Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services                             ...
Table of ContentsAbstract ...................................................................................................
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   V. Challenges and Opportun...
AbstractThe following Master thesis is build upon three core thematic pillars: the business models for mobilepayments, the...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services I.      Introduction      Ma...
In the coming Chapter II the current mobile paradigm development and the different points that affect itwill be outlined w...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and ServicesII.       Theoretical Framewo...
The situation in the EU follows the general trend with a visible development of the mobile market withinthe 27EU member st...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   Mobile vs PC   In January ...
The Global Network ConnectivityAlthough the mobile devices were initially purely telecommunications tools, the appearance ...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   Figure 5: Frequency of pre...
2.3 The Emergence of M-PaymentsA mobile payment or m-payment may be defined as any payment where a mobile device is used t...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   The lack of cooperation be...
developers to accept in-app purchases directly via PayPal without having to store customers personalfinancial information....
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   micro-coordination.   Norm...
owners and 3% of all mobile users did an m-payment.Additionally, the research indicates that 9% of iPhone users employed m...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   With the fast development ...
III.      Methodology       The goal of the following Master thesis is to explore the influences over the different stakeh...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   Four business modeling des...
Figure 20. Business modeling cycleThe overall research approach of the thesis is based on the usage of mixed methodology o...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   next years while the resea...
IV.      State of Art Consolidation and Analysis      In the following chapter the State of Art two of the core thesis the...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   Today the Payment Services...
4. Nonconventional CurrenciesNonconventional currency is a term referring to any currency used as an alternative to the do...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   By 2006, fourteen trillion...
Secondly, money can be identified according to one of its three main functions as a medium of exchange,a store of value an...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   Being in their core a mark...
might turn out to be an impediment for citizens to start using the complementary currency, theadvantage is clear: it can s...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   Players can also trade goo...
"Points”, “credits”, "coins," "bucks" and other forms of virtual currency are becoming standard offeringsfor social networ...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services   According new eMoney Direc...
The same consideration would be then valid for the EU regulatory landscape and business activities. “Howincome related to ...
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
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Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
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Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
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Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
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Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
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Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
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Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
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Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services
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Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services

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The following Master thesis is build upon three core thematic pillars: the business models for mobile payments, the concept of virtual currencies, and the choice for the implementation of the first two within business models for the creation of new products and services for mobile.
The thesis explores how the rapid development of mobile ICTs influences the different stakeholder groups and the creation of new business opportunities for mobile.
A key aim is the discovery of the driving forces, responsible for the choice of the concrete m-payment method, the related technology and the respective payment medium allowed – both conventional and virtual currencies. This choice is the natural basis in the development of the business models for the creation of new products or services for mobile.
Several examples of products and services for mobile using m-payments and/or virtual currencies from the EU market landscape would be overviewed. Two Belgian business models for new services will be explored. The first the Belgian case study will look into the already commercial service, while the second one is looking into the currently developed business model for a new service to be introduced in the coming 2 years.
Key Words: mobile, ICT, m-payments, virtual currencies, business models

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Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services

  1. 1. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Lucy SetianVrije Univeriteit BrusselFaculteit Letteren en WijsbegeerteStudy area: Communication StudiesSupervisor: Prof. Pieter BallonMobile Payments and Virtual Currencies:The Emergence of the New Mobile Products and ServicesThesis submitted to obtain the grade of Master of Communication Studies – New Media and Society in EuropeAcademic year 2011/2012 1
  2. 2. Table of ContentsAbstract ..................................................................................................................................... 4I. Introduction ......................................................................................................................... 5II. Theoretical Framework ......................................................................................................... 71. The Mobile Economics .............................................................................................................. 72. The Mobile Innovation Horizon ................................................................................................ 10 2.1 The Historical Appearance of the M-Commerce and M-Payments Trend ................................... 10 2.2 From E-Commerce to M-Commerce .................................................................................... 11 2.3 The Emergence of M-Payments .......................................................................................... 123. Social Influence and Impact .................................................................................................... 144. Alternative and/or Conventional Currencies for M-Payments ........................................................ 16III. Methodology ..................................................................................................................... 18IV. State of Art Consolidation and Analysis ............................................................................. 22IV.1. Currencies ....................................................................................................................... 221. Definition .............................................................................................................................. 222. Regulatory Framework in the EU .............................................................................................. 223. Conventional Currencies ......................................................................................................... 234. Nonconventional Currencies .................................................................................................... 24 4.1 Complementary Currencies ................................................................................................. 24 4.1.1. Virtual Currencies ............................................................................................... 28IV.2. The M-Payment Business Model ...................................................................................... 331. Ecosystem Stakeholders ......................................................................................................... 332. Billing ................................................................................................................................... 39 2.1 Billing Control Categories ................................................................................................... 39 2.1.1 Operator-Centric Model ............................................................................................ 39 2.1.2 Bank/Credit Card – Centric Model.............................................................................. 41 2.1.3 Peer-to-Peer Model .................................................................................................. 44 2.1.4 Collaboration Model ................................................................................................. 46 2.2 Transaction Type ............................................................................................................... 48 2.3 Transaction Settlement Type .............................................................................................. 48 2.4 Validation Settlement ........................................................................................................ 493. M-Payments’ Context Categories .............................................................................................. 49 3.1 Proximity Payments ........................................................................................................... 50 3.1.1 Contactless Payments .............................................................................................. 50 3.1.2 Mobile as a PoS Terminal ......................................................................................... 51 3.2 Remote Payments ............................................................................................................. 51 3.2.1 Mobile Money Transfers ........................................................................................... 51 3.2.2 Online M-Payments ................................................................................................. 524. Technology Design .................................................................................................................. 52 4.1 Functional Characteristics .................................................................................................. 52 4.2 Functional Architecture ...................................................................................................... 53 4.2.1 Premium SMS/USSD based Transactional Payments .................................................... 54 4.2.2 Direct Carrier/Bank Billing ........................................................................................ 55 4.2.3 Mobile Web Payments (WAP/GRPS) ........................................................................... 