According to the GSM Association, it’s not too late for Mobile Network Operators and Service Providers to make good margins from mobile payment services. The GSMA believes that margins in excess of 20% are achievable for those prepared to invest in this fast-growing opportunity. But success requires a level of patience and commitment that many operators may lack. As with many other human endeavours, the ultimate rewards will go to those with the boldness and perseverance necessary to come out on top.
Apple, Google and PayPal may appear to have an insurmountable lead in payment services given the rapid progress they have made in this area over the last decade or so. But we are now seeing signs that Mobile Network Operators (MNOs) and Service Providers (SPs) are waking up to the huge potential of this market, not just in terms of replacing dwindling voice and SMS revenues, but also in supporting new service portfolios and reducing customer churn.
A recent report from the GSMA1 claims that MNOs and SPs can achieve margins of >20% once they have a mature mobile payments platform with a critical mass of users (estimated at 30% of the subscriber base). This is way above the level that most would-be players in the game have imagined is possible, and much closer to the levels that make the investment proposition an attractive one for hard-pressed operators. Most recent estimates of the margin potential of mobile payment services have quoted figures of 2% – 5%. At that level, it’s hard to drum up the level of support required for a multi-year investment in a new service. But if margins of 20% are achievable, and the CAPEX required is low, then it starts to look like a ‘no-brainer’. Indeed, Millicom has claimed that their MFS mobile money business ‘could be a $1billion revenue opportunity’, and it is well known that M-Pesa contributes more than 18% of Safaricom’s total revenue. Add to that the extra loyalty of customers once they are active users of mobile payments2, and the potential to enable new services that are profitable in themselves3, and the investment case starts to look positively mouth-watering.
So what’s the catch?
Well, according to the GSMA report, it is likely to take 4-5 years to reach ‘break-even’ point on mobile payments. Although the CAPEX required is low, OPEX is significant in the early stages, when the number of new customers registering on the system is at its highest and agents must be employed to collect cash and turn it into digital currency. The real money is only earned once a significant proportion of an operator’s subscribers are active users of the mobile payment service and the operator has implemented a ‘digital financial ecosystem’ that allows funds to be moved in and out of the system digitally, rather than by transfers of cash. And it is this digital financial ecosystem that provides the framework for the launch and management of new services, with their additional profitability. The GSMA speculates that many operators, accustomed to the high margins achievable from their core (CAPEX-driven) business will lack the staying power to absorb OPEX losses for the 3-4 years that may be required to build a viable mobile payments service.
But for those that stay the course, the future looks bright. At a time when many of their competitors are likely to be reduced to low-margin ‘connectivity’ services, those offering mobile payment services will be playing in the OTT game. And, as we all know, that’s where the money is.
1. GSMA (2014) – ‘Mobile Money for the Unbanked’
2. The Bill and Melinda Gates Foundation (2013) – ‘Fighting poverty, profitably: Transforming the economics of payments to build sustainable, inclusive financial systems’
3. Paul Leishman (2010) – ‘Is there Really any Money in Mobile Money’