Aite Group’s Gwenn Bezard thinks he’s figured out the avenue cell phone carriers may find themselves taking on their way to becoming financial services providers: By selling air time to nontraditional markets like the under- and unbanked through prepaid cards. Over time, he thinks, serving that market could lead them to become merchant acquirers.
Cell phones are the great disruptive technology for the financial services industry: To the extent that mobile payments take market share from other vehicles, they have the potential to atomize the value of bank brands and even minimize payments cards’ market share.
If Japan’s DoCoMo’s operations become the industry model—small payments go on the customer’s bill while larger payments are authenticated as credit or debit transactions—mobile carriers will become de facto card issuers and merchant acquirers as the vehicle becomes the payments method of choice for young people. That initially small fraction of the market can then grow organically by taking market share from other payments venues, like ordinary cards. Eventually, according to Bezard’s theory, this disruptive technology becomes the mainstream, unseating earlier industry models.
In Bezard’s analysis, the path to this outcome lies among under- and unbanked American populations that routinely use cell phones for almost everything, and have a healthy appetite for cell phone minutes. Market share of so-called “virtual topups”—buying air time with a cell phone or a prepaid card—will grow from 10 percent in 2006, to 21 percent in 2010. “It’s a reflection of a higher market penetration of prepaid cards across not only the unbanked, but also all those segments of the population that are not typically included in the unbanked population,” he says.
Bezard’s perspective is worth paying attention to, since the idea of disruptive technologies, identified by Harvard professor Clayton Christensen, is that the unseating of dominant industries and products begins by the dominant group’s acting rationally, catering to its best customers and investing in its core competencies and products, letting smaller, disregarded—but innovative—companies pick up the crumbs. Over time, says Christensen, the market shifts from the big players’ products to the small innovators, which in their turn become dominant.
Since this description perfectly describes the mobile payments phenomenon, major payments providers might want to take a look at Bezard’s ideas. This is especially true because that projected 100-plus percentage growth in market share over four years reflects continued growth in cell phone use, meaning that 21 percent in four years will result in a much larger dollar amount than 21 percent of today’s market.
Prepaid card-payment volumes in this area will show healthy growth in this period, he estimates—to about 1.3 billion payments in 2010, from 1 billion in 2005, generating an extra $800 million in revenues. Of that growth, market share of the ubiquitous “scratch off” top-up cards sold in chain stores today will fall from 62 percent in 2005, to 8 percent in 2010, while the market share for point-of-sale activation will grow from 29 percent in 2005, to 68 percent in 2010.
It’s not so much that the under- and unbanked population in the United States will grow significantly, he says. “The underlying assumption is not that the unbanked population is going to expand dramatically in the U.S.,” he says, but that prepaid cards will be taking market share from the more common top-up methods available today.
Unlike some observers, though, Bezard is unwilling to predict an apocalyptic picture of the future for acquirers and issuers, brought to their knees by the T-Mobiles of the world. Real change, after all, is slower than enthusiasts want to think.
“(Carriers eventually becoming acquirers) is definitely the overall potential direction, but I’m cautious about the speed of adoption, and how large that phenomenon will be,” he says. “But (topup) could lead carriers into merchant acquiring, and it could start with selected segments of the market, like small merchants, or cab drivers, or people who sell things at craft fairs.”
Overlooked segments like these, added together, eventually achieve a certain critical mass that compels providers either to serve them, or lose healthy revenues. But as increasing numbers of cell phone carriers enable payments on their instruments—if only to keep their customers on the phone—larger numbers of people will use cell phones as their payments vehicles. And as that fraction of the market grows, it’s only a matter of time before those carriers do the math and decide they’d rather direct those card-acquisition fees to their earnings, than to some third party. That idea was good enough for Wal-Mart.
When this event takes place, it’s likely to seem to come out of nowhere. And in fact, the avenues Bezard discusses are barely on the map for companies not directly associated with the phenomenon they represent—they’re too busy acting rationally, and serving their best customers. But that’s the premise, and danger, of disruptive technologies. (Contact: Aite Group, Gwenn Bezard, 617-338-6037)