55 4.2.4 Phone-based Applications ......................................................................................... 56 4.2.4.1 Mobile Wallets .......................................................................................... 56 4.2.4.2 2D Barcode (QR) Code Application............................................................... 58 4.2.4.3 Custom Solutions for Virtual Currency Systems ............................................. 58 4.2.5 SIM-based Application ............................................................................................. 58 4.2.6 Dual Chip ............................................................................................................... 58 4.2.7 Contactless NFC and RFID ........................................................................................ 59 4.2.7.1 Contactless NFC ........................................................................................ 59 4.2.7.2 Contactless RFID ....................................................................................... 60 4.2.8 Bluetooth ............................................................................................................... 605. Generic Architecture for M-Payments........................................................................................ 61 5.1 Public Key Infrastructure and SIM Cards .............................................................................. 62 5.2 Protocols .......................................................................................................................... 636. M-Payments’ Initiation ............................................................................................................ 637. Regulatory Issues .................................................................................................................. 64 2
  3. 3. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services V. Challenges and Opportunities .............................................................................................. 65 1. Key Attributes of M-Payments ................................................................................................. 65 1.1 Consumers as Users: Acceptance and Adoption ..................................................................... 65 1.1.1 Convenience ........................................................................................................... 65 1.1.2 Cost ...................................................................................................................... 67 1.1.3 Security ................................................................................................................. 68 1.1.4 Privacy .................................................................................................................. 71 1.1.5 Merchants .............................................................................................................. 71 1.2 Merchants as Users: Acceptance and Adoption ...................................................................... 72 1.2.1 Convenience ........................................................................................................... 72 1.2.2 Cost ...................................................................................................................... 73 1.2.3 Security ................................................................................................................. 74 1.2.4 Consumers ............................................................................................................. 74 1.3 Technological Standards ..................................................................................................... 74 1.3.1 Interoperability Standards ........................................................................................ 74 1.3.2 Security Standards .................................................................................................. 75 1.3.3 Performance Limitations........................................................................................... 76 1.3.3.1 Network Resiliency .................................................................................... 76 1.3.3.2 Database Requirements ............................................................................. 76 2. Key Attributes of Virtual Currencies .......................................................................................... 77 2.1 Currency Regulations ......................................................................................................... 77 2.2 Service and Product Offering: Conventional and Virtual Currencies .......................................... 78 2.3 Consumers as Users: Acceptance and Adoption ..................................................................... 79 2.4 Merchants as Users: Acceptance and Adoption ...................................................................... 80 2.5 Solution Providers as Users: Acceptance and Adoption ........................................................... 80 3. Market Development: The Rise of New Products and Services ..................................................... 80 VI. Business Models’ Overview and Analysis ........................................................................... 82 1. Business Models based on M-Payments .................................................................................... 82 2. Overview of EU Case Studies ................................................................................................... 83 3. Belgian Case Studies .............................................................................................................. 91 3.1 Ping.Ping .......................................................................................................................... 91 3.1.1 Value Network ........................................................................................................ 91 3.1.2 Functional Architecture ........................................................................................... 93 3.1.3 Financial Model ....................................................................................................... 94 3.1.4 Value Proposition .................................................................................................... 95 3.2 CoMobile .......................................................................................................................... 97 3.2.1 Value Network ........................................................................................................ 97 3.2.2 Functional Architecture ........................................................................................... 99 3.2.3 Financial Model ...................................................................................................... 101 3.2.4 Value Proposition ................................................................................................... 103 3.3 Comparison ..................................................................................................................... 103 VII. Conclusion ...................................................................................................................... 105 Declaration of Honor ............................................................................................................. 106 Acknowledgments ................................................................................................................. 107 Bibliography .......................................................................................................................... 108 3
  4. 4. AbstractThe following Master thesis is build upon three core thematic pillars: the business models for mobilepayments, the concept of virtual currencies, and the choice for the implementation of the first two withinbusiness models for the creation of new products and services for mobile.The thesis explores how the rapid development of mobile ICTs influences the different stakeholder groupsand the creation of new business opportunities for mobile.A key aim is the discovery of the driving forces, responsible for the choice of the concrete m-paymentmethod, the related technology and the respective payment medium allowed – both conventional andvirtual currencies. This choice is the natural basis in the development of the business models for thecreation of new products or services for mobile.Several examples of products and services for mobile using m-payments and/or virtual currencies fromthe EU market landscape would be overviewed. Two Belgian business models for new services will beexplored. The first the Belgian case study will look into the already commercial service, while the secondone is looking into the currently developed business model for a new service to be introduced in thecoming 2 years.Key Words: mobile, ICT, m-payments, virtual currencies, business modelsAmount of Words: 39 963 4
  5. 5. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services I. Introduction Many social scientists define the social construct of today and the last decades as the one of the Information Society. Despite of the numerous and often strongly varying definitions, overall the theories yet remain always within the context of the human society and information technology. However, only few of these many attempts to explain what actually the Information Society [1] is, can properly reflect the changes in the understanding of interconnectedness, interdependencies and innovations from the past decade brought up by the Mobile Information and Communication Technologies (ICT). It is important to grasp that the emergence and further vast development of the mobile ICT was the result of mutually influencing factors within a cyclic process of bringing change. The human needs, desires and the innovation capacity and drive altogether were among the leading factors for the deployment of a new set of converging technologies, part of the global network, being the wireless telephony technologies, which completely changed and are still changing the ideas for the identification of physical and virtual realms of location, time, social affiliation, connectivity and identification. In addition the globalization reflected on the society, states and organization not only in the increased ability and possibility to physically cross-borders but also in the mental mind-shift of the humans. The term “Mobile Communication Society” slowly began to replace the “Information Society” both in terms of theories and practice. When Motorola and Bell operated the first commercial mobile telephone service MTS in the US in 1946, few could have expected the forthcoming developments. The creation of Internet as we know it was one of the main reasons for the huge change of perceptions of what mobile is and what major part it has in the human’s life. The convergence of telecommunications and IT leads to the development of new perception regarding mobile for the society and the business. This new perception reflected into placing new roles in the functions mobile has such as the ones related to the users’ ability to conduct purchases without cash while being on the move, or the ability to make such transfers without even using a traditional currency. Before new services and/or products based on m-payments could be launched, it is crucial to understand what previous studies have discovered about the acceptance of m-payments methods, systems and currencies and about mobile services markets. It is also important to be determined what issues have remained unresolved and which of them could turn into key bottlenecks in regards of the further market development. This will be examined in the following chapters with the goal to present successful innovative products and services’ examples from Europe and Belgium in particular, based on specific m- payments and concepts of currencies. The following Master thesis will first study the developments of mobile ICTs and the way it affects the different stakeholders. Second, it will propose an in-depth focus on the developments and trends related to the m-payments technologies in particular and separately from that look into the introduction of new, nonconventional currencies. Third, how this two leading themes affect and influence the creation of new business models based on the usage of m-payments and a combination of new and old systems of exchange will be examined. Some of the most innovative examples from the EU and Belgium in particular will be presented. 5
