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 …

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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  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. "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. 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. 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
  • 33. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services the international transactions regulation questions, regarded differently by the different countries and on the other hand the EU as a whole. The UK court decision is just one example about the decision-making in the EU, which in itself proves that the EU-wide approach and efforts regarding virtual currencies taken by the different member states are fragmented. IV.2 .The M-Payment Business Model 1. Ecosystem Stakeholders There are many different stakeholders in the process of realizing successful m-payments business proposition. Depending on the business model the configuration between the different parties in the ecosystem might be different. Looking just at the m-payment industry market, the associated services span across different and heterogeneous sectors that have not been truly integrated in the past [58]. Natural candidates for service providers are mobile network operators (MNOs) and financial institutions (i.e., banks and debit/credit card companies). Until today, various combinations of these actors have been tried in a number of solutions: MNOs offered m-payments either independently to differentiate themselves, e.g. Paybox in Austria, or by joining an alliance to gather forces and create momentum with their competitors, e.g. Simpay. There were also some pilots launched together by MNOs and financial institutions such as MobiPay in Spain. A number of pure players targeting towards niche markets such as micropayments systems for purchasing mobile content or for paying car parking, e.g. PayByPhone, also emerged. Large technology companies such as Google and Apple also started to raise their interest in joining the scene. An increasing number of startups such as the US Square offer innovative m-payment solutions, which interact with the physical world: e.g. payments at the point of sale (PoS) of a physical store. Based on a number of papers [40, 41, 42, 43], several main groups of stakeholders could be distinguished, including both business and non-business players. The classification bellow represents a deductive overview of the mentioned research documents. As the majority of those research papers present, the m-payments’ business models have two main parts in their lifecycle, the one of the providers of m-payment services and the one of the demand [43]. As a first example for an overall picture of the key stakeholders’ map, in Figure 6 you can see the model for a typical payment scenario according to the researcher Stamatis Karnouskos [40]. According to it, the payment process is envisioned as a linear, but cyclic flow within which, at first sight, customers, merchants, acquirers and issuers are necessarily participating. Since this concept is cyclic, the demand and supply side could be considered as mutually balancing. Figure 6. 33
  • 34. The more detailed involvement is presented in the Figure 7, which lists the concrete partners. Next to thecustomer and merchant, there are the government, the service provider, the financial sector, the devicemanufacturer, the mobile network operator and the software provider.Figure 7.In the second example, Figure 8 [41], the potential cooperating parties are the same with the only newaddition of the concrete mentioning of a security and authentication provider. The flow is again linear, butit comes in a value chain manner, starting from the merchant, going through the financial institutions,the mobile network operator, the security and authentication provider, the device manufacturer and justthen to the end user. This way of representing the flow pushes the core of the business model in thefunction of the merchant or service provider as the initiating part on the supply side. 34
  • 35. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Figure 8. In the third example, Figure 9 [42], you can see an even more extensive overall map of the stakeholders involved within the m-payment ecosystem. They are separated into two groups: the required and the optional additional ones. For the first time, there is a consideration for the possible involvement of additional actors. However, the list of the required ones is not appropriately considered, as will be motivated in the next chapter. Figure 9. As a conclusion of these three relative examples of the overall m-payment ecosystem, a number of stakeholders with varying functions within the concrete m-payment business model can be distinguished. As the particular functions of the stakeholders haven’t been yet clarified, bellow it is given a more elaborate overview of the roles of those of them, which are mandatory for the successful realization of an m-payment business model. This overview would be again within the stake of art research; it would be analyzed and used in the next chapter as a basis for the new propositions and modifications in the stakeholders’ mapping. 35
  • 36. We can distinguish the following key players in the ecosystem [43, 44]:1. Customer (payer): The customer or the payer transacts with the merchant or with other customers via the m-payment process2. Merchant/Brands (payee): The merchant or the brand transacts with the customers or with the other merchants, suppliers and etc. via the m-payment process3. MNOs: The operators have a large customer base, and because they control the subscriber identity module (SIM) and/or the wireless identity module (WIM) card of the mobile device, they have a strategic influence and impact in the m-payment model. For the biggest MNOs the main interest in m-payment is the possibility to achieve a substantial return on investment (ROI) 1) as the direct billing organization in m-payment transactions; 2) due to the associate interest for the increased data usage in online m-payments transactions 3) the creation of value-added service offerings for the customers4. Financial sector institutions - banks, credit card companies, and payment processors: The financial sector has been handling payment systems for decades and can realize cross border payments, which makes the respective financial organizations key players in the stakeholder map. However, being the primary source of choice for a financial transaction, the financial sector is still reluctant to support the development of a mobile micro-payments system, which would then result in high transactions costs. From another point of view, the possibility to use the mobile device would enlarge the customer base of such companies over unbanked or underbanked communities.5. Mobile device manufacturer or Original Equipment Manufacturers (OEM): The device manufacturers play a significant role and although they have little to no payment experience, they control big part of the user technology and the capabilities of the end-device, which affects the implementation and deployment of a m-payment service. The cooperation among manufacturers and between them and the other m-payment players to develop a common approach to mobile device capabilities is crucial in the m-payment business models evolution. The successful implementation of a generic architectural framework for m-payments enabled devices could result in a substantial increase in both sales to new customers and for the renewal of existing devices in the market to ones that are payment capable.6. Technology providers: among the biggest beneficiaries of the successful realization of the m-payment ecosystems are the technology vendors and systems integrators. They are however also among the organizations, which have to put most of the R&D efforts in this process by realizing m-payment hardware infrastructure, its components and the connected middleware. These organizations are positioning themselves to provide the infrastructure and messaging for m-payments and in the process offering to act as a trusted intermediary between the banks and the MNOs, where the two parties are involved in the m-payment business model. They encompass a number of functions such as the ones of chip manufacturers, who create the smart card chip on which the m-payment app or secure element can reside; the secure element issuer, who personalizes the chip with the secure 36
  • 37. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services element; the Trusted Services Manager (TSM), who enables the service provider to use the secure element. 7. Software and service providers: The software providers have several main roles. They develop the means of implementing m-payment infrastructure by producing standard compliant software that will connect the different parts of the m-payment process and to assure a secure transaction with safe authentication; They work as Over-The-Top developers by creating applications and tools which allows consumers, merchants, brands and payment providers to use number of digital services and products, connected to m-payments. The service providers will bring this service to the market and adapt it to user’s needs. MNOs and financial institutions can also play the role of the service provider and can offer limited m-payment services on their own. 8. Government, public authorities, and regulators: all m-payment solutions and business models are developed under constrains and requirements imposed by government legislation and regulation at the national or international level, such as for example in the EU. Each player has different incentives and strategies. Sometimes these interests and strategies may be in conflict between the different players e.g., the MNO would like to maximize revenues through each m- payment transaction whereas customers and merchants would like to minimize costs for each m-payment transaction. In Table 5 bellow you can see the expectations of each of the above-mentioned stakeholders [45]. The color code as it follows: Table 5. Similarities and differences between the m-payments ecosystem stakeholders’ interests YES = VERY IMPORTANT MEDIUM NO = TO BE AVOIDED or NOT IMPORTANT FOR THAT STAKEHOLDER Financial Mobile device Technology Software & service Government, public Customer Merchant/Brand MNO institutions manufacturer providers providers authorities, regulators Personalized Service Minimal learning curve Trust, privacy and security Ubiquitous access Low or zero cost in using the system Low or zero cost of implementation Interoperability between MNOs, 37
  • 38. financialinstitutionsand devicesAnonymity ofpayments (like with cash)Person to PersontransactionsFaster transactiontimeIntegration withexisting paymentsystemsBeing able tocustomize theserviceReal time status ofm-payment serviceIndependentlydesigned solution to generate newrevenues anddecrease churnExceptionalbrandingopportunitiesBetter volumes in bankingCustomer loyaltyGenerating newincome by increase of trafficIncreased averagerevenue per userBecome anattractive partner tocontent providersLarge marketadoptionEmbedded (native)in the device m-paymentapplication/ featureLow time to marketRevenue throughtaxation of m-paymentstransactionOpen standardsFair competitionbetweenm-paymentsprovidersMarket developmentof new services 38
  • 39. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services 2. Billing 2.1 Billing Control Categories The gatekeeping function in the m-payments business modeling is the one of the billing controller organization or organizations in the players’ configuration [42]. Four main models could been distinguished [43, 45]. One part of them imply for clearly existing billing gatekeeper(-s) in the business model, while the other rely more on the mutually beneficial partnership approach.  Operator-Centric Model  Bank/Credit Card-Centric Model  Peer-to-Peer Model  Collaboration Model 2.1.1 Operator-Centric Model The telecom operator would act independently to deploy m-payment, hence will play the gatekeeping role in the m-payment business model. The applications may support a prepaid stored value model or the charges may be integrated into the customer’s wireless bill. The operator could provide an independent mobile wallet from the user mobile account (airtime). Payments may be further classified into prepaid airtime (debit) and postpaid subscription (credit). The operators would rely on conventional currencies in the core of their transactions’ models. However taking into account the faster convergence of the telecom industry with the media and internet service providers (seen mostly as OTT players in relation to the other content industries) they would have more interest in implementing also new and simpler transaction models, which don’t require the deployment of new financial systems within their infrastructure. Further on the various technological or virtual-currency based possibilities around operator-centric solutions will be examined. Figure 10: Operator-Centric generic relationships’ model 39
  • 40. From a usability standpoint, the Operator-Centric Model provides the fastest and easiest approach for theend-user to decide on the usage of new services involving m-payments. The primary benefit to mobileoperators is sole control over the revenue stream. Brand recognition is an additional benefit to the MNO.Hence, interviewees, participated in the research of the Smart Card Alliance [42], shared the commonconcern that this model will not fairly address the interests of all of the ecosystem stakeholders.Otherwise said, what would be a plus for the MNOs would turn out to be a minus for most of the otherassociated business players. The majority of the surveyed respondents pointed out that the MNOs wouldbenefit both from the additional service fees and from the increased value-add to the consumer. Thiswould lead to the unbalanced distribution of customer loyalty retention, increased or new revenuestreams, and potential reduction in customer turnover.In addition the proposed model faces several threats and challenges in its successful realization of massadoption. One of the major challenges for the model according to the survey participants is on one handthe billing. While MNOs should handle the interfacing with the banking network to provide advanced m-payment service in banked and under banked environment, currently they lack a connection to existingpayment networks.On the other hand there is a big concern that MNOs would not be capable of efficiently fulfill the customerservice requirements: the idea of the operators being involved in customer service issues and paymentresolution concerns such as bad debt, receivables, transaction inaccuracies - is flawed. In comparison tothe MNOs, many share the perception that the existing financial stakeholders match better to this role.Additional concerns include privacy, fraud and risk management. Again to the view of the surveyedparticipants, operators may not be best suited to manage data that is as sensitive as financialinformation.The consumer attitude on perceived convenience is a seen also as a challenge. Last but not least the lackof existing strong business relationships between MNOs and merchants is an existing issue. Since bothsides don’t have traditional business relationship, acquiring such relationships would require a time andcost consuming shift in the operators’ business models, requiring a noticeable business agility anddevelopment of new competences. Regardless of the model, some level of collaboration will be necessary,allowing businesses to focus on what they do best. The MNOs would have the motivation to developthese existing relationships and to build new with the retailers and software and service providers inorder to develop m-marketing apps for loyalty programs, smart posters, vouchers, coupons and etc.However, for many that means the moving away of operators from their core business competencies inorder deploy m-payments using the Operator-Centric Model. 40
  • 41. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Figure 11: Risks and Benefits for Operator-Centric Model Stakeholders 2.1.2 Bank/Credit Card-Centric Model Under this model a bank, a credit card issuing company or a group of financial organizations will work to add m-payment technologies to their existing service portfolio. These companies would rely on traditional “real” currencies in the core of their transactions’ models. However, the emergence of complementary currencies will add an additional interest layer regarding the appearance of new digital products and services. Still, the complementary currencies will always have a little development pace in this model, since the existing banking/credit cards’ sector wouldn’t be willing to make a 180-degree change in their industry. A bank/credit card issuer would deploy m-payment applications or devices to customers and ensure merchants have the required PoS acceptance capability. Payments will be processed over the existing financial networks with credits and debits to the appropriate accounts. MNOs are used as a simple carrier; they bring their experience to provide Quality of Service (QOS) assurance. In the following chapters the various technological or virtual-currency connected possibilities around bank-centric and credit card-centric solutions will be presented. 41
  • 42. Figure 12: Bank/Credit Card-Centric generic relationships’ modelUnder the Bank/Credit Card-Centric model, only the banks/credit card companies (or an alliance of both)would collect transaction-based fees, which give them the gatekeeper role. This could be either a flat feeor a percentage of the transaction, such as the current interchange fees. However, MNOs would still havea big benefit in this scenario. The banks could pay a “rental fee” to place their applications on theoperator’s SIM card. There are a lot of revenue collecting agreements’ possibilities related to that - froman option of one time payment to monthly collecting fees. Also if the telecom network is used for theonline transaction, this would mean a possible increase in data transaction volumes and revenues.Despite of the strong MNO’s position, the acquiring band/credit card company(-ies) owns the merchantrelationship. In many cases the acquirer provides the merchant with the appropriate acceptance devicefor the PoS, if such device is needed.The core reason for that is the interest of financial companies to increase the amount of executedmicropayments and the creation of a new channel to do, such as the ones relying on m-payments. Forbanks and credit card companies micropayments represent a new revenue stream capture, but the highcost of these transfers for the merchants and in between financial companies would result in a veryexpensive scenario. Since the merchants pay the interchange fee for every payment they received fromtheir customers, the existence of a small payment wouldn’t give enough profit margin of interest of themerchants. Hence a high fee would result in decrease of the acceptance and hence adoption speed ofsuch transaction services.In result this would require a rethinking of the business agreements in order to be an effectiveproposition both for the financial and retail sectors. The four players in the transaction have an alreadytraditionally established relationship due to the close alignment to the existing operational model forpayments, including payment fees and mechanisms. That’s why this leaves space for some debate overthe actual level of fees, should this payment channel cost more or less than existing channels. However,respondents consider this is easier to negotiate than devising an entirely new fee structure. In conclusionthe successful agreement of interchange fees will result in the possibility for mass adoption of mobile 42
  • 43. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services micropayments, which on its own will unlock a whole new customer base – of unbanked communities or in the developing world. In addition this would result in reduced cash-handling costs, including theft, shrinkage; increased cashier efficiency and throughput, less queues; reduced money counterfeit exposure; increased impulse spending of consumers – which, however, would be happier with the faster speed of payment process. Also consumers would be able to keep track of their low-cost purchase history. The existence of a traditional value chain for each participant that is relatively clear and easily defined, makes the Bank/Credit Card-Centric even more simplified. An issuing bank/credit card issuer gets greater client loyalty and more direct contact with their customers in return for the m-payments technology investment. A merchant will get faster transaction times and increased spend. The acquirer will receive electronic transactions, which would otherwise have been cash purchases. And while a pro is that the customer will win on convenience and flexibility, a con is the potential limitation of the consumer to the usage of one specific service from one specific bank/credit card issuer. An opportunity is the relationship building between financial organizations and marketing companies, from which the former can collect revenues. Still this requires a careful consideration. Too much of the wrong kind of messaging to the consumer will very quickly be recognized as annoying spam and could damage the reputation of the bank as well as harm the adoption of m-payments. However, according to the surveyed respondents with appropriate and relevant messaging, this new channel could help to revolutionize the way consumers shop. Overall, the realization of a purely Bank/Credit Card-Centric model wouldn’t be feasible. First, the partnerships and revenue sharing with MNOs, device manufacturers and overall mobile platform controlling companies like e.g. Apple will be unavoidable. If such players decide to do so, they may have a very disruptive impact on the development of the model. The perceived paradigm today is that they have seeded the widespread adoption of mobile telephony through the supply of discounted, white- labeled handsets based on a number of different standards, operating systems, and service offerings, locking in both customers and suppliers. Therefore, such companies or company groups can control what applications are loaded on these devices. Second, financial organizations may be not willing to invest into a new form factor such as NFC for example, given that many are rolling out contactless credit and debit cards. Third, customers would not want to manage multiple wallets on their devices or have different applications for each of their accounts, resulting in fragmentation, hesitation, slow consumer acceptance and adoption. Similarly banks may be forced to support various operator-specific standards, which happened in a Benelux trial. Last but not least, as already has been mentioned the micropayments’ models of such m-payments services need to be aligned in order to guarantee an effective costs-benefit structure for the banks/credit card issuers. 43
