One of the major changes 2011 is going to bring is the start of operator billing on the web. It will provide a user-friendly way of making mobile (and web) payments without those silly credit cards that are preventing the majority of the world to participate.
Operator billing is nothing new. Premium SMS (see for instance Verizon’s FAQ) , where the user pays something extra to receive news items or ringtones, or vote in a TV show, has existed for ages. The price is automatically charged to your operator account.
The most advanced country on earth when it comes to mobile payments is Kenya. About 50% of the population handles about 20% of GDP by mobile phones these days. The social consequences are profound, and operator Safaricom became the biggest bank in East Africa in the process.
Update: I finally found a good description of the system.
Banks and credit card companies of the world, be very afraid. The operators will come to take your business away.
Operator billing uses your SIM card for identification, and any purchases are charged to your operator’s monthly bill, which you receive anyway. Alternatively, the purchases are subtracted from your pre-paid account.
When you establish a mobile connection, your phone uses your SIM card to contact your operator’s gateway, where your identity and credit are validated.
Thus, whenever someone pays for something the operator gateway, plus some specialised systems behind it, make sure the amount is charged to the buyer’s operator bill.
The seller will need some kind of agreement with the operator (or, better still, a worldwide consortium of operators) in order to receive his money; this is similar to the agreement today’s app stores require.
The seller could also use his phone as a purse and use the received money to buy other goods or services. In fact, the longer the system exists the more this will happen, because it’s the easiest way of doing things.
Eventually operator billing will replace credit cards as the dominant payment system on the web. This is a good thing, since the larger part of the world’s population is excluded from the current payment system.
It was reported (article meanwhile disappeared) that the number of credit cards in the US is dropping; where at the end of 2009 there were 70 million credit cards, at the end of 2010 there are only 62 million. The number of households in the US is estimated to be 115 million, so if we assume that there’s at most one credit card per household, 47% of American households do not have access to a credit card. (I was unable to find these figures for Europe.)
Sure, users without credit cards are generally less wealthy than those with one, but on the other hand there are so many of them that serving them is economically very interesting.
For instance, it has been estimated that the global app market, which requires credit cards, is worth US$ 3.8 billion right now. However, one single ringtone, Crazy Frog, made its creators a cool half billion back in 2006.
Source: one of those huge Tomi Ahonen articles under “Missed the app store ”
Thus, four years ago one succesful ringtone
that sold for more like 9 cents than 99 was worth one-eighth of this year’s entire app store economy. It was so succesful because it wasn’t dependent on those silly credit cards and could reach all people with a mobile phone.
Update: it was pointed out to me that Crazy Frog cost around 99 cents instead of the 9cts I found ... somewhere. That changes the math, of course, but it’s still quite an achievement, and I feel my larger point still stands.
Note to self: check sources better. And link to them.
There’s a second factor: Ringtones are less technologically advanced than mobile apps, so more phones can use them. In the not too distant future, though, all mobile phone will be able to run apps, while there’s no reason to assume credit cards will increase their reach at the same rate.
Part of the reason mobile banking is so succesful in Kenya is that the majority of the population is not eligible for a bank account, let alone a credit card. Thus they are actively looking for an easy alternative to carrying around lots of bank notes.
In contrast, the West has solved this problem a while back with its existing banking and credit card system. That system doesn’t really work very well on the Internet, but we’ve all grown used to that situation and haven’t really looked for solutions.
(And don’t get me started on countries where sending slips of paper by snail mail is the highest revealed truth about banking. And if they send a slip to Europe, the European bank has to send it back across the Atlantic. I mean, why not ship gold ore by mammoth?)
Thus it’s the West that is behind here. The mobile economy needs something that’s more user-friendly and more accessible than the current credit card system. Operator billing fits the ... well ... bill.
Several companies already understand the potential of operator billing:
“Only a few” is too many clicks. Two is the correct number: the click that says “I want to buy this,” and the click that confirms tbe payment.
AT&T Android users can now easily charge their Android Market purchases to their monthly accounts with only a few clicks.
The benefits for the consumer are obvious: operator billing works for anyone with a SIM card, and recognition and sign-in is automatic. Consumers understand the benefits well enough to actually want operator billing. In a recent survey it was the most popular choice for mobile payments, above app stores and way above credit cards.
Anecdotal evidence: my friends, who are not particularly tech-savvy and certainly not into the mobile web, immediately understand operator billing and volunteer that it would be a far better system than the current credit-card-driven one.
The benefit for developers is a vastly extended reach. If operator billing is combined with some sort of HTML5 app, you could, in theory, reach 3 billion HTML-capable phones out there. Even Apple’s reach pales into insignificance besides these numbers. The economics would be quite different, though.
3 billion: Tomi Ahonen’s Phone Book, page 39.
Incidentally, once operator billing becomes the standard, the average computer will require a SIM card slot, too.
Operators, you’ll all agree, are a nutritious part (as Mr. Z would put it) of operator billing. The problem is that right now the operators have no fucking clue what they’re doing.
Recently Vision Mobile published a scathing critique of the operators and their desperate attempts to create a business model that resembles that of Apple or Facebook:
Telcos simply got sidetracked by the media business and mobile advertising, areas outside their main focus, forgetting they’re in the business of communications and making communications simple and effective. The first thing telcos have to do is undergo corporate psychotherapy. They have to look at themselves in the mirror and accept that they are a phone company. They sell conveniently packaged communications.
Those communications will include payments. After all, paying for something they find online is a common problem for mobile users across the globe, and solving it in an easy manner is a unique selling point of the mobile operators.
The problem is that the operators may not actually see this unique selling point because they’re too busy devising mobile content strategies that nobody’s interested in, as they have been since at least the mid 90s.
If the operators keep ignoring their true potential, other companies (say, Google) could start to give out SIM cards, too. And then the operators have a real problem instead of an imagined one.
In fact, Google is already working on mobile payments. Back in June there was a report of a system to let the seller create a QR code, and when the buyer scans it he’s forwarded to his Google Checkout page. This totally convoluted user interface will be unable to compete with operator billing.
Recently, it was reported Google is working on a payment system, but one based on near-field communication (NFC) for direct device-to-device payments. It seems this will be the next big thing — at least, as far as quite a few leading US companies are concerned.
What I plain don’t know is how you’d get your money on your phone. If there’s no way of doing that without a credit card I’m not sure if NFC is going to be a huge success. Westerners don’t really need yet another credit-card-based payment system, while people in the emerging markets won’t be able to access it.
Another question is whether the receiving device will be a simple phone. From the tone of the article it might be a specialised device, which makes the whole technology useless in the emerging world, where sellers don’t have the money to buy an NFC receptor.
With the current information we can’t say anything useful about this system. We’ll have to wait for technical specs to surface, but the NFC idea is at least a step in the right direction — and might goad the operators into action.
I hesitate to name 2011 the Year of Operator Billing, because there are many technical and political issues that must be solved before a unified system can be deployed across Europe and North America, and that’ll take more than a year. But operator billing is definitely coming.
Update: The story continues. I turn out to have made two mistakes, there was one critique, and a bunch of new facts and figures.
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