Blog article
See all stories »

What is the Mobile Payments Ecosystem?

I've been trying to figure out how the different companies get together to manage card payments. It's a complicated business, and I’m still learning.  Readers, please do comment and correct my understanding.

Fundamentally it seems card payments are fairly simple; what has caused complexity is the way that each role has been split up. So let’s begin at the beginning and take it forward.

The basic ecosystem

Let’s begin with the ‘Four-party Scheme’. This is the basic model for credit and debit card payments:

The Cardholder makes payments.

The Merchant receives payments from the Cardholder.

The Issuer provides banking facilities to the Cardholder. This includes the card itself, along with regular statements and facilities to deal with fraud or card loss.

The Acquirer provides banking acceptance facilities to the Merchant.  This includes the hardware and systems to receive payments, fraud detection, and arranging the appropriate net transfer of funds from Issuers.

The names, Issuer and Acquirer, I believe, come from the processing of cheques: before electronic card payments, Issuers would issue cheques; Acquirers would collect and process them.  Both will typically be banks.

So, for example, a typical Cardholder might be John Smith. The Merchant might be Jones’ Butcher in Penrith. The Issuer, then, could be John Smith's bank, Barclays, who has supplied him with a debit card.  The Acquirer  is Jones’ Butcher’s bank - RBS, say.  When John makes a payment to Jones’ Butcher, the transaction generates 'paperwork', which in due course causes funds to move from Barclays to RBS. Nowadays, of course, the paperwork is usually electronic.

However it’s only this simple if there is a direct relationship between the Issuer and the Acquirer.  That's fine if there are only a small number of banks involved, but it doesn’t scale.  So the next step is to introduce a payment exchange, called a "Scheme". The scheme acts as a trusted intermediary between Issuers and Acquirers.  Examples of schemes are VISA, MasterCard and JCB.  Schemes ensure trust between the financial parties involved, define ‘Interchange Fees’ (how much gets paid to the Issuer for each transaction), and make it possible for any financial institution to exchange payments with any other.

Extending the ecosystem

As payments have become more complex, with Chip'n'PIN or eCommerce (web) facilities required by the Merchants, so providing the payment acceptance part of the Acquirer service has become more complex for the issuers.  So there are “Payment Service Providers” who specialise in that, such as Worldpay, CCBill, or SagePay.  They may be employed by the Acquirer, to provide a service for their Merchants; or by the Merchant, to avoid being locked to a specific Acquirer or Scheme. 

In addition, the cost to a Merchant of setting up with an Acquirer is quite high; so there are Aggregators, such as Square, iZettle or PayPal, who work with lots of small merchants but only pay the Acquirer costs of a single merchant.  Other specialist companies can provide additional niche services to either Merchants or Acquirers: Fraud detection, Hardware terminals, and Software Providers.

At the Issuer end of the value chain, customers value the association or discounts their favourite Brands can offer in a payment card; the Brands, in turn value the additional engagement with their customers: Virgin, O2, Hilton, Marks&Spencer and hundreds of others.  Most such Brands don’t want to manage payment cards themselves, and employ Programme Managers to provide a ‘white label’ Issuer service for them.  For UK prepaid cards such Programme Managers include Prepay Solutions (PPS), Advanced Payment Solutions (APS) and First Data International. 

And of course other companies provide niche services to the Issuers:  Creators of Cards, Fraud detection; Call Centres, and more Software Providers.

A word of caution: Please bear in mind that all of these names are just roles: a given organization may provide several of them.  For example, American Express acts as Issuer, Scheme, Acquirer, and supplies most of the other roles too.  And some business models involve multiple roles: many prepaid cards, for example, are both Issuer (to make payments) and Acquirer (to support top-ups).   Too, there’s no industry standard for any role names except Issuer and Acquirer – I’ve merely used the most common names I’ve encountered.

Moving to Mobile Payments

Many of the roles are starting to involve a mobile phone app as part of the proposition: 

  • Issuers provide account management apps, or integrate account management into Brand apps.
  • Aggregators use smartphones or pads as the processors for their ‘Point of Sale’ devices.
  • Merchants increasingly include payment acceptance functionality into their apps, and look to the Payment Service Providers to facilitate that.