  • 44. Figure 13: Risks and Benefits for Bank/Credit Card-Centric Model Stakeholders2.1.3 Peer-to-Peer ModelThe independent m-payment peer-to-peer (P2P) service provider acts independently from financialinstitutions and mobile network operators to provide m-payment. He provides secure m-paymentsbetween customers or between customers and merchants without using existing wire transfer andbank/credit card processing networks. This could be based both on existing currencies and/or on virtualcurrencies, which will be examined in the coming sections.The money transfer from one person to another, even across great distances, has existed for a long timethanks to a number of providers. Thanks to the Internet this service has become more convenient,however due to the high costs associated with this type of transfers its daily day use is still very limited.Remote payments to merchants were made convenient, but still they were rather inapplicable in the caseof real-time purchases. Mobile devices with peer-to-peer capabilities have the potential to overcomethese obstacles. According to the Smart Card Alliance research 3 main scenarios can be considered forthe P2P payment implementation. Within them the provider deploys:  Contactless devices to customers and PoS equipment to merchants in a closed loop model  With a m-payment app for the mobile device  P2P service provider uses an existing online application, e.g. PayPal Mobile, without the need of a PoS equipment 44
  • 45. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Figure 14: P2P generic relationships’ model This model diminishes the need of existing payments ecosystem of PoS terminals, ISOs and acquirers that deploy them, and the processors and payment networks that route and settle the transactions. According to the Mobile Card Alliance research the most popular up to date examples are the ones deployed by new P2P providers such as PayPal Mobile and Obopay, which provide a transaction routing service for banks, merchants, and customers. The providers of such platforms earn their core revenue in the form of transaction fees/commissions for loading and unloading the account or licensing fees from merchants or consumers for downloading software. The model has the potential to allow key partnerships between P2P providers with both traditional financial organizations and mobile operators. For the banks and credit card companies this means revenue streams capturing from the processing fees, while for the telecoms the pros are connected with the increased data traffic for the usage of the P2P services platforms over mobile Internet networks (e.g. 3G connectivity). However, it has to be considered that if the service provider utilizes another bank as its payment processor that might lead to a disintermediation. The mobile operator faces the same disintermediation concern. They can also channel marketing revenue of customers from merchants and issuers by playing the intermediary role in loyalty programs. Also P2P providers can take advantage of stored value account float and cross-sell opportunities for other offerings or products. This results in opportunities for merchant interchange exists as well. Except that, merchants have a special interest in the P2P model, since first it will reduce their cost of cash handling and increase their processing speed. Second that’s an opportunity for them to decrease the costs of processing credit and debit payments, and extend their offering to underbanked customers who cannot obtain a traditional bank/credit card, and to such, who seek to wire money to friends and family overseas as in the cases of cross-border remittance. For the customers on the other hand, this model 45
  • 46. also results in a decrease in their spending on payments and enables a remote payment option.However for the successful implementation of the model there are a number of challenges, similar to theones that contactless payments currently face, that need to be overcome. Among those are the provisionof a sufficient number of merchant locations to be meaningful to customers, the ensuring that thetransactions, whether at PoS or online, are convenient and the provision of a sustainable revenue to thefinancial organizations so that they will drive transaction volume to this channel.In order for P2P providers brand to be perceived as reliable and trustworthy as the credit and debit cardsprovided by the long-established financial institutions both customers and merchants have to beeducated with credible proves, including means to the overcome of negative reporting on moneylaundering and security and the timing resolution of disputes and chargebacks.Figure 15: Risks and Benefits for P2P Model Stakeholders2.1.4 Collaboration ModelThis model involves collaboration among banks, mobile operators, handset manufacturers and otherstakeholders in the m-payments’ value chain, including a potential trusted third party that manages thedeployment of mobile apps. Payments in this model are processed over the existing financial networkswith credits and debits to the appropriate accounts. Also with the development of virtual currencies,many other configurations are possible allowing the exchange of products and services both for existingcurrencies and virtual currencies. The Mobile Card Alliance research represents two main strategies forthe model. According to the first, a mobile operator partners with one bank to offer bank-specific m-payments services. According to the second, industry associations representing telecoms and financialinstitutions negotiate and set standards for apps that reside on secure elements in mobile devices,allowing multiple card types from different banks to be used. 46
  • 47. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services In both scenarios, the mobile devices and compatible PoS devices are deployed that meet the standards set by the partner bank or industry associations. Potential sources of revenue include merchant commissions, merchant and consumer trans-action fees, new customer acquisition fees, and marketing fees. The amount paid and collected by each stakeholder is the source of considerable contention. It is expected that merchant fees are split between banks, telecoms, and perhaps 3 rd party trusted service managers (TSMs). Comparable models exist in the credit card industry for customer acquisition and marketing fees between partners. Figure 16: Collaboration generic relationships’ model 86% of survey participants within the Mobile Card Alliance research considered the Collaboration model as having greatest potential for long-term success. Although this model seems as the best compromise between the different business players, the industry appears poised to deploy m-payments, waiting for someone else to make the first move. A bold action is needed by a player in the role of trusted service manager to orchestrate the activities of collaborators and competitors. Such activities include the final decision on the handset and chip standards, merchant enablement, and standards for certifying and deploying secure payment applications. Finally and most controversially, the biggest decision to be made is related to the development of a sustainable model for revenue-sharing arrangements among stakeholders. The revenue sharing model remains an open question, depending on the value that partners create for each other: most of the surveyed participants pointed out that payment transaction revenue belongs to the bank/credit card company, while airtime, operator services and fees for application residency on the handset or wallet belong to the MNO. Respectively, banks would own financial liability while MNOs - network security. There has been a broad support for TSMs owning some risk, entitling them to revenues from risk assumption for the services provided. The liability for privacy risk between banks and mobile operators still remains unresolved issue. 47
  • 48. Another revenue streams may include advertising based on mobile marketing via smart posters;couponing; customer loyalty programs and rewards and co-branding arrangements bringing new valueadded on established value propositions. The number of novel services would generate new customerfees, e.g. application load fees for an open wallet approach, for secure identification, for home of buildingaccess, location-based services (LBS) such as finding a lost device, for topping-up of transactions or formass transit ticketing systems.2.2 Transaction TypeDepending on the size of the content value, transactions could be categorized under micropayments andmacropayments.Depending on the type of transaction made, there are a number of identified categories. Pay Per View: the mobile user pays for each view, or increment, of the desired content. For example downloadable MP3 files or video clips. Pay Per Unit: the mobile user pays for each unit of content provided by the content provider. Units can be based on volume or duration of content, such as per byte or per minute. The amount of units used for each session will be billed to the consumer. Such examples of this type could be used in downloadable games or streaming video content. Flat Rate: the mobile user pays a recurring periodic amount to access the content on an unlimited basis during the period. For example unlimited access to online newspaper articles.2.3 Transaction Settlement TypeDepending on the timing of the payment, we can identify three main types of transaction settlement[43]. Pre-paid: Under this transaction settlement type mobile users pay in advance of obtaining the content with pre-paid account, which are deducted after each payment session. This is the most common charging method for MNOs as well as third-party service providers in order to be able to evaluate only that the user is capable of paying. The prepaid user is a significant part of the current telecom operator customer base. Post-paid: Under this transaction settlement type mobile users receive and use the content before they paid for it. The consumer is billed after the access to the content is obtained. Post-payment is the most common method used in e-/m-commerce transactions today, including examples such as: phone-bill based, a charge method most commonly used by MNOs; account-based (bank/credit card), a method used by banks, which have an account of the consumer, or by the credit card industry. Pay-now: Under this transaction settlement type the mobile user pays in real-time or close to real- time, based on the technical limits. 48
  • 49. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Real-time: This method includes solutions that charge the user of the service in real-time. This means that funds become immediately available to the merchant, same as cash. Electronic wallets are an example for real-time transactions. Near “real-time”: This method represents solutions that charge the user of the service in a reasonable amount of time. A typical example of this category is the debit card, as well as systems that do real-time fund reservation, but the clearing and fund transfer happens later and typically at the end of the day. Financial institutions can handle the timeframe between the reservation and the clearing according to their risk management policies. 2.4 Validation Settlement Based on the validation of the tokens exchanged in a mobile transfer scenario we can have two types of payments.  Online M-Payment This assumes that in a MP procedure the tokens exchanged, e.g. electronic money can be verified by contacting an external entity that both transacting parties trust. Typically the trusted external entity is an authorization server. This is the trivial case for almost all m-payment procedures.  Offline M-Payment In this case no third party is involved during the m-payment procedure. Hence the tokens that are exchanged between the two transacting parties can be verified without external help such as the one of an authorization server. Examples for that are the e-coins transferred in mobile wallets. 3. M-Payments’ Context Categories In the previous section we have presented the stakeholders, their interests and possible configurations. In this section is represented a model of categorization of services on the criteria of the actors involved (relation), the context of their usage and their location. At the core of the mobile ICTs growing success is the location independency of the user. Effectively, transactional services as the ones depending on m-payment systems are subject to the context in which they are operated. For example you can shop with an m-payments service while you’re in the supermarket; you can transfer money to your colleague to share a bill or you can use an m-payment solution when you want to buy a new music album from a web shop or a physical one. The physical context in which the user finds himself is the most indicative feature of the m-payments business modeling. Depending on the type of context the requirements for the execution of such a transaction could vary a lot. M-payments can be executed between consumers (P2P or C2C) or between consumers and companies (C2B), meaning a different context of usage. In connection to that the location of the consumer and device play a crucial role for the classification of payments: they can be done either in proximity, e.g. at 49
  • 50. the counter in a supermarket, or remotely, for example paying in an e-shop of a company registered inanother country via a mobile phone connected to the global Internet network.Hence the choice for the m-payment technology has an implication on the circumstances under which itwould be used. For example the major characteristics of Bluetooth, and Wireless Infrared Communicationm-payment technologies is the relative short communication range offered, which implies a cruciallimitation in over-long distance transfer. It is a question of economic choice of the industry players, whichtechnology would they propose, so that is widely used depending on the context of its consumer usage.As depicted in Figure 17 four categories of m-payments could be distinguished [44].Figure 17. M-Payment Context Categories, INNOPAY Research [44]3.1 Proximity PaymentsTransactions in which the mobile device communicates locally are defined as proximity payments. Theyinvolve the use of short range messaging protocols such as NFC, RFID, Bluetooth and contactless chip topay for goods and services over short distances. Two types of proximity payments [44] are todistinguished: contactless payments and payments executed by using the mobile device as a PoS withthe support of an external reading device.3.1.1 Contactless PaymentsContactless payments are payments executed in proximity without the need of a contact: e.g. chargingfor your bus ticket by swapping your phone over the reading terminal; paying at PoS by holding yourmobile in proximity; transferring money to a friend by moving the two phones towards each. As theexamples demonstrate, contactless payments can be done both between consumers and betweenconsumers and merchants. 50
  • 51. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Contactless technology can be divided into two categories:  Vicinity: this technology offers a maximum read communication distance of 1 to 1.5 meters  Proximity: this technology has a much smaller read communication distance, usually about 7.5 centimeters in most instances There are several technologies allowing contactless communication. A popular emerging technology for contactless communication, that gets a lot of attention in regards of m-payments, is Near Field Communication (NFC). It will be explained in the coming chapters, together with other, similar methods to perform contactless payments. The common threat is that they can be done via the mobile Internet, Bluetooth or radio frequency waves of the mobile speakers. 3.1.2 Mobile as a PoS Terminal One of the recently appeared new communication technologies allows the usage of the mobile phone as a PoS terminal for your physical bank/credit cards. This is realizable with the help of an extra device – external card reader - and an application for the hardware the mobile phone can be used to accept card payments. The external card readers typically support payments between consumers and SMEs. They are specifically targeted for enterprises not large enough for traditional PoS devices, thereby providing access to those otherwise excluded due to high lump sum investments. One can imagine examples allowing the usage of a mobile as PoS by the restaurant managers, supermarket salesmen and etc. 3.2 Remote Payments In this category fall transactions, which are conducted independent of the user’s location. Examples include P2P payments, digital cash, prepaid Top-UP services, delivery of digital services, mTickets, etc. Although we can distinguish two subcategories of remote payments, their general functioning has almost the same technological context. 3.2.1 Mobile Money Transfers Mobile money transfer is simply alternative way to send money. It represents a transfer of funds from one consumer to another over long distance, in which the funds are deposited into a mobile or “virtual” wallet. It could be executed both nationally and internationally. One can image a scenario in the developing world countries, where people from major cities can transfer funds to their relatives in the province. Also in large developed countries there is a large market for P2P mobile money transfers, supported for instance by the PayPal services. The main advantage to use mobile money transfers overseas is related to the remittances. A remittance is a transfer of funds from a foreign worker to his home country. Remittances form a huge market. According to a recent report [44] of The World Bank1 remittance amounted USD 325 billion in 2010, and is expected to reach USD 404 billion by 2013. Driven by the lack of banking infrastructure and available alternatives, mobile remittances form an even larger share of this market. 51
  • 52. 3.2.2 Online M-PaymentsM-payments online are payments realized via the mobile browser or via an application on the mobiledevice. The main use case of online m-payments is in the context of m-commerce and digital goods.E-business models such as the ones relying on m-commerce activities are often incorporated into mobiledevices in order to maximize revenue opportunities. Mobiles are thereby becoming an ecosystem for m-commerce, allowing developers to build their own m-commerce applications on the mobile device. On theother hand, the buying of digital goods and services - apps, games, music and etc. is the fastest growingsegment within the m-payments business models. Depending on the platform, m-payments are typicallydone by either having stored card payment details linked to the user account on the mobile phone, orprepaid cards credited to the user account. The large variety of possible technological designs would bepresented in the following section.4. Technology DesignCurrently there are a number of primary technology solutions for real-currency m-payments. First, acomprehensive overview of the functional characteristics to be taken into account based on a number ofsources [44, 45] is presented bellow. Second, nice technological solutions for the fulfillment of real-money payments, representing both state-of-art solutions and emerging technologies are described.These are the following: Premium SMS based transactional payments, Direct Mobile Billing, Mobile webpayments (WAP), the new emerging model from Haiti: direct carrier/bank co-operation; the hybridpayment technologies allowing both real- money and virtual currencies transactions like contactless NFC.In addition custom created solutions tailored credit/points-systems for the usage of virtual currencies, tobe further explored, will be introduced.4.1 Functional CharacteristicsIn order for m-payment services to become acceptable in the market as modes of payment the followingconditions have to be met [18]: Human-centric product/service design: The m-payment application must be user friendly with little or no learning curve to the customer. The customer must also be able to personalize the application to suit his or her convenience. Universality: M-payments service must provide for transactions between one customer to another customer (C2C), from a business to a customer (B2C), between businesses (B2B), from a government to citizen (G2C), from a government to government (G2G) and from a government to business (G2B). Flexibility: Payments must be possible in terms of both low value micro-payments and high value macro-payments. Interoperability: Development should be based on standards and open technologies that allow one implemented system to interact with other systems. Security, Privacy and Trust: A customer must be able to trust an m-payment application provider that his or her credit or debit card information may not be misused. When these transactions become recorded customer privacy should not be lost or made credit histories and spending patterns of the 52
  • 53. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services customer should not be openly available for public scrutiny or unfair sales to other companies, interested in their data. M-payments have to be as anonymous as cash transactions. The system and its connection to various applications should be foolproof, resistant to attacks from hackers and terrorists. This may be provided using e.g. public key infrastructure security, biometrics and passwords integrated into the m-payment solution architectures.  Cost: The m-payments should not be costlier than existing payment mechanisms to the extent possible. An m-payment solution should compete with other modes of payment in terms of cost and convenience.  Speed: The speed at which m-payments are executed must be acceptable to customers, merchants and network operators if they are part of the business model.  Cross border payments: To become widely accepted the m-payment application must be available on all possible levels. The coverage should include domestic, regional and global environments. 4.2 Functional Architecture The mobile technology landscape provides various possibilities for implementing m-payments. A mobile phone may send or receive information (mobile data service) through various channels – SMS, USSD, WAP/GPRS, and Bluetooth. The m-payment client may reside on the phone, in the subscriber identity module (SIM) or as a sticker or on a smartcard like within NFC technologies. The choice of the channel has a direct reflection over the economic models and strategic collaborations. In Table 6 bellow you can find some examples of m-payments technology classification from a recent Juniper research [34]. Table 6. M-Payments technology classification 53
