Mobile wallets by telcos: Why & how it is a profitable business model
Not long ago, telcos used to be like walled gardens — to send text messages and call your family and friends, they were the sole provider of the underlying communication services. This changed with the proliferation of free services such as WhatsApp, Viber, Facebook and others which arrived at our smart devices. Now, we carry our phones and communicate for free. A research paper by LivePerson, examining Gen Z and Millennial digital habits clearly show that the phone is the new wallet. In the study, 61.8% of global consumers ages 18–34 would choose to leave their wallets at home instead of their phones. Similarly, The Austrian Telecom A1 has confirmed the findings with their research. As a response to these user needs, they create the A1 Wallet.
As free alternatives, the new social channels quickly gained traction, which led to a decrease in earnings. Telcos had to undercut the price of their phone plans to keep customers using their paid services. A big hit came from the European Union in 2019. Now, customers within the European Union can end their contract early and choose a better deal. Additionally, roaming taxes between member states have been removed.
To change consumers’ perception of their brand and advertise themselves as technological besides communication providers, telcos ventured into TV subscription services, databases, and home automation. Now, thanks to open banking and a new set of regulations embraced and imposed by the governments of countries such as Columbia, India, Kenya, and now all of Europe with PSD2, telcos have the chance to enter the digital wallet market as well.
The adoption rate of digital wallets in the US was less than 10% in 2019. This signals telcos have a niche market that they can conquer first. Despite various finch offerings, there are still billions of customers that telcos can entice. It is a new market to win, and by venturing in countries where wallets still have low user adoption, they build themselves a name of pioneers. We have seen this with Alipay and WeChat Pay in China which were the first payment services to entice people into digital payments early on. Being pioneers, they currently account for 90% of China’s QR code payment market. Chinese now compare new fin-tech players against the leaders.
Similarly, we saw this with Apple and Android being the first novel mobile platforms to entice users and subsequent ones like Windows Phone who failed. Now, Alexa is the pioneer in smart speakers, with the competition lagging. The business model is to invest early on and build a reputation.
A new study from Juniper Research has found that the number of people using digital wallets will increase from 2.3 billion this year to nearly 4 billion, or 50% of the world’s population, by 2024. This, in turn, will push wallet transaction values up by more than 80% to more than $9 trillion per annum. Let’s see how & why telcos can and should build a lucrative business model around digital wallets and enter the field of fintech.
1. New sources of revenue
How can telcos build a lucrative business model around digital wallets while offering them free of charge to their customers? First, you need a user base. Once you start offering cash-back and thus acquire more customers, you can profit from four sources we describe below.
The first source of revenue is loan origination. Banks would pay commission to the telco to use their loan service. The Mobile Money Lender model revolves around Partnership between lenders and mobile network operators (MNOs) to offer mobile money loans to customers by leveraging their mobile phone data for scoring. For example, in Columbia, a huge percentage of the population does not have a bank account and thus credit card. As such, the banks cannot track their expenses and build a profile of them. The latter is crucial when deciding whether to give a loan to an individual. However, once users from the developing world begin using your wallet daily, their transactions can be shared with interested banks. Columbia has the so-called shark loans, where people get a loan and have to pay back a huge debt. This is where Movii comes to the rescue. Similarly, Tala is an online lender in Kenya whose proprietary algorithm scrapes approximately 10,000 data points from the phone (including SMS, call records, locational data, etc.) to analyze and score customers. By offering customers’ transaction data to banks, they do not only ensure themselves a new source of income (commissions) but impact the lives of millions by helping them get a loan when in poverty.
The second source of revenue comes from advertising a merchant’s products in your wallet. For example, Paytm in India has its marketplace within the app (Paytm Mall) who generates revenue from charging fees and commissions from the sellers, which differ for different categories of products. In Bulgaria, Phyre charges retailers to advertise their offers within their wallet app.
The third source of revenue is premium accounts. Revolut charges $9.99 or $14.99 a month per user based on two types of premium accounts — premium or metal. If your customers are often on the go and fly a lot, they will benefit from the included travel and medical coverage. Additionally, users have to pay less for using airport lounges.
