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Digital Commerce: Show me the (Mobile) Money

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Summary: Many companies are struggling to build a mobile commerce business case that generates significant incremental revenues in the next five years. But some will ultimately use digital wallets to create a valuable platform that bolsters customer loyalty and produces substantial revenues from location-based marketing, advertising and the management of personal data. What are the barriers, how can they be overcome, and what are the key actions for telcos, major Internet players, banks and payment networks? (April 2013, Executive Briefing Service, Dealing with Disruption Stream.)

The Cycle and Functions of Digital Commerce (April 2013)

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Below is an extract from this 32 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Dealing with Disruption Stream here. Digital Commerce strategies and the findings of this report will also be explored in depth at the EMEA Executive Brainstorm in London, 5-6 June, 2013. Non-members can subscribe to access the report here, and to find out more about this and other enquiries, please email  / call +44 (0) 207 247 5003.


STL defines Digital Commerce 2.0 as the use of new digital and mobile technologies to bring buyers and sellers together more efficiently and effectively. Fast growing adoption of mobile, social and local services is opening up opportunities to provide consumers with highly-relevant advertising and marketing services, underpinned by secure and easy-to-use payment services. By giving people easy access to information, vouchers, loyalty points and electronic payment services, smartphones can be used to make shopping in bricks and mortar stores as interactive as shopping through web sites and mobile apps.

Figure 1 - The Cycle and Functions of Digital Commerce
The Cycle and Functions of Digital Commerce (April 2013)

Telcos and their partners could play a major role in enabling digital commerce 2.0 as intermediaries that create platforms that help to bring together buyers and sellers. But Internet companies, banks, payment networks and others are also seeking to act as digital intermediaries between merchants and consumers.

This executive briefing builds on STL Partners' Strategy Report, Dealing with the 'Disruptors': Google, Apple, Facebook, Microsoft/Skype and Amazon, which examines the mobile commerce strategies of the major Internet players, and STL's Digital Commerce 2.0 Executive Brainstorm events in London, New York, San Francisco and Singapore. It identifies the major obstacles to the rollout of a successful mobile commerce service and then uses the STL Partners business model framework to flesh out the comprehensive strategic and systematic approach that will be necessary to overcome these obstacles. In so doing, it details the potential value propositions of a digital wallet for banked consumers, unbanked consumers and merchants.

The report concludes by identifying the strengths, weaknesses, threats and opportunities for telcos, major Internet players, banks and payment networks in the mobile commerce market. It then uses this SWOT analysis as the basis to recommend potential actions for each of these players.

Mobile Commerce – Hard to Get Right

In a recently-published report, The Mobile Commerce Land-Grab, STL Partners explored how smartphones are extending digital commerce out of the home and the office and on to the street and in to the store. With full web browsers and a host of apps, these handsets enable consumers to access information and interact with merchants and brands from anywhere and at anytime.

That report concluded that Internet companies, telcos, banks, payment networks and other companies are in land-grab mode - racing to sign up merchants and consumers for digital wallets that could enable them to secure a pivotal (and ultimately lucrative) position in the fast growing mobile commerce market.

Across Europe, the Americas, Asia and parts of Africa, telcos, Internet players, payment networks and banks are looking to deploy their own digital wallets in the belief that these apps will become a key strategic platform. A digital wallet - software that stores debit and credit card information, loyalty points, electronic vouchers and cash – could be used to interact with consumers while they are actually shopping, brokering targeted offers and promotions. For marketers, the wallet offers a golden opportunity to reach a consumer on the cusp of making a purchase.

While Internet players, such as PayPal and Apple, tend to be focused on signing up users for their online wallets, telcos, such as AT&T and Vodafone, are developing a mobile app-centric solution that uses the SIM card for authentication.