  • 54. 4.2.1 Premium SMS/USSD based Transactional PaymentsShort Message Service (SMS) is a text message service that enables short messages, 140-160 charactersthat can be transmitted from a mobile phone. SMSs are stored and forwarded by SMS centers. SMSshave a channel of access to phone different from the voice channel. They can be used to provideinformation about the status of one’s account with the bank or can be used to transmit paymentinstructions from the phone (transactional).Unstructured Supplementary Service Data (USSD) is a technology unique to GSM. It is a capability builtinto the GSM standard for the support of transmitting information over the signaling channels of the GSMnetwork. USSD provides session-based communication, enabling a variety of applications. USSD istransaction-oriented technology while SMS is a store-and-forward technology. Turnaround response timesfor interactive applications are shorter for USSD than SMS.The consumer sends a payment request via an SMS text message or an USSD to a short code and apremium charge is applied to their phone bill or their online wallet. The merchant involved is informed ofthe payment success and can then release the paid for goods.Since a trusted delivery address has typically not been given these goods are most frequently digital withthe merchant replying using a Multimedia Messaging Service (MMS) to deliver the purchased music,ringtones, wallpapers etc.A MMS can also deliver barcodes, which can then be scanned for confirmation of payment by a merchant.This is used as an electronic ticket for access to cinemas and events or to collect hard goods.Transactional payments have been popular in Asia and Europe but are now being overtaken by other m-payment methods such as mobile web payments (WAP), mobile payment client (Java ME, Android) andDirect Mobile Billing for a number of reasons:  Poor reliability - transactional payments can easily fail, as messages get lost.  Slow speed - sending messages can be slow and it can take hours for a merchant to get receipt of payment. Consumers do not want to be kept waiting more than a few seconds.  Security - The SMS/USSD encryption ends in the radio interface, and then the message is a plaintext.  High cost - There are many high costs associated with this method of payment. The cost of setting up short codes and paying for the delivery of media via a MMS and the resulting customer support costs to account for the number of messages that get lost or are delayed.  Low payout rates - operators also see high costs in running and supporting transactional payments, which results in payout rates to the merchant being as low as 30%.  Low follow-on sales - once the payment message has been sent and the goods received there is little else the consumer can do. It is difficult for them to remember where something was purchased or how to buy it again. This also makes it difficult to tell a friend.Some m-payment services accept Premium SMS payments. The typical end user payment process is thefollowing: the user sends SMS with Keyword and unique number to a Premium Short Code. Then he 54
  • 55. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services receives a PIN: user gets billed via the short code on receipt of the PIN. Finally the user enters a PIN to get access to content or services. 4.2.2 Direct Carrier/Bank Billing The consumer uses the mobile billing option during checkout at an e-commerce site, e.g. an online gaming site to make a payment. After two-factor authentication a PIN and One-Time-Password, the consumer’s mobile account is charged for the purchase. It is a true alternative payment method that does not require the use of credit/debit cards or pre-registration at an online payment solution such as PayPal, thus bypassing banks and credit card companies altogether. This type of m-payment method, which is extremely prevalent and popular for example in Asia, provides the following benefits:  Security: Two-factor authentication and a risk management engine prevent fraud.  Convenience: No pre-registration and no new mobile software is required.  Easy: It’s just another option during the checkout process.  Fast: Most transactions are completed in less than 10 seconds.  Reliability: 70% of all digital content purchased online in some parts of Asia uses the Direct Mobile Billing method. E.g. In the T-Cash model the mobile phone and the phone carrier is the front-end interface to the consumers. The consumers can purchase goods, transfer money to peer, cash-out, and cash-in. A ‘mini wallet’ account can be opened as simply as entering *700# on the mobile phone, presumably by depositing money at a participating local merchant and the mobile phone number. Presumably other transactions are similarly accomplished by entering special codes and the phone number of the other party on the consumer’s mobile phone. 4.2.3 Mobile Web Payments (WAP/GRPS) The General Packet Radio Service (GPRS) is a mobile data service available to GSM users. GPRS provides packet-switched data for GSM networks. GPRS enables services such as Wireless Application Protocol (WAP) access, MMS, and for Internet communication services such as email and World Wide Web access in mobile phones. WAP is a technical standard for accessing information over a mobile wireless network. The principal application is to enable access to the Internet from a mobile device via a WAP browser. However, additional applications using WAP can be downloaded and installed on the device. Similar to an Internet browser on a personal computer, a WAP browser on a mobile can be used to make remote consumer-to- business payments and P2P transfers. Applications downloaded and installed on the mobile device can also be used to make PoS payments. Despite of the inherited disadvantages of WAP, using a familiar web payment model gives a number of proven benefits: 55
  • 56.  Follow-on sales where the mobile web payment can lead back to a store or to other goods the consumer may like. These pages have a URL and can be bookmarked making it easy to re-visit or share with friends.  High customer satisfaction from quick and predictable payments  Ease of use from a familiar set of online payment pagesWAP billing is also known as direct operator billing or mobile content billing. However, unless the mobileaccount is directly charged through a mobile network operator, the use of a credit/debit card or pre-registration at online payment solution such as PayPal is still required just as in a desktop environment.Mobile web payment methods are now being mandated by a number of mobile network operators. Anumber of different actual payment mechanisms can be used behind a consistent set of web pages.The first example is when there is a direct connection to the operator’s billing platform. It requiresintegration with the operator, but provides a number of benefits such as simplicity due to the existingbilling relationship between MNOs with the consumers (the payment will be added to their bill); customersatisfaction due to the instantaneous payments’ possibility; accurate responses; secure payments andprivacy on the consumers’ data; best conversion rates from a single click-to-buy and no need to enterany further payment details; and reduced customer support costs for merchants since customers willcomplain to the operator. It has however a drawback, the payout rate will be much lower than with otherpopular payment providers.In the second example a simple mobile web payment system includes a credit card payment flowallowing a consumer to enter their card details to make purchases. This process is familiar but any entryof details on a mobile phone is known to reduce the success rate (conversion) of payments. In addition, ifthe payment vendor can automatically and securely identify customers then card details can be recalledfor future purchases turning credit card payments into simple single click-to-buy giving higher conversionrates for additional purchases.4.2.4 Phone-based ApplicationThe client m-payment application can reside on the mobile phone of the customer. This application canbe developed in Java (J2ME) for GSM mobile phones and in Binary Runtime Environment for Wireless(BREW) for CDMA mobile phones. Personalization of the phones can be done OTA9. Such m-paymentapplications can be downloadable or native – installed by default on the device.4.2.4.1 Mobile WalletsM-payment application software that resides on the mobile phone with details of the customer – hisaccount details or credit card information, which allows the customer to make payments using the mobilephone, is called as a mobile wallet. Customers can multi-home with several debit or credit paymentinstruments in a single wallet. Several implementations of wallets that are company-specific are in useglobally.9 OTA stands for “over the air” 56
  • 57. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Online companies like PayPal, Amazon Payments and Google Checkout also have mobile options. Here is the process: 1. First Payment User registers, inputs their phone number, the provider sends them an SMS with a PIN User enters the received PIN, authenticating the number. User inputs their credit card info (or another payment method) if necessary. (Not necessary if account already existing) and validates payments 2. Subsequent payments The user re enters their PIN to authenticate Requesting a PIN is known to lower the success rate (conversion) for payments. These systems can be integrated with directly or can be combined with operator and credit card payments through a unified mobile web payment platform. The Mobile Forum industry group [66] managed to illustrate the essential components of the mobile wallet operation that enables a mobile wallet stakeholder to control how a part of the ecosystem operates. This is especially relevant when a mobile wallet is in day-to-day operation with consumers and merchants, which you can see in Figure 18. Figure 18. Essential components of the mobile wallet operation 57
  • 58. 4.2.4.2 2D Barcode / Quick Response (QR) Code ApplicationThis is an application allowing the usage of two-dimensional (2D) barcode containing more informationthan a conventional one-dimensional linear barcode. A 2D barcode enables fast data access and is oftenused in conjunction with smart phones. Mobile PoS payment apps using 2D barcodes include Starbucksand Target pre-funded accounts. A mobile device that displays a 2D barcode with the consumer’sprefunded account information can be scanned by a PoS device at checkout.4.2.4.3 Custom Solutions for Virtual Currency SystemsThe virtual currency payments systems usually are based solely on credits, points or another kind of atoken. They have a direct link to real currencies, but don’t entail their exact same worth on theplatform/application, where they are used. For example you can have 10 points, which means that youcan use 5% of discount by purchase of a good, which has a real price. These systems are usually highlytailored towards the needs of a concrete business and are usually implemented within other applications,such as loyalty programs virtual cards’, virtual reality platforms, online games, e-commerce platforms fordigital products and services. These internal payment systems are twofold. On one hand they representan external to the application exchange system between traditional currencies and virtual currencies. Onthe other, they are used as an exchange system based on virtual currencies for the purchase of digitalservices and products sold and used on the concrete application.Usually these applications are made in a close value chain loop. They are connected to the productsand/or services of either one or a group of collaborating companies. These organizations need to agreeon the value of exchange of the specific new virtual currency, based on a number of factors such as thewillingness to pay of their customers, the estimation for the costs related to the content/service sold, therelation between traditional “real” currencies and the new artificial one, and more.4.2.5 SIM-based ApplicationThe SIM used in GSM mobile phones is a smart card i.e., it is a small chip with processing power(intelligence) and memory. The information in the SIM can be protected using cryptographic algorithmsand keys. This makes SIM applications relatively more secure than client applications that reside on themobile phone. Also, whenever the customer acquires a new handset only the SIM card needs to bemoved. If the application is placed on the phone, a new handset has to be personalized again.4.2.6 Dual ChipUsually the m-payment application is integrated into the SIM card. Normally, SIM cards are purchased inbulk by telecom companies and then customized for use before sale. If the m-payment applicationservice provider has to write an m-payment application in the SIM card, this has to be done incollaboration with the MNO, the owner of the SIM. To avoid this, dual chip phones have two slots one fora SIM card (telephony) and another for a payment chip card. Financial institutions prefer this approach asthey can exercise full control over the chip and the m-payment process [18]. However, customers wouldhave to invest in dual chip mobile devices. 58
  • 59. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services 4.2.7 Contactless NFC & RFID 4.2.7.1 Contactless Near Field Communication (NFC) This is a short-range, high frequency, standards-based wireless communication technology that enables exchange of data between devices in close proximity (less than two inches to four inches). This technology is the fusion of contactless smartcard (RFID) and a mobile phone. When NFC is used for mobile PoS payments, a mobile device, with a for example embedded NFC chip, sends encrypted data to an NFC-enabled PoS device. Thus, instead of swiping a card or paying with cash or check, the consumer taps or waves his mobile device at the PoS device. NFC can also be used for mo- bile P2P transfers if the sender and receiver’s mobile devices are in close proximity. The mobile phone can be used as a contactless card. NFC enabled phones can act as Radio frequency identification tags or readers. This creates opportunity to make innovative applications especially in ticketing and couponing [48]. The “Pay-Buy Mobile” project launched by GSMA targets 900 million mobile users with a common global approach using NFC. Currently NFC trials are being conducted across Europe in countries as diverse as Austria, Belgium, the Czech Republic, France, Germany, Hungary, Ireland, Italy, Lithuania, Poland, Russia, Slovenia, Spain, Sweden and Turkey. The most proactive among those countries are the Netherlands and the UK. In the Netherlands, financial service providers ABN AMRO, Rabobank and ING, together with the ICT providers T-Mobile, KPN and Vodafone planned to launch a joint venture this year to popularize and facilitate the usage of NFC for m- payments. In the UK, Orange and Barclaycard rolled out Quick Tap, a contactless m-payments service which allows UK customers to make purchases worth GBP 15 or less by tapping their Quick Tap mobile handset against a contactless reader at over 50,000 stores in the UK. The service allows UK shoppers to load up to GBP 100 on their phones from their Orange or Barclays cards. MasterCard handles the billing of the m-payment service, while Gemalto provides the Trusted Service Manager services. Gemalto’s NFC services also include the UICC Cards supplied to Orange [44]. NFC usage area NFC is used mostly in paying for purchases made in physical stores or transportation services. A consumer using a special mobile phone equipped with a smartcard waves his/her phone near a reader module. Most transactions do not require authentication, but some require authentication, using PIN, before transaction is completed. The payment could be deducted from a pre-paid account or charged to a mobile or bank account directly. E.g. NFC vendors in Japan are closely related to mass-transit networks, like the Mobile Suica used on the JR East rail network. Osaifu-Keitai system, used for Mobile Suica and many others including Edy and Nanaco have become the de-facto standard method for m-payments in Japan. Its core technology, Mobile FeliCa IC, is partially owned by Sony, NTT DoCoMo and JR East. Mobile FeliCa utilizes Sony’s FeliCa technology, which itself is the de-facto standard for contactless smart cards in the country. Other NFC vendors, mostly in Europe, use contactless payment over mobile phones to pay for on- and off-street parking in specially demarcated areas. Parking wardens may enforce the parkings by license 59
  • 60. plate, transponder tags or barcode stickers. First conceptualized in the 1990s, the technology has seen acertain level commercial use in this century in both Scandinavia and Estonia. End users benefit from theconvenience of being able to pay for parking from the comfort of their car with their mobile phone, andparking operators are not obliged to invest in either existing or new street-based parking infrastructures.Parking wardens maintain order in these systems by license plate, transponder tags or barcode stickersor they read a digital display in the same way as they read a pay and display receipt.Other vendors use a combination of both NFC and a barcode on the mobile device for m-payment, forexample, Cimbal or DigiMo, making this technique attractive at the PoS because many mobile devices inthe market do not yet support NFC.A good example for alternative solutions that would allow users to benefit from NFC via their non-NFCpowered handsets is provided by the technology provider DeviceFidelity. In 2010, the company rolled outits In2Pay microSD technology, which aims to bridge the gap between mobiles and NFC payments byproviding payment network-compliant contactless payment capabilities for any handset with an SD slot -whether micro, mini or full-sized. In2Pay supports devices irrespective of the location of the slot andincludes a security feature that disables the integrated antenna when the product is not in use to avoidunintended contactless transmission.Despite of the visible interest and attempts to introduce the technology, NFC faces significant challengesfor wide and fast adoption, due to lack of supporting infrastructure, complex ecosystem of stakeholders,and standards. Some phone manufacturers and banks are enthusiastic; however, there is still a high levelof uncertainty and fragmentation of viewpoints between the different market players.4.2.7.2 Contactless Radio Frequency Identification (RFID)This is a technology that uses radio waves to transfer data from an electronic tag called an RFID tag.Some RFID tags can be read from several meters away. An RFID reader transmits an encoded radiosignal to interrogate the tag. The tag receives the message and responds with its identificationinformation. Similar to NFC, RFID can be used for both mobile PoS payments and some mobile P2Ppayments. However, RFID’s longer transmission range may cause RFID-enabled m-payments to be lesssecure than NFC-enabled ones.4.2.8 BluetoothBluetooth is a proprietary open wireless technology standard for exchanging data over short distances(using short-wavelength radio transmissions in the ISM band from 2400–2480 MHz) from fixed andmobile devices, creating personal area networks with high levels of security. This standard, which hasbeen used in the past 17 years, is seen as many industry players as the natural competitor to the NFCtechnology.With the development of the latest Bluetooth 4.0 version, the Bluetooth communication becomes splitinto two categories: high speed and low energy. The high-speed version relies on Wi-Fi allowing for highdata transfer rates, but using more power. The low energy version uses the legacy Bluetooth protocols,but is meant to draw considerably less energy than previous versions of Bluetooth. Switching between 60
  • 61. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services the two can be done on the fly using a dual-mode chip. This means having the possibility to execute high-speed data transfers on demand with very low power usage over time. Dual-mode Bluetooth 4.0 chips has been already produced from manufacturers including Atheros, CSR, and Texas Instruments. The cost increase over the more typical Bluetooth chips we see in today’s gadgets is thought to be negligible. One of the main market protagonists considering the implementation of Bluetooth instead of NFC for the next generation m-payments enabled mobile devices is Apple. Hence, the question arises, what would be the market acceptance of the other players, if a major market share holder such as Apple, makes a definitive step like adopting Bluetooth and surpassing fully NFC and other payment technologies. 5. Generic Architecture for M-Payments In this section a simple, illustrative conceptual scenario, describing the relationship between the major participants in a collaborative m-payment model, is demonstrated. Customers and merchants would like to use an m-payment service. The m-payment application service provider provides the necessary technical infrastructure to facilitate m-payments and acts as an intermediary between the financial institutions and MNOs. The service provider registers users who would like to avail of the m-payment service. The users, both customers and merchants, have to be registered with the m-payment app service provider prior to using the app and the underlying service. At the time of registration the service provider collects the bank account details, credit card details or profile credit details of the customer and merchant as well as their valid digital certificates. In the case of a real-money transaction the mobile phone numbers of the customer and the merchant are mapped to their respective bank accounts. The app service provider maintains this mapping. The users are provided with a client m-payment app, such as the mobile wallet, that in our example concept case is either resident on their phones or else in the SIM card. The app may be provided to users over the air or preinstalled on the device. The mobile wallet will normally interact with the app service providers’ server. Example Usage Case The mobile phone user communicates with a merchant and makes a purchase, e.g. buying a ticket from an airline over the phone. The merchant obtains for example the phone number of the customer and initiates the m-payment transaction request stating the amount for which payment is required. The customer confirms the request and authorizes the payment. The app service provider receives the authorization and verifies the authenticity of the customer. Then he debits the customer account and credits the merchant account by interacting with the bank. Once the electronic funds transfer is successful a confirmation message is sent to the customer and the merchant advising them of the debit and credit respectively. The Certifying Authority that also is shown in Figure 19 supplies digital certificates for the users in the system to provide security. This model can be extended to handle the interaction between the app service provider and the financial system taking into account interbank payments and settlement. 61
  • 62. Figure 19. Generic Architecture for M-Payments Mobile Phone User Telecom Operator Premium Direct Carrier/ WAP/G Phone-based SIM-based Dual Contactless Bluetooth SMS/USSD Bank Billing RPS Applications Application Chip NFC and RFID Certifying M-Payment Application Bank Authority Service Provider Merchant / Brand5.1 Public Key Infrastructure and SIM CardsEvery user of the system is listed in a publicly available directory. For example Elena wants to send amessage to another user John. Elena first obtains John’s public key from the directory and encrypts themessage using it. Since only John has the private key only he can read the message (after decryption)and no one else. Further Elena can digitally sign the message. In this scheme anybody can verify thatElena did indeed send the message and the message was not altered during transmission.A Certification Authority maintains the publicly available directory, which is responsible for issuing andrevoking digital certificates. A digital certificate contains the public key of a user in the system. Thisframework is known as public key infrastructure (PKI).A user normally maintains his or her private key confidentially in a personal secure environment. SIMcards have the ability to store and process private keys. In terms of key management, there must be anadministrative system to issue key pairs to genuine citizens in a country.5.2 ProtocolsA sample protocol that describes the transaction between customers and merchants, each using his orher mobile phone and an m-payment application service provider as an intermediary (cf. generic 62
