Friday 19 July 2013

Where's my m-Wallet?

Dear Reader,

I recently attended a conference on mobile apps, mobile technology and mobile commerce. Although the conference had some interesting talks, panels and exhibitors - I'll leave details of the day's events for later. But an interesting incident occurred that day that left me thinking and exploring the mobile commerce market.

I walked into the conference gate and realized that I had left my wallet at home. Too lazy to go back home and pick it up - I resolved myself to get through the day without a penny in my pocket. Essentially starve myself through most of the day. Fortunately, I had a few dry fruit nuts in my bag to help me curb my hunger pangs.

The conference had a snack bar serving beverages and snacks throughout the day. The stall was nothing fancy and I guessed the vendor sourced his snacks and beverages in the morning and stocked himself with a rough estimate of how much he thought he could sell. All the items on the list had a markup of 20% and payment was in cash only. So, the vendor probably paid up for supplies or made a deposit and towards the end of the day he'll have to clear his balance and pocket the profits. Transactions start at the end of the day and close at the end of the day with all dues cleared by the end of the day.

I wondered, if I had a m-Wallet could I use it to pay this vendor, would the vendor be willing to accept such a mode of payment? What would he look for in adopting a m-Wallet mode of payment? What technology would help make it easy to adopt such a mode of payment?

I went home at the end of the day, picked up my wallet, ordered some chinese take away food and settled down to do a bit of research on m-Wallets.

Below you will find a summary of my findings and thoughts. Do let me know what you think in the comments section.

Until next time.

Regards,
Jyothin

Introduction

'm-Wallet' is a term used to describe modes of payment that use mobile devices to transact via wireless communication. 'm-Commerce' is an umbrella term for all such mobile transactions and includes m-Wallet as one such method.

For the sake of simplicity, I define m-Wallet as "A method to store cash and a mode of payment as a replacement to cash". Cash based payment IS the conventional method - the WYSIWYG payment method. It is fast, it is in your hand, ready to use, easy to use, and of course the more the merrier ;-). m-Wallet, as per the definition above, is an alternative to the cash in your traditional wallet.

I've taken the approach of m-Wallet as a replacement to cash and not as a replacement to debit/credit cards. The reason being - in most developing countries, a) cash is still king where the majority of the work force earn a daily wage and live hand to mouth, b) a majority of them don't have an active bank account (current or savings), c) a majority of them feel more comfortable managing their own money and knowing where it is going.

Payment Methods

The list below summarizes the most common payment methods that are in use and their typical usage methods in third world countries.
  • Cash: conventional and most widely used, cash in - cash out, fast, handy, easy to use, less secure, feels more secure, typically low value transactions.
  • Smart card: not much in use nowadays, 'cash is in the card', 2-step process (needs a secure PIN to complete the transaction), needs a smart card reader, cash in - cash out, more secure, typically low value transactions.
  • Debit card: widely used, 2-step process (needs a secure PIN to complete the transaction), needs a debit card reader, the bank is the middleman, debit and credit into bank accounts take more time than smart cards, secure, typically low to mid value transactions.
  • Credit card: widely used, don't need to have cash in the account to transact, needs a credit card reader, the bank is the middleman, debit and credit into band accounts take more time than smart cards, secure, typically mid to high value transactions.
Other modes of payments include cheques (or checks), DD, online (Internet based account to account transfers), etc.

For a simple transaction of buying a cup of coffee, we either pay by cash, smart card, debit card or credit card. The rest either take too much time or are too cumbersome when all you want to do is buy a cup of coffee.

Facts and Figures

The chart below shows the volume of transactions in cash, m-Wallet (projected), debit cards and credit cards. Cheque based, ECS, and other electronic based retail transactions are excluded.


The chart below shows the penetration of PCs, TVs and Mobile phones in India as their projections until 2015. Clearly, mobile phones have had the highest penetration rate.



m-Wallet Transactions

The figure below illustrates a simple cash based transaction (buying a cup of coffee) between a vendee and a vendor.

The vendee withdraws cash from an ATM and stores it in a physical wallet. Cash in the wallet is used to pay for goods (or services) to the vendor in exchange for goods (or services). The vendor pays cash to cover costs and deposits the profits at the bank. There are no transaction costs.

Figure 1: A simplistic cash based transaction.