Recently, mobile phones have started to allow the phone to replace the physical card.  The business models for these are not yet clear, but the technical mechanisms introduce further players.  There are currently two approaches, which I’ll call ‘online’, and ‘secure-element’ based. 

Online Payments require the phone to be connected via broadband to the Issuer service, and use a variety of mechanisms to connect to the merchant.  Examples are PayPal, Square, and BankInter of Spain (NFC payments).  These require support only from Software Providers. 

The alternative requires a ‘Secure Element’ on the phone – an uncrackable processor controlled by a third party: a ‘Secure Element Owner’.  This might be a Phone Manufacturer such as Samsung; or it can be a ‘Network Operator’, such as Vodafone, EE, or a ‘Carrier’ in the ISIS consortium), with support from TSM Providers, SIM Providers and Software Providers.

And that’s it!  A full ecosystem.

10037

Comments: (14)

Mark McMurtrie
Mark McMurtrie - Payments Consultancy Limited - Woking 02 October, 2013, 09:58Be the first to give this comment the thumbs up 0 likes

The time has come for clearer definitions of "mobile payments". It covers a wide variety of scenarios and use cases. It is too broad.

We should start using more specific terms when we are discussing the topic. 

One good example is the increasing usage of the term MPOS when talking about the use of a smartphone (in conjunction with a PIN pad) as a payment acceptance terminal for micro-merchants. 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 04 October, 2013, 20:36Be the first to give this comment the thumbs up 0 likes

I agree but I fear that vested interests will keep redefining mobile payments the way it suits them. A couple of years ago, they use to claim mobile payments would disintermediate banks. I hardly hear that line any more. Then, they started saying mobile wallet means mobile payment. When mobile wallet adoption went nowhere, they suddenly started claiming mPOS as mobile payments. Wonder if they'll start calling it "tablet payments" when someone installs a SQUARE dongle on a tablet or "electric payments" because it won't work without electricity? Personally, I find the funding method to be the most faithful representation of a method of payment. Cash is cash. Mobile wallet using a bank-issued credit card is still card payment - mobile is just the form factor. If the mobile phone bill is the funding mechanism, then it's true mobile payment - few examples being Dwolla, Zong, Boku, etc. 

A Finextra member
A Finextra member 07 October, 2013, 13:28Be the first to give this comment the thumbs up 0 likes

These are interesting points.  And I agree that the article covers only some of mobile payments.  It omits payments made by entering card details to a mobile phone, and payments from a bank account via a mobile phone (banking apps, or Barclays PingIt). 

But I have to take issue with Alexander and Ketharaman's comments.  No one has the right to define the English language: it is whatever popular use makes it.  It differs in that respect from the French language, which is whatever the Academie Francaise decides.   Anyone is entitled to create their own definitions of 'mobile payments' for their own uses, but not to assume that their definitions will constrain anybody else.

Looking at popular use, 'mobile payments' means 'payments involving a mobile phone'.  Nothing else.

Following up on Mark's comment, if we're going to annex 'MPOS' as meaning 'payment acceptance using a smartphone', can anyone suggest a term for 'payments where a smartphone represents the source of value in a face-to-face transaction'? 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 07 October, 2013, 16:48Be the first to give this comment the thumbs up 0 likes

Unless there's a general agreement of what the term "mobile payments" means, I wonder if the question raised in the title of this post would ever be answerable. Agreement can emerge from consensus or by definition. Consensus generally takes very long. That's why I believe it's customary for IEEE, API, APICS, FATF and other industry bodies in virtually every industry to define special terms in a particular way even though the constituent words are in English. I think they do this in order to establish a certain industry-specific taxonomy and thereby prevent wholesale chaos. I strongly feel the need for some industry definition of the term "mobile payments", even if the definition is at gross variance from my current view of the term, so that - on a lighter note - we don't end up with funny experiences like the one described here!

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 09 October, 2013, 13:53Be the first to give this comment the thumbs up 0 likes

If all 'payments involving a mobile phone' should constitute 'mobile payments', fair enough. By the same token, can the popular use be extended to call all payments made from a desktop "desktop payments" and ditto for "laptop payments"? Suddenly struck me that the 'e' in ePayments must stand for 'electric' since none of them will work without electricity.

