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Why U.S. carriers are not successful with mobile payments

October 25, 2010

Elena Krasnoperova is vice president of analytics and fraud management at Zong

Elena Krasnoperova is vice president of analytics and fraud management at Zong

By Elena Krasnoperova

The topic of mobile payments is red hot in today’s payments and mobile news media. But wireless carriers in Asia and Europe have been successfully enabling mobile payments for many years.

If U.S. carriers want to realize the full potential of mobile payments, they should emulate best practices in pricing and risk management policies from around the world.

The high revenue-share percentages that U.S. carriers charge today are severely limiting both the size of the addressable market and the consumer adoption of mobile payments. 

Because only merchants with zero cost of goods can afford to pay such high fees, mobile payments today are limited to industries such as online gaming and social networking.

Many merchants pass on the high cost of mobile payments to their consumers in the form of surcharging. Consumers get less value for their money if they charge the transaction to their phone than to a credit card.

European and Asian carriers who have reduced their fees – in some cases, as low as 5 percent – have seen a dramatic increase in their revenues from mobile payments, both by penetrating additional industries – for example, online publishing or music downloads where merchants must pay content and licensing fees – and getting a higher share of the consumer wallet.

Hold back on refunds
Another example where U.S. carriers would benefit from the experience of international peers is in refund policies.

Many U.S. carriers today have a no-questions-asked refund policy, when consumers can be instantly granted a refund for mobile payment transactions they did months ago.

While many of the refund requests are legitimate, others are not. An excessively loose refund policy that gives the merchant or the mobile payment processor no opportunity to investigate the legitimacy of the claims opens the door to abuse, friendly fraud and buyer’s remorse.

We have seen instances where consumers get carrier refunds for hundreds of dollars’ worth of transactions spread over many months of purchases.

Sometimes this happens after these consumers were already granted a refund by the merchant or by the mobile payment provider.

Furthermore, some U.S. carriers assess penalties on the mobile payment providers for excessive refund rates, without giving them an opportunity to dispute the refund in cases of abuse.

This practice stands in stark contrast to the credit card industry, where merchants can always dispute the chargebacks filed against them, and to the refund policies of the vast majority of European and Asian carriers, who refer the consumers asking for the refund to the mobile payment provider.

A third example where U.S. carriers could learn from their European and Asian counterparts is spending limits.

Many U.S. carriers impose tight spending limits on mobile payments, which are sometimes as low as $25 or 30 per month per consumer. They do it to reduce refund rates and to avoid consumer churn due to sticker shock from overspending.

In contrast, most European and Asian carriers have a very different approach to spending limits – with dramatically better results.

Many have no spending limits at all. Others require mobile payment providers to send SMS alerts to consumers when their spending exceeds a certain amount to avoid them getting carried away. Yet other carriers have very high spending limits – for example, in Norway, the monthly spending limit is about $815.

Wailing about whales
Low spending limits hurt mobile payments in several ways.

First, they eliminate the “whale effect” – the high concentration of purchases by a small number of users (i.e., “whales”).

Based on our study of the consumer concentration curves in countries with and without spending limits, we estimate that U.S. carriers would more than double their mobile payments revenues by simply removing the spending limits.

Second, low spending limits actually increase – rather than decrease – the refund rates, because they hurt “good” volume more than “bad” volume.

Mobile payment providers have tremendous amount of data about their consumers, and can impose “smart” spending limits based on the history and risk profile of a particular consumer.

Third, low spending limits introduce friction into an otherwise frictionless payment experience, reducing the likelihood of impulse buying.

To summarize, U.S. carriers will see a dramatic increase in their mobile payments revenues if they adopt the best practices from their European and Asian counterparts: lower fees, tighter refund policies and no spending limits.

Elena Krasnoperova is vice president of analytics and fraud management at Zong, Menlo Park, