Telcos Urged to Find a New Calling in Mobile Payments

Mobile network operators have faced setbacks in mobile payments, but some experts insist they still have a place in the market. Others are not so sure.

In the U.K., the telcos behind the Weve mobile commerce initiative dropped plans for their mobile wallet late last year. In the U.S., the telcos behind the Softcard wallet announced plans to shut down after selling off their technology and intellectual property to Google.

The problems confronting mobile network operators (MNOs) extend beyond payments, stemming from companies that are also a looming threat to the mainstream payments industry. Facebook, for example, has stated plans to adapt its messaging platform both as a payment instrument and as an alternative to telcos' text-messaging services.

Telcos have been in a turf war with communication services startups that provide free messaging to rival paid SMS text and WiFi calling services to compete with monthly subscription fees for calls. Facebook’s purchase of WhatsApp, the free global messaging platform, takes significant market share and revenue from the telcos.

Last year, Mark Zuckerberg, founder and CEO of Facebook, was a bit more brash with the Mobile World Congress audience about the recent acquisition, whereas this year, during a panel discussion on March 2, Zuckerberg spoke more about fanning mutually beneficial partnerships with the MNOs.

The issue for operators began with the 2005 introduction of tokenization. Before tokenization, a wallet startup had to build its own connection to every carrier they wanted to provide the wallet on. The wallet's issuing partner had its own building to do to connect to these systems as well.

The process took no less than six months and cost around $4 million, said Antonio Baena, CEO of Quesnay, a strategy and implementation consulting firm that works with banks, telcos and retailers.

“It was a complex decision...which made it hard [for banks] to jump into new providers,” he said during a panel discussion at Mobile World Congress in Barcelona on March 3.

With tokenization, a tech company such as Apple Pay can create a token service provider (TSP) in about three months at far less cost, Baena said. Then the issuers simply connect to that; issuers can also be their own TSP. Banks need not take a "wait and see" approach to fast-changing payment tech anymore, said Baena.

Tokenization works with any payment method, including credit cards and direct debit, and the process can be used for all types of commerce. Tokens can also store additional data.

Tokenization has brought about the “democratization” of mobile payments, Baena said. It’s not only easier for a new company to build a mobile payment system, but legacy players now have a much simpler process for building market-specific mobile payment solutions, he said.

While Baena has gotten plenty of feedback about the demise of the MNOs, he said there are several areas where a telco's assets can be relevant.

For instance, it’s still up for debate whether a hardware-based secure element needs to used or whether host card emulation (HCE), which sidesteps the use of the secure element, is preferable.

Many heavy hitters are throwing their weight behind HCE. Google began using the technology in late 2013 to get around the U.S. operators' block of Google Wallet on Android phones. Visa and MasterCard support HCE. Plus companies like Royal Bank of Canada and Tim Hortons have announced HCE deployments.

But even if HCE wins out, MNOs can still be relevant to mobile payments by managing identity.

Carriers typically do some type of customer vetting much the same as banks do, said Sherri Haymond, senior vice president and group head of digital channel engagement at MasterCard, during the panel discussion.

This can be beneficial not only for provisioning cards into mobile wallets but also for decreasing risk at the point of purchase, said Baena.

Telcos also have a distribution advantage. For example, AT&T, Verizon Wireless and T-Mobile, the three operators behind Softcard, have a huge retail footprint which helped them deploy the mobile wallet from the start. In May last year, the venture said it had activated on average 20,000 new mobile wallets per day for a sconsecutive 30-day period.

“If Google bought Softcard, it’s because there is value there” with the MNOs, said Baena.

In addition to buying Softcard’s technology and intellectual property, Google reached a deal to have the carriers pre-load Google Wallet on the phones they sell.

With the recent flops, for telcos the mobile payments arena could look bleak. But there are promising mobile wallet projects that involve telcos. Barcelona-based CaixaBank, which has about 13.6 million customers, launched a contactless mobile wallet nearly a year ago with the top three telcos in Spain. Zafar Kazmi, head of mobile payments and mobile commerce at La Caixa, said the journey with the MNOs has been good.

Although the bank is one of the easiest to work with, you don't even have to be a customer. CaixaBank has more than 73 mobile apps for both customers and non-customers.

“My customer doesn’t have to be a La Caixa customer just yet to use some of my solutions,” Kazmi said. For instance, the bank has built several apps for searching events taking place at conference centers.

Kazmi wonders whether MNOs could be a part of a hybrid secure element infrastructure, which could expunge some of the security concerns raised over HCE.

MNOs could even become the only point of contact when consumer’s mobile devices, full of applications that store or have access to payment credentials, are lost or stolen. “When we lose our wallet we call our credit card company; when we lose our phone we don’t call our credit card company, we call our mobile network operator,” said Baena.

While Baena sees a future where consumers can make one call to their operator to cancel or secure all the payment credentials stored within the device, Jeremy Bornstein, head of payments innovation at RBC, is skeptical.

The idea that there will be a centralized system so all banks can share information with all carriers is a bit far-fetched, Bornstein said.

How unlikely the scenario is was poignantly laid out in a story from Dave Birch, director at Consult Hyperion. After having a card replaced, he had forgotten to update the information in a bus transportation app. His card was declined on the bus and the app was asking him to type in his new payment card credentials. Birch didn’t have the card with him and obviously hadn’t memorized the card number, but several other applications on his smartphone, including his Barclays mobile banking app, had the credentials stored but couldn’t communicate with the ticketing app.

“We’re still taking card not present authentication and trying to shoehorn it into a mobile app,” Birch said during the discussion.

But banks are likely hesitant to “talk” to other apps, because of security concerns. The best way to keep systems secure is by limiting the circle of trust, Bornstein said. Because of RBC's use of tokenization in its Secure Cloud infrastructure, the MNO, the merchant and any other third party do not have visibility into what it's sending across the network, he said.