging markets
Yesterday, Visa announced a new prepaid mobile payment service that enables users to send and and receive funds from each other, send and receive money internationally, make purchases at Visa merchants (in person or online), and even withdraw cash from Visa ATMs. That makes it already more capable than mobile payments solutions being slowly deployed in the United States. What’s more, it’s all done via mobile phones—and not fancy phones either, essentially any GSM handset will do the job. And here’s the clincher: Users don’t need credit cards or bank accounts.
Here’s how it works. The system is a prepaid service: When users sign up, they get a card verification number (CVV) and set up an identification number for an account tied to their mobile phone. Users can get money put into their account from any other user on the system, or by putting cash into their accounts via Visa ATMs (using their ID numbers and CVVs) or by bringing cash to an authorized agent of the service operator. Once they have money in their account, they can sent it to anyone else on the system, use it at any Visa point-of-sale, along with getting cash out of Visa ATMs. They can also use their accounts to make online purchases and send payments internationally.
The best part is that no special phones or SIM-swapping are required. The service works on essentially any GSM phone using a protocol called Unstructured Supplementary Service Data, or USSD. You can think of USSD as being a lot like text messaging: Messages are limited to 182 characters (including overhead for routing — about 160 characters are available for user data), and like SMS can be used while users are on the phone. However, unlike SMS (which is a delay-plagued store-and-forward service like email) current implementations of USSD are session-based, which means they maintain an open, real-time connection with remote servers. USSD may not be able to push through a lot of data at a time, but it does support interactive connections to mobile services — and, on nearly every provider, USSD isn’t billed separately like text messaging.
In developed markets, USSD is typically only used for things like checking account balances. However, in emerging markets it has been successfully used to roll out mobile payment services. Heck, there are Facebook and Twitter clients built on USSD too. Right now, there are more than 100 mobile payment services operating in developing nations (with nearly 100 more expected) that have served over 100 million people in the last ten years. Successful examples include M-Peda in Tanzania, SWAP Mobile in South Africa, mPay in Poland, and SharEpay in Cambodia.
Visa and Fundamo
Back in June, Visa bought a South African firm called Fundamo for about $110 million in cash — a relatively tiny acquisition for a firm of Visa’s size. At the time, the takeover didn’t generate much interest: Fundamo was a small mobile payments company in South Africa focused on bringing mobile payment solutions to developing markets. Although most global finance watchers agree emerging markets are underserved by traditional financial institutions, they don’t yet see developing market operations as central to those institutions’ future.
Visa is showing some signs of thinking differently. Essentially, Visa’s new payment services layers its own VisaNet services (including payment security, Visa’s vast network of merchants and ATMs, transaction processing, clearance and settlement services) on top of financial services offered by mobile network operators in developing countries. Visa’s new initiative provides a way to put many of those payment services under the Visa umbrella, enabling them to jump from serving a limited geographic area in (say) one market to offering a service that is literally recognized around the world.
Visa’s initial partner is MTN Mobile Money, which is already operating in a dozen countries and sports some 5.7 million users — the initial launch will be in Nigeria and Uganda. Visa says developing countries in Asia, Africa, and Latin America will be among the first target markets for the new service.
Why USSD mobile payments work in emerging markets
One of the reasons prepaid mobile payment solutions can work in emerging markets is that more people own mobile phones than have bank accounts. Where consumers in developed markets like North America and Europe typically have a selection of bank accounts (say checking and savings) and maybe some sort of online payment service (PayPal, Amazon, even Google Checkout), many consumers in developing nations don’t have any of that. Their per-capita income is far lower than their counterparts in developed nations, and in many cases banking infrastructure is too distant, unreliable, or simply non-existent. It doesn’t do you much good to put your money in a bank if you have to walk six hours both ways to do anything with it.
However, mobile phone ownership in developing nations is skyrocketing: In fact, that’s one of the primary reasons why the ownership of feature phones still outnumbers smartphones by about four to one worldwide. According to the International Telecommunication Union, by the end of 2010, about 90 percent of the world’s population lived within range of a mobile network and some 3.8 billion mobile subscriptions were expected to be active in the developing world. That represented nearly three quarters of all global mobile phone subscriptions.
