mobile payments 101 - with audio

8/3/2019 Mobile Payments 101 - With Audio

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Mobile Payments 101

Richard A. Gibbs June 1, 2011

Karen Ross

Andrew Lorentz

How do they work?



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Agenda

What is a mobile payment?Mobile payment technology

Near field communications

Value proposition and challengesCritical issues



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What is a mobile payment?

Mobile payment

a payment (transfer of funds in return for a good or service) where the mobiledevice is involved in the initiation and confirmation of the payment

includes P2P transfer of funds

Mobile banking

access to banking functionality (query + transaction) via the mobile device

includes the provision of part or all of the banking functionality already provided bybanks over the Internet in the form of online banking

Mobile transaction

transaction where the mobile phone is used simply to initiate an order but not makea payment or to receive delivery of goods or services (e.g., event ticket bar code)



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Mobile payments technology

Short Message Service (SMS)

SMS is a communication protocol allowinginterchange of short text messages

Problems as a mobile payment platform

● Slow, store-and-forward operation

● No security or encryption, sent in clear text only (except during transmissionover the air)

● No inherent proof or confirmation of receipt or delivery

Generally used to purchase digital goods

(ringtones, avatars, games) or send moneyP2P or P2B

Send money

§Send a text to 729725(PAYPAL). Specify theamount and therecipient’s phonenumber or emailaddress.

Send money

§Request moneySend a text to 729725(PAYPAL). Include thewords get and from,and then specify theamount and the phonenumber of the person

you’re requestingmoney from.



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Unstructured Supplementary Service Data (USSD)USSD is a mechanism for transmitting information via aGSM network

Unlike SMS, USSD offers a real-time connection during

a session which makes it faster Used extensively overseas for mobile financial servicessuch as remittances and billpayment

Examples: M-Pesa in Kenya,TchoTcho Mobile in Haiti



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Quick response (“QR”) two-dimensional barcodesPopular for closed-loop applications

Starbucks, Target, other retailers



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Near field communication (NFC)

NFC is a short-range high frequencywireless communication technology thatenables the exchange of data betweendevices over about a 4 cm. distance

Allows emulation of existing contactlesspayment standards (MasterCard PayPass,Visa payWave, American ExpressExpressPay, Discover Zip)

Allows P2P transfers (NFC device to NFC

device)

Can read “tags” from smart posters for offersor coupons



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NFC applications

Click to edit Master text styles

Second level● Third level

● Fourth level● Fifth level

Source: Essentials for Successful NFC Mobile Ecosystem, NFC Forum (Oct. 2008)



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NFC business models

Mobile network operator centric model

MNO independently deploys mobile payment service

Can bypass financial institutions or develop open “wallet” application

Challenged by lack of connection to existing payments networks

Generally limited to remittances and P2P

Financial institution centric model

Financial institution develops a mobile payment application to be used on any mobile device

Ensures merchants have necessary POS capabilities

MNO involvement may not be necessary

Collaborative model

Financial institutions, MNOs, and trusted service managers collaborate to deliver mobilepayment

Model favored by the Federal Reserve

P2P model

Third party develops application to provide P2P or other form of mobile payment



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NFC stakeholders

Key Stakeholders

Consumer

Financial Institutions (FI)/Banks

Mobile Network Operators

(MNO)Merchants

Trusted Service Managers(TSM)

Supporting Stakeholders

Payment Card Associations

Handset Manufacturers

Secure Element Manufacturers

Technology Providers (NFCChipset, POS Terminals)

Third Party Application Providers

Standard Bodies



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NFC mobile payment ecosystem

“You have banks competing with

carriers competing with Apple andGoogle, and it’s pretty much a goatrodeo until someone sorts it out.” DrewSievers, chief executive of mFoundry(developer of mobile payment softwarefor merchants and banks)



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NFC stakeholder roles

Consumers who use the mobile payment device

Issuers and Acquirers who are regulated financial institutions with access to paymentnetworks (banks and money transmitters)

Merchants who can accept contactless payments

Mobile network operators who ensure a supply of NFC-capable mobile devices andmay be gatekeepers for secure elements

Payment networks who set standards and promote acceptance of payment cards

Chip and handset manufacturers of NFC-capable mobile devices who comply withstandards

Trusted service managers who provision and manage the applications on NFC-capablemobile devices

Issuing and acquiring payment processors who process payments on behalf of issuingand acquiring banks

Application issuers who offer applications for specific purposes (e.g., proximity paymentcards, transit, vending, person-to-person payments)

Application developers who develop applications for use on NFC-capable mobiledevices



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Standards bodies involved in NFC

Maintains, evolves,and promotes standardsfor payment accountsecurity.

Drives adoption of itstechnical standards, whichprovide an open andinteroperable infrastructure

for transactions performedusing smart cards, systems,and devices.