  • 63. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services architecture for m-payments in the section above) is outlined in this section. It is assumed that customer and merchant are registered as users with the m-payment application service provider with their respective bank account details and both of them have valid digital certificates. An example for the transactions is illustrated below. 1) Service Request Customer  Merchant The customer makes a service request to the merchant. 2) Product Options Merchant  Customer The merchant sends his product options and his certificate. 3) Product Selection Customer  Merchant The customer selects a product. The selection is signed by the customers’ private key. 4) Payment Request Merchant  M-Payment Application Service Provider  Customer The payment request, containing the invoice amount, is signed using merchant’s private key. Customer can verify that the merchant is genuine by using his certificate (sent earlier in step 2). The M-Payment Application Service Provider also authenticates the merchant before passing the payment request to the customer. 5) Payment Authorization Customer  M-Payment Application Service Provider The customer authorizes the payment request by digitally signing the authorization using the customers’ private key. The M-Payment Application Service Provider transfers the money from the buyers’ account to the seller’s account by communicating to the bank(-s). 6) Payment Confirmation M-Payment Application Service Provider  Customer The M-Payment Application Service Provider confirms payment made to the merchant. M-Payment Application Service Provider  Merchant The MASP informs the merchant for the successful payment. The customer and the merchant can verify their respective bank accounts as to whether payment has been made. M-Payments’ Initiation Both the consumer and the merchant can initiate payments [43], although consumer payment is becoming the most common since it suits the personal nature of mobile devices. 63
  • 64.  Consumer focused (Issuer-centric)The consumer chooses to make an m-payment. They interact with the payment server using their mobiledevice to authenticate and authorize the payment. They are subsequently presented with status showingconfirmation of the successful transaction or failure with a reason. Extensions to this include NFC orContactless Payment options using additional hardware built into the mobile phone. The customer and hisagent are in charge of handling the interaction with the mobile device while the merchant may be totallyunaware of the mobile nature of the payment. It is usual that the customer-issuer interaction is mobile,but the rest may be based on existing wired infrastructures and standardized e-payment protocols. Merchant focused (Acquirer-Centric)This is similar to the consumer-focused scenario. In this model the merchant and its respective agent areresponsible for managing the interactions with the mobile device.This is similar to mobile electronic funds transfer at point of sale EFTPOS terminals except it is processedvia a mobile device.6. Regulatory IssuesExamples of regulations that affect the m-payment ecosystem include, but are not limited to:  Data protection laws  Competition laws  Consumer protection laws  Telecommunications regulation  Environmental regulations  Tax regulations  Financial regulations  Payment system regulationsThese regulations may impact how each component in the m-payments business models’ ecosystemfunctions. The respective authorities may require e.g. the specifying of the requirements for loggingtransactions, or defining what information must be displayed at the time of a purchase. The scope andgranularity of the various regulations varies widely from country to country and a mobile wallet providerneeds to take this into account when operating in a specific territory. The EU legislation is provides aclear definition regarding a number of those regulatory areas. The key goals are to guarantee thesuccessful development of a strong internal digital market, which in the current case would meancompetitive m-payments’ market. Antitrust laws in the EU are intertwined with a number of these otherdomains, guaranteeing that European players will have a valuable proposition on the internationalmarkets. Questions regarding the right of universal access, support for R&D, harmonization of mobiledata and roaming prices, open-source technologies development, standardization, interoperability, andetc. are key for the mobile industry evolution. However, the goal of enabling the creation of competitiveEuropean products and services would also mean that a lot of new regulatory challenges would emerge.And in order for EU to demonstrate leadership on a global scale, these need to be tackled with agility,such as regarding the usage of virtual currencies, already mentioned in the previous section. 64
  • 65. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services V. Challenges and Opportunities 1. Key Attributes of M-Payments A number of key attributes define the challenges and opportunities related to the implementation of m- payments. As earlier a number of functional characteristics were introduced, here the aim is to present their impact and possible outcomes with the development of m-payment solutions. M-payments face a number of techno-economic issues. Mobile devices are constrained with respect to cryptographic functionality, which is one of the main requirements for payment systems. There is also a difference in performance when mobiles using a wireless link are compared to desktop computers connected over a fixed line to the Internet. Thus, this would make impossible the access to the existing payment infrastructure from a mobile device in the same way as from a PC. This makes it difficult to design an m-payment solution and furthermore requires a know-how exchange and cooperation between different stakeholders in the mobile network and electronic payment area. 1.1 Consumers as Users: Acceptance and Adoption For the acceptance and the adoption of m-payment services and products by the consumers, 3 key attributes with their challenges and opportunities need to be taken into account. The first the level of the level of convenience of the developed products and the related services, second is their cost and the third is their security level. The few consumer surveys on attitudes toward contactless and m-payments revealed that convenience is a major attraction. A U.K. survey asked consumers who liked m-payments with immediate funds transfer what they found attractive about the payment method [51]. The three most-cited reasons were related to convenience: ease of use - 34%, overall convenience - 25%, and speed - 23%. 1.1.1 Convenience When referring to the convenience of payment methods, consumers may have different aspects of the attribute in mind. These aspects include portability, flexibility, speed, ease of use, and ease of setting up and learning to use each payment method.  Portability M-payments will likely be more convenient than traditional payment methods in terms of portability. A mobile device will eliminate the inconvenience of carrying multiple plastic cards in a physical wallet by enabling consumers to link m-payments to those card accounts. Because of this enhanced portability, consumers may have access to more card accounts than is feasible with plastic cards. These card accounts could include credit, debit, and prepaid cards, as well as merchant-specific loyalty cards (good only at the store issuing the card) that entitle the user to rewards or discounts. Finally, to the extent m- payments can be used for microcredit transactions, they will eliminate the inconvenience to consumers of carrying coins and currency.  Flexibility In addition to various card accounts, a mobile device can carry other payment methods, such as PayPal, that allow the consumer to pay directly from a bank account through a service provider platform. From 65
  • 66. the many payment instruments loaded on the mobile device, consumers can choose a paymentinstrument that best fits a type of payment. Many consumers may want to fund payments from a debitcard account or directly from a bank account for everyday, micro purchases, or from a credit cardaccount for occasional large purchases. To maximize their rewards, some consumers also may want theoption of paying with a merchant-specific card rather than a general-purpose credit or debit card. M-payments can make it easier for consumers to choose among these options at the PoS. SpeedThanks to their accessibility in one-stop shop virtual mobile wallet, the users would be able to choosefaster both their preferred payment account and payment method and to make the transfer faster. Inaddition certain m-payments technologies have a faster transaction speed.With contactless payment methods like e.g. NFC the consumer needs only to tap/wave the contactlessdevice in front of a reader to make a purchase. According to some estimates, this payment method canbe 15 seconds to 30 seconds faster than swiping a traditional card and signing the receipt or entering aPIN [51]. This small difference in transaction speed can be important in mass transit scenarios orhighway toll gates where consumers need to move quickly through the checkout point. Setting up and Learning CurveThe main challenge in the acceptance and adoption of m-payments could be the difficulty for someconsumers to set up and learn to use. Compared with traditional payment methods, such as checks ordebit and credit cards, setting up m-payments will require more steps and a certain level of digitalliteracy. Consumers may need to download an m-payment application and link multiple accounts in it.Consumers will also need to devote time and effort to learning how to use the app. However, these setupand learning processes are likely to be much less burdensome for some consumers than others. Inparticular, younger consumers familiar with the technology of mobile devices may find it easy to learnhow to use m-payments. Indeed, for such consumers, downloading an m-payment application andputting a payment account in the application may be faster and less burdensome than waiting for thedelivery of physical devices, such as plastic cards.Conclusion on Opportunities and ChallengesOverall, convenience is likely to encourage consumer adoption of m-payments. They surpass traditionalpayments in portability and flexibility. For certain types of transactions, such as mass transit, m-transactions have a substantial speed advantage.However, m-payments could be harder for some consumers to set up and learn to use than traditionalpayment methods. Still, this factor will be less important for many consumers, especially the younggeneration, which are already used to the mobile technology specifics. Both regression studies andconsumer surveys indicate convenience is important to consumers in choosing among payment methods[51]. As a result, the convenience advantages of m-payments could be a major factor inducingconsumers to use them. 66
  • 67. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services 1.1.2 Cost The cost of using a payment method includes two components: the fees paid to payments providers, banks, or merchants for using the method and the costs of equipment and materials needed to use the method. Empirical evidence on the importance of the costs to consumers is strong. The cost of investing in equipment needed for m-payments is likely to vary significantly across different consumers’ groups, depending on the type of mobile phone the consumer has and which mobile technology is used. To make a m-payment with NFC technology, even consumers who already have smart phones would have to purchase a new phone or a specialized NFC-sticker (which works only on certain legacy mobile phones models) because few smart phones are now equipped with the technology. However, it may be inappropriate to view the entire cost of upgrading to an NFC-enabled smart phone as a cost of making NFC- based m-payments because the phone may have other valued features. For other m-payment technologies, such as WAP or 2D barcode, the equipment cost will depend on whether the consumer already has a smart phone. Surveys indicate that about 40% of mobile phone users owned smart phones by mid-2011 [52]. These consumers would not need new equipment to make m-payments with non-NFC technology. The other 60% of mobile phone users would have to pay to upgrade from a regular phone to a smart phone. As before, it would be inappropriate to consider the entire cost of switching to a smart phone as a cost of making m-payments because consumers would likely derive other benefits from upgrading to a smart phone. The ongoing costs to consumers of using m-payments are likely to be the same as or lower than for traditional payment methods. One cost is related to the data plan subscription fee to a mobile carrier. The amount of data communication used for m-payment transactions, however, is likely very small compared to that for other activities, such as accessing a social networking sites or sending and receiving SMS, photos, and videos. Thus, most consumers may see no substantial increase in the cost of their data plans when they start making m-payments. Another ongoing cost consists of fees consumers are charged by banks, payment providers, or merchants for using the various payment instruments loaded on their mobile phones. The relevant cost for the consumer is the fee, net of any rewards or discounts for using the payment instrument. Several regression studies have found that consumers respond to differences in costs to a significant degree when they choose payment methods. In a study of consumer payment choice in Spain [51], card rewards significantly increase a consumer’s likelihood of preferring to pay with a card rather than cash in six of eight sectors considered. For most payment instruments, the net fee is the same whether or not the card is linked to an m- payment method, suggesting that m-payments would have neither an advantage nor a disadvantage over traditional payment methods. For example, if a consumer’s bank charges a monthly debit card fee, 67
  • 68. the consumer will have to pay the fee whether the debit card payments are made using a mobile deviceor a plastic card.As noted earlier, however, m-payments allow consumers to access a wider range of payment instrumentsat the PoS, including general-purpose payment cards and merchant-specific cards that entitle theconsumer to rewards for purchasing from the merchant. The resulting flexibility in choice of paymentmethod may allow the consumer to lower the net fees he is charged for making payments. For example,if the net cost of paying with a debit card rises because the card issuer reduces its rewards, a consumermay be able to switch to a merchant-specific card with more generous rewards that is already loaded onhis mobile phone.Conclusion on Opportunities and ChallengesThe effect of cost on consumers’ willingness to use m-payments is two-sided. In order to use m-paymentservices, the majority of consumers will have to pay to upgrade their mobile phones to use m-payments– either by buying a next generation mobile device (especially if NFC is the primary technology) orupdating their current device.Despite of that, the ongoing costs for m-payments could be lower than for traditional payments. This isdue to consumers’ greater flexibility in choosing the payment method with the lowest fees net of rewards.If one of these effects dominates, the impact on consumer adoption could be substantial, since theempirical evidence indicates that consumers respond strongly to differences in costs across paymentmethods.1.1.3 SecurityAn important aspect of the security issues is linked with the trust and credibility of the solution provider.Under the new models proposed we have scenarios under which the m-payment technology provider isnot the same as the billing organization or he is the same as the billing organization, but he doesn’t havecredibility history with the consumer base. Upon subscribing to an m-payment system, users areexpected to place inherent trust in the system. Giving access to a checking or savings account to asoftware company is not the same thing, in most users’ minds, as giving that same access to an alreadytrusted entity, such as a bank. Hence the build up of credibility of m-payment players towards the usersmakes the basis for the consumer adoption.According to recent researches [51], consumers consider two aspects of security in choosing amongpayment methods are considered as the most important for consumers. The first one is the likelihood offraudulent transactions. Such fraud occurs when someone uses a payment instrument to complete atransaction that has not been authorized by the account holder. The second one is the extent to whichlaws and regulations protect consumers from financial loss when unauthorized transactions occur.A number of surveys have found concern about security to be the most-cited reason for consumers’reluctance to adopt m-payments. In a MasterCard survey 62% of respondents said that they needconfirmation that their personal information is safe to be comfortable making a mobile transaction. In 68
  • 69. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services another questionnaire, 63% of respondents thought their personal data were more vulnerable when using a mobile phone for purchases than when using a debit/credit card [53]. A third survey found that 94% of respondents would be willing to make an m-payment if they knew it was secure.  Likelihood of fraudulent transactions M-payments have the potential to significantly reduce the likelihood of fraudulent PoS transactions. One way is by facilitating dynamic authentication of the transaction at the PoS. In a number of countries the authentication for card payment transactions has traditionally relied on static data, such as a card account number, expiration date, PIN, or signature. Such data does not change from transaction to transaction. If intercepted by a criminal, static data can be used to make fraudulent payments. Hence, m-payments should be capable to provide a user-controlled transaction- specific privacy support. The last implies that anonymous payments should be possible as that’s possible with cash payments. A possibility for the improved transaction-specific privacy is the usage of a chip or a card embedded in a mobile device can enable dynamic authentication, in which data unique to each transaction is used to authenticate the payment device. According to the Smart Card Alliance, data of this type cannot be used to make fraudulent transactions, even if intercepted by a criminal [42]. M-payments are especially suited to dynamic authentication. The reason is that for example NFC- equipped mobile phones will have the necessary chip, and NFC-enabled merchant terminals will be able to communicate with the chip to perform dynamic authentication. It is important to note, however, that dynamic authentication is possible with other payment methods. The required chip can be installed on a plastic card, as is common in other countries. Visa and MasterCard have recently announced plans to promote the use of such cards10 by giving merchants stronger incentives to accept them. Another way through which m-payments could reduce the likelihood of fraudulent transactions is through password protection of the mobile phone and of the m-payment application on the phone. Such password protection provides an extra layer of security similar to the traditional cards’ payments. Furthermore, technologies such as mPKI, biometrics, and mobile digital signatures will have to be further advanced in order to be easily integrated into m-payment architectures. Such advances in mobile ICTs may also enable new forms of authentication, such as facial recognition, e.g. the payments startup FaceCash created a mobile app that enabled participating merchants to view a photo of the consumer before approving the PoS purchase [53]. 10 These cards are often referred to as EMV cards. When Visa announced its plans to encourage use of the cards, it noted that the change would not only allow dynamic authentication but also promote mobile payments. The reason is that the same terminals required to accept EMV cards could also be used to accept NFC-enabled m-payments [52] 69
  • 70. While m-payments have the potential to reduce the likelihood of fraud, such benefits will be realized onlyif mobile devices as a whole are protected from malicious software and hacking attacks. To fully exploitthe convenience of m-payments, consumers may store large amounts of sensitive payment informationon their mobile phones. The concentration of such information in a single place may pose a greater risk oftheft by criminals than when consumers carry cash, checks, and plastic cards in their wallets. Althoughpayment information stolen from a phone could not be used to make payments that rely on dynamicauthentication, that information might be used for other types of fraudulent payments or to be resold tointerested commercial parties for marketing purposes.Stolen information might be used to make unauthorized transactions with magnetic stripe cards orunauthorized transfers from a consumer’s bank account through service provider network as PayPal.Avoiding such information theft will require strong security for mobile apps, operating systems, andhardware. It will also require a commitment and necessity by consumers to update their systems andapps. Consumer protection by fraudulent transactionsThe second core security aspect is the consumer protection from loss when fraud occurs. Under currentlaws and regulations, most consumer protections depend on the payment instrument and not whetherthe instrument is used with a mobile device. For example, whether a fraudulent purchase is made with acredit card or with an m-payment method linked to a credit card, the consumer’s maximum liability wouldbe the same. For a debit card, the consumer’s liability could be higher (different in various countries), butas in the case of a credit card, it does not depend on whether the fraudulent payment is made with amobile phone. For still other payment methods, including prepaid cards and accounts at paymentintermediaries such as PayPal, laws and regulations provide the consumer limited or no protection againstloss from fraud, bringing up the question of liability. Once again, though, the lack of protection does notdepend on whether the method is used with a mobile phone.Despite that consumer protections for most payment instruments are the same independent from theinstrument format, m-payments could worsen consumers’ actual or perceived protection against fraudlosses in two ways. First, the only consumer protections for m-payments linked to a mobile phone bill ormobile prepaid account are those provided by the national laws and independent regulators’ rules, whichdiffer between countries. Second, the greater flexibility that m-payments provide to consumers inchoosing among payments methods - all with different consumer protections - may create greateruncertainty and confusion in their minds about their liability for fraud losses. This potential for confusionhas led to calls by some consumer advocates for a consistent set of consumer protections for m-payments independent of the method used to make the payment.Conclusion on Opportunities and ChallengesSecurity is likely to dissuade consumers from adopting m-payments initially due to concerns about thesafety of a relatively new and unproven payment method. Uncertainty about consumer liability for lossesfrom fraudulent m-payments may reinforce these concerns. However, both regulators and industry maybe able to take measures to reduce, if not eliminate, this uncertainty. In addition, m-payment solutions’ 70