  6. 6. In the coming Chapter II the current mobile paradigm development and the different points that affect itwill be outlined within a theoretical perspective. First, the reasoning behind the concept about the rapidexpansion and development of mobile, the appearance of m-commerce and m-payments in particular willbe presented. Afterwards, the concept of nonconventional currencies in relation to the m-paymentsfurther development and focus in the situation specifically in the EU will be introduced. The bordersblurring between virtual money and conventional currencies, lead by the creation of new e-businessmodels and strategies with a focus on mobile and their impact leading to the consideration of new policiesand regulations, will be studied.In Chapter III the methodology, chosen for this research, will be explained from analytical, empirical andcritical perspective.In Chapter IV State of Art of currencies, with a special focus on new virtual currencies and of the buildingblocks of the m-payment business model will be presented and examined.In Chapter V the Challenges and Opportunities, resulting from the implementation of m-payments andvirtual currencies are examined.In Chapter VI an overview of European case studies will be made. Two case studies from Belgium will beidentified and analyzed on the basis of their business models. The aim is the differences and similaritiesin the functioning of varying business models based on m-payments and conventional or virtualcurrencies to be demonstrated and validated.Chapter VII will contain final a conclusion on the key findings. The aim is the creation of basic forecastsand recommendations for the future developments of business models based on m-payments andconventional and/or virtual currencies. 6
  7. 7. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and ServicesII. Theoretical Framework The success of a new payment service would be determined by a number of interdependent factors. To describe the relations between these variables, the example framework shown in Figure 1 [41] could be applied. It represents a meta-model to describe the m-payment services market based on previous research outcomes. The framework represents different standpoints present in professional, academic and legal m-payment literature. It gives a good insight into clearly determining which factors impact the m-payment services market and services development, another issue in need of clarity. Figure 1. Framework of factors impacting the m-payment market 1. The Mobile Economics The Mobile Penetration The mobile penetration both globally and regionally in Europe grows with a high-speed: Currently there are 6.6 billion mobile phone connections, 3.6 billion subscribers with 1.3 billion phones supporting mobile broadband globally, stated the Director General of GSMA 1 Anne Bouverot in her keynote opening of the Mobile World Congress 2012. In 2015 the estimations for the growth of mobile predicts 9.1 billion mobile phone connections, 4.6 billion subscribers with 3.2 billion phones supporting mobile broadband [2]. Such a rapid expansion of the mobile ICT would lead to such developments, which have influence over the whole economics. According this new data from the GSMA, the global mobile industry revenues will grow from US$1.5 trillion dollars in 2011 to US$1.9 trillion in 2015. This statistics show the incredible increase of mobile penetration and their further rise. 1 GSMA stands for global association of mobile operators - the worlds leading body of mobile operators and device makers 7
  8. 8. The situation in the EU follows the general trend with a visible development of the mobile market withinthe 27EU member states [3].Figure 2: Mobile subscribers and penetration rate at EU level, October 2004 – October 2010Figure 3: Mobile penetration rate, October 2009 – October 2010As it is visible on Figure 2 according to the latest statistics the amount of phones – 622.3 million inOctober 2010 – is even larger than the number of EU citizens, which are around 502.52 million peopleaccording to the latest Eurostat statistics [4]. This means that currently the average EU citizen has 1 or 2mobile phones, allowing him to be almost constantly reachable due to his connection to the variousnetworks. As Figure 3 shows the difference in the member states mobile penetration rates is not thatsubstantial, although there is certainly variation between big and smaller member states. 8
  9. 9. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Mobile vs PC In January Google and the research firm Ipsos MediaCT Germany [5] released a study made over the 5 mobile markets US, United Kingdom, Germany, France and Japan. Its key takeaway is that across the five countries more consumers use a mobile phone (feature phone or smartphone) than a computer (desktop or laptop), as you can see on the Figure 4 bellow. It also reveals that users are clearly shifting from feature phones to smartphones and are increasingly using their smartphones to access the web. However, smartphone owners are continuing to get online on their computers. Figure 4. According to a recent research of Canalys [6] last years the vendors shipped 488 million smart phones, compared to the 415 million client PCs2 worldwide. This market share points out the rising consumer preference in buying smartphones, which usually are cheaper, but still with a substantial cost. The unique multifunctional smartphone makes it a good replacement for the consumer because of its fast day-to-day usage main characteristic both on the go and during other activities over the day. 2 The definition of client PCs in this case includes not just laptops and desktops, but also Netbooks and "pads" or tablets, which were the fastest growing segment by far. 9
  10. 10. The Global Network ConnectivityAlthough the mobile devices were initially purely telecommunications tools, the appearance of Internetdidn’t surpass them. It leaded to the gradual conversion of telecommunications and IT and respectively inthe creation of devices allowing the Internet.Around 1/3 of the mobile phone owners in Western Europe were connected to the mobile Internet at leastonce monthly in 2011, which equates to 100 million individuals, showed a Forrester Research [7]. Thenumber of Internet users surfing via their mobile phones increases gradually.Specialists from Ericsson predict that by 2020 there would be 50 billion connected devices [8]. Thisfinding illustrates the substantial increase in the connectivity level between machines, humans andnetworks, allowing the users to be almost all the time part of the global network. Hence the focus is notonly on connectivity anymore, but also on mobility, as the Ericsson statistics demonstrate.2. The Mobile Innovation Horizon2.1 The Historical Appearance of the M-Commerce and M-Payments TrendAn experiment, done with the Google Ngram Viewer tool, reveals an overview of the usage of the words“mobile payments”, and “mobile commerce” within the past decades. As it is visible in the Figure 5already in 1950 the term began to occur in the literature, which was even before the start of the firstattempts for the creation of Internet. This was 10 years later, around the same time when the term“mobile payments” became visible. At this moment we can see the rapid boom of “mobile commerce”-related topics in the literature and its gradual development into a trendsetter with stable growth. Whilethe mobile commerce became a popular topic, the m-payments-related topics remained stillunderdeveloped.Several reasons for that could be distinguished. With the rise of Internet, mobile commerce andelectronic commerce were rather understood as similar terms. First because around 1950 the invention ofthe two of the most well known types of mobile devices was actually still very far away - the first hand-held mobile phone was demonstrated by Dr Martin Cooper of Motorola in 1973, using a handset weighingaround 1 kg [15]; the IBM 5100, the first commercially available portable computer, appeared inSeptember 1975, and was based on the SCAMP prototype [16].Second, it was rather conceptual question of the similarity in the terms “mobile commerce”, as we knowit today, and “electronic commerce”. At that time the concepts of the first online shops were related tothe idea of “mobility” in terms of the physically abolishing the distances by not being into the samephysical location as the shop as much as this was true for electronic commerce. This possibly led to theoverlapping of understanding about definitions in these early years, while actually the real m-commerceactivities required more time to get into the light of interest of authors in the sense we put about ittoday. 10
  11. 11. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Figure 5: Frequency of presence of the expressions “mobile commerce” and “mobile payments” between 1940 - 2010, Google Ngram Viewer tool As mentioned earlier, it was just in the late 90s and early 2000s when m-payments became a topic of interest and remained so even after the Internet bubble burst. For its key contributors it attracted researchers such as Tomi Dahlberg, Jan Ondrus, Yves Pigneur, Key Pousttchi, Agnieszka Zmijewska and others [41]. Hundreds of m-payment services as well as access to e-payment and Internet banking were introduced across the globe. Noticeably many of these efforts failed among which the majority of the dozens of m-payment services available in the EU member states and listed in the 2002 ePSO database [62]. 2.2 From E-Commerce to M-Commerce “By 2014 mobile internet will overtake desktop internet usage for shopping,” predicted Nigel Morris, chief executive of Aegis Media Americas. Electronic commerce changed a lot since the boom of Internet. The engine behind it is the capability to pay electronically coupled with a website. E-commerce has been facilitated by ATMs and shared banking networks, debit and credit card systems, electronic money and stored value applications, and electronic bill presentment and payment systems. Today the mobile commerce comes as its natural successor. It is seen as one of the enablers for the 3rd generation of mobile communication networks. A huge number of applications can be imagined for mobile commerce, including ticketing, banking, shopping, betting, trading, entertainment, gaming, logistics and etc. The majority of the m-commerce applications have one common feature: in the end the consumer would have to pay via his mobile device for the services he has used or goods he has purchased. 11