Engages in technical,commercial, and publicpolicy initiatives to ensurethat mobile services areinteroperable worldwide.

Develops mobileservice-enabler specifications to promoteinteroperability.

Establishes internationalstandards, including standardsapplicable to financial transactions and

contact and contactless smart cards.

Develops,maintains, and drivesadoption of itsprogramming languageand APIs, which providean open and interoperableinfrastructure for applications and securecommunications withindevices.

Developsspecifications for NFCdevices that are based onISO/IEC standard 18092for contactless interfaces,ensuring interoperabilityamong devices andservices.



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Overview of NFC device components



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Securing NFC mobile payments

Security critical applications that require paymentand account credentials need secure hardwarestorage and a secure execution environment

Role is handled by the secure element (SE)

A secure element is a platform where applicationscan be installed, personalized and managed, whichconsists of hardware, software, interfaces, andprotocols that enable the secure storage of

credentials and execution of applications for payment, authentication, and other services



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Secure element location options

On the universal integrated circuit card (or UICC)

Typically this is the phone’s subscriber identity moduleor SIM.

MNOs have control of the UICC.

On a separate chip or SD card inserted in the phone.

Financial institutions have the option to be MNOindependent.

Embedding the secure element in the phone itself.Preferred option for the location of the Secure Element



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Deployment scenarios

Simple Mode—A MNO-centricmodel where only the MNOperforms SE lifecyclemanagement functions butTSM can monitor and verifyloading of applications



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Deployment scenarios – closed model

One MNO – One TSM



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Delegated Mode—TSM isauthorized to loadapplications and performapplication lifecyclemanagement functions



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Authorized Mode—Severalentities are authorized to loadapplications and performapplication lifecyclemanagement functions



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Deployment scenarios – open model

Multiple MNOs – Multiple TSMs



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Collaborative business model for NFC



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Collaborative security model for NFC



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NFC advantages…

Security

Multiple layers of security (secure element, PIN, additionalauthentication factors [phone number, SMS challenge],information never passed as clear text

Lower merchant liability costsMag-stripe data exposure is eliminated

Lower issuer costs

No physical card distribution

Reduced fraud due to lost cards



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Value proposition and challenges

Customer is always “on-line,” which allows for

Improved customer relationship management

● Receipts sent to phone after purchase

Increased yield from marketing spend

● Co-marketing – purchase concert ticket and get a e-gift card for

purchase of music on iTunes

Targeted offers

● Messages and offers can be sent to customer in conjunction with atransaction (e.g., rebate coupons, map to event just purchased)

● Paperless coupons

● Smart offers – customized offers sent to customers based oncustomers’ demographics and transaction history



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Stakeholders have varying motives for pursuing mobile

payments

Financial institutions

Mainly a defensive play to protect current payment products

Prevent further disintermediation of the financial institution by keepingfinancial institution involved in any solution developed

Reduction of transaction costs of existing payment methods,especially cash and checks

Mobile network operators

Provision of value-added services to subscribers to reduce churn andincrease average revenue per unit through associated increases inairtime and data usage



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Merchants

Faster checkout

Ability to send directed marketing messages

Reduced transaction costs and fraud liability

Increased customer satisfaction and loyalty through offersand reward programs

Consumers

Faster checkout

Security

Convenience



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High cost for merchants

POS terminal updates or replacement

New systems may need development

Adoption by consumers

Consumers averse to change

No incentive to use contactless payment card (even if theyhave such a card)

What is the revenue model?

More players in the revenue food chain

Untested technology



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Critical issues – privacy and control

Whose customer is it?

Whose data is it?

How can I market to these customers?

How can I help others market to these customers?

●

Google Offers, mobile couponingHow can I use information about these customers?

● Geo-location, etc

Who controls collection?

Who controls communications with customers?Who safeguards the customer data? (liability for breach)



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Critical issues – financial services

Who powers the payments and how?

What payment instruments? Debit instruments subjectto possible Fed rate cap

What authority? (bank or money transmitter)

How does the financial institution meet its complianceobligations?

If the MNO wants control – how does it comply withfinancial services laws and regulations?



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Critical issues – technology and operations

How should the solution be implemented?

Whose intellectual property is used?

Is the business model financial institution- or mobileoperator-centric?

Who manages the secure element and applications onthe secure element?

Will the application be open or closed (or somewhere inthe middle?)

● Consumer choice and ubiquity



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Critical issues - economics

What are some possible revenue models?

Incremental revenue attributable to NFC

● Pay-as-you-go model

– MNO or TSM obtains revenue from application issuers for personalization and provisioning

●

Landlord-tenant model – MNO obtains revenue from charging application issuer “rent” for space of secure element

Interchange and transaction revenue

● Banks obtain revenue through current interchange process

no matter which business model is chosen, however,interchange usage fee must be shared with more parties

MNO obtains revenue from increased data usage

mobile payments 101 - with audio

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