I always expected different companies to choose different definitions of 'mobile payments' depending upon their vested interests. But, today I came across the same company quoting vastly varying figures for mobile payment spend. In this blog post, SwitchPay says, "U.S. Mobile Payments Expected to Top $1 Billion in 2013" whereas in an infographic on another blog post, the same company proclaims, "MOBILE PAYMENTS USAGE HITS $163.1 BILLION (in 2012)." 

This is getting even more interesting than I expected! 

A Finextra member
A Finextra member 09 October, 2013, 21:02Be the first to give this comment the thumbs up 0 likes

Good point, Ketharaman. I do think that definitions are important for meaningful discussion. Labeling e-comm transactions as "mobile payments" is self-fulfilling prophecy, unless the underlying payment mechanism IS mobile-based (e.g. M-Pesa or Pingit).

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 10 October, 2013, 08:18Be the first to give this comment the thumbs up 0 likes

@AlexanderP:

I tend to agree with you and that's partly what I'd meant by "Personally, I find the funding method to be the most faithful representation of a method of payment." That said, I think it'd be very difficult to draw a line between form factor on the one hand and funding method on the other and avoid wondering if PingIt is a "true" mobile payment since it eventually uses a bank a/c as the funding method. I hope you get my drift.

I'm reconciled to having a couple of different definitions but all I ask is for internal consistency within each definition and acceptance of the consequences of the specific definition viz.:

  • If somebody uses the expression "mobile payment" to reference every payment made from a mobile, then they must use the expression "desktop payment" to reference every payment made from a desktop.  
  • If somebody claims that dongle-based mobile POS is mobile payment even if it only accepts the same old plastic card, then they can't claim that SQUARE will disintermediate banks. 
A Finextra member
A Finextra member 10 October, 2013, 08:54Be the first to give this comment the thumbs up 0 likes Well, unless you use digital currency, ALL payments are ultimately made to/from a bank a/c...
Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 10 October, 2013, 11:21Be the first to give this comment the thumbs up 0 likes

Not really. Boku, Zong, M-PESA and Airtel Money are examples of mobile wallets that can be funded with normal cash or a mobile phone account without involving a bank account (or a bank card or any other bank product).

A Finextra member
A Finextra member 10 October, 2013, 11:32Be the first to give this comment the thumbs up 0 likes

When you fund your mobile a/c, guess where that money ultimately ends up...

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 10 October, 2013, 15:52Be the first to give this comment the thumbs up 0 likes

While I'm not aware of any rule in that regard, payment modes are generally denoted by what happens on the side of the payer and at the point of payment, not that of payee or collection. In any case, with M-PESA,  when A sends money to B, B can choose to keep the receipt in the mobile wallet itself. Even if B wishes to withdraw the receipt, it will be by cash at a cash-out agent, not transfer to a bank a/c. In fact, in all likelihood, A and B don't even have bank accounts.

A Finextra member
A Finextra member 10 October, 2013, 17:46Be the first to give this comment the thumbs up 0 likes

When A sends money to B, ultimately money moves from one MNO's bank a/c to the other one (with M-Pesa, there is no money movement at all as both parties are with the same operator). In any case, at some point money has to go through a bank account (again, unless we deal with digital ccy).

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 11 October, 2013, 07:34Be the first to give this comment the thumbs up 0 likes

In each of the four examples that I've quoted, there's only one MNO involved, so there's no question of money moving from one MNO's bank a/c to another MNO's bank a/c.

In the case of M-PESA, money does move from A's M-PESA a/c to B's M-PESA a/c. At the infra layer, maybe only bits and bytes move. But at the business process layer, A and B do perceive the movement of money i.e. payment, otherwise we won't be treating M-PESA as an example of "mobile payments" at all. And all this happens without involving a bank.

PingIt is not one of my four examples. However, from whatever I know about it, PingIt uses FPS to move money from A's bank a/c directly to B's bank a/c, without touching the two MNOs' bank a/cs.