Business Issues, Not Technology the Issue for Service Provider Mobile Commerce
By Gary Kim, Mobile Marketing & Technology
There are good reasons mobile service providers have been more willing to participate in mobile digital commerce sales than sales of physical goods: margin and business risk. Mobile service providers are quite willing to be part of ecosystems selling digital goods, where inventory and logistics issues are miniscule.
That clearly is not the case for bigger-ticket items where there are very-real inventory costs and the service provider has to act as a provider of credit in ways that directly affect balance sheets, says Jay Emmet, OpenMarket general manager.
So where are the greatest opportunities? In a nutshell, transactions where the payment ecosystem favors suppliers able to efficiently bill for small transactions, in high volume, with limited inventory and fulfillment risk.
“We think service providers are very interested in micro transactions for products under $20, says Emmet. If you think about it, mobile service providers, and telcos in general, are extremely efficient at rating lots of very-small transactions with very-high volume.”
Consider the other ways consumers can pay for purchases, such as credit cards or checks. There is a cost associated with any payment method, and not all methods are equally suitable for credit card payments, for example.
On average, credit card charges are around two percent of the retail sales amount, with one key exception. Even a $3 credit card charge incurs a 50-cent minimum transaction cost, plus two percent of the value of the goods sold. So any retailer putting 50-cent retail sale gives 100 percent of the sale amount to Visa or Mastercard. Obviously that makes no sense.
“I think service providers will prefer sales of $25 to $20 or less billed directly to the phone bill because they are more efficient than anybody else,” Emmet says. As far as credit and inventory issues, they likely will want to link the phone bill billing to a prepaid account, linked credit card or automatic clearinghouse system for larger transactions.
That minimizes the amount of risk The business issue for mobile provider involvement in sales of physical goods is a better business ecosystem for distributing risk.
Do mobile service providers really want to carry the liabilities of retail transactions 10 times bigger than the $150 they typically are comfortable with any single consumer? Retail sales entail greater liability for bad debt, for example, and that could affect balance sheets.
So some clear balance statement issues might exist for service providers. People think it is a technical challenge; it’s really commercial risk and business model issues.
At the moment, a service provider takes the risk for goods billed to the phone bill. There is no intermediary. On the contrary, mobile service providers understand their risk exposure for a typical consumer service account. But they are understandably nervous about the extent of mobile purchase risk for physical goods.
“They will focus on supporting the transactions, and shift the inventory risk to the consumer’s other accounts, says Emmet. In the U.K. market, you can create a linked account to the phone and specify which charges go where. That allows the brand to be part of the value chain, and there is a piece of the transaction for the operator.
“There is no reason transactions can’t be a big revenue driver for mobile operators,” says Emmet. To the extent that transaction volume, and the size of the user base, are important for small-amount transaction services, mobile operators are well placed.
In part, U.S. service providers also operate in a payment environment different than exists elsewhere. “Consumer credit is primarily a U.S.-centric phenomenon,” says Emmet. “You can’t bill mobile service to a credit card in many other places in the world.” In Japan, for example, nearly all phone services are sold prepaid, so there is an automatic way of managing bad debt risk.
Most other places, prepaid mechanisms are more prevalent, while the U.S. market operates extensively with postpaid payments, which introduces a greater element of risk.
Also the reality is, in the U.S. market, telephone brands are very strong, and they are leery of jeopardizing brand reputations for potential downside. Even today, when consumers have made a mobile phone or other purchase billed to the phone company, they call the phone company when there are issues, not the actual provider of the goods.
That will change over time, but no service provider really wants to jeopardize a $100 a month account and reputation over a ring tone purchase.
There also are “bill shock” issues. Service providers will have to create on-going invoice presentation to separate out purchases from phone charges, says Emmet. “It is not a technology issue; it is a commercial issue.
“They don’t want to wake up tomorrow with a consumer owing them $62,000.”
The physical goods business model also is quite different from that for digital goods. Generally, service providers are comfortable with getting 35 to 40 percent of a digital goods transaction. That doesn’t work for physical goods.
If a user wants to bill a $2 parking ticket to a mobile phone account, the vendor cannot afford to give away 40 percent of the transaction. In Europe there are pricing bands for real goods, government goods and digital goods that all have distinct pricing mechanisms, says Emmet.
The Apple Store, in-app capabilities and premium SMS are areas mobile service providers already have gotten comfortable with. Next they move into quasi-real-goods markets, says Emmet.
They have an efficiency for billing micro transactions no one else can touch, plus the phone is always there, and available for impulse or convenience buys. Ways of distributing risk are the real barriers.