Since mobile operators are handling subscription billing and prepaid accounts for all those billions of people anyway, many have worked out deals with local governments to offer basic financial services to subscribers. They’re typically not doing business as banks (nor are they subject to most banking regulations), but they are able to conduct transactions with and between customers via their mobile phones and maintain accounts on their behalf. They can also authorize agents to collect and disperse cash. The upshot is that, in developing nations, mobile commerce is one of the most common forms of “banking” available to people, and the process is being driven by mobile operators rather than banks.
In terms of sheer numbers, there’s little doubt those billions of mobile phone users will be a major driving force behind mobile financial services, money transfers, and mobile banking for the foreseeable future. Visa sees that huge pool of mobile-enabled users as an opportunity.
Why developed markets haven’t embraced USSD
It’s not true that no mature markets have adopted USSD as a mechanism for mobile payments: Poland’s mPay is a good example. However, a key distinguishing characteristic of developed economies is that banks and credit card companies are the gatekeepers for rolling out mobile payments solutions. And, for the most part, banks and credit card companies aren’t enamored of USSD.
One thing that gives credit card companies the heebee-jeebees is that USSD messages — like text messages — are sent in the clear, and the restrictions on message length and available bandwidth limit software-side encryption options. The radio transmissions between a mobile handset and cell site are encrypted, but the service is still subject to tampering, replay attacks, and similar fraud mechanisms. While USSD can be locked down reasonably well (using many of the same techniques used to secure Web sessions on smartphones) that incurs more overhead for developing, testing, and deploying mobile banking apps, and can significantly reduce the overall responsiveness of USSD-based apps.
Plus, there’s just not a lot of bandwidth available: USSD services uses two channels (FACCH and SDCCH) limited to about 140 bytes per second and 85 bytes per second, respectively. In other words, every USSD message can take over a second to transmit or receive, and during transmission and reception it actually reduces bandwidth for voice capabilities. So if you’re on the phone at the time, you might find voice quality goes down. While limited capabilities and simple interfaces might be a boon for the “unbanked” and “under-banked” in developing nations, financial institutions in developed markets understandably balk at offering only a time subset of services to their mobile customers — many of whom are experienced with sophisticated online banking services.
There’s also limited capacity for handling USSD on typical cell sites. Individual cell sites can support up to eight SDCCH channels, but many only support four. That means that eight simultaneous USSD sessions would use a single cell site’s capacity for USSD service. And remember, since USSD is session-based, those channels stay open even when no data is being transferred to and from handsets. Providers can set timeouts to drop connections if there is no activity, but in crowded places like shopping malls and sporting events, it’s easy to see how available USSD capacity could be consumed quickly. (There is some research (PDF) that purports to show this just doesn’t happen in every day use, however.) As mobile operators in developed markets have focused on rolling out 3G and 4G mobile broadband services, banks and credit card operators have focused on those higher-bandwidth channels for mobile payment technologies, which can support a full range of services, rather than the bandwidth-constrained world of USSD.
Another obstacle: Consumers in developed countries have generally shown limited adoption of prepaid services. Although pre-paid credit cards and phone service aren’t uncommon, consumers in banks’ and mobile operators’ most-coveted demographics prefer to keep all their money in their own accounts, authorizing payments for services on an ongoing or one-at-a-time basis. In many circles, there’s even a stigma associated with prepaid services, where they’re sometimes considered a sign that someone isn’t credit-worthy. These factors make Visa even less likely to try to bring its Fundamo-based solutions to the U.S. or other markets, at least as a mainstream mobile payments system.
Smaller but further ahead?
For consumers in developed countries — outside Japan, anyway — the sad truth is that having well-established financial institutions, credit card companies, and consumers that almost universally have bank accounts has turned into a hindering factor for developing mobile payment solutions. Countries and markets that don’t have that infrastructure (or anywhere near the same level of consumer spending) find themselves in the potentially enviable position of having working mobile payments solutions today that work on everyday inexpensive phones.
It’s one of the little ironies of the high-tech world.