  • 71. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services providers may be able to prove to consumers the safety benefits of such mobile features as dynamic authentication, multilayered password protection, and authentication by facial recognition. If so, security could eventually become an attribute that encourages rather than discourages consumer adoption. 1.1.4 Privacy M-payment should be able to provide anonymous transfers, as it is possible today with cash. A consumer may want that both his financial information to remain confidential and his personality to stay anonymous in the transaction. In todays traditional transactions it is impossible to associate a transaction that has been paid for, to a particular customer, as it is not possible to derive any personal information about the customer from this transaction. In the electronic and mobile world, this is more difficult to achieve. Part of the reason is that every message that is used in the transaction can be traced to a source address. Complex cryptographic protocols are needed to achieve such anonymity or unlinkability. At the same time allowing anonymity creates additional problems, namely in the way of ensuring authenticity, proper authorization and fair- exchange. In the mobile world this shapes out as even more complex, since the mobile devices are associated to belong to a concrete user. Consequently the danger of extracting personal and confidential information from the source address, which the transaction itself may provide the access, is a rather big challenge in the m-payment systems. 1.1.5 Merchants Evidence on the effect of merchant acceptance on consumer payments choice is limited but confirms that consumers are more likely to adopt payment methods with high merchant acceptance. Researchers found that a specific card brand, such as Visa or MasterCard, is more likely to be a consumer’s first choice if a large number of local merchants accepts cards of that brand [51]. Consumer surveys have generally not asked consumers about the influence of merchant acceptance on their payments choices. An exception is a recent survey by Javelin [52] about contactless payments, which finds modest evidence that acceptance matters to consumers. Among respondents who indicate they are unlikely to use a contactless device, 16% say they are worried that the merchants they usually shop with will not accept contactless payments. Conclusion on Opportunities and Challenges Few brick-and-mortar stores are currently able to accept NFC-based m-payments, and recent steps by Visa and MasterCard to push merchants in that direction will not take full effect until 2015. Therefore, unless alternative technologies such gain speed, merchant acceptance of m-payments is likely to remain low in the near term. Though empirical evidence on the subject is scant, it indicates that low merchant acceptance of a payment method makes consumers less willing to use the method. Thus, for at least the near term, this attribute of m-payments will tend to discourage consumer adoption. 71
  • 72. 1.2 Merchants as Users: Acceptance and AdoptionIn some cases, a merchant may be able, but unwilling to accept the payment method. For example, themerchant may consider the fees charged by the card issuer or payment provider to be too high or fearthe payment will not be completed as promised. In other cases, a merchant may be unable to accept apayment method. For example, a merchant may not have invested in the equipment needed to processthe payment or may not have signed up with the payment provider or payment network that will processthe payment.Since m-payments are relatively new, they are much less likely to be accepted by merchants thantraditional payment methods, such as cash, checks, or debit and credit cards. Initially, merchantacceptance is likely to be lowest for high-cost technologies such as NFC. The recently announced plans byVisa and MasterCard [54] to encourage acceptance of chip cards is likely to increase the number ofmerchants able to accept NFC-based m-payments because terminals that accept chip cards can alsoaccept NFC-based payments. However, the card networks’ new merchant incentives will not be fullyeffective until October 2015. Merchant acceptance of m-payments based on other technologies, such asWAP or 2D barcode, is not as dependent on merchant willingness to invest in new equipment becausethese payments can be accepted with current equipment. In this case, however, merchants will generallyneed to enroll with the m-payment provider in advance in order to accept the m-payment. To be willingto take that step, the merchant must be convinced that the new payment method will generate enoughadditional revenue to outweigh the fees charged by the m-payment provider.1.2.1 ConvenienceWhen referring to the convenience of payment methods, merchants may have different aspects of theattribute in mind. Same as the ones of consumers, but in a slightly different context, these aspectsinclude portability, flexibility, speed, ease of use, and ease of setting up and learning to use eachpayment method. PortabilityM-payments will likely be more convenient than traditional payment methods in terms of portability ofthe m-payment reader. These readers may be mobile phones themselves representing PoS terminals,new generation of mobile devices, or reading terminals for payments. In addition, employees of SMEswould also be able to use their business mobile phones to make work-related payments. In the case ofmicropayments, this would be especially useful, due to the accountability of their transactions. FlexibilityIn addition to various card accounts, an m-payments reading device can accept other payment methods,such as PayPal. Merchants will be able to propose a range of different payment instruments, amongwhich consumers can select the one, which they prefer. Merchants would be able to cost effectivelyaccept micropayments, especially if they manage to conclude effective partnership with the billingorganization(-s) in the m-payments business model. In addition they would be able to offer merchant-specific card rather than a general-purpose credit or debit card, linked to different loyalty or couponingprograms, which from their side are based on virtual currencies. 72
  • 73. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services  Speed Thanks to their accessibility in one-stop shop virtual mobile wallet, the merchants would be able to accept the consumers’ preferred payment account and payment method and to make the transfer faster. In addition certain m-payments technologies have a faster transaction speed, which will decrease the queuing time in e.g. shops, as we already mentioned.  Setting up and Learning Curve The main challenge in the acceptance and adoption of m-payments could be the difficulty for the merchants/shop managers to set up and learn to use the associated devices. Merchants may need to download an m-payment (reader) application and link their accounts in it and the respective allowed payment methods for the consumers. Conclusion on Opportunities and Challenges Overall, convenience is also likely to encourage merchants’ adoption of m-payments. M-payments surpass traditional payments in portability and flexibility. For certain types of transactions, such as mass transit, m-transactions have a substantial speed advantage. 1.2.2 Cost The cost of using a payment method includes two components: the fees paid to payments providers and/or banks for using the method and the costs of equipment and materials needed to use the method. Similarly to consumers, the importance of the costs to merchants is strong. The cost of investing in equipment needed for m-payments is likely to vary significantly across different merchants’ groups, depending on a number of factors such as number and size of the stores/sales points, the number of visitors and etc. As mentioned earlier in relation to the consumers’ stakeholder group, the cost of equipment varies strongly between emerging m-payments technologies such as NFC and upgrading options such as QR codes, WAP, Bluetooth and etc. The ongoing costs to merchants of using m-payments are likely to be higher than for traditional payment methods, if not negotiated with the respective billing organizations. Since most of the payments made will be for micro purchases, especially in the case of bank-centric billing model the interchange fees for bank/credit cards’ transactions need renegotiation to be cost-efficient for all parties involved. Conclusion on Opportunities and Challenges The effect of cost on merchants’ willingness to use m-payments is two-sided. In order to use those services, the majority of merchants will have to pay to upgrade their payments acceptance devices, or to buy new ones. Also the ongoing costs for m-payments could be higher than for current payments’ methods, due to the nature of purchases made. If one of these effects dominates, the impact on merchants’ adoption could be substantial. 73
  • 74. 1.2.3 SecurityLike consumers merchants also consider two main aspects of security in choosing among paymentacceptance methods. The first one is the likelihood of fraudulent transactions. The second one is theextent to which laws and regulations protect merchants from financial loss when unauthorizedtransactions occur.Conclusion on Opportunities and ChallengesSecurity is likely to dissuade merchants from adopting m-payments initially due to concerns about thesafety of a relatively new and unproven payment method. Uncertainty about merchants’ liability forlosses from fraudulent m-payments may reinforce these concerns. However, both regulators and industrymay be able to take measures to reduce, if not eliminate, this uncertainty. M-payment solutions’providers may be also able to prove to merchants the safety benefits of such mobile features as dynamicauthentication, multilayered password protection, and authentication by facial recognition. If so, securitycould eventually become an attribute that encourages rather than discourages merchants’ adoption.1.2.4 ConsumersMerchant acceptance is the likelihood that merchants will accept a payment method when the consumerwants to use it to pay for products or services. Similarly to the view of consumers, merchants would beunlikely to pursue the usage of a new technology if they don’t have the guarantee that the consumer willhave the interest and possibility to use it.Conclusion on Opportunities and ChallengesIf the consumers’ challenges could be overcome, the merchants would also embrace the idea of m-payments technologies.1.3 Technological StandardsCurrently, there is no consensus among the players in terms of m-payments standards setting. Certainstart up companies have proposed standards and they hope to make these de facto by being first moverswith strategic advantage and early market selection. The battle over standards occurs at the firm leveland at the inter-consortia level [49].1.3.1 Interoperability StandardsM-payment solutions should be available regardless of the location of the user, i.e. whether he is roamingabroad or not. In the EU it is required that a cross-border electronic payment system is available in allmember states, and that it is as efficient as any domestic system, hence requires to answer to certaininteroperability requirements. Any global m-payment system should be able to handle cross-borderpayments in any currency and at any place. For such a service to be widely acceptable, it should bepossible to make cross-border payments almost as easily as local payments. Furthermore m-commercethat expects online universal payment services has to be capable of integrating, in a user-transparentfashion, P2P, B2C, and B2B, domestic, regional, and global coverage, low-value and high-valuepayments. 74
  • 75. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services In order to ensure this all-inclusiveness and fair access, m-payments require cohesive technology standards that can provide a universal mode of payment. Consolidation of standards in the m-commerce arena is critical and it will enable producers and consumers to make investments that produce value. The lack of standards will give rise to lot of local and fragmented versions of interoperable m-payment billing models offered by different stakeholders. Especially in financial services, interoperability has always been a highly controversial topic, and its progress has been uneven and in many cases rather slow. Standardization around the payment service should make interconnection of networks and systems technically easy and cost-effective. M-payment component development should be based on standards and open technologies that will allow any system to interact with another system on a global scale at all levels (e.g. any mobile with any PoS, any payment software should run on a wide range of mobiles etc.). The number of acceptance points is critical. Therefore, standardized solutions that can be composed of plug-and-play components are a must. 1.3.2 Security Standards Standards need to address security and privacy concerns of consumers as well as interoperability between various implementations. Standards formation is a process of negotiation between various stakeholders; it is rather more political negotiations in nature rather technical discussions. First movers benefit from this situation by creating de facto standards and major market share. For widespread use and customer acceptance of m-payment services, both perceived and technical levels of security should be high. For customers, privacy should not be compromised and there should be no possibility of financial losses. For businesses, customer authentication is important. As per the general framework of any secure messaging system - confidentiality, integrity, non-repudiation and authentication should be guaranteed by the m-payment services [50]. The most important implication is that every secure transaction involves 3 separate entities (i.e. provider, operator and user) and thus requires both provider and user to trust the additional middleman (i.e. operator). This trust is required for the following reasons: • None of the end parties (i.e. provider and user) can be sure that its connection is really continued in the secure way behind the operator proxy. • The content of the connection is being decrypted and encrypted in the operator’ s proxy, making it vulnerable to possible attacks by both “trusted” operator and third parties (i.e. hackers). The end parties have to trust the operator to ensure and enforce an adequate security policy concerning both remote and physical access to the proxy server and its premises. • No end-to-end authentication is possible. Both real currencies and virtual currencies’ solutions raise the same privacy and security issues that arise in any e-commerce context, such as compliance with the e.g. data security standards. The reason for that is that consumers must provide their payment information when purchasing virtual currency. In addition, complex virtual currency and virtual wallet programs involve more complex privacy and security issues, such as joint ownership or sharing of customer information and assumed merchant of record 75
  • 76. responsibilities. Each program warrants thoughtful allocation of responsibility for privacy and datasecurity issues, as well as related fraud management.1.3.3 Performance LimitationsM-payment systems also have to consider the inherent performance problems of the mobile environment.Firstly, the bearer service in wireless networks is rather limited when compared to fixed networks, i.e.less bandwidth, longer latencies and more errors. Secondly, cheap mobile devices produced for the massmarket have several restrictions, e.g. concerning the input and output of data (small keyboard anddisplay), processing power, and memory. Thus, payment protocols suitable for desktop computers infixed networks cannot be deployed in wireless systems without modification. Third, the mobile handsetsproduct lifecycle is considerably shortened and it’s characterized with the fast appearance of new mobiledevices.1.3.3.1 Network ResiliencyMost financial transactions need networks supporting high transmission speeds, which support their realtime requirements. In addition, any disruption of telecommunications services will critically affectfinancial services processes. Therefore network resiliency is an important consideration for the financialsector.The first step towards achieving resiliency is to have redundancy in the network, which means ensuringthat a single point of failure does not disrupt services. Redundancy is achieved by having multiple routesfor network traffic from the source to the destination, multiple telecommunications circuits and/oralternative communications technologies. Although redundancy ensures a significant degree of faulttolerance, by itself it cannot ensure availability in the face of deliberate attacks.To protect against attacks, diversity needs to be incorporated into the network infrastructure. Properdiversity management can ensure that redundant assets do not share common vulnerabilities.Beside mentioned network requirements regarding electronic and m-payments, especially in m-payment,wireless networks begin to implement personal mobility and service provider portability in addition toterminal mobility. Personal mobility is the ability of the user to access their personal services independentof their attachment point or terminal. Service provider portability allows the user and/or the terminal tomove beyond regional mobile network. The user will be able to receive his personalized end-to-endservices regardless of the current network, within the limits of the visited networks service offerings.This freedom then requires the coordination of a wide range of service providers, compatibility ofbackbone networks, and network operators agreements.1.3.3.2 Database RequirementsElectronic payment systems, including m-payments, process massive amounts of data every day. Tomanage this data, techniques must be improved and further developed in order to be able to store andretrieve data quickly and efficiently, and to ensure the long-term sustainability of the system. 76
  • 77. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services As the volume increases, the technological infrastructure must be able to scale up appropriately. Storage and retrieval performance of data depends not only how the data is logically organized but also on the underlying hardware that is used to store the data. Database engines are used to support its functionalities. Hence, the first step towards designing such powerful databases is to understand the logical structure of the data and design the database schema properly. As in the case of network support, any disruption to database support will have catastrophic consequences for the financial information concerned. Thus, resiliency and fault-tolerance must also be built into such engines. 2. Key Attributes of Virtual Currencies A number of key attributes define the challenges and opportunities related to the implementation of nonconventional, virtual currencies. 2.1 Currency Regulations The regulations for players in the financial industry are different from those governing the telecommunications industry, which means that each industry has its own particular standards body to comply with [49]. The clear-cut financial systems allowing the exchange of goods and services against money currencies such as the euro, dollar, etc., stays in front of a challenge of a new kind. The appearance of virtual currencies at first was not seen as a treat to traditional financial exchange systems but as purely marketing tool to increase customer loyalty. However, with the development of digital commerce platforms, digital products and services and the ubiquity of access to them via a number of technologies, this slowly began to change. The concept of virtual currencies slowly began to take shape, moving the focus from customer loyalty towards the actual exchange of goods and services with value both in the digital and the real world. Suddenly, the unconventional currencies such as the virtual ones came in the interest focus of policy- makers, decision-makers, non-governmental organizations, industry, consumers, and etc. Concerns related to the devaluation of classic financial currencies and the associated to them systems together with the danger of illegal activities related to these digital tokens appeared. Today many governments and intergovernmental organizations still don’t have a full legislative answer to these valid questions connected with the opportunities, threats, weaknesses and strengths of these digital systems. However, with the explosion of ICTs and especially the mobile ICTs a number of attractive new services and products became accessible through both conventional and nonconventional currencies. This trend has an immense impact over the creation of new business models related to m-payments, and hence would be a key differentiating element in the case studies to be presented. 77
  • 78. Opportunities and ChallengesOne of the first challenges to appear is when a virtual currency can be redeemed for cash, particularly ifit involves more than one company. At that point the financial services laws come in play, including thoseused to prevent money laundering. However, the real challenge is when the virtual currency movesinternationally, which is quite common among corporations, as well as social media groups. For examplea new Japanese payment services law regulates these kinds of transactions. In Japan, the key is whenthere are points and those points have value. Gambling laws apply, too. If a person is gambling, itseither legal or illegal. Companies facilitating service have to undergo screening.According to Forbes [77] “the cynical view is that when the government is taking a cut of the gamblingproceeds, its legal.” But most of this gambling is done through micropayments, similar to the kind oftransactions many consumers have grown accustomed to completing on iTunes. With enough volume, itadds up quickly. In 2010 the value of virtual currency was calculated to reach about $1.6 billion.There are laws that apply with real implications for liability: As the popularity of the Issuers virtualcurrency increases, the Issuer considers allowing users to redeem the virtual currency with third-partyvendors, building P2P transfer capability, and offering full cash redemption. As virtual currency shiftsfrom being a prepayment for goods or services redeemable with one company to a widely accepted proxyfor real currency or a means of transmitting money between various participants, issuers need toconsider state and federal services laws such as money transmitter laws and money service businesslaws. Financial services’ laws involve significant compliance obligations, costly and time-consuminglicensing requirements, and civil and criminal penalties for non-compliance.Virtual currencies instead of credit cards?It is interesting to note that in countries for example like China, where few consumers own a credit card,the virtual currencies or gift cards to use over US-platform like iTunes could be the best solution. For theperiod until Apple started offering Chinese yuan-denominated payments, virtual currencies to bepurchased on local platforms like Taobao were flourishing by supporting the low-cost international tradebetween Chinese consumers locked-in to download Chinese apps on a non-Chinese platforms. In thissense the virtual currencies could also have a positive impact in the fast facing of the internationaltransactions’ challenges depending on factors like the country’s financial state for example.2.2 Service and Product Offering: Conventional and Virtual CurrenciesDespite of the rather negative concerns in relation to conventional currencies, the virtual currencies havethe potential to be used in a conjunction with them for the creation of new offerings. As an example wecan take the prepaid cards. The primary markets for prepaid cards are unbanked people. This umbrellaterm is used to describe diverse groups of individuals, typically with poor credit ratings, who do not usebanks or credit unions for their financial transactions. The advantages of prepaid debit cards includebeing safer than carry cash, worldwide functionality due to e.g. Visa and MasterCard merchantacceptance. This results in demolishing the need to worry about paying a credit card bill or going intodebt, the ability for anyone over the age of 18 to apply and be accepted without regard to credit qualityand the ability to direct deposit paychecks and government benefits onto the card for free. 78