Now let see the role of a m-Wallet in the same transaction (see Figure 2 below). A vendee loads his/her m-Wallet with cash by initiating a transfer transaction to the bank. Such a transfer transaction could be via SMS with additional security like a unique PIN/authentication/OTP. Once loaded, cash in his/her m-Wallet can be considered as being equivalent to hard cash with the exception that you cannot feel it. At the bank's end, a load transaction is only an account to account transfer for the same user. The m-Wallet itself is in a NFC enabled mobile device. The vendee then uses NFC to sync with the vendors' NFC enabled mobile device to initiate a payment transaction. The vendee transfers cash to the vendor's m-Wallet and goods are exchanged to complete the transaction. The vendor may or may not choose to unload the cash in his m-Wallet but if the vendor does choose to unload the steps would be similar to loading and again for the bank it would only be an account to account transfer for the same user. Again, there are no transaction costs. Transaction 1 is like going to an ATM and with-drawing cash. Transaction 4 is like going to a bank and making a deposit.

The vendor can then use the same cash in his/her m-Wallet to pay for costs or transfer it back into his/her bank account via a secure PIN/authentication mechanism.

Figure 2: A simplistic m-Wallet based transaction.

Note the additional notification steps in Figure 2. When a vendee initiates a m-Wallet transaction at his/her end a notification is sent to the bank with details of the payment being made. Similarly, when a vendor completes a m-Wallet transaction at his/her end a similar notification is sent to the bank with the details of the payment received.

(Psst... the vendor and vendee don't really need to know that the notification is being sent... it can be an automatic process)

What I've tried to do here is replace your wallet with an m-Wallet in your mobile device. There are no transaction costs and neither the vendee pays less than when using cash (or m-Wallet) nor does the vendor charge more than when accepting cash (or m-Wallet). Of course, for the vendor to cover his costs his/her suppliers should also have a m-Wallet. Just makes it that much more easier for the vendor.

This leads us to the question of 'Why would anyone want to use a m-Wallet as opposed to cash in the wallet?'

Clearly, there is a certain market segment - the ones that have forgotten their wallets at home like me - who would benefit from being able to pay using their m-Wallets and some others who may like the convenience of using a m-Wallet. My presumption is that this would be a very very small % of the market size and that too such situations are incidental. This certainly does not warrant a vendor to adopt a m-Wallet based payment system, they would rather stick to hard cash based transactions than worry about PINs and customer convenience just for one day. Their goal for the day would probably be to sell as much as possible. 

And without vendors accepting m-Wallet based transactions, money in a vendee's m-Wallet is practically useless to transact.

An off chance technology savvy vendor could accept m-Wallet based transactions and perhaps price his/her goods differently for cash based and m-Wallet based transactions but then again its too much work for any vendor looking to run a day-to-day business and who hopes to make a quick buck at the end of the day.

