Early last month, O2 announced that it was closing the doors on its O2 Wallet mobile wallet service. The closure came less than two years after the wallet was launched, prompting a slew of questions regarding what this meant for the future of mobile networks operators (MNOs) in the mobile wallet space. While MNOs are well-positioned to play a leading role in deploying innovative mobile wallets, how can they calibrate the right model for success? Amid rising competition in this space from other players, should MNOs attempt to develop standalone mobile wallets, or forge strategic industry alliances?


Why Did the O2 Wallet Fail?


The simple answer provided by O2 was that changing market conditions and customer preferences led O2 to rethink their mobile wallet strategy. By scrapping the wallet, O2 could “look for new and better ways to help people manage their money on the move, both in the UK and abroad.” The decision may have been further precipitated by recent mobile payments developments from parent company Telefonica, including a joint venture with Spanish banks Santander and CaixaBank.


Perhaps, O2 also wants to concentrate resources on ensuring the success of Weve, the m-commerce platform that O2 is developing in collaboration with rival mobile operators EE and Vodafone. While Weve is primarily a platform for mobile marketing and ads, it also comprises a mobile wallet that will allow consumers to purchase goods and services using their smartphones.


But the likely root of the closure was that the O2 Wallet business model simply did not work. As the mobile wallet ecosystem becomes clustered with traditional financial institutions and technology giants such as Google and Paypal, the precise role of mobile operators has become less defined. This growing competition may have driven O2 back to the drawing board to assess how they can successfully capture a portion of the huge potential mobile payments revenues.


Should MNOs Lead Mobile Wallet Development?


MNOs are well-positioned to play a leading role in the development and deployment of mobile wallets. They control the “rails” upon which these services are offered, and also enjoy strong brand recognition among consumers. The business model for MNOs in mobile financial services, however, is still unclear. MNOs are accustomed to a revenue model that involves low variable costs and high gross margins, while financial services is largely a low margin, high volume industry. For MFS providers, these low margins are squeezed even further by the addition of multiple players such as handset manufacturers and MNOs to the value chain. Thus MFS must add value for MNOs in other ways in order to justify the investment.


In many developed markets, heated competition among MNOs means that offering MFS services can serve as an important tool to encourage customer loyalty and thus reduce churn. Offering a mobile wallet to consumers can differentiate the MNO from its competition, as long as the service is perceived by subscribers as secure, convenient and ultimately – useful. MNOs can also earn revenue from mobile wallets by charging fees to banks or credit card companies to rent space in the secure elements on MNO-owned SIM cards. Other potential revenue streams could come from mining customer data, selling ads or loyalty marketing. Beyond direct revenue streams and churn reduction, innovative mobile wallet platforms could also enable MNOs to attract new clients for their primary services – data and communications.



Standalone Wallets vs. Joint Ventures


For MNOs, developing mobile wallets can be an important way to maintain a competitive edge. But in order to succeed in the mobile wallet space, MNOs need to identify the right deployment model. Should the wallet be developed as a standalone offering, as part of a bilateral agreement, or through a collaborative, cross-industry partnership model?


The most successful MNO-led mobile wallets in developed markets to date  have employed the partnership model, introducing the wallets alongside other ecosystem stakeholders, from major banks and cards networks to technology giants. The Sixdots m-commerce application, for example, was founded by Belgacom and BNP Paribas Fortis and has since signed on all of the other major Belgian banks as well as key MNOs as either co-investors or commercial partners. Accordingly, the app (which is currently in its pilot phase and will be launched in spring 2014) will be available to smartphone users with a bank card from any bank in Belgium and a mobile data subscription from any Belgian telecom operator.


This strategic partnership enables the interoperability that is essential for widespread consumer adoption. Weve, as another example, is a joint venture between the major MNOs in the UK, with participation from major UK banks including Barclays, HSBC and Lloyds. Thus, the platform is a neutral entity that is not tied to a particular handset or operating system and can be used by the vast majority of UK consumers. Other promising MNO-led joint ventures include WyWallet in Sweden, which draws together the country’s four major MNOs, as well as 4T Mobile Payments in Denmark, a partnership between the four leading operators.


While these cross-industry collaborations seem to be the path forward for MNOs to successfully navigate mobile commerce, the failing Isis experiment shows that they are not a silver bullet. The NFC-based digital wallet, a joint venture between AT&T, Verizon and T-Mobile in the US, has struggled with both consumer adoption and the maintenance of key partnerships. Despite strategic partnerships with American Express, Chase and Wells Fargo, the platform has not taken off as quickly as expected. In this case, despite key partnerships, adoption was hindered by the lack of essential NFC infrastructure among both merchants and consumers – showing that the technology can be just as important as the partnerships.


Though a collaborative approach does not guarantee success, MNOs launching mobile wallet solutions in a silo are far less likely to succeed. The failed O2 Wallet is evidence of this argument. Given the fragmented nature of the mobile and financial services spheres, in which consumers are divided among an array of banks and operators, launching an operator-specific platform will limit the potential consumer base and also the utility of the platform. While these platforms may work in markets where one MNO dominates the landscape (for example, Safaricom and M-PESA in Kenya) they are less likely to take-off in more competitive markets. T-Mobile’s new Mobile Money service in the US only offers (free) P2P money transfers to other T-Mobile customers – thus limiting its’ utility. Interoperability with other networks would expand the reach and adoption of the service, but could also threaten T-Mobiles profit margin.


The path towards success in mobile wallets is still cloudy for MNOs, but closely watching emerging joint ventures may offer some clarity. Doubtless, collaboration between industry stakeholders is important for interoperability and ultimately consumer adoption. But if an MNO opts to develop their wallet in conjunction with industry partners (even industry rivals), more questions emerge, such as who to partner with and what the wallet should look like. The primary question which has stalled the progress of these platforms has been how to ensure that the partnerships are mutually beneficial to all parties. MNOs are well-positioned to benefit from the growth in mobile payments, but without finding the right business model they may be edged out by platforms that bypass operators altogether.

© Mondato 2014. Mondato is a boutique management consultancy specializing in strategic, commercial and operational support for the Mobile Financial Services (MFS) industry. With an unparalleled team of dedicated MFS professionals and a global network of industry contacts, Mondato has the depth of experience to provide high-impact, hands-on support for clients across the MFS ecosystem, including service providers, banks, telcos, technology firms, merchants and investors. Our weekly newsletters are the go-to source of news and analysis in the MFS industry.

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