In fact, you need both. To become a market leader, a digital wallet will have to be very easy to use both online and at point of sale. Most consumers will want to use the same digital wallet across a PC, a mobile handset and a tablet, so they can track all of their spending, vouchers and loyalty points easily. At the same time, wallets that are used both online and at point of sale will be able to generate a far more complete and comprehensive picture of the consumer's shopping habits.

Fragmentation and the waiting game

The large number of players targeting the mobile commerce market with a diverse range of approaches risks confusing both consumers and merchants. There is a danger that both groups will play a waiting game, preferring to see which solutions rise to the top and which flop. Many stakeholders, particularly upmarket retailers and brands, are likely waiting for Apple to roll out a mobile commerce proposition they can use to target the many affluent owners of iPhones. In other words, the land-grab may end up being a very drawn out and expensive process for all involved. For more detail, see our recent report, The Mobile Commerce Land-Grab.

One of the underlying reasons for the high degree of fragmentation is the difficulty in circumventing the many barriers to the development of successful mobile commerce services. In an attempt to overcome these obstacles, companies are experimenting with different technical solutions and business models. This chapter sets the scene for the rest of the report by identifying the major barriers that need to be overcome.

The big barriers

STL Partners believes the main barriers to rolling out a successful mobile commerce service are:

Demand-related factors

  • Competition from existing solutions in mature markets
  • Low financial services penetration in developing and emerging markets
  • Low incomes in large swathes of developing and emerging markets

Supply-related factors

  • Mobile advertising/marketing is hard to get right
  • The cost of deploying infrastructure
  • Difficulty in building a broad ecosystem
  • Regulatory complexity

Demand-related factors

Competition from existing solutions

Many people do not see the need to get a mobile wallet – their plastic cards (chip and PIN) work well in bricks and mortar stores, while PayPal, iTunes and Amazon Payments work well online. In fact, these existing payment mechanisms have set a high benchmark. Most consumers are unlikely to adopt a mobile wallet, unless it is a simple solution that works in a consistent and intuitive way both online and at point of sale.

There is a view that a mobile wallet is a solution in search of a problem and even people within the telecoms industry don't see consumers rushing to embrace mobile wallets: The broad consensus among delegates at STL Partners' EMEA Executive Brainstorm in June 2012 was that it will be three to five years before the majority of consumers are using mobile wallets regularly in markets in the EMEA region (see Figure 1).

Whereas telcos can distribute digital wallets by preloading them on to the handsets they sell, persuading consumers to use them will clearly depend on merchants being able to accept payments from these wallets. For digital wallets to gain traction with consumers and yield comprehensive transactional data, they will need to be accepted by both online merchants and retail stores and restaurants.

Low financial services penetration in developing markets

To pay for goods and services digitally, a consumer typically needs a bank account or some kind of stored value account. However, in many developing countries, most people don't have bank accounts, either because there are no bank branches in their locality or because the cost of financial services is too high or because they don't have sufficient income to need a bank account. However, where local regulation permits, mobile money transfer services are enabling people to transfer stored funds from one account to another, paving the way for mobile commerce.

Low incomes in developing countries

In Africa, developing Asia and parts of Latin America, most people don't have enough disposable income to purchase smartphones or make the kind of impulse purchases mobile commerce activities are supposed to encourage. These economic factors clearly impact the business case for deploying such services in low and middle income countries.

Figure 2 - Mobile wallets will take time to gain traction
Mobile wallets will take time to gain traction (April 2013)

Source: STL Partners Executive Brainstorms, San Francisco, Singapore, Dubai and London, 2012-2013

Supply-related factors

Mobile advertising/marketing is hard to get right

Mobile advertising is still a relatively small business – it accounted for approximately 1% of global advertising spend in 2011, according to analyst estimates . Prior to its IPO, Facebook famously acknowledged that it didn't ‘directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.’ Facebook isn't the only company struggling to figure out how to make mobile advertising/marketing successful. Obstacles include consumers' impatience with spam, their reluctance to use limited screen space and valuable bandwidth to receive advertising, short attention spans and information overload.