  • 79. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Such prepaid cards are especially suitable for the purchase of virtual currencies. As earlier explained, virtual currencies today are mostly used to purchase virtual goods within a variety of online communities like social networking websites, virtual worlds, online gaming platforms and etc. Hence virtual currencies have their biggest consumer base within the young generation. In result the purchase of virtual currencies with advantageous prepaid cards targeting these consumer groups would result in a mutually beneficial cooperation model for all of the stakeholders. 2.3 Consumers as Users: Acceptance and Adoption A number of consumers are already actively using virtual currencies as an exchange token within e.g. virtual reality worlds, social networks, e-commerce platforms, and as an in-game currency, or as a loyalty points system of exchange. And while this presents an opportunity for the consumers, it can soon result in being seen as a threat. In the first case, the consumers can buy the virtual currency with real, conventional money or win it through some mechanism on the e.g. virtual world, game or social network where they are being used. Then they can either use it to purchase virtual goods, services or increase their ranking within these virtual reality worlds or games. They can also trade on their own with these currencies on the platforms where they are used. However, key thing is that once purchased, these new currencies can’t be redeemed back into a real-money currency. Hence, they have worth only on the platform where they are used. In the second case, the consumers can win points, credit or any other form of a virtual currency by participating in loyalty programs or actions over specialized platforms. This gives a new dimension since they start-receiving discounts on material goods and services having value in conventional currencies or can even win promotional bonuses for their active engagement with a concrete brand, e.g. checking-in in a bar where a famous beer brand has a promotion. In both of these examples two key findings are visible: consumers are locked-in within digital platforms or loyalty programs where these new virtual currencies have a unique worth. The danger comes first with the risk of frauds, e.g. consumers appear to have their real world bank account hacked to purchase and use virtual currencies, which then can’t be tracked. Second, the growing number of these different new currencies being used for many different reasons and related to many different commercial activities of brands, e-commerce platforms and games becomes too complex for the mass of consumers. The threat is that the more disconnected new systems appear the more the consumer wouldn’t be able to subjectively measure the actual worth of what he is purchasing this currency for and become victim of commercial actions. Often consumers believe that when they participate in loyalty programs they are the winning side, while they don’t realize for what are they trading their participation. E.g. loyalty programs give a direct access to the merchants and brands to the consumer purchases’ history and hence preferences and personal data or the checking-in in a local bar can create a danger for the consumer to be openly tracked. 79
  • 80. 2.4 Merchants as Users: Acceptance and AdoptionSimilarly seen, merchants have both advantages and disadvantages in their decision to use virtualcurrencies.This could be explained with the existing of two key scenarios related to the merchants: one where heuses a currency, which is not his and one, where he owns his own currency.In the first scenario the merchants won’t own the power function while using a virtual currency. Forexample a merchant can be present on a platform such as Facebook, but he wouldn’t be the gatekeeperbecause he doesn’t own the platform. Hence he won’t own the exchange system of this virtual currencybehind it. What he owns is the offering for a product or service sold on the platform, which can bepurchased only with the platform’s virtual currency. However, the amount of the currency is decided bythe currency creator, which in this case is the platform owner. Conclusively, the value of the respectivevirtual can shift a lot for both merchants and consumers using it and they don’t have much control overthat.In the second scenario when the merchant owns the control over the worth of a virtual currency such asin loyalty programmes. Taking the opposite side of the consumers’ interest, for them this gives an accessto the consumers’ purchase history, which might be a good source of new revenue streams. However,even then a number of legal questions are still under debate and the interested parties on internationallevel have controversial opinions about that, which results in different regulatory frameworks in differentparts of the world.2.5 Solution Providers as Users: Acceptance and AdoptionTurning it the other way around, a number of solution developers create applications containing anumber of loyalty programs in itself. Seen as that, they don’t have any control over the exchangesystems of these currencies, but they control an important customer relationship by offering a mash-upof currencies and programmes in one solution. They create a new proposition with a value added, whichallows them to benefit from the customer basis of these loyalty programmes through e.g. in-appadvertising, branding opportunities and etc.3. Market Development: The Rise of New Products and ServicesThe successful development of the business models for m-payments and the acceptance of virtual m-currencies would create the needed conditions and basis for the creation of new products and services.Other industry players would be able to use the capabilities offered by successfully implemented andwidely adopted m-payment systems, allowing the usage of both traditional currencies and newnonconventional ones such as the virtual currencies.This would be an opportunity for the creation of interlinked online and offline services and products. Suchexamples include social networks for dating, loyalty programmes, m-commerce platforms and etc., 80
  • 81. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services allowing the trade (buying and selling), bartering, winning, or redemption of a number of different content types:  M-Ticketing: booking plane tickets, concert tickets, transport tickets, etc.  Digital goods: downloadable music or video content, value-added information, virtual currencies, and etc.  Digital services: music or video content to be streamed, mobile cloud (SaaS) services, and etc.  Purchasing physical goods and services  Voting: TV voting polls, TV games 81
  • 82. VI. Business Models’ Overview and Analysis 1. Business Models based on M-Payments The business model in the business model In the previous sections the core aspect of the m-payments business models, being the 4 possible billing models, defining the existence and level of the gatekeeping function related to the payment transactions, have been identified. Based on the analysis of the state of art examples it has been concluded that the most widely-accepted by all business stakeholders’ billing model is the Collaborative one. There is however a second key reason explaining why the different interests seem at best while taking the balanced approach of collaboration. The key to understand the novel character of the most successful case studies based on m-payments is to look at their business models as well. The notion is that the most successful new business model designs based on m-payments are the ones, which are also implementing the concept of collaboration as the basis of their framework. In order to do explain and prove my theory two types of business models build up on different configuration of stakeholders – both business players and external stakeholders will be introduced. These are the models of Value Chain and Value Network. The term “value chain” was first introduced by Michael Porter in 1985 [44]. The value chain analysis describes the activities an organization performs and links them to the organizations competitive position. Traditionally the value chain relates to a single chain of activities and usually applies to one firm operating in a specific industry. The value chain analysis describes the activities within and around an organization, and relates them to an analysis of the competitive strength of the organization. The key take away is that the main control for the creation of a product or service is within the organization and all other business partners remain outsiders in the niche of their own business, depending on their role for the organization, responsible for the creation of the concrete product or service. Otherwise explained the value chain model is based on the vertical partnership of businesses, give their input for the realization of a product or service, being developed by an organization. These external businesses are seen as suppliers rather than equal partners, which puts them in a dependent position towards the respective organization aiming to put on the market a concrete good or a service. In opposition to that, a value network is a business analysis perspective that describes social and technical resources within and between businesses similar to the model of a multienterprise. The value network is a key element of the Business Modeling Methodology, outlined in Chapter III. It spans over the industries of the numerous e-commerce partners that participate in an end-to-end collaboration [45]. This interconnected network of cooperating business partners also includes the numerous business processes carried out by the many collaborating partners. They contribute to and make up the value network, where all of the partners are interrelated and dependent on each-others input. 82
  • 83. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services However still, despite of being interdependent, the value network scenario leaves room for the creation of a gatekeeping function among the partners. Hence, all new business models aiming the creation of products and/or services based on m-payments will also be linked to the chosen by them m-payment, which has an internal business model on its own. If a new model for an innovative service based on m-payments is created, it will directly dependent on the m-payment business model itself. If for example the m-payment model is based on operator-centric billing, the chosen technology is NFC, and the usage of both conventional and virtual currencies is possible, then this would be one possible scenario with very concrete implications and issues. A completely different scenario would appear if the chosen m-payment model is based on peer-to-peer billing, the chosen technology doesn’t allow proximity payments, and the system works primarily to allow the purchase of virtual currencies. Hence, even if a new service or a product is to be based on the collaboration with several partners, including the m-payments partners’, within a value network it still could be the case that indirectly one of the m-payments partners internally within the m-payments business model plays the gatekeeper’s role. This would directly affect the creation of a new product or service and all the parties involved, if the payment system’s gatekeeper can decide on key issues relevant for the new value proposition. In conclusion this indirect control maintained by just one partner in the new value network – the m- payments gatekeeper – could be seen as creating a new form of an internal value chain even though the new product’s/services’ players aim for a fair collaboration in the spirit of the introduced business modeling methodology. A solution would be if the internal business model for the m-payments business players were also collaborative. This would mean a fair distribution of interests in their own business models and avoid the potential appearance of strong monopolistic role. That would result in maintaining the fair participation of the m-payments and the related to those m-currencies providers within the to-be- created business model’s value network. 2. Overview of EU Case Studies A number of m-payment pilots and initiatives are in motion around the world. Different geographies have different levels of progress and maturity in different applications with m-payments: while several African countries make use of m-payments for P2P remittance and to reach the unbanked, Asian countries like Japan and South Korea are well advanced in the use of the mobile phone for Point of Sale payments [69]. In these geographies the mobile device is evolving into a single device with multi-payment apps. Europe is experimenting with Point of Sale NFC payments and mobile wallets. In 2010 Western Europe initiatives based on m-payments are mainly offered using SMS, but currently many using NFC are being tested [69]. The two technologies are the most popular, however the number of WAP/Internet pilots has gradually increased in the second half of 2010. 83
  • 84. In Europe a number of pilots have been launched to test NFC in relation to public transport [72] andparking. Some of those initiatives focus solely on transport, while other also include POS payments inshops. SMS is also available to pay for public transport tickets or for purchasing tickets to events or forparking. Examples of these EU initiatives are enlisted in the Table 7 bellow.Table 7. Service Technology Pilot or Commercially available Cases NFC Pilot Payter (Netherlands) Mobile Parking SMS Available Paybox (Austria) NFC Pilot London Underground (UK) Touch&Travel (Germany) Mobile Ticketing SMS Available Beep (Netherlands) Paybox (Austria) NFC Pilot Rabo Mobiel (Netherlands) Mobile PoS SMS Available Paybox (Austria) Luup (Gemany, Norway) Mobile remittance SMS Available Mobipay (Spain)The overview of the most prominent existing as pilots or commercially available EU initiativesindependent from their m-payments technology – WAP/Internet, NFC, USSD, and etc. is presented in theTable 8 bellow.Table 8. Austria – Paybox Netherlands - Rabo SMS betalen Belgium – M-Banxafe Norway – Telenor Belgium – Proximus M-Pay Norway - Mobile Axept Belgium – Proximus SMS Poland - MPay Wallet Belgium - Ping.Ping Portugal - MB Phone Czech Republic - Czech Telefonica O2 Romania - ING – MasterCard trial Estonia – Cinemon Cinemas Ticketing Romania - Good.bee France - Disneyland Paris NRC trial Spain – Mobipay France – Payez Mobile Spain - Banamex SMS Banking France – TreiZen Spain - NFC Telefónica France - Tag Pay Spain - Presto Park&Go Germany – MobilZahlen Spain - Banco Popular Español Germany – NetBank Swizerland - PostFinance SMS Banking Germany – RMV mobile ticketing Swizerland - Epay24 Germany – StarMoney Handy UK – AvantixMetro Germany - T-Mobile Streetgiggs UK – Mobile theatre ticketing service Germany – Touch&Travel UK – Monilink Germany - 12Pay UK – Payforit Hungary – MobilFizetés UK – RingGo Mobile Italy – PosteMobile UK – Trinity Mobile Netherlands – Beep! Mobile Tickets UK - MoBank Netherlands - Rabo Mobiel: mobile banking & Europe – Atlas Interactive SMS billing NFC 84
  • 85. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Paybox Austria www.paybox.at - Austria Description Paybox offers mobile POS payments at vending machines or petrol station. In addition services such as mobile parking, ticketing for public transport, tickets for (music) events, toll ticketing, and remittance (money transfer) are also available. Users have two payment options. The fist is to use a Paybox account with a direct debit on the customer’s account, the second - via the mobile phone bill, which is currently possible only for Mobilkom and ONE postpaid customers. In the case of transport tickets for example, Austrian railway operator OBB has teamed up with Paybox Austria, Mobilkom Austria and ONE, to offer customers tickets using their mobile phones. The OBB mobile ticket can be purchased via SMS or through the Vodafone live! portal. Mobilkom and ONE contract customers can pay for their tickets through their monthly phone bills. Similarly, in the case of mobile parking tickets, consumers can pay for their parking ticket with an SMS sent from their mobile phone. The case is a good example for a mobile-operator centric billing model, which is rather successful in terms of uptake and usage of m-payment services. Service Mobile Ticketing; Mobile Parking; Mobile Remittance; Mobile PoS M-Payment SMS, NFC Technology Secured through Paybox PIN per SMS; SMS confirmation; combination of voice call and Paybox PIN Cost for usage Annual subscription fee Partners MNO: ONE and Mobilkom; Merchants: lottery, casinos, web shops, retail shops, cigarette vending machines, ÖBB Railways, Wiener Linien; Technology: NXP Semiconductors, Nokia Additional The Austrian MNOs Mobilkom Austria and ONE are the owners of Paybox information Austria. Mobilkom has been leveraging Paybox for 3rd party content and mobile services since 2001. As per mid 2009, Paybox has over 5 million customers and is accepted at 20,000 locations. All post-paid subscribers are automatically enabled for the service. Potential One of the bigger m-payment players, large client base. Subscription fee is a hurdle for diffusion. 85
  • 86. Touch&Travelhttp://www.touchandtravel.de/ - GermanyDescription Touch&Travel is a mobile ticketing scheme running in a pilot phase in Germany since 2008. Using NFC the ticketing system enables mobile ticketing based on NFC-enabled mobile phones. Deutsche Bahn and NXP together with other project partners co-operated in the pilot phase and are now joining forces to successfully bring Touch&Travel into the market. The service has been introduced nationwide for all rail passengers in November 2011. The Touch&Travel system turns mobile phones into tickets as passengers use their mobile phones to check-in when they get on the train and then to check-out again when they reach their destination. All station platforms and bus stops have touch point terminals installed. The length of the journey and the ticket price are calculated at the end of the journey, and the customer receives a regular statement of journeys made. As of March 2012 users can take advantage of Touch&Travel using a smartphone app for Android, iOS and Symbian Anna. It will allow them to purchase tickets on their mobile, change their travel route spontaneously and pay free of charge by direct debit to their mobile bill to one of the MNOs - Telekom Deutschland Telekom, Vodafone or Telefónica Germany (O2). In addition customers can collect the virtual currency for the DB loyalty program - bahn.bonus-Punkte. The points can be used to get rewards from more than 500 travel and products’ offer in the loyalty program.Service Mobile Ticketing, LoyaltyM-Payment NFCTechnologySecured through SIMCost for usage Free of charge during trialPartners Partners for the project are public transport providers Verkehrsbetrieb Potsdam, Berliner Verkehrsbetriebe, as well as technology partners Atron electronic, smart card developer Giesecke&Devrient, Motorola and semiconductor manufacturer NXP.Additional In July 2007, Vodafone Germany selected Paybox as the processor to launchinformation a national m-payment system in Germany. With the paybox Mobiliser Products (Money Mobiliser, TopUp Mobiliser, Mobile Wizard), Vodafone Germany enables their customer to exploit the whole potential of m- commerce for secure payments in the Internet, m-commerce, content and NFC payments.Potential The initiative has assumed that NFC-phones would become widely available in 2010. This is not the case. A technology push product. 86
  • 87. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services London Underground Mobile Ticketing - UK Description The NFC London Underground Mobile Ticketing pilot has been launched in November 2008. For the trial approximately 500 O2 customers received a Nokia 6131 NFC-enabled mobile phone on which the Oyster card and credit cards were available. The O2 mobile wallet on the NFC-enabled handset consisted of the Oyster card for paying public transport tickets and a Barclay’s card for PoS payments. Participants were able to test travelling on London’s public transport system but also making purchases in retail outlets. The mobile allowed riders to load “pay as you go” value by touching their handset on Oyster ticket machines in tube stations or at Oyster ticket stops and calendar period passes to an Oyster card instance provisioned to the phone. Participants were able to tap and go on all Oyster-equipped Underground, bus, and tram fare terminals. Given the lack of contactless payment awareness at the time, it is not surprising that the Oyster functionality created the highest customer satisfaction and interest. Contactless usage and terminal deployment were far more prevalent in transit than retail during this period, and twice as many users expressed strong interest in the transit features as compared to retail payment features. Overall, more than 90% of participants reported their expectations had been exceeded, with more than 50% stating that the presence of transit payment on the phone would influence their choice of handset. Patrons repeatedly cited the benefit of “not getting caught out forgetting your Oyster Card at home” as a key benefit. Being able to see the Oyster balance was also highly ranked by consumers feature. Initially Transport for London (TfL) has stated it will support NFC payments on mobile phones in 2012 in their bus and underground network. Following the bus deployment, TfL had to begin the complicated task of replacing the 20,000 Oyster contactless card readers that have been in operation on the London Underground since 2002. However, these plans to introduce open-loop contactless and NFC payments in the UK’s capitals’ public transport network have been delayed until at least 2013 [73]. New, up-to-date contactless card readers allowing EMV contactless card users and NFC-enabled mobile owners with NFC operating in card emulation mode will be available from next year. Service Mobile Ticketing M-Payment NFC, Mobile Wallet Technology 87