  12. 12. 2.3 The Emergence of M-PaymentsA mobile payment or m-payment may be defined as any payment where a mobile device is used toinitiate, authorize, transmitted and confirm an exchange of financial value in return for goods andservices [17]. This can apply to online or offline purchases of services, digital or physical goods.Mobile devices may include mobile phones, PDAs, wireless tablets and any other device that connect tomobile telecommunication network and make it possible for payments to be made [18]. The realization ofm-payments will make possible new and unforeseen ways of convenience and commerce.Hundreds of m-payment systems have been introduced worldwide in the late 1990s and early 2000s. Andeven after the burst of the Internet bubble, the m-payment remained a hot topic. In 2010 globally 4.6billion m-payments transactions have been completed [70]. As the statistics show this figure is expectedto grow 48.8% per year through 2013 to 15.3 billion. Non-bank providers handled about 6% of m-payments in 2010 and are expected to handle 1.2 billion or 8% of all m-payments in 2013. In 2010 thevalue of global m-payments reached €62 billion, and is expected to grow aggressively at a sustainedannual rate of 52.3% from 2009 to 2013, putting global m-payments at €223 billion.Unfortunately, back then the EU didn’t and still today don’t manage to reach its potential in terms of m-payments compared to, for example, the Asia/Pacific region. According to estimates [19] there were 7.1million m-payment users in Western Europe in 2010, compared to 62.8 million users in Asia/Pacific, alarge share of them in Japan.Probably one of the key reasons regarding EU is exactly its special geopolitical nature, one that enablesthe coexistence of both emerging and established markets. This creates a special situation in which thesame restricted geographic area plays host to diverse markets where the circumstances for providers andusers of mobile services are visibly different. At the same time, Europe - the worlds second-smallestcontinent – is also a rather “compact” ecosystem, known as the world’s largest single market. Moreover,in Europe the majority of payment solutions are targeted at specific countries and driven by localrequirements. It thus emerges that the key to grasping EU’s mobile landscape and tapping theconsiderable European revenue stream lies in understanding how adoption drivers vary betweendeveloped and developing regions.In the past, one of the main reasons for the limited EU success was partly due to the fact that mobiletechnologies were too complex and not sufficiently mature. Also the legal framework was too vague andunclear legal, compared for example with Japan, where m-payments have gained large adoption, and arestill increasing in user base.Even today with the appearance of new innovations such as NFC m-payments the situation in the EUdoesn’t appear to be really moving ahead. The lack of a concrete pan-European framework to addressmain concerns such as technical standards, security, interoperability, and the cooperation betweenmarket participants, risks perpetuating a EU fragmented m-payments market. 12
  13. 13. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services The lack of cooperation between key European players is one of the core reasons for the EU m-payments’ market to lag behind. The EU businesses from the different sectors involved cause a fragmentation due to their strongly diversifying interests. Hence, they don’t manage to find a resolution to agree upon a business model enabling inter-operable payment solutions. As a result, all leading companies like Apple, Google and Visa that have currently launched the largest and most promising global m-payment initiatives, reside outside the EU. In addition both for e- and m-payments, (potential) market participants seem reluctant to invest as long as the legal situation regarding scope for applying collective fee arrangements such as for payment cards or for the usage of new alternative currencies, hasn’t been settled. Still, as the EC3 clarifies in their 2012 green paper on m-payments [20], the EU still has the possibility to grasp the m-payments opportunity thanks to the rapid proliferation of smart phones with the option of installing sophisticated payment applications. In result, the volume of payments made through mobile phones is currently the fastest growing of all payment methods and with a strong will for mutually beneficial resolution the public private collaboration can lead to a real m-payment integration at European level. Currently that happens on a self-regulatory basis and through for example cooperation, such as the one between the European Payments Council and GSMA. The green paper quotes statistics from recent studies, according to which the value of m-payments worldwide will “surpass USD 1 trillion in 2014, totaling USD 350 billion in Europe alone” [20]. Thus, the finding of a resolution about the m-payments business modeling will be one of the most important goals and discussions for Europe in the coming years. A successful resolution has the potential to bring not only a pan-EU success to all of the stakeholders in the m-commerce ecosystem, but also to repeat the GSM 2G network standard success story of Europe on the international scene [67]. The Influence of the Mobile Apps and Platforms The mass adoption and increased popularity of smartphones and tablets, together with the emergence of app stores, such as Apple’s App Store or Google’s Android Marketplace, has proven to be a complete game-changer for the mobile ecosystem and for consumer perception of m-payments, particularly in developed markets. Mobile apps are implemented on top of existing infrastructure by both the companies themselves but also by independent, third party developers. The result is more extensive and specific functionalities for the smartphone (and other existing mobile devices) with greater user experience. This also has its effects on the payment industry: many financial service providers have either considered or already opened up, offering APIs4 for developers to create new, innovative m-payment apps. With its launch of a developer library for m-payments in February 2010 [60] PayPal became one of the frontrunners in this area. The library, which is part of the PayPal X Payments Platform, enables app 3 EC stands for European Commission 4 API stands for application programming interfaces 13
  14. 14. developers to accept in-app purchases directly via PayPal without having to store customers personalfinancial information. Customers are able to make a payment from a merchant or developer’s app withoutleaving the app.In the months following the introduction of PayPal X, other payment networks launched innovation labsand open platforms. MasterCard Worldwide introduced its proprietary payment and data services as anAPI and allowed 3rd party developers to build new payment applications in May 2010 [61], followed byVisa in October 2010 [62].Apps are increasingly being used for m-payments, developed both by the owners of the infrastructureand by 3rd party developers. Nowadays payment services are developed for social platforms such asTwitter, e.g. Twitpay or Twippr, notably both linked to PayPal. Most banks are developing apps for mobilebanking and some also allow m-payments through the same app. There are many other functionalitiesenabled by a variety of apps, such as the mobile cheque deposit like Instant Checkby developed by theSpanish bank Banco Sabadell, Bump - implemented by ING Direct USA, the QR barcode scanning app byStarbucks or through hardware attached to smart phones such as Intuit and Square.Overall the landscape for m-payments has been truly altered in a positive way thanks to the apps and theconnected to them products and services. With the added functionalities and enhanced user experiencemobile apps become a serious driver for m-payments innovation and the creation of new viable businessmodels based on m-payments.3. Social Influence and ImpactNowadays, people prefer carrying a simple device during travel, such as a mobile for talking, web surfing,business meetings, and mobile working instead waiting to get to their offices or homes in order toconnect to the global networks from their desktop computers.Exactly the context of usage of technology is rooted in the shift from the idea about the InformationSociety towards the Mobile Communication Society in terms of social effects and impact.For example in their research on the functional uses of the technology, Ling and Yttri [9, 10] identifiedsome primary categories for mobile phone use. Two of these categories depict new forms of coordination:micro- and hyper-coordination. Micro-coordination entails instrumental uses of the mobile phone, such ascoordinating basic logistics, redirecting trips that are already under way, or making plans with othersentirely “on the fly”. Hyper-coordination refers to the expressive and relational dimensions of mobilecommunication, such as chatting with family or friends via text messaging.These new forms of coordination demonstrate the highly personal, intimate nature of mobile telephony.In the case of micro-coordination, schedules are managed more flexibly as individuals use their mobilesto overcome the physical restrictions of space and time [11]. In this way, space and time arepersonalized through mobile communication. The mobile communication has taken the personalization ofspace and time to new levels as individuals exploit the flexibility afforded by the technology through 14
  15. 15. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services micro-coordination. Normally space and time aren’t personalized to the same extent and in the same ways by all types of users, but that new meanings for them, however varied, are shaped through the use of network technologies, especially those that can be used virtually anytime anywhere. Or as Manuel Castells put it “the diffusion of mobile communication technology greatly contributes to the spread of the space of flows and timeless time as the structures of our everyday life” [12]. This phenomenon based on the blurring of borders between space, time and location had been greatly examined by John Tomlinson [13] in his theory about the emergence of the culture of instantaneity within the context of the Information Society vision: “But what is immediacy? The concept has two relevant connected connection with space: freedom from intermediate agency; direct relation or connection, …proximate, nearest, next, close, near. And in relation to time, “pertaining to the time current or instant…occurring without delay or lapse in time, done at once; instant”. Although it is the relation to time that may seem most relevant to speed, as we shall see, both these senses are suggestive for an analysis of the transformations of speed culture in our era of modernity.” Exactly this culture of instantaneity accustomed to rapid delivery, ubiquitous availability and the instant gratification of desires managed to fully accelerate and reach its peak within the vision of the today’s Mobile Communications Society. Mobile ICTs more than any other ICTs have this intimate “relationship” with the individual user, based on the features of the mobile devices itself – to be all the time with the person, allowing him to be almost always connected to both human and machine networks and to cross time-space-location borders being extremely digitally flexible. Bridging the desire and its actual subject are the core of the e-commerce and hence of the m-commerce. With the current technological and business concepts’ developments the mobile becomes even closer to the individual, a true “extension of the hand” as the mobile phone is commonly referred to in Finland [14]. This need for close-to-real time gratification of the desired is the main characteristic of the e- commerce and with the increased penetration of mobile – became the main characteristic of m- commerce. The change of consumer behavior becomes clearly observable with the mass adoption of smart mobile devices and the development of apps, extending their functionalities. The access to financial services, easy to control on the go, becomes one of the most interesting features for consumers [44]. A recent research [63] reveals that e.g. 41% of iPhone users expressed an interest in conducting payments via their mobile. According it iPhone users carried out more mobile purchases and did a higher number of mobile transactions than any other smart phone user segment: 18% of them carried out m- banking activities and respectively 16% carried out m-payment transactions from their devices. In comparison only 10% of non-iPhone smart phone users showed interest in m-payments, while only 5% of all mobile users engaged in mobile banking. Similarly, only 6% of other brands’ smart phone 15