For these reasons, mobile advertising/marketing needs to be very, very well-targeted. As has demonstrated, transactional data can be a great help in this respect. And it isn't rocket science. If a consumer has bought a Nikon SLR camera, then they are likely to be interested in special offers on Nikon-compatible lenses. In fact, transactional data, combined with location data, can be used to deliver very precise marketing – somebody who regularly buys Indian food from a supermarket is likely to be interested in a voucher for an Indian restaurant in the vicinity of where they live or work.

The need for very precise targeting explains why so many companies are looking to persuade consumers to use their digital wallet and subsequently give their permission to harness transactional data, which can then be combined with demographic and location data to make highly personalised offers.

The cost of deploying infrastructure

Most retailers, restaurants and cafes can't yet accept payments made by mobile handsets. Right now, it is difficult to make a conventional business case (i.e. no ROI for at least three years) for enabling mobile payments in bricks and mortar stores either using software or hardware:

At point of sale, software-based solutions may be too slow, too insecure and, in some cases, hindered by a lack of in-store connectivity. Merchants want simple solutions that can reduce the number of staff on tills.

And a hardware-based solution will be expensive and time-consuming to implement: A NFC terminal costs $100-$300, depending on the level of integration with other POS systems, and it could be several years before most people have an NFC handset.

Difficulty in building a broad ecosystem

In general, merchants are looking for one simple solution that all their customers can use - they don't want to be limited to one telco's customers or one bank's customers. That means mobile operators and banks may need to form joint ventures or work with aggregators, creating complexity and the need for consensus-building among competitors.

Moreover, actors from several different industries (telecoms, retail and financial services) need to work together to deliver effective mobile commerce services. The involvement of so many players has slowed time to market and led to procrastination. The result has been a host of trials and experimentation, leading to confusion among merchants about where the mobile commerce market is heading.

Regulatory complexity

Although governments have a vested interest in moving their citizens away from cash, thereby increasing tax revenues, the deployment of mobile payments is often held back by regulatory requirements, which differ market by market, making it difficult to achieve global economies of scale. That weakens the business case for new entrants, such as Google and Apple, but favours the incumbent banks who are already familiar with the local regulations.

To read the note in full, including the following sections detailing additional analysis...

  • Executive Summary
  • Overcoming the Barriers
  • 1. Understand the marketplace you are operating in
  • 2. Develop compelling service offerings
  • 3. The value network
  • 4. Technology
  • 5. Finance - the high-level business model
  • Conclusions and next steps
  • About STL Partners

...and the following figures...

  • Figure 1 - The Cycle and Functions of Digital Commerce
  • Figure 2 - Mobile wallets will take time to gain traction
  • Figure 3 - The mobile commerce flywheel
  • Figure 4 - The STL Partners Business Model Framework
  • Figure 5 - For banked consumers, digital wallets mainly offer convenience
  • Figure 6 - For the unbanked, digital wallets offer convenience and some savings
  • Figure 7 - For merchants, digital wallets help build deeper customer relationships
  • Figure 8 - Telcos' potential revenue streams from a digital commerce service
  • Figure 9 - Telcos' potential major costs in launching a digital commerce service
  • Figure 10 - Telcos' mobile commerce revenues are likely to be modest
  • Figure 11 - Telcos have regular customer contact and real-time data
  • Figure 12 - Potential strategic actions for telcos
  • Figure 13 - Leading Internet companies have global reach and scale
  • Figure 14 - Potential strategic actions for Internet players
  • Figure 15 - Banks have local knowledge, payment networks trusted brands
  • Figure 16 - Potential strategic actions for banks and payment networks

...Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 32 page report in PDF format hereNon-Members, please subscribe here. Digital Commerce strategies and the findings of this report will also be explored in depth at the EMEA Executive Brainstorm in London, 5-6 June, 2013. For this or any other enquiries, please email  / call +44 (0) 207 247 5003.