The fourth source of revenue comes from currency exchange. For example, fintech companies that offer digital wallets such as Revolut, Monese and Curve charge a 0.5% fee for specific currencies outside foreign exchange market hours — all hours except midnight on Friday to midnight on Sunday in London. A1, as a telco with its digital wallet, charges 2% of the amount.
The fifth source is the transactions fees. Revolut offers free withdrawals up to $300 per rolling month while Monese offers £200 or €200. There is a fee of 2% of all withdrawals above this.
2. Advertise your brand without costly marketing
Imagine you are dining with colleagues from the office. Unfortunately, the restaurant does not have a POS terminal. The waitress asks for your credit card and you take out your physical Mastercard which is an alternative to the card in your wallet. Your telco logo on top shines like a diamond. People are stunned and want to know how they can obtain such cards themselves.
In another scenario, you are on a trip to Kenya. You are carrying your budget Android phone which does not support NFC. You pay at a local shop with the same physical MasterCard. Right there, you advertise the telco across the globe. The shiny new card implies wealth.
Even if customers have a phone that supports NFC and use your wallet, people would still stare at the marvelous way of payment and ask about the app and cards you used. It is all about free advertisement.
Telecom companies rank among the biggest spenders on advertising in the US to constantly win new customers and engage existing ones. We are talking about billions of dollars. By investing in a digital wallet, telcos dramatically cut down on costs.
3. Create a closed-loop
As mentioned earlier, telcos are transitioning to digital companies. Thus they now face competition from new players. Apple, one of the key players in the field offers TV & music service payment subscriptions, smart speakers as well as a credit card. Apple’s strategy is to entice people in all areas of their lives in the form of digital solutions. This strategy works, as once customers hop into the ecosystem, it is hard for them to leave. Recently, telcos in Bulgaria like A1, Vivacom follow the same strategy — create a rich portfolio of digital services including mobile wallets and make people so invested in your platform that they wouldn’t hesitate to switch when an opportunity arises. In Kenya, Vodafone offers M-pesa, a digital wallet as well as TV subscriptions. This creates a closed-loop of loyal customers.
The top of the cherry in keeping people in telcos’ new version of a walled garden is the credit card and mobile wallet. Your digital payments span through many areas of our daily life, including transportation tickets, entertainment such as paying your TV subscriptions, online shopping, paying the bills, buying food in the store and even hiring a vehicle. Other perks include using loyalty cards, all stored within your telco wallet. You build a habit for your customers to use your digital wallet in all areas of life. And habits are hard to break. Thus, customers will think twice before uninstalling your app. Add to that no fees for inactive wallets account for more than 6 months and we have a winner.
But what if your customers are willing to uninstall your app? First, they need to transfer their funds to another account. Next, they have to go to the process of closing the account. For Revolut, they have to speak to an actual agent over the phone. For Monese, you have to send an email.
4. Retain customers by integrating your wallet into messaging platforms
Nowadays, people use messaging platforms all the time and they have become way more popular than SMS as a means of communication. You can deliver value to your customers by allowing them to send payment links from their digital wallet to another user’s wallet by embedding a link in their chat so they don’t have to switch between apps. This will increase user satisfaction and lead to loyal customers.
You can take it a step further. For example, iMessage allows users to choose from shortcuts. ING bank has taken advantage of that and allows users to use their shortcut and send money directly within iMessage without opening their bank app. You as a telco can benefit from building a similar shortcut.
Summary
It is a new field traditional telcos are trying to venture into. They do not know to build a digital wallet on their own. This is why we see telcos like A1 building wallets by buying the infrastructure of existing payment services and putting their brand on top. This way they do not have to wait for a license to operate as a licensed e-money institution. What is more, they do not have to account for crucial security measures such as Point-to-point encryption (P2PE), Tokenization and Biometric Protection among others. Lack of top-notch security can lead to a data breach which in turn will be the end of your wallet.
On top of that, you need great UI and UX to differentiate yourself from the steep competition. Think of simple design, ease of use, easy terminology, timely notifications, seamless onboarding experience, and payment flows, as well as studying the market conditions and competitors’ offerings. As for market conditions, you need UX Designers who can study the shopping behavior of the local population of a given country and technology in use to find out which functionalities will this target group most benefit from — QR codes (crucial for older phones who do not support NFC and cannot pay at POS terminals), gift cards, loyalty cards, or even bank loans.