  16. 16. owners and 3% of all mobile users did an m-payment.Additionally, the research indicates that 9% of iPhone users employed mobile coupons, compared to 4%of users who own smartphone devices from another brand and 2% of all mobile users.On the other hand, according to another research, conducted online by the market research companyTealeaf [64], as smartphone adoption grows, UK consumers for instance are increasingly expecting afaultless experience across all online channels. 10 million UK online consumers made an onlinetransaction on a mobile device in 2010. However, 83% of them also experienced problems when carryingout mobile transactions. 74% of UK consumers in the survey claimed not to see any reasons for a mobiletransaction to fail on the first try and 66% of UK respondents said that upon experiencing a problemconducting a mobile transaction, they would be less likely to buy from the same company via otherpurchase channels.51% of the surveyed, who conducted a mobile transaction in 2010, expressed that they expect a bettershopping experience on their mobile device than the one in a store. As the key problems experienced,34% of the UK interviewees pointed out the error messaging and 24% of them - navigation difficulties.When questioned about their reaction upon experiencing a m-payment problem, 29% of the respondentswho experienced m-commerce problems in 2010, stated they would abandon the transaction on theirmobile and try again later on a computer, 13% claimed they would switch to a competitor’s app orwebsite and 9% answered they would not conduct a mobile transaction again due to their dissatisfaction.Independent from that, 23% of UK respondents said they would call customer service to solve the issue,when faced with m-commerce problems.In conclusion, the growth of smartphones beside to the enhancements of their capabilities makes peoplemore open towards m-payments. Nevertheless, as the given above examples show, there are still hurdlesto overcome in terms of security, trust and user experience to convince consumers about the truebenefits of m-payments and the new product/ service offerings relying on them. Which challenges haveto be overcome and which opportunities exist would be further examined in Chapter V.4. Alternative or/and Conventional Currencies for M-PaymentsNot only the tools and networks around m-payments would completely change the perceptions, but alsothe means of payment. In result of the new innovative business models, completely new concepts relatedto currencies already appeared and new ones are on their way. These currencies have a direct effect overthe traditional perception of money, changing the consumer, business and governmental behavior inthese regards.The idea of conventional currencies slowly begins to be shifted by the idea about the mixture betweenconventional and alternative, unconventional currencies. As one of the most fast developing concepts forsuch currencies could be considered the one of complementary currencies, a combination between well-known and accepted money media and the new ones, entailing both marketing and financial strategies intheir creation. 16
  17. 17. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services With the fast development of ICTs and mobile technologies in particular, a number of business models and concrete scenarios relying on virtual currencies, as an example of digital complementary currencies, already emerged. Thanks to the continuous fast evolvement in digital the m-payments in combination with virtual currencies and conventional money within digital environments and over various devices would create a completely novel perception about the unification of currencies. In result new legislative, policy, and business concepts would emerge and lead to a radical change of perception in regards of payments over and with devices with “new” and “old” money. In the State of Art section the specifics around the currencies and the virtual currencies in particular; together with the features and characteristics of m-payments business models will be examined. Which challenges and opportunities exist in relation to virtual currencies would be further explored in Chapter V. 17
  18. 18. III. Methodology The goal of the following Master thesis is to explore the influences over the different stakeholder groups and the creation of new business opportunities, which the rapid development of the mobile ICTs caused. In essence, a key aim is the exploration of the driving forces behind the choices about the creation of business models for mobile with a special focus on m-payments and the used in them m-currencies. There are several purposes for that: the identification of key findings and the presentation of how this reasoning affects the trends, which develop onwards; the identification and hence deduction of key stakeholders’ configurations leading to the establishment of innovative successful new products and services based on m-payments and conventional and non-conventional m-currencies. Finally assumptions and recommendations related to the further development of m-payments business models using those old and new currencies will be made. In conclusion, the subject and approach of this thesis fits nicely in the methodology of business modeling [56, 57], where take into account the different interests, resources and competences of the different stakeholders from the mobile technologies and the related domains. The key pillars of the business modeling design are visualized in Figure 19. Figure 19. Business modeling design The general definition of business modeling is “the description of the organizational prerequisites/requirements necessary for the creation of a specific product/service, the technical characteristics/architecture of that product or service, the roles and relations between the company, its customers, partners and suppliers, and the different value-creating - be it physical, virtual or financial - flows between them”. 18
  19. 19. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Four business modeling design phases are used to describe the business modeling scenarios:  Organization design phase: This phase involves defining the business players’ configuration. It tries to identify who are customers to be reached and how is this to be done. This includes the identification of distinctive competences, and taking business governance decisions.  Technology design phase: In this phase the technology scope is defined, including the architecture of the technical design and the approach to achieve it. The systemic competences that will contribute to the business strategies need to be determined, and decisions on the developing or acquiring of technical competences have to be made.  Service design phase: This phase involves the creation of an offering with a specific value proposition towards the end customer. Companies have to make a choice about the delivery channels they will use and calculate the share of the overall profitability of each sales channel. Issues such as the choice of sales channels with a higher cost structure have to be kept in mind in the cases where this will be more important to the overall business – e.g. an important customer segment prefers this costlier alternative. The business players have to take into account the degree of flexibility of each channel, i.e. whether channels can be expanded and/or reconfigured depending on the customers’ expectations. Finally, the bottlenecks and their effect on discontinuations of daily operations of each channel have to be examined.  Financial design phase: In this stage, the financial prerequisites for the interlocking roles are mapped in a financial model. The financial modalities are formalized in binding contracts that clearly describe each partner’s responsibilities and the financial/other benefits they will receive in return. Depending on the legal structure of the partners involved, different forms of financial exchanges could take place. In Table 1 you can see the different control and value parameters, defining the key aspects of the proposed business model. Table 1. Business Model Design Parameters The focus of the thesis falls on the description of the impact of interrelated organization, technologies, revenue models and service design aspects on business model scenarios for m-payments with conventional and unconventional currencies. Key elements and findings will be estimated. 19
  20. 20. Figure 20. Business modeling cycleThe overall research approach of the thesis is based on the usage of mixed methodology of researchdesign. By using the mixed method between qualitative and quantitative research methods, different datacollection sources and procedures will be triangulated. The triangulation of theoretical research methodswill be done together with multiple case studies analysis and an input based on brainstorming, expertinterviews and surveys.The theoretical research is based on the data collection and analysis of a large number of literatureoutputs including academic, industry, legal (regulatory), research, business and technology journalismsources. The choice to rely on this method is due to the novel character of the thesis topic in order tofollow the whole historical development and achievements of the relevant issues up until today.It is the aim to gather a broad range of various outputs from different sources, such as articles, reports,whitepapers, analyses, books, market studies, legal documents such as regulations andrecommendations, presentations, and etc. The main topics, covered by them are related to conventionaland unconventional currencies, mobile industry trends and innovations, m-payments systems, mobile andoverall technology players’ specifics in European and global markets, mobile business models, and more.Still, according to Dahlberg et al. [59] most academic research related to m-payments cover technicalissues related to security, protocols, systems architectures, or consumer-centric studies, e.g. adoption.He explains the rather limited and fragmented scope partly due the complexity of the proposed m-payment solutions. Thanks to the increased interest it is to be expected the increase in diversity in the 20
