August 19, 2016
Carrier Billing: An Evolution Toward the Mainstream
By Ray Ramillosa, Vice President of Marketing, Boku
Last year, a mobile payments trade publication referred to carrier billing as “The World’s Most Popular Mobile Payment.” That’s a bold assertion when the term “mobile payments” has been used so loosely that it can be equally applied to everything from peer-to-peer money transfers to purchases made with mobile in stores to online purchases made through mobile websites and mobile purchases made in-app. Popularity can, of course, be defined in many ways and carrier billing is quite popular when looked at through the lens of number of users worldwide, but rather than focus on the claim itself, it is worth explaining what carrier billing is and what lies ahead for this emerging form of mobile payment.
The only ‘100% mobile’ mobile payment
Whereas most forms of mobile payments are actually some hybrid of a mobile transaction funded by a credit card or bank account, carrier billing is the only form of mobile payment that lets consumers charge a purchase directly to their mobile phone bill using their mobile phone number or have the cost of a purchase deducted from their prepaid minutes balance. Given that 75 percent of the mobile subscriber population in the world uses prepaid phones, carrier billing leverages one of the most widely distributed cash top-up networks in the world, which is critical to digitizing cash.
Millions of people around the world use carrier billing to make payments. Surprisingly, a significant chunk of carrier billing volume today is generated by consumers in more developed countries in North America and Europe. With that said, emerging markets represent a big opportunity for carrier billing, given the low levels of credit card and bank penetration in those markets and given the accessibility that carrier billing offers. For merchants, conversion is the big draw, including enabling them to not only convert browsers to buyers at a higher rate, but also convert those who often do not have another way to pay online.
It has not yet reached the mainstream as a widely accepted payment method, however. Standing in its way are technical hurdles, commercial hurdles and regulatory hurdles.
Technical hurdles: Driving the Change from PSMS to Direct Carrier Billing
The earliest forms of carrier billing utilized PSMS connections, which relied on charging the consumer a fee to send or receive a text message in addition to their standard SMS rate. While some carrier billing still relies on this technology, PSMS connections are increasingly being replaced with direct carrier billing connections, which connect directly to carriers’ billing platforms making it possible to directly charge a consumer’s phone bill.
Direct carrier billing technology makes it possible for payments processed via carrier billing to function more like payments processed via credit cards. This can provide enhanced features such as continuous price points (vs. price points only available at fixed increments such as $1.00, $1.50, $2.00, etc.), billing flows that are no longer tied to an SMS, and direct refund capabilities. Continued adoption of this new technology is a must for carrier billing to enter the mainstream.
Commercial Hurdles: Reducing the Cost for Merchants
Carrier billing historically has been a costly form of payment for merchants to accept—in some cases it can be more than 40 percent of the transaction price. Such high costs are feasible in virtual goods environments, which have been mainstays of carrier billing for some time, where there is no real cost of goods.
As carrier billing has become more common in digital-goods environments where there are licensing costs for the goods sold, costs have come down out of necessity. In mobile app stores, for example, where carrier billing is increasingly being used as a form of payment, typical costs for merchants are 10-15 percent of the transaction.
That’s still high relative to credit cards, obviously, but indicative of progress and the downward trend in cost is continuing. Countries like Japan and Korea, where the cost of carrier billing is in the low single digits and close to or on par with the cost of credit cards, are often referenced as ideal case studies for carrier billing. As a result of the low costs in these markets, carrier billing has long been used for the purchase of both digital and many types of physical goods. In short, as the cost of carrier billing comes down, the places where carrier billing can be used goes up. And, even in the developed economies of the West, there is a noticeable trend toward using the availability of carrier billing for physical goods.
Regulatory Hurdles: Navigating Outdated Frameworks
In certain geographies, regulatory hurdles have also prevented carrier billing from being more widely used. In Europe, for example, carrier billing has long operated under an exemption to the EU-wide Payment Services Directive (PSD), which has limited it as a payment method for digital goods only.
Despite this, new e-money based carrier billing approaches that no longer rely on the PSD exemption are emerging, making it possible for carrier billing to be used for the purchase of any type of good, including physical goods and non-digital services . While it is true that consumers won’t likely be charging a television to their phone bills any time soon, the movement to use carrier billing to purchase everyday physical goods and services such as magazines, transport tickets, vending items, and parking vouchers is already well underway from companies like corethree, IPC Media, and more. In cases where these items are purchased via mobile applications, carrier billing provides an ideal payment method given the relatively friction free (and, in many cases) one-click purchase experience that it can deliver.
The market for digital goods purchased on mobile using carrier billing is projected to grow to $13 billion by 2017, up from a current estimated market size of $4 billion. This growth will be fueled by the combination of improving technology and infrastructure, decreasing costs, and new advancements on the regulatory front. And while hurdles along these fronts are real, the positive progress along each of these dimensions is just as real.
Ray Ramillosa is the vice president of Marketing for Boku. Boku has partnered with more than 250 mobile operators in 68 countries to enable their subscribers to purchase goods using their mobile number.