  • 88. Secured through SIM / Password / PinCost for usage N/APartners Transport for London, Transys/Cubic, a mobile network operator O2, Nokia, Barclaycard, Visa Europe, and AEGAdditional -informationPotential The success potential in using NFC is low. Londons underground network requires very fast transactions, while the existing Oyster Card authenticates passengers in less than 300ms. A consideration of the TfL director of customer experience Shashi Verma is that linking to the secure element embedded in the MNO’s SIM slows transaction times beyond the acceptable 500ms. In addition the steps to install an NFC wallet are too complex for the average consumer.Rabo Mobielhttp://www.rabomobiel.nl/ - the NetherlandsDescription In 2006 the Dutch Rabobank became the first Western European bank that has launched its own mobile virtual network operator (MVNO) service - Rabo Mobiel. Its key service “Rabo SMS betalen” contains a mobile wallet MiniTix and subscription based m-payment method. MiniTix allows money transfers up to 150EUR/month by sending an SMS to the respective mobile number. The mobile wallet is connected to a Dutch bank account. For example, the customer uses “Rabo SMS betalen” to make a money transfer to another person. The customer sends an SMS to a short code to the mobile phone number of the intended recipient of the money and the amount. After that a confirmation will be sent to both sender and recipient. Payments are sent over a secured line. At the end of the process of making a payment, a codeword has to be inserted to confirm the payment. The next year Rabo Mobiel conducted an NFC trial of mobile contactless payments and is ran 19 different trials of various sizes, including payments in a supermarket (C1000), a school, a fast food restaurant, vending machines, and cinema ticketing. Rabobank’s goal is to replace some of today’s cash and debit card payments with one device that could provide all this in a compact package. It is a good example for banc-centric model of billing. In the Netherlands the NFC Pilot ‘Pay with your mobile phone at C1000’ was conducted in 2007 and 2008. During 6 months, 100 customers of the C1000 supermarket in the small town of Molenaarsgraaf could pay for their shopping by means of their mobile phone. They had to by simply hold a 88
  • 89. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services mobile next to a reader at the checkout. They then entered a PIN code as usual into the POS reader and the transaction was complete. In addition to the possibility to pay, bottle deposit receipts could also be saved on the phone. The deposit could be deducted at the checkout, credited to a Rabobank account, or donated to charity. The pilot was using a payment solution that utilizes the existing PIN system in which the debit card had been replaced by a mobile phone. The initiators wanted to use the pilot to achieve an NFC technology breakthrough. Service Mobile Ticketing; Mobile Parking; Mobile Remittance; Mobile PoS M-Payment Mobile Wallet, SMS, NFC Technology Secured through SIM/Account/ None Cost for usage Apps are free to download; The “Rabo SMS betalen” service is free to use. The money loading into the mobile wallet account, the receiving money and transferring money from account to ‘ordinary’ is free of charge, with a minimum of 1EUR for a transfer. The sender is charged for the SMS by the MNO. Partners MVNO – Rabobank; NFC Pilot “Pay with your mobile phone at C1000” - RFID Platform Nederland, LogicaCMG, Schuitema (C1000), Rabobank, KPN and NXP Semiconductors. Additional - information Potential Excellent potential and a good example for a collaboration model between business stakeholders. CityZi Pass http://www.cityzi.fr/ - France In partnership with three other providers, Orange launched a trial of CityZi Pass in May 2010, in the city of Nice [75], followed by Strasbourg. CityZi is a large-scale pre-commercial roll out of mobile contactless services. It enabled mobile subscribers to purchase and validate tickets on public transport, purchase items in shops, and accumulate loyalty points. It also provides tailored local information such as news and bus timetables. Description French MNOs wanted to market the first NFC handsets for use by several thousand customers. For the first time in France customers discovered a multiservice offer of mobile contactless services, delivered through the support of the operators. The first commercial mobile NFC handsets were marketed to 500,000 residents in the Nice metropolitan area along with a set of mobile NFC apps. 89
  • 90. In the summer of 2010 Orange sold the phone in its nine stores in Nice and nearby Manton and Beau Soleil, with approximately 30 retailers selling the NFC enabled phones. The scope of the initiative covers the entire urban community of Nice, including the city as well as the 24 neighboring communes. The first services on offer within the framework of “Mobile Contactless Nice” includes:  Public transport: ticketing, passenger information  Promotion of local heritage and education: e-campus project  Trade and retail: local bank transactions, mobile loyalty and couponing programs  Cultural/tourist information: museums Waving the phone over a tag takes the browser straight to a pre- programmed page, providing access to real-time tram and bus times, TV listings, news, weather, restaurant booking and directory enquiries. Overall, if the consumer buy e.g. an amount of transport tickets not exceeding € 10, they will be charged on his mobile bill. All other in-store transactions done with an m- payment will be deducted directly from the consumer’s bank account. For example the Nice transport company, Lignes D’Azur, which operates buses and trams in the city has an NFC option similar to Oyster in London. Cityzi customers can load up an Bpass Java application on their phone with credit to make journeys through an over the air transaction. Tickets can be bought at €1 each, or for €2 with parking, or in packs of €10. Each tram journey costs €1 and users can have credit of up to €19 on a phone at any one time. The price of the tickets is charged to the subscriber’s phone bill and the mobile operator runs a revenue share with Lignes D’Azur. The phone can be used to take the tram or bus for journeys even if the phone’s battery is flat, although you need a connection to add a ticket to the phone.Service Mobile Ticketing; Mobile Parking; Mobile Remittance; Mobile PoS; Mobile LoyaltyM-Payment NFCTechnologySecured through SIMCost for usagePartners Orange-France, SFR, Bouyges Telecom, NRJ Mobile, BNP Paribas, Credit Mutuel, Veolia, Samsung, Gemalto, OberthurAdditional In 2011 the contactless communications service confirmed its good start byinformation passing the milestone of one million French people with a Cityzi mobile, making more locations anxious to replicate the program. Today, 10 cities 90
  • 91. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services have NFC projects. To the already massively equipped Nice and Strasbourg are added Bordeaux, Caen, Lille, Marseille, Paris, Rennes and Toulouse, which will cater for contactless technology on a large scale. Potential The operators are convinced that France is involved in a massive development that is expected to reach 2.5 Cityzi mobiles by late 2012. The project is among the boldest NFC implementations in Europe to involve telecom service providers, and its success could have broad ranging implications for the emerging technology. The key success factors are the scale of the trial and the roadmap for further deployment and the involvement of multiple national and local partners across the eco-system - both industrial partners and service providers. 3. Belgian Case Studies 3.1 Ping.Ping - www.pingping.be The Business Model The business model of Ping.Ping is a successful implementation of a two-sided market model or a platform model. The green cells in the business modeling design matrix demonstrate the most possible combination of parameters. The four main aspects would be thoroughly examined. Table 9. Ping.Ping business modeling design matrix CONTROL PARAMETERS VALUE PARAMETERS Functional Value Network Financial Model Value Proposition Architecture Combination of Assets Modularity Cost (Sharing) Model Positioning Concentrated Distributed Modular Integrated Concentrated Distributed Complement Substitute Distribution of Vertical Integration Revenue Model User Involvement Intelligence Integrated Disintegrated Centralized Distributed Direct Indirect High Low Revenue Sharing Customer Ownership Interoperability Revenue Sharing Model Model Direct Intermediated Yes No Yes No Price/Quality Lock-in 3.1.1 Value Network The Ping.Ping platform is open to all mobile phone users in Belgium and also offers different services such as loyalty programs, e-tickets and discount vouchers. The key findings bellow regarding the business model of Ping.Ping have been deducted within the expert interview with Stijn Vander Plaetse, former Vice President of Innovation at Belgacom and the current founder of two of the most innovative mobile start- ups in Belgium - Digitopia and TagTagCity. 91
  • 92. The organizations participating in the value network are the presented in the Table 10 bellow.Table 10. Partners ORGANIZATION SECTOR Belgacom MNO Tunz Technical and Financial service provider Delahize Retailer Coca-Cola Retailer Accor Services Technology ProviderInternal Business Actors In February 2009 the Belgacom group aquired 40% of Tunz SA. Tunz is an institution that deals with electronic money, governed by the Belgian law of 22 March 1993 on the status and supervision of credit institutions. Its activities consist of issuing payment instruments in the form of electronic money. Tunz is approved by the Banking, Finance and Insurance Commission (CBFA), which isresponsible for prudential supervision. The acquisition matched up with an agreement between both par-ties to develop a single mobile micropayment brand in Belgium.The brand was launched officially at the beginning of March 2009 under the name Ping.Ping. Under thispartnership, Tunz is the sole technological and financial partner behind the Ping.Ping ecosystem whileBelgacom ensures the commercial deployment of the service on the national territory. Under this agree-ment all of the applications developed by Tunz have been customised under the Ping.Ping brand. Combination of AssetsThe essential resources needed for the successful realization of the CoMobile platform are concentratedwith the lead partner Belgacom. Hence, as both provider of the platform and as a main billingorganization, Belgacom has the platforms gatekeeping role. Vertical IntegrationThe CoMobile platform project presents a good example for close collaboration between a MNO with othertechnology providers, demonstrating the changing nature of telecom companies. However, with theacquisition of the majority of the shares of his key technology partner, the structure becomes verticallyintegrated. Customer OwnershipThe Control over Customers is one of the two main parameters for the definition of a platformtypology. The customer base of the platform is automatically generated by the customer base ofBelgacom Group, which makes the Customer Ownership direct: every owner of a Belgacom accountautomatically gets a Ping.Ping account, however that doesnt mean that users will actually be interestedto use this account. 92
  • 93. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services The platform value would solely depend on the unique cooperation with partners such as retailers, schools, libraries, media companies and etc. If the external business players agree to integrate their services and products on the Ping.Ping platform, this actually leaves the assets ownership to them. In conclusion the platform could be categorized under the Broker Platform typology. 3.1.2 Functional Architecture  Modularity The platform has a modular design. This modularity allows the delivery of a continuous stream of incremental innovations around the common product architecture of Ping.Ping. From a cost-benefit perspective the open nature of the platform will allow the integration of further features, the optimization of the current structure and the possibility to co-relate better to the solutions of new external business actors – developers as suppliers or others. For PingPing, Tunz.com delivers the mobile wallet platform together with a number of specific developments and customizations in order to extend the services proposed by Belgacom, such as:  Seamless integration with the billing system of Belgacom: purchases carried out by PingPing users can be carried on directly on their mobile phone invoice or pre-paid credit  Interface with banks allowing users to connect their mobile wallet with their bank account  Mobile Applications for iPhone and Android to make payments to any desired payee, to check the account balance and etc. Tunz.com’s unique quality is that we combine a state of the art m-payments system with an e-money license, which solves the regulatory burdens for many mobile operators. Moreover, Tunz runs the service in a full white-label model leaving the whole customer ownership and market proposition to our partner. There are three possibilities of using the mobile wallet platform of Ping.Ping: First the user can send an SMS to a short number. This short number can be found at the place of purchase. Then the user will receive a confirmation SMS for his purchase. In the second case, the user can put a NFC-sticker with a microchip, the Ping.Ping tag, on the back of his mobile. This tag can be obtained online, after the creation of an online account. It allows making a payment by scanning the tag over a reader at the cash desk. This enables smartphones to take advantage of the NFC-technology, secured by a PIN code. Finally, the user can pay via the website of a merchant who accepts Ping.Ping as a payment option. In all transaction scenarios no confidential data is sent over the Internet. Messages sent via mobile telephony are automatically encrypted and protected by strict telecom security rules, ensuring maximum security.  Distribution of Intelligence The vertically integrated value chain of the product, owned by the Belgacom Group, demonstrates the centralized nature of the intelligence distribution. 93
  • 94.  InteroperabilityThe platform has an interoperable architectural design, allowing the cooperation with external parties.3.1.3 Financial Model Cost Sharing ModelThe core costs in relation of the platform are within Belgacom, however the close cooperation withexternal business parties allows them to decrease these costs. Revenue ModelTwo revenue sources exist in the revenue model of Ping.Ping. The one is based on the cooperation withexternal business players, who want to propose their offerings over the platform.The other is directly linked to the end-users. Currently there is no cost for consumers for the usage ofPing.Ping: no registration, transaction or termination fees are charged for using it. They pay only aminimal sum for sending and receiving certain text messages: a text message to and from the numbers4315 and 4400 costs €0.15 (incl. VAT) and a text message to and from the number 4340 costs €0.40(incl. VAT). In the case when users top up their PingPing account via Online Banking, Visa, MasterCard orAmerican Express, they are billed the standard costs linked to these payment methods.In accordance with the CBFA provisions, the maximum amount of a conventional currency a user canhave in his PingPing wallet is currently €2,500. Currently there are 3 billing models available, where themaximum size of the micropayment transfer is 25€/transaction and for digitized meal vouchers -€150/transaction. In relation to the three main billing models, implemented by Belgacom the mainrevenue sources can be estimated.- Operator-centric: The Proximus customers get automatically linked to their mobile telephony bill or prepaid card, which means their payments are billed on their telecom bills. For prepaid customers, the amounts due are immediately deducted. This is the biggest and direct revenue source for Belgacom.- P2P-centric: Users with a Keytrade account can link their bank account directly to their Ping.Ping account. During each transaction, the amount will immediately disappear from their Keytrade account.- Bank-centric: Users can top up their accounts many manually by bank transfer, with a credit card - VISA, American Express, MasterCard, or with Mister Cash/Bancontact.The last two cases are not disclosed; hence it’s a question of internal agreement between the MNO andthe respective financial institutions. Revenue Sharing ModelIn the case of the operator-centric billing modes, the MNO has the biggest revenue share. Under theother two billing modes – the financial institutions get the man revenue share. 94
  • 95. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services 3.1.4 The Value Proposition The PingPing Belgacom Group brand is a mobile micropayment platform, allowing users to purchase products and services such as parking tickets, food and beverages in supermarkets, school/company canteens or vending machines, P2P-payments, movie tickets, online content such as mobile versions of newspapers and magazines, bus tickets, car-wash and more using their mobile phones. In March 2009 the operator Belgacom launched in Belgium an m-payments trial based on NFC- technology. In order to pilot the NFC service, which was added to the m-payments service, Belgacom partnered with the Belgium food retailer Delhaize, provider of service vouchers to the companies Accor Services and Coca-Cola. In the collaboration with Accor Services, 500 Belgacom employees received NFC tags to be linked to their mobile phone numbers. This had the goal to enable them to make contactless payments using electronic Ticket Restaurants meal tickets stored in their PingPing accounts at restaurants equipped with contactless readers. At present, the commercialization of Electronic Ticket Restaurants is not possible in Belgium due to the lack of guidelines, which regulate their use. Figure 20.  Positioning Ping.Ping has an ambiguous positioning. As a micropayment mobile wallet, on one hand it provides a substitute for classic payment methods - being both e-payment products, card-based or cash. On the other hand, as a platform allowing the access to a number of products and services it is complementary to other industry participants, interested in distributing their products and services over new channels and reaching new customer base. 95
  • 96.  User InvolvementThe level of user involvement at the stage of early adoption is especially important. Due to the novelcharacter of both the payment solution, which is the basis of the platform and the platform as such, thereis a need of creating the right understanding among consumers about Ping.Ping. The platform is growing,however, at a slower pace, considering both its unique nature and the small geographic market. With theimplementation of services linked to loyalty programs, the platform increases its potential for fasterconsumer and merchants (and other 3rd party businesses) adoption. Intended ValueThe primary attributes that the platfrom is intended to possess, that together constitute the intendedcustomer value are the rare combination of all the three parameters together: customer intimacy,product leadership, and operational excellence.As the most important among the three could be considered the customer intimacy, based on thelocking-in of the owned by Belgacom, Proximus, mobile network user community. The more Proximusclients start to use the Platform with its direct billing to their mobile accounts, the more revenue will begenerated for the Belgacom Group. Bellow you can find few use case scenarios, demonstrating thesuccessful partnership between Ping.Ping and external business partners. The criterion for productleadership is based on the users’ access to such premium services and products, which are also a successfactor for the overall growth of the platform. The further development of competitive offerings using theplatform as a market for products and services will lead to the increase in the importance of theoperational excellence of Ping.Ping. However, at the current moment, this is still not the case due to thelimited number of offers, available to consumers.Catering at SchoolThe Provinciale Hogeschool Limburg pays with PingPing for catering. PingPing is integrated in thestudent/personnel card so students/employees no longer need cash to pay. The Student Council hasrecently surveyed the students about their opinion on Ping.Ping [76]. The overall opinions were positive -78% of the 552 participated students considered the new solution a worthy successor of Proton.At the LibrarySince recently BIB Hoeilaart became one of the first libraries in Flanders accepting payments viaPingPing. This was made possible with the support PIMC, the exclusive partner for the development ofthe Ping.Ping payment system in libraries. The switch to full self-service decreased the length of thequeues, allowing customers to pay even from home. The solution saves time for the receptionemployees, who can focus more on the reception and customer service.CarwashWith Ping.Ping customers can pay their carwash by sending an SMS in more than 40 wash centres of theFleet-Wash network (http://fleetwash.poi-locator.be/). All, which is required, is to send an SMS to 4315,which costs 0,15 euros/SMS, and to follow the instructions at the entrance of the carwash. The non-Proximus users can also use this service by creating a Ping.Ping account and choosing another of theavailable payment options. 96
  • 97. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services 3.2 CoMobile The following example from Belgium for the creation of the CoMobile platform is in an ongoing project status. All of the findings bellow are based on the project documentation, expert interviews with participants in the project, and brainstorming meetings related to it. The final decisions regarding the business model have not been made by the time of submission of this thesis. The Business Model The business model of CoMobile is an example of a two-sided market model or a platform model, currently being in a process of fine-tuning and implementation. The green cells in the business modeling design matrix demonstrate the most possible combination of parameters. The four main aspects would be thoroughly examined. Table 11. CoMobile business modeling design matrix CONTROL PARAMETERS VALUE PARAMETERS Value Network Functional Architecture Financial Model Value Proposition Combination of Assets Modularity Cost (Sharing) Model Positioning Concentrated Distributed Modular Integrated Concentrated Distributed Complement Substitute Distribution of Vertical Integration Revenue Model User Involvement Intelligence Integrated Disintegrated Centralized Distributed Direct Indirect High Low Customer Ownership Interoperability Revenue Sharing Model Intended Value Direct Intermediated Yes No Yes No Price/Quality Lock-in 3.2.1 The Value Network The goal of the CoMobile project is to develop a platform to combine mobile Internet with social networking. The research institute IBBT supports the development of the CoMobile business model together with the project’s consortium members. The organizations participating in the value network are the presented in the Table 11 bellow. 97