  21. 21. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services next years while the research in the domain matures. Only a limited number of studies have looked at m- payment innovation and diffusion in a systemic manner. Most investigations covering the topic have been carried out by consulting or industrial organizations [58]. My qualitative research part would be based on 2 main case studies from Belgium and an overview of other case studies from Europe. The choice lies upon the case study method, as this research strategy is the best at demonstrating an understanding of a complex issue or object. It can extend experience and add strength to what is already known through previous research. Case studies are the demonstration of detailed contextual analysis of a limited number of events or conditions and their relationships. This would best visualize concrete real business product/service examples with their differences, similarities, achievements, room for improvement. The overview of the European examples is based on documentary findings and a survey - consultation with a number of stakeholders from the industry done via a number of online networks. This case studies’ overview would strive to demonstrate key trends and changes within the overall business modelling landscape, and demonstrate possible development patterns for the future. By using the business modelling methodology within the Belgian case studies analysis and presentation, the induction of a valid framework with distinct and comparable parameters, encompassing all the key aspects relevant to the case study, will be possible. The first Belgian case study is based on a currently developed project “Co-Mobile”. During the project the input from few group expert interviews and brainstorming sessions with representatives from each of the company partner organization has been used. The research literature [57] defines an expert as a person, responsible for the development, implementation or control of solutions/strategies/policies, and who has privileged access to information about groups of persons or decision processes. The conducted expert interviews were from an explorative nature in order to try to better define the techno-economic aspects of the project. The consortiums’ experts have been interviewed about the ways in which their current business models operate, about the possible business requirements they deemed necessary in view of their project, and about their imagined views of the business models of the other partner members and overall market competitors and leaders. The input acquired by way of the business case study and expert interviews serves as a basis for our description of the identified actors, roles and requirements, as well as for the several business collaboration scenarios. Finally, all project partners’ input has been solicited and used it to make last- minute changes to the presented current status of the possible business scenarios. The second case study from Belgium is based on existing literature sources. It observes an existing business offering and analyses its current success depending on all of the elements defining the business model behind it. 21
  22. 22. IV. State of Art Consolidation and Analysis In the following chapter the State of Art two of the core thesis themes will be examined and a final conclusion based on the interconnections and interrelatedness of those two areas will be done. The first one is dedicated to the currencies as means of payment. A review of conventional currencies and with a more specific focus on the new generation currencies – the complementary currencies will be made. As a key example for the trends in the usage of the complementary currencies overall and in m- payments in particular, the introduction, implementation and development of virtual currencies will be explored. The second one is dedicated to m-payments’ business models. There the main two types of m-payments’ business models based on the perspective of the business actors’ configuration will be examined. A special attention would be placed at the organizational, technological, service offering and financial aspects of those and demonstrate the links and outcomes depending on the choice made. The reason to look into the business models of m-payments is that they are directly reflected into the creation of business models for products/services based on m-payments. The knowledge from the first state of art section will be linked to the second one and deduct the relationship between the business models’ configurations and the currencies to be used. This would be reflected into the analysis of the model for products/services, which rely on m-payments and conventional or/and virtual currencies. IV.1. Currencies 1. Definition In economics, currency refers to a generally accepted medium of exchange. However, in order to give an appropriate definition of a currency, the configuration of a number of features has to be evaluated. These features build the currency topology and define the context of its usage. Until today there have been only a limited number of attempts to classify the existing topologies. As the Jens Martignoni points out in his research [21] among the most important criterions in the general design of a currency we can distinguish 3 main ones. The first one is the commercial value - of a currency, be it a soft or a hard currency. The second criteria concerns the material: natural money such as whale teeth, shall money and etc; coins or metal money; notes or paper money; giro money; electronic money and more. The third criteria takes into account how the money is backed, for example the historical backing by gold or silver; the fiat-money; backing by other commodities, services and so forth. 2. Regulatory Framework in the EU A number of regulatory initiatives are causing the change in the payments’ landscape and in particular the ones related to e-transfers and m-transfers [70]. 22
  23. 23. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Today the Payment Services Directive (PSD) is fully in force in all EU countries with the exception of Poland at the time of writing, and the adoption of Single Euro Payments Area (SEPA) instruments, in particular the SEPA Credit Transfer, is starting to grow. PSD and SEPA represent sweeping changes seeking to create a common legal framework and a standardized environment for euro payment services in the EU. They aim to transform the fragmented national payments markets of the (still expanding) Eurozone countries into a unified and highly competitive internal market based on a single currency. Other initiatives being formulated and implemented around the globe also have an impact on payments. These measures, including examples such as the EU Digital Agenda5 and the IPFA6 initiative to name but two, are further pushing the payments market toward increased levels of standardization, interoperability and de-fragmentation. The main European regulatory and industry initiatives are:  FSA Liquidity Regime  PSD  SEPA / eSEPA  e-Money Directive  Pressure on Card Interchange Fees  Evolution of TARGET2  UK Faster Payment Services  Digital Agenda for Europe  ACH Frequent Settlement  Alternative Card Schemes 3. Conventional Currencies Probably the widely accepted perception about conventional currencies is the one, which refers to them as the coins and banknotes of a particular government, which comprise the physical aspects of a nations money supply or of a monetary union, an example of which is the Eurozone in the EU. Another part of a nations money supply consists of bank deposits7, ownership of which can be transferred by means of cheques, debit cards, or other forms of money transfer. Deposit money and currency are money in the sense that both are acceptable as a means of payment [22]. In most cases, a central bank has monopoly control over emission of coins and banknotes (fiat money) for its own area of circulation (a country or group of countries). It regulates the production of currency by banks (credit) through monetary policy. This type of currencies could be defined as conventional. In order to facilitate trade between these currency zones, there are different exchange rates, which are the prices at which currencies (and the goods and services of individual currency zones) can be exchanged against each other. Currencies can be classified as either floating currencies or fixed currencies based on their exchange rate regime. 5 The Digital Agenda for Europe is part of the Europe 2020 Strategy of the EC. 6 International Payments Framework Association 7 sometimes called deposit money 23
  24. 24. 4. Nonconventional CurrenciesNonconventional currency is a term referring to any currency used as an alternative to the dominantnational or multinational currency systems, usually concerning national or fiat money [23]. This kind ofcurrencies have different designs, but have the same idea to serve purposes other than the ones servedby our conventional money. They could be created by an individual, corporation, or organization, theycan be created by national, state, or local governments, or they can arise naturally as people begin touse a certain commodity as a currency.The terminology classifying those different types of nonconventional currencies is rich and varying in itsconceptual understanding: community currency, local (regional) currency, private currency, alternativecurrencies and etc. However, despite of the terminological distinction used, more often the entailedconcepts are overlapping, substitutable or in a type of a relationship with the conventional currencies’systems [24].In this sense the most precise categorization, possible to be made, is the one allowing the distinctionbetween two types of nonconventional currencies: Alternative Independent from conventional currenciessystems and Complementary Currencies.One of the best examples to demonstrate the differentiation between those two types is through theconcept of Private Currencies. The idea here is that essentially Private Currencies could be issued byanyone: individuals, businesses or NGOs as opposed to ordinary currency issued under the authority ofthe government. However, although one part of the Private Currencies are independent from any form ofconventional currencies, it is more often true that the majority of Private Currencies are being designedas complementary to the conventional monetary systems [25].Hence most of the business models relying on nonconventional currencies are based actually on a Type ofComplementary Currency, on which the focus falls further bellow.4.1 Complementary CurrenciesA complementary currency is an agreement to use something else than legal tender, i.e. national money,as a medium of exchange, with the purpose to link unmet needs with otherwise unused resources [26,27]. Complementary currencies exist on many levels and for many purposes.One example is what has happened with frequent flyer miles issued by the airline industry around theworld. Initially, frequent flyer miles have been considered only as a marketing gimmick for eachindividual airline in order to secure the client’s brand loyalty, and to reconstitute a captive clientele. Thesimple reallocation of cash flows within the company was a fraction of customer revenues, used tofinance these awards given to the most loyal passengers. They could only be used to purchase airlinetickets of that specific airline.However, soon more elaborated models followed, in which a monetization of reward points wasdeveloped so that they could be used to acquire goods or services in other brands and shops. 24
