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As part of their efforts to deliver banking services on mobile phones, banks have had to learn to work with wireless carriers.
February 20
A mobile payments business model Citigroup Inc. tested in India has proven a hit among all the key players, even wireless carriers.
Observers have often said that U.S. carriers, well known for maintaining strict control of their hardware and pricing, would be unwilling to support payments chips in their phones without a cut of the transaction revenue. But bankers are reluctant to share these fees, and the India test offers a viable alternative: subsidizing the cost of the phone.
Though Citi executives stressed that paying for phones is not part of their long-term strategy, analysts said the idea could give mobile payments enough of a short-term boost for the technology to gain critical mass among consumers. Citi has taken a similar approach in the past to persuade consumers to adopt new technology.
In its test in Bangalore last year, Citi offered participants up to $110 to purchase a Nokia Corp. handset and use it to make purchases.
Beyond the rebate, "there was no unusual dividing up" of the transaction revenue or any other expenses, said Jeff Semenchuk, a managing director and the head of Citi growth ventures. "Everyone stuck to their core business, and how they make money."
The phone featured near-field-communication chips that enabled people to make contactless payments with the handset. Customers needed to link a Citi card to the phone and make 12 purchases to receive the full $110 in rebates. Most did — and kept on going.
Satish Menon, the executive vice president of Citi growth ventures, said there were two categories of trial participants: the active ones, who sought it out, and passive ones, who had to be approached.
The active ones increased their spending on their linked Citi accounts by 300% over the course of the trial. Even the passive participants spent 75% to 100% more, he said. (A control group of nonparticipants kept their spending flat.)
The project also delivered benefit to the other major players, Nokia and Vodafone Group PLC, which provided the wireless service for the phones. Menon said that Vodafone saw measurable improvements in customer loyalty among participants. (To simplify the enrollment process, the trial was restricted to existing customers of Citi and Vodafone, so it could not measure new business for either company.)
MasterCard Inc., the contactless payment terminal maker Vivotech Inc. and 250 Bangalore merchants were also involved in the test, which ran for 26 weeks starting in July.
Menon said the project showed that the business case for mobile payments, for both banks and wireless carriers, "has been completely proven with the Bangalore piece, and I think that bit of information is universal and will apply both in the United States and in the other markets."
In Bangalore, the $110 rebate made the phone free to consumers, and was so popular that 20% of all the new handsets Nokia sold in the city were purchased through the program, Menon said.
George Tubin, a senior research director at TowerGroup Inc. of Needham, Mass., said Citi has a proven history of using incentives to drive consumer behavior.
The Bangalore rebate echoes a well-known 2004 promotion in which Citi offered Apple Inc.'s hard-to-find iPod Mini music player to customers who agreed to open a Citi account online and use its bill-pay service. At the time, it was arguably easier to get an iPod through Citi than to find one in stores.
"Citi would say, 'We'll give you a free iPod, but you have to … do more than two bill payments a month,' knowing that when customers do more than two bill payments a month, they become more loyal customers, they carry higher balances," Tubin said. Citi was "trying to force the behavior that they know a more profitable customer exhibits."
And it worked, he said. "If you can change customer behavior and incent that changed behavior, a lot of times it sticks."
The next step is to duplicate the program's success in the U.S., and Tubin said the carriers here have resisted supporting mobile payments.
Though he said the wireless companies would benefit from increased business under Citi's model, "we've seen a lot of carriers in the U.S. being resistant to that, saying that's not all we want to be" because they also want a share of the transaction revenue.
Tubin said carriers should be open to Citi's model, if the bank can show that mobile payments attracts or retains customers. "Carriers make money when people sign up," he said.
Even though the model has been shown to benefit the parties, getting all the stakeholders to agree will take time, Tubin said.
"There are so many different players," he said. "There's three massive carriers and a lot of smaller ones. There's a whole bunch of big banks, there's Visa and MasterCard, there's Apple, there's PayPal. There are so many players in the U.S. that are really entrenched … that I think it's a little bit more of a challenge to make it happen."
Semenchuk acknowledged that even given these results, U.S. carriers may still demand more, such as transaction revenue, and Citi has not ruled that out as a possibility. "There are new revenue streams that will come out of this that we are open to exploring," he said.
Sprint Nextel Corp. spokeswoman Jennifer Walsh Kiefer said her company is aware of the trial and "we're watching that with interest. We're exploring a number of different mobile payment options, and we're always looking for business models that will bring something convenient and simple."
Representatives of the other two major U.S. wireless carriers, AT&T Inc. and Verizon Communications Inc., did not reply to inquiries.
Menon said that although the rebate attracted many participants in Bangalore, Citi probably would have to tweak the model in the United States. For starters, Indian consumers purchase their phones independently of their carrier relationships, and do not generally receive subsidies on the handsets, a common practice in this country.
And rebates may not even be necessary for long, he said. Just as Citi no longer gives out iPods to bill-pay users, cash incentives for phones could only be used long enough to persuade people to use mobile payments services; it would not be a long-term part of Citi's strategy.
A report published last week by Edgar Dunn & Co. said the trial attracted 3,141 people. The average participant was 30.5 years old, worked in the technology industry, made $15,720 a year and made $207 in card payments a month.
"While such an uplift may not be generated in all projects and there is no guarantee that this will indeed be the case in commercial rollouts, the data collected during the pilot demonstrates that" mobile payment programs "can be commercially viable for all entities involved," the report said.