  • 98. Table 11. Partners ORGANIZATION SECTOR Belgian MVNO focused on mobile internet. 36% of Mobile Vikings isCityLive (Mobile Vikings) owned by the international MNO KPNAlcatel-Lucent Technology Provider for the telecom industry ClearPark is an innovative payment software and service company, aClearPark daughter company of Clear2Pay The successful Belgian Social Network, with over 70 millionNetlog subscribersCARDWISE Issuer of prepaid cardsThe Belgian Direct Marketing BDMA has approximately 450 member companies active in publicity,Association direct marketing and retailAs defined under the platform business model two project has 4 main actor groups: the internal businessactors – the owners or gatekeepers of the platform; the external business actors – the merchants/brandsusing the platform for their loyalty program or to make group offering sales propositions; the consumersas end-users and finally the public domain stakeholders. Hence, the two main business roles are of theones of the platform controllers’ and of the ones who bring the value to the platform.Internal Business ActorsCurrently Alcatel-Lucent and Clear2Pay are developing a Mobile Wallet Solution, allowing payment,loyalty and couponing services. Both Netlog and Mobile Vikings make use of this Mobile Wallet. Moreover,Netlog is planning to offer Cardwise prepaid credit cards to its community. Finally BDMA is joining theproject, as the solutions developed in CoMobile can bring important added value to their members. Combination of AssetsThe essential resources needed for the successful realization of the CoMobile platform are spreadequitably across the multiple partners. Hence, assets are distributed. Vertical IntegrationThe CoMobile platform project presents a great example for cross-sectoral collaboration. That’s also thereason for the distributed combination of assets of the different business partners.Although the project has a focus on a particular thematic, its national territorial scoping allows it to becomparable in terms of potential with the Cityzi project in France. As previously concluded one of thecore reasons for the Cityzi success was in the cross-sectoral collaboration of big and small players. Thisleads to the conclusion that the CoMobile project gives the same indication for success due to thedisintegrated value network configuration of the partners. Customer OwnershipThe Control over Customers is one of the two main parameters for the definition of a platform typology. 98
  • 99. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services With the convergence of the two loyalty programs of Mobile Vikings and Netlog, the customer base of the platform automatically increases. This will guarantee the maintenance of the trusted customer relationship. Based on the fact that the foreseen loyalty program will be a closed loop model this will result in a customer lock-in. Since the CoMobile has as its core value the close customer relationship - basis also for its unique Value Proposition, the main Customer Ownership will be direct. Hence, the internal business players will have the control over the customers. However, the platform would mainly depend on the unique propositions - be it a loyalty program of a brand or a group selling offer of a merchant - of the external business players. In conclusion the platform could be categorized under the Broker Platform typology. 3.2.2 Functional Architecture Technologically, the development of the platform and the linked loyalty systems is feasible. However, although functionally tangible, the CoMobile platform leads to a number of legal questions. CoMobile will enlist and analyze all regulatory requirements that apply to the proposed platform, in particular in the area of data protection, privacy, e-Money and e-Commerce.  Modularity The technical framework of the platform foresees a modular design. The modularity will allow the possibility of delivering a continuous stream of incremental innovations around a common technological platform, or product architecture. From a cost-benefit perspective the open nature of the platform will allow the integration of further elements, the optimization of the current structure and the possibility to co-relate better to the solutions of new external business actors – developers as suppliers or others. The CoMobile project would result in the development of the following components part of the overall technical framework: - Portal for Cross-Loyalty, Ad-hoc Group Deals and Collaborative Consumption, both for classical (PC) access and mobile phone access, enhanced with localization services - Development and extension of the Mobile Wallet Server (MWS), by Alcatel-Lucent/Clear2Pay to enable cross-loyalty schemes. After a first phase, Mobile Viking subscribers will be able to use their loyalty points for offers for Netlog loyalty points and vice versa. In a second phase, this platform will be made more generic, to open it up for other loyalty schemes. - Generic Authorization Component to cover ClearPark’s and Alcatel Lucents’s authorization modules and use them as an authorization means for prepaid MasterCards (Cardwise): the MWS will have to be connected to the MasterCard and VISA payment network, such that it can act as authorization platform for prepaid MasterCards. This will enable Netlog members and Mobile Viking subscribers to use a credit card to pay with their accumulated loyalty points. - Extended Mobile Wallet Component being able to act as a Community Service Platform - to tackle group deal logic and collaborative consumption 99
  • 100. - Cross-Loyalty Rule engine with the possibility to easily make additional cross-scheme agreements- Currencies Interchange System: The platform should allow any new external player, e.g. retailer, to join the cross-loyalty program on the platform and agree with other players on interchange rules. A backend solution functioning as a clearing house needs to be developed. It will automatically manage the settlement between the amount of a payment made for a Group Deal and the amount of virtual currencies which the deal initiator, according to the project proposal, wins with the fulfillment of the transaction/transactions. This would result in additional privacy and security issues that will need to be tackled. E.g., the required security level for authentication for a loyalty scheme at the local grocery store will be quite different from the one for MasterCard payments. Therefore, the platform will have to provide for pluggable authentication modules. Additionally, with the possibility to convert loyalty points into real cash on a pre-paid MasterCard, more security and legal issues will arise.The usability of the platform will be investigated. This will include the investigation of a number oftechnical aspects such as:- Programming requirements- Security and Privacy- Scalability- Intuitiveness and Speed of Use at the back-end and front-end- Overall interface user-experienceThis will mainly encompass a security and privacy analysis, the development of pluggable authenticationmodules, the R&D of security modules beyond the current state of art. Distribution of IntelligenceThe networked collaboration between the partners will enable the distributed intelligence to be alsoreflected in the architectural design of the platform. InteroperabilityThe project foresees the choice of an interoperable architectural design. The project intends to make theloyalty programs not only compatible but also open to external parties, by building the more genericCoMobile platform.Today the prepaid MasterCard card, issued by Netlog together with Cardwise, concerns prepaid account,credited with traditional currency. It can be used in any shop accepting MasterCard card payments.However, when using the Mobile Wallet Server (MWS) as authorization platform, the consumers will beable to pay at the shop using the same card and terminal, but against loyalty points or coupons.Technically this can be done by using the MWS as authorization system for the prepaid credit cards,whereby ClearPark becomes the issuer processor for Cardwise. 100
  • 101. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services 3.2.3 Financial Model  Cost Sharing Model The allocation of resources and the related to them costs is fair and balanced between the project partners. Further details regarding the initial costs’ funding can be found in the project proposal. However, after the realization of CoMobile the cost-sharing model would evolve depending on the new cost structure for the market exploitation of the product. In terms of marketing efforts, the platform would rely on approach, similar to the alternative marketing strategy of Mobile Viking’s marketing strategy. As the project leader Jan De Meester – member of the teams of the Mobile Vikings and ClearPark - explained during the expert interview meeting, this model foresees no actual marketing, communications’ and sales costs. De Meester commented that CoMobile will probably also build its marketing upon the loyalty program, which is to be covered by 3 rd parties. The idea could be defined as creating a crowdfunding for the user offering, according to which if you manage to attract new customers for the Mobile Viking community and in this case for the Netlog network as well, you win virtual currency - loyalty points. The consumer will then be able to use this virtual currency for purchasing a number of products or services having a worth as a conventional currency. According to De Meester this could decrease the overall marketing and sales costs by 30%.  Revenue Model As it is written in the project proposal, the key for the CoMobile success is in the possibility to link “mobile Internet with social networking and payment/loyalty schemes on a win-win basis for all stakeholders. “Mobile meets communities” or even better “Mobile enables micro-communities”.” The resulting platform has the potential to help creating improved, smaller and more human micro- communities that are better embedded in the daily life of the consumer, while in the maintime turn this advantage in the Value Propositon of CoMobile, directly linked to the platforms’ Revenue Model. The partners in the consortium are already collaborating in offering: - Payment/loyalty schemes with mobile component Alcatel-Lucent and Clear2Pay are developing a white-labeled Mobile Wallet Solution, offering payment, loyalty and couponing services. The Mobile Wallet Server will be extended to become a Community Service Platform for Group Deals. The CoMobile project wants to combine the social network of Netlog and the mobile Internet users of Mobile Vikings and together go beyond the existing initiatives such as Groupon. An ad-hoc, localization based group deal model can be done by maximizing the power of the mobile Internet - always connected, localization, identification, etc. Mobile Internet users, if they are part of a community (such as Netlog or Mobile Vikings) have a number of unique features. Cardwise and Netlog are co-operating to issue prepaid MasterCard cards to the Netlog members under the brand name LifePass. Today this concerns prepaid accounts, credited with conventional currency. These cards can be used in any shop accepting credit cards. When using the MWS as authorization platform, one could actually pay at the shop using the same card and terminal, but using loyalty points or coupons as a payment means. This task perfectly links the classic debit/credit card-accepting network to 101
  • 102. the versatile payment world.All use cases have not yet been defined, but one simple scenario is to allow community members to findretailers and construct ad-hoc deals, which could go as follows: A member with a Mobile Viking accountgoes to a restaurant on a busy shopping day in the weekend. He proposes to the restaurant owner tomake a group deal for 10 other Mobile Vikings, for that day and after an agreement has been reached heregisters the deal via his Smartphone. All members within the near 5 km are located and informed viathe platform. If 10 other join for lunch, each gets a 15% discount, and the initiating member gets someloyalty points, e.g. Mobile Viking points, transferrable into calling credit.- Loyalty schemes in social networks and mobile phone (smartphone) communitiesBoth Netlog and Mobile Vikings make use of this Mobile Wallet Solution. Netlog uses it as the basis for aloyalty program it is launching in Gent - LifePass. Mobile Vikings wants to use it as the platform for itsown on-us loyalty program (Viking Points). Today, these are not interconnected, but target the samepublic - young, Belgian, internet; and the same goal - loyalty, reduce churn, attract new customers,monetize membership, etc.A challenging task will be to extension of the Community Service Platform towards CollaborativeConsumption, a concept based on a form of barter for goods that can easily be shared (cars, bikes, sportequipment, DIY appliances, storage, parking, etc.). Traditionally the system is based on used or pre-owned goods being passed on between persons. In CoMobile an alternative to the more common reduce,reuse, recycle, repair methods of dealing with waste is proposed. Having a community, providing trust(identification, authentication), access (mobile internet) and localization (mobile localization service) canbring unique features compared to competing initiatives. Some fraternity services such as shopping,baby-sitting, charity and etc. are remunerated with virtual currency, available in the platform (loyaltypoints, barter or just reputation points), instead of hard currency. The mobile wallet platform shouldmanage this functionality. Possible use cases could be numerous and reflect a number of use casesrelated to the complementary currencies’ concepts: gained ‘charity/volunteering’ points might one day beinterchangeable for a (cash) premium issued by the government, as recognition for enhancing the socialfabric in the society. An important additional factor is tax law, as virtual currency gained for services,might be redeemable for the worth o f real cash thanks to the cross-loyalty program.- Payment in social networksIn parallel to the Mobile Wallet Solution project, Netlog is planning to offer prepaid credit cards to itsmembers. For this Netlog co-operates with Cardwise. This will allow will allow the usage of the prepaidcredit cards as a “classic” payment instrument for the open loyalty scheme of Netlog and Mobile Vikingsover the CoMobile platform. Revenue Sharing ModelThe business opportunities, ecological consequences and social power of this platform can be significant,but some issues remain to be solved by the IBBT research groups involved in CoMobile such as theanalysis of the business opportunities and possible market introduction strategies. The business modeling 102
  • 103. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services in CoMobile will also investigate the possibilities of bringing the platform to an international scale. The revenue sharing model is still undefined. 3.2.4 The Value Proposition  Positioning The CoMobile platform will have a complementary role to existing products and services. This will enhance both their market competences and will help the growth of CoMobile.  User Involvement End users are the most important element on which the business model bases itself. Without active involvement of the end users, the proposed services wouldn’t be able to become viral and the both the consumers’ and businesses’ communities wouldn’t be able to grow. De Meester emphasized that by becoming ambassadors and buyers of the platform’s offerings, the end users have a direct role in the creation of deals with retails. Hence they play an indispensable role for the assets’ creation and further community development. As explained by the project member De Meester and by the project member from Alcatel Lucent Michiel Pelt the most popular scenario would involve the creation of Deals’ spots by a direct negotiation of the end-users with the local retailers. The retailer would then have to agree with the overall conditions to participate in the cross-loyalty program, allowing all community members to receive a discount in both the format of a conventional currency and of a virtual currency – in loyalty points/ coupons, the second possible to be paid via the LifePass prepaid card.  Intended Value The primary parameters building the Intended Value on which CoMobile relies are a combination of high level of Customer Intimacy and Operational Excellence, created by the concept of group dealings, allowing the access to cost-advantageous products and services. 3.3 Comparison A number of differences and similarities can be evaluated. Bellow are presented the key among them. Ownership and Integration The main difference between Ping.Ping and CoMobile is in their internal business players’ organization. While Ping.Ping relies on a vertical integration and almost full monopoly over the platform ownership, the CoMobile consortium believes in the distributed ownership, where every one of the six partners has a key asset to offer to the project. In this sense Ping.Ping is strongly dependent on external business partners to outreach and create new customer segments, while CoMobile uses the capabilities and trust of the customers of the existing partners – mostly Netlog, BDMA and Mobile Vikings. And although this would result in the faster growth of CoMobile, the benefits would be naturally less for the individual participants compared to Ping.Ping, owned by Belgacom. It could take couple of years before one is capable of deciding which of the ownership models would better for a platform model based on m-payments. 103
  • 104. InnovationIn terms of innovation capabilities, the two case studies follow different directions. The main innovationof Ping.Ping is within its m-payments possibilities or the mobile wallet overall. First, the aim to introduceNFC as one of its payment methods on a national scale is really a big step in a commercial product.Second, the possibility to bill your purchase directly on your Proximus account or prepaid card is probablyone of the few successful implementations of an operator-centric billing in a mobile wallet both inBelgium and in Europe overall.In comparison CoMobile’s main innovation is the exploitation of the concept of virtual currencies in loyaltyprograms and location-based services, based on the strong B2C relationship – with the participants of theMobile Vikings’ and BDMA communities and Netlog’s social network. Although the concrete valueproposition hasn’t been finalized yet, the framework is really challenging the perceptions and regulationsfor money and value, which will probably result in active debates in Belgium regarding the legalimplications of the possibility to execute payments by both virtual and conventional currencies.User Experience and AdoptionA similarity between the to case studies is the attitude towards end-users. Although the mobile wallets,presented by the two platforms, have rich capabilities, still they are mostly directed towardstechnologically savy, young people. Large consumer groups will be left out of the opportunity to use suchmobile platforms due to number of factors such as:- lack of knowledge on the functionality of such platforms and mobile wallets- fragmentation between mobile wallet software solutions – applications – and hardware solutions – mobile devices- lack of understanding of the differences and advantages between different payment methods- the complexity of the usage scenarios and the inability to mingle between different payment methods, e.g. when do you choose to pay with your loyalty points and when with conventional currency- lack of digital skills- lack of trust towards the platform owners and their intentions to use one’s data via his/her participation in location-based loyalty programs or participation in simple payment scenarios for particular services 104
  • 105. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and ServicesVII. Conclusion Based on the number of findings, a key conclusion is that the evolution of ICTs for mobile payments could not be taken as a discretely developing trend. The development in coming years will prove that before everything else, technologically, m-payments won’t rely just on one possible solution – from a software and hardware point of view - for the execution of a transaction over a mobile. The first general conclusion is made on the grounds of the convergence of business models of different initial initiatives. Second, in regards of the business configuration, the notion of value network will gain on importance, especially in the continuous unfolding of new platforms as one of the key business models today. The cross-industrial collaboration between platform owners as internal business players and merchants and brands as external business players will increase. However, the participation of consumers as influence-making players on such two-sided business models will augment its nature, especially when looking at particular consumer groups from perspectives of interests, location, needs and offerings. Regional, intergovernmental and global institutions will increase their efforts to foster the development of agile policy frameworks for digital products and services. A special attention has to be granted to the introduction of new legislative instruments respecting the mutually beneficial coexistence of old and new value mediums of currency systems. This will aim the latter to become the tool of a new sustainable economy model, both market and social challenges driven. It is hard to predict how would the introduction of new products and services for mobile based on both conventional and nonconventional currencies (such as the virtual currencies) affect both the society and the industry. Overall, the concept for mobile will change, leading to the next stage of systemic innovation. The development of mobile cloud computing will be the main cause for the devices’ interfaces to become form-factor independent. The form-factor independency will lead to the transition towards connected interoperable devices such as web TV, laptops, tablets and etc. This would create the possibility to use your mobile phone as a mobile wallet over a number of other devices, such as the real-time purchase of a VOD streaming on your web TV via your mobile phone or tablet. In conclusion, in the coming 5-10 years, concepts such as mobility, connectivity and value exchange will evolve towards a new age of ICTs, based on mobile and new economic concepts for worth and value exchange based on the trust relationship between the business and the Mobile Communication Society. 105
  • 106. Declaration of HonorI solemnly declare that I have written this master’s thesis Mobile Payments and Virtual Currencies: TheEmergence of the New Mobile Products and Services myself.I am aware of the rules on plagiarism and have therefore ensured that these have been applied in thismaster’s thesis.July 25, 2012Lucy Setian 106
  • 107. Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services Acknowledgments First and foremost I pay my homage to my supervisor Prof. Peter Ballon, who supported me throughout the preparation of this thesis with his advice, guidance and knowledge whilst giving me the space to work in my own way. I would like to offer my sincerest gratitude to Wouter Degadt, part of the research team of IBBT, whose invaluable insights and good eye on detail were a great support in the preparation of this work. As part of IBBT team, I would also like to thank to Uschi Buchinger for her kind support. I am grateful to Mr. Jan De Meester, Mr. Michiel Pelt and Mr. Stijn Vander Plaetse who shared with me key insights and know-how from their work and expertise. I am also grateful for all the inputs of a number of specialists during my online consultations. A big thank you goes to my good friend and mentor Patrick, without whose support and encouragement, all of this wouldn’t be possible. I am extremely indebted to Aso Tavitian, for his trust and invaluable support during my whole Masters course. Finally the biggest Thank You goes to my father Aram, whose invaluable help, patience and understanding was accompanying me and giving me strength for self-belief during all of these years. I couldnt be able to successfully reach my goals without his immense support! Thank you all. 107
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