Taking a step back, I've tried to answer the question - 'What's in it for me?' from the point of view of each of the below players,
  • Some random government official - "Ideally we would want to be able to track every financial transaction that takes place in an economy. 'Track' here refers to the ability to monitor any wrong financial doings/illegal transactions, etc. All transactions via a bank or bank account or electronic media are in some ways accounted for. What is left are those cash transactions that exchange hands with no way of knowing the parties involved and hence no way of knowing if it is a legal transaction and in turn affect tax collections. We certainly see m-Wallet as a means to having some accountability. m-Wallets would be most beneficial to those who have low incomes, are daily wage earners.. blah blah blah .. yawn .. blah blah blah ..foot in mouth... ahem sorry.. that live hand to mouth. We are even willing to encourage banks to initiate a new type of bank account, called a m-Wallet account. Money in this account is what is in your m-Wallet and can be used freely for m-Wallet transactions. Of course, we are assuming here that everyone will own a NFC enabled device. Is that a fair assumption?"
  • Some random bank official - "An m-Wallet current account sounds interesting but we already find it difficult to get this target market (namely low income daily wage earners that live hand to mouth) to open and use a normal current account. It would be even harder to get them to understand and use a brand new m-Wallet account. It will sound like just another fancy term. Unless we provide an incentive to open a m-Wallet account, say, in the form of a better rate of interest on these accounts, not many would see a benefit in opening one. Perhaps, if we can provide an interest rate of (say) 10 basis points above the existing interest rate on a current/savings bank account, new customers would be willing to open new m-Wallet accounts and existing customer would be willing to move their money from existing accounts to a m-Wallet account. Money in the m-Wallet account would get the benefit of this high rate and all loading/unloading to a customer's m-Wallet will be to this account. A m-Wallet bank account also limits ones cash exposure to only a fraction of their savings account thus making one's savings account a little more protected from fraud/theft (conceptually of course). For us as a bank, if total new deposits in m-Wallet accounts is not going to be significant it is not worth even providing a +10 bps interest rate on these accounts. Besides, we will still have to do inter bank transfers to settle all m-Wallet transactions periodically."
  • Some random banking software developer - "Damn... more work! When will I ever get to work on something new and cool than maintaining some useless banking software. I can either spend the rest of my life making this software real real fast so that it can do millions... no billions of quick short m-Wallet load/unload transactions and notifications with all the mumbo jumbo security that goes with it OR I could spend the rest of my life making Inter bank m-Wallet account settlements fast and easy. But for now... its time for a coffee break. Oops, I have no cash in my wallet... time to look for a new job."
  • Some random mobile handset manufacturer - "NFC is a fairly new technology that is seeing traction in sharing contacts, photos, musics, and other data. For NFC based money transfers, enhanced security features will be needed. The technology needed to make secure NFC transactions would be an extension of the security we already provide for mobile payment/m-commerce transactions through a 3G/4G wireless connection. But making secure transactions as fast as the time it takes to pull out a few wades of cash from your wallet, may be a challenge. Also, not all mobile devices are NFC enabled. We could use alternatives to NFC, like QR codes, or some other kind of handshake mechanism between the vendee and vendor but it has to be handshake mechanism. These are small value transactions so the faster and easier it is, more people would be willing to use it."
  • Some random vendee - "If I get a higher interest rate on an m-Wallet account, I would be interested in using it more. A m-Wallet is certainly more convenient when I run out of cash and need to make an urgent purchase. Again, it is useless to me if a vendor does not accept m-Wallet transactions and if the banks charge me a setup fee or transaction fee... sorry no thanks! Is m-Wallet secure? Is it possible for someone to steal cash from my m-Wallet without my knowledge? how can we prevent such thefts? What if I lose my mobile device?"
  • Some random vendor - "If I get a higher interest rate on my m-Wallet account, I would be interested in opening, using and accepting m-Wallet transactions. But I will also have to pay my suppliers at the end of the day. It would be nice if they too accept m-Wallet transactions. Otherwise I'll have to pay them hard cash which will not be quick especially because my incoming cash is stuck in my m-Wallet. I also don't want to keep my customers waiting in line for a NFC transaction to complete. It must be fast and secure. Otherwise customers will just give me hard cash and walk out, which is fine for me. On the other hand, if a m-Wallet customer ends up purchasing 2.5x times a hard cash paying customer, I don't mind keeping them waiting."
  • A random hundred $ Bill/Rs. Note - "I prefer sitting in a bank vault in the comfort of my fellow notes than sweat it out in the open, going from one hand to another. Some of these hands give me all kinds of tattoos! The most popular being "I luv u" (and sometimes their cell phone number). I can understand if they really love me so much... who doesn't? I'm money after all, but they don't need to make it explicit by giving me a tattoo. Some of these hands are dirty. I certainly don't want to be called dirty cash and labelled illegal. I am fine with my virtual m-Wallet buddy spending time on someone's mobile device as opposed to me sitting on someone arse."

Aha... but P2P transactions are not allowed by RBI !

Honestly, I'm not sure why but anyways. 

 Although the above seems to be a P2P transaction, it is not. 

 In affect, the P2P method described above only mimics an account to account transfer. The key here being the notifications that are mandatory and sent to the bank to notify the bank that a payment has been made/accepted and also to keep track of the balance in the m-Wallet account.

If you don't like P2P, just call it something else.

Not another middle-man

Paytm, freecharge.in, etc. are examples of some middlemen companies that provide mobile services that make it convenient for one to recharge their prepaid mobile, pay bills, and execute other similar transactions from their mobile device. The best way to take advantage of their service is to download their mobile app (which is free) and make payments using the app. Some of their services are free and some are not. Such middlemen could also play the role of a m-Wallet service provider by engaging with various banks to make the process seamless both to the banks and the vendee/vendor. Then again, if they charge for such a service, would a vendee/vendor be willing to pay? An added overhead of a mobile app is that for effective use of the app, subscription to a data plan is a must which would again be an underlying cost to a vendee/vendor.
Figure 3: What value can a middleman add to the ecosystem?

Conclusion

The wave is already there. One only needs to build the right surf board and get someone to ride the wave without falling off.

Whatever the outcome... I still want to be able to buy a cup of coffee the next time I forget my wallet and I know for sure that the likely hood of me forgetting both my wallet and my mobile is very remote.

 Or maybe I'll just use a bit-of-coins!


References


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Location: Bangalore, Karnataka, India

2 comments:

  1. JyothinMonday, August 11, 2014

    Interesting infograph on mobile payments... http://www.mformobile.com/mobile-wallet-summit/pdf/MobileWalletInfographic.pdf

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  2. JyothinSunday, July 26, 2015

    An update on the current state of mobile payments in India...
    https://drive.google.com/file/d/0BxegdmydCyrlZ1FGWnh0N01tVFk/view?usp=sharing

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