The viewpoint of a Central Bank(er) on mobile payment developments

1. Mobey Forum 17-18 June 2010 Helsinki The viewpoint of a Central Bank(er)on mobile payment developments 17 June 2010 Harry Leinonen The views expressed are those of the author and do not necessarily reflect the views of the Bank of Finland. Harry Leinonen

2. Continuous mobile web-availability will change business patterns • Active web-presence by everyone also via mobile phones • Network power is very strong resulting in natural monopolies (eg Facebook) or open networks (eg email) • True globalization, a borderless web-community • Lower distribution and customer contact costs • Synergies among network products (eg different account systems) • More free services (changing IPR solutions and interests) • Increased web-value will attract criminals and require improved security solutions Mobile payment services will be part of the next wave of the web-revolution Harry Leinonen

3. Future requirements for successful payment services • Simple user-interface (’show-balance’, accept/make payment) • Continuous availability, here and now 24/7 • Global addressing and reach (email and IBAN in parallel) • Simple real-time processing based on program libraries • Cost and charges at ’internet/email’ level, extras only for value-added services • Open network structure (or monopoly provider) • Increased ’limitless’ customer data content (open and encrypted) • Synergies via real-time linkages to other processes in other systems (ordering, ticketing, invoicing, etc) • Solid e-security and e-identification Legacy systems need to be replaced by re-engineered modern technology, as everything else in the e-world Harry Leinonen

4. Mobile payments offer three major improvements • screen&keyboard, ”limitless” memory, PC-processor • near-field-communication, internet communication • tamper resistant protection, encryption processors • personal security/ID device • higher automation level, more synergies • Enhanced user interfaces • Advanced security features • Lower costs As with all other payment instruments – mobile payments will just transfer funds from payer to payee Any difference only due to overall efficiency improvement Harry Leinonen

5. Mobile phone and m-payment enhancements – the dominant payment instrument of the future? Person-to-person In shops Ticketing e/m-commerce 01010100101 01010110101 10101001101 Up-to-date balance info Digitalised card info over-the-air (OTA) into phone Complete transaction records Versatile m/e-ID and encryption and back-up ((())) Mobile = miniPC for payments Enhanced NFC and RFID input Auto-reconciling Increased convenience, speed and security at lower costs

6. All kinds of accounts and issuers can use the same m-platform and m-technology • Banking services (debit card, credit card, etc) • Money remittance services • Payment institution services • TELCO billing services • Central bank services (m-cash?) Parallel usage requires a trusted service manager (TSM) to administer the security and identification environment Will a dominant service provider emerge? Harry Leinonen

7. - Necessary m-payment cooperation parties TELCOs Merchants Handset suppliers EFTPOS suppliers Inter- bank Consumers Banks, card companies etc Development of new integrated services requires a longer chain of cooperation than before Harry Leinonen

8. Off-line or on-line cooperation? Requires: Common instrument acceptance and terminal standards in addition to common interbank standards Risks: Instrument forgery, off-line differs from online balance Requires: Common security device ‘slot’ and common interbank standards (customers only connected to ‘own bank’) Risks: Stolen instruments together with identification data (when protected by dynamic audit-trail) • In off-line payee accepts instrument to be paid later • In on-line issuer verifies payment immediately Until now criminals have rapidly learnt to bypass off-line controls. As phones are always online, going directly for the mobile online alternative seems sensible. Harry Leinonen

9. Solving the m:n e-identification need,multiple slots or common identification provider? Registration Registration office office The open Internet Service Service • Multiple security chip slots can only be a temporary solution • The long-term solution requires TSM (trusted service manager) for the security chip and an e-identification provider providers providers ’ ’ Bank Bank identification ID provider provider Customer’s Customer’s Customer Customer secure secure Taxation Tax identification ID authority authority provider provider Service Service providers providers ’ ’ Insurance Insurance The The network network of of identification ID company company connected connected provider provider identification identification Social Social providers providers security security office office Authorities provide paper identification, who will provide e/m-identification? Harry Leinonen

10. The business model dilemmas • Banks’ supply failure makes TELCOs, remittance companies • and new entrants interested • - Closed or open network solutions • Who will provide what in mobile payments? • How will the security infrastructure be set up? • Attainable revenue levels and the charging models? • Common widely used infrastructure or proprietary solutions? • Level and distribution of TSM revenues • Liability level on TSM in case of failures • Mobile payment costs close to SMS production costs • Hidden consumer charging delays payment habit changes • Hidden charging reduce service providers’ investment incentives Provision of m-payments will be delayed and limited as long as these dilemmas are not solved Harry Leinonen

11. Open network requirement • ‘Four-box’ model with competing issuers and acquirers • Payer sends a real-time credit transfer to payee • All (smart) phones should become mobile payment competent • Everybody (consumers, merchants, companies) can receive mobile payments • All acceptable service providers can be issuers • All acceptable service providers can be acquirers • Interchange fee (roaming charge) = zero • Common clearing and settlement solution An open system is more efficient than competing oligopoly networks Harry Leinonen

12. Hidden/embedded pricing hinders development • Limited price competition and consumers not aware of cost diff. • Payers lack incentives to economise, change their pay habits • Higher costs and distorted volumes (inefficient mix of instruments) • New entrants (instruments and providers) have difficulties when their superiority remains hidden and legacy revenues are given • The merchant-based MIF-taxation unsuitable for P2P payments The current business model of cash&card payments delays m-payment developments Harry Leinonen

13. Authority challenges in mobile payments • Domestic systems disappear • Dependence of foreign systems increase • Authority cooperation at embryonic level only • Global services vs national authorities • Synergic efficiency vs closed segmented industries • Open service competition vs regulated industry stability • Individual freedom vs enforced e-identification • Synergies via combining expanded data and processes • Synergies by providing payments for non-banked • Open competition often neglects externalities (systemic risks) • Under-estimation of back-up needs and indirect losses • Hidden and monopoly pricing disadvantages • Anonymity and lack of audit trail provoke criminal usage • Regulatory arbitrage results in distorted competition Authorities need to ensure that past regulatory policies are maintained for new services but also recognize new needs and benefits and avoid inefficiencies Harry Leinonen

14. The direction of developmentsseem to be quite clear,but the pace of developmentsseem very blurryexcept for being very slowin the past. Harry Leinonen

15. Thank you for your attention.Q&A Harry Leinonen

16. Some background documents: Harry Leinonen: Future payments - mobile, social or sociomobile? Quartely Journal SPEED (Settlement, Payment, E-money & E-trading, Development) Vol4 No 4 to be published in June 2010 Transparent price competition or two-sided subsidisation in card payments? Is there a need for a more efficient business model for the card industry? Journal of Payments Strategy & Systems, Vol 4 No 2 to be published in June 2010 The Changing Retail Payment Landscape: An overview Paper presented at FED Kansas City Retail Payment Conference 2009 (www.bof.fi/sc/hleinonen) Hidden payment charges at point of sale and possible impact of increased transparency in Evolving Payment Habits, Bank of Finland Expository Studies A:113, 2009 Payment Habits and trends in the changing e-landscape 2010+, Bank of Finland Expository Studies A:111, 2008 How Could Mobile GSM Experiences be Used to Increase Card Payment Efficiency?, GTNews, www.gtnews.com 2008 Harry Leinonen