  25. 25. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services By 2006, fourteen trillion airline miles have been issued by five global airline alliances – more than all the dollars or Euros bills combined [28]. They can be earned without setting a foot in a plane, e.g. through the use of specific credit cards, and they have become redeemable not only for air travel, but for car- rentals, long-distance phone services, and an increasing range of products. Two thirds of all British Airways miles are cashed in for something else than for purchasing an airline ticket. In review, airline miles have become corporate ‘scrip’, a complementary currency with a specific commercial objective to increase the customer loyalty. They mobilize the otherwise unused resource of an empty airline chair to achieve that aim [29]. Another good example of multi-enterprise programs is the one that has been set up in France, revolving around the national railway company, SNCF. In the beginning six major outlet brand names and one bank reward spending and cash withdrawals through a common system: loyalty points or tokens can be redeemed for gifts, vouchers, train tickets, gift cards and “Savings certificates”, i.e. money. In conclusion, this model communicates with the real economy, but it was designed to primarily operate in- house, by redirecting customers towards the goods and services provided by companies that are members of the network [30]. Design criteria The design criteria involve the technical aspects of the complementary currency, which are partly influenced by the aims and purposes of the complementary currency. Currencies can take different forms. Hence the first criterion in regards of the design is the “Support Medium”. Commodity currencies are “goods” used as a generally accepted means of payment. Historically these have been for example salt, wheat, cattle, shells, cigarettes, precious metals such as gold, silver, bronze and etc. Nowadays, we are more familiar with money in the form of paper and coins. Finally, electronic money – being card-, internet- or m-payment based - can be distinguished as one the most fast-developing support mediums. Each support medium has its own advantages and disadvantages in relation to counterfeiting and fraud, involved costs, trust, accessibility, creating, storing and transporting. You can see one example of such pros and cons estimation in the Table 2 bellow [31]. Table 2. Pros and Cons of each Support Medium of Money Commodities Paper & Coins Electronic Infrastructure Low necessity Medium Necessity High Necessity (legal, social, technical) Transport, Store & Exchange Very Inconvenient Convenient Very convenient Convenience Fraud & Counterfeiting Low Risk Medium-High Risk Medium-High Risk Costs of creation High Low Very Low Operational Costs Low Low High (Labor/ Capital intensive) Very Trustworthy; Less Trustworthy; Less Trustworthy; Trust in value real (intrinsic) value face/nominal value face/nominal value Creation Limited Unlimited Unlimited 25
  26. 26. Secondly, money can be identified according to one of its three main functions as a medium of exchange,a store of value and a standard of value - unit of account/ measuring. Not all complementary currenciesfulfill these functions equally. The choice to implement or not to implement interest, transaction bonuses,demurrage (hoarding tax), transaction fees, and expiration dates, affect the extent to which acomplementary currency fulfills the functions of saving and exchanging as visible in Table 3 [31].Table 3. Mechanisms to encourage and discourage spending and/or saving Spending Saving Encourage Spending Bonus / Inflation Interest Discourage Transaction Fee Demurrage / Negative Interest / ExpirationWith regard to the standard of value, most complementary currencies simply denominate their unit ofaccount in terms of conventional currencies, for example an apple worth €5 is also worth 5 barter credits.However, there are some exceptions, such as in time banking where currencies are denominated inhours, while in other cases they are denominated in physical units: miles in case of Air Miles, the kWh incase of the WAT (a complementary currency in Hokkaido, Japan), coal in case of the Wära, crops in caseof the LEAF and etc.Every standard of value has its own specifics and best possible use cases. Currencies referring toconventional currencies have the advantage of familiarity and don’t need a multitude of complex pricingsystems, whilst time denominated currencies are useful when a currency is primarily intended for valuingservices rather than goods.A third design criterion is the issuing procedure or the basis on which money is brought into circulationand taken out of circulation - redemption. Money sometimes has real value (intrinsic value), representssomething of real value (representative money), and sometimes doesn’t have or represent any real valueat all.Backed currencies are issued on the basis of a specific good, like gold or silver, and have a guarantee ofthe issuer that they can be redeemed at all times for a fixed amount of this specific good at the issuingorganization, usually banks. Non-backed currencies on the contrary, are not brought into circulation onthe basis of a specific good and do not represent anything of real value. It can be exchanged forsomething of value (that is you can buy something with it) only for as long as there is confidence in themoney itself. The money is therefore often referred to as fiduciary money or fiat money.In some cases complementary currencies are backed by, and redeemable for other (usually conventional)currencies rather than a specific good like gold. In their guide Lietaer and Hallsmith refer to these as“purchased and redeemable vouchers”. Commercial vouchers differ in one respect, as these arepurchased with conventional currency but are not redeemable for conventional currency. Instead, onecan redeem them for a limited variety of products, such as CDs, books, food and others, at a certain typeof shops, where those are accepted. 26
  27. 27. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Being in their core a marketing strategy, the loyalty points can also be exchanged for a limited range of products and services only. But contrary to commercial vouchers these are received for free with every purchase in conventional money. Finally mutual credit can be perceived a distinct issuing procedure, where currency arises by simultaneously creating a debit (for the buyer) and corresponding credit (for the seller) with every transaction. In this case the currency is backed by a promise of the indebted person to provide goods or services in the near future. In some cases signing a contract is required, making a promise legally enforceable. Table 4. The issuing procedure possibilities of complementary currencies Non-backed Backing and By national By By a Promise or By commodity (Fiat-money/ redemption currency Collateral contract fiduciary money) Gold-backed Local Exchange Local currency; National currencies; Wära; Trading System Examples Commercial Credit Barter currencies; commercial (LETS); Time- System (C3) Ithaca hours vouchers Banks Currencies are not always 100% backed either by commodities, national currencies, goods, collateral or promise [32]. In other words, the commodities, currency or good in deposit is insufficient to back all money in circulation. In fact, most currencies are only partially backed, a practice known as fractional reserve banking. Fiat money, that derives its value from government regulation or law8, is 0% backed. It is possible to design a complementary currency backed by for example multiple commodities or multiple national currencies. An example of the former would be the Bancor, a currency proposed by Keynes after World War II, containing thirty different commodities. An example of the latter would be the Special Drawing Rights, an international currency based on a basket of national currencies. It is not also unimaginable to think of hybrid currencies, partially backed by commodities and partially backed by national currencies. The final design criterion end essential for the survival of a complementary currency is cost recuperation. Naturally the creation, and continuous management of a complementary currency involves costs and the challenge is to keep them as low as possible. Most of the time some funding is required but also multiple possibilities exist for the recovery of costs involved. Income can be generated both internally and externally. The first option is to attract funding through sponsorship or for example advertisement income. The second is to charge the users of the complementary currencies through for example entry fees, periodical membership fees, transaction fees (Value Added Tax or Income Tax) exchange fees, interest (on debts), expiration dates and demurrage (hoarding tax). Although internal cost recuperation 8 the initial value of fiat money is established by government decree 27
  28. 28. might turn out to be an impediment for citizens to start using the complementary currency, theadvantage is clear: it can sustain itself and is not dependent on external sources of funding. It is alsoimportant to notice that in case of some complementary currencies the costs are recuperated inconventional currencies, whilst in others complementary currencies themselves are accepted.Based on the developments of the Information Society towards the Mobile Communications Society, therelated trends presented in the introduction, and the criterions determining the success of the variousComplementary Currencies, the emergence and the fast implementation of the Virtual Currencies is a keydevelopment.Similar to the example of the French SNCF case regarding the network of brands where thecomplementary currency has been successfully introduced, the virtual environments could be consideredas the next great area of future developments.4.1.1 Virtual CurrenciesDefinitionThe "virtual currency" is any medium of exchange, other than real currency, used to facilitate online orother electronic transactions. People can use virtual currencies to make payments in virtual environmentslike for example gaming, social networking or e-commerce deals’ sites. It is possible to earn it bycompleting tasks in the virtual environment or simply participating for a set period of time. However, themain advantage for both owners of the currencies and of the platforms where it is being used is whenusers buy it, converting real-life currency into a virtual one.The rise of virtual payments began in the early 2000s and quickly gave way to a number of legal andethical issues [33]. Today, a number of companies are attempting to use forms of virtual currencies as acorporate marketing tool to engage users more with a site and to facilitate frequent site visits. As usersinvest more time, and sometimes also money, they are more inclined to stick with a site to reap therewards of those investments. They may also attract their friends to join the game or platform, especiallywhen they can benefit by the bonuses for new signups are offered in virtual currencies.Usage areasVirtual currencies have an application in a number of areas. Bellow you will find the current mostimportant of them.  Virtual GamesUsers can become extremely involved with other users in virtual worlds or/and in a gaming context,where the virtual currency is often available for buying in-game goods. Players can earn currency, find it,or take it from other players in compliance with the rules of the game. It can provide a faster way ofmoving through game levels by providing users with tools they can use to surmount in-game challengesor facilitate the richer user experience in virtual worlds, where players can buy goods for their characters.Thanks to this it will support the increase their feeling of connection to the character and the game. 28
  29. 29. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Players can also trade goods or currencies with other players. This facilitates cooperation between players and creates a social network.  Social Networks Social networking platforms started using virtual currency to offer buying virtual gifts for friends, accessing premium site features, or making edits to a profile. They also started combining the virtual currencies with gifts, products and services, within the real world, through loyalty programs and group discounts’ gamics.  Loyalty Programmes and E-Commerce Platforms As already mentioned, as a complementary currency the virtual currencies slowly begin to blur the borders between digital content and real-life merchandise. By allowing the consumers to feel engaged through various gamification strategies within their loyalty programs, brand attract new customers, enhance the relationships with the existing ones and manage to turn them into their brand ambassadors towards their peers – friends, family, followers on social media/networks. For example by attracting new friends to participate in the loyalty program or the respective platform, you receive additional amount of the particular virtual currency, a discount by the purchase of more of that currency or maybe a discount by the purchase of real or virtual goods or/and services with that particular currency, as the only allowed means of payment on the dedicated e-commerce (or as we would later on discover m-commerce) platform. Market Trends A Juniper Research study [34] predicts that the amount of money being spent on virtual currency in mobile apps is going to more than double in the next four years, going from $2.1bn last year to $4.8bn by 2016. On one hand the virtual currencies don’t necessarily directly reflect on the real currencies, which makes them unique for the existing global monetary systems. On the other they don’t necessarily represent an exchange system, which is universal and globally usable. As we slightly touched upon this, sometimes they can have worth only in the concrete sector, where they are introduced – e.g. to buy only concrete goods or services with these, or to exchange them for intangible assets. For example, Apple provides iTunes users the option of buying prepaid iTunes gift cards, which contain credits that can be redeemed for music and movies. Many online games allow players to earn and purchase "points", "tokens", etc. that can be redeemed for virtual and real-world prizes. Facebook also started a system of "credits" that has a wide variety of applications apart from gaming, such as making charitable donations using a particular charitys Facebook page. Looking into the future, Google has announced that it acquired the start-up company Jambool and its proprietary "Social Gold" virtual currency platform. According to an industry speculation Social Gold will be used to supplement Googles current online payment system, Google Checkout. 29
  30. 30. "Points”, “credits”, "coins," "bucks" and other forms of virtual currency are becoming standard offeringsfor social network platforms, online game sites, retailers and other businesses. Examples include Bitcoin,Facebook Credits, Second Life Linden Dollars, and World of Warcraft Gold. Virtual currency systemsgenerate revenue, provide low cost alternatives to credit cards for micropayments, offer prepaid solutionsappealing to youth and other users without credit cards, and help companies build attractive loyaltyprograms [35].Virtual currencies are more often used to sell digital goods or services. However, they continue tobecome more complex in turning into complementary currencies by approximating conventional money.They allow purchase of physical goods and services from multiple merchants, offer cash redemptionoptions, and facilitate peer-to-peer payments.Despite of being called virtual, these currency systems pose real legal issues for the issuers of the virtualcurrency, the network service providers, partners and users. Issuing virtual currency could subject anissuer to various regulatory regimes on international, national, regional level with wide rangingoperational, financial and liability implications. These could involve restrictions on an issuers ability toexpire the virtual currency or impose inactivity fees, requirements to give cash back for unused virtualcurrency, obligations to remit unused virtual currency balances to states, potential regulation as afinancial institution, requirements to structure systems to avoid illegal lotteries, and privacy and datasecurity issues. Also the businesses and consumers relying on using the virtual currencies have to have aclear idea about all of the possible drawbacks.In countries such as the USA, Japan, China [36] and etc, the impact of virtual currencies begins to betaken seriously into account and for some of the countries, those currencies face already very concreteregulatory obligations and restrictions.The usage of virtual currency in e-commerce business models is on the rise, a significant part of whichdue to the advantages that virtual currency affords to a vendor. Virtual currency platforms allow issuingcompanies to lower costs by eliminating the need for a third-party company, such as a bank, to processeach payment transaction. Further, a vendor has significant control over the value of, and authorizeduses for, virtual currency, which turns him into a gatekeeper of all transactions. This control enablescompanies to realize higher revenues, cut costs, and build more-attractive customer loyalty programs.And although virtual currencies offer a number of potential benefits, there are a host of legal issues toconsider, which is the core of the current state of art of virtual currencies. The main purpose of acurrency is to facilitate commercial transactions and regulation of virtual currencies is a largely untestedfield. And while they become popular, for example online game and social networks’ companies and theirlegal advisors start making their best guesses as to how these systems will be treated by courts andregulatory bodies.The EU legislation 30
  31. 31. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services According new eMoney Directive, electronic money is defined as the digital equivalent of cash, stored on a device, server, mobile phone, electronic purse, etc [70]. The definition of e-money as included in article 2.2 of the Directive provides that products must be "issued on receipt of funds" to qualify as e-money [71]. Hence platforms, m-commerce sites and applications that allow collection of credits, points or other virtual currencies by performing certain activities distinct from the direct purchase of such credits or points, reside outside the scope of EU e-money legislation. The question arises then what is the status of platforms where the same credits or points can be both purchased and earned, since these platforms generally store purchased and earned credits in one user account. Macro- and Microeconomic Implications Taking into account the universal character of a virtual currency, accessible through almost everywhere, one of the important questions, which currently still remains unanswered, is related to the price and worth implications of virtual to “real money”. If for example a European consumer owns a number of virtual credits and wants to cash them out into an old-fashioned “euro” currency, does that mean that he would receive as much euro as an American would receive dollars or he would receive less? That could mean also that by buying virtual currency you’re in the financial golden zone of “currency neutrality” even if the banking system in your country or union crashes, just because you can cash out your “points” in another country where there are no market fluctuations, inflation, deflation or else. That of course would be true until the concrete virtual currency is stable on the digital market and there is still interest in buying or using that currency in a concrete type of virtual goods and services. Another important issue would be control of ownership. Being a digital unit, such virtual currency could be replicated almost untraceably and since it would be a type of a private currency, the actual question of control about how much of this currency has been issues, remains open. It could appear that the virtual currency looses its value not only in the virtual world, but also in the real one, resulting in financial capital meltdown for payers and businesses. Taxation issues One of the most important legal issues, which the online businesses have to comprehend, concerns the tax consequences of the conversions of online currencies, as they could have significant ramifications for international transactions. "The characterization of these transactions for tax purposes also has direct implications for operating structures social media companies may select for non-U.S. activities," explained the international tax consultant from KPMG, Jim Carr regarding the usage of online currencies by US social media companies [37]. He observes that "because of sparse tax guidance to date, social media companies engaging in cross-border transactions with consumers may be unsure whether and how their virtual currency transactions will be taxed," noting that analysts project a $14 billion global virtual trading market this year. 31
  32. 32. The same consideration would be then valid for the EU regulatory landscape and business activities. “Howincome related to virtual currency is characterized for tax purposes is a key to assessing the taxconsequences. To the extent that companies using virtual currencies conduct activities through foreigncorporations, the characterization of income resulting from virtual currency will determine which tax rulesare relevant,” added Carr’s colleague Jason Hoerner.According to Carr to reach an informed conclusion regarding characterization companies should carefullyconsider the terms of service they offer players. For example, is virtual currency properly characterizedfor income tax purposes as property, a deposit, a software license, a service, or could it actually betreated in the same way as a foreign currency? Each answer may carry different tax consequences.Accountability by FraudScammers, however, use the unclear characterization of these virtual currencies also to hit the “real-money” economy. Such example is the falsification of credit card numbers or their theft from realconsumers, including for example iTunes users in the US or in Europe. Then they wholesale their creditcard details on Chinese platforms like Taobao, known as the eBay of China, to purchase all kind of things- including virtual goods in games. As it has been reported, on Taobao, a gamer can buy virtual currencyor paid apps at a discount of 50% or more. The seller will provide him with an iTunes login tied to afraudulent or stolen credit card number, which can be used to purchase the goods [38]. One may alsoask if the consumers buying virtual currencies with a big discount can’t cash their value back intoconventional currency, how could these frauds be detected and who within the transactions chain shall bethen held responsible.Another interesting example regarding for the “gray area” of virtual currencies is the handled in front ofthe UK court Zynga case in 2011. Zynga, a US social network game developer, develops browser-basedgames for social networking websites. The company claims to have more than 240 million active monthlyusers and last year filed with the Securities and Exchange Commission in America to raise $1bn (£611m)in an initial public offering, reportedly valued at $15-$20bn. However, in the same year the conviction ofa hacker from Devon for hacking into Zyngas accounts, put companies like Zynga into the regulatoryspotlight regarding the questions of worth and value of virtual currencies [39].The British hacker Ashley Mitchell stole around 400bn virtual poker chips and began selling the currencyon the black market for people to use on the Zynga site. He managed to pocket £53,612 before hisarrest, exploiting the growing market for the online sale of virtual goods. For Graham Hann of City lawfirm Taylor Wessing, Mitchells prosecution was a great example of how lawyers are trying to figure outhow real laws apply in the” virtual world". Highlighting the issue, Hann commented: "Are virtual onlinechips actually property that can be stolen? What right does a user have if his chips are taken fromhim? Can the people who bought the hot chips be guilty of handling stolen property? Can flooding themarket with illicit chips devalue the Zynga currency, like the Bank of England printing money?"Mitchells conviction suggests that, so far as the UK courts are concerned, virtual currency is "property",albeit that it is wholly intangible and theoretically limitless. This case reveals that on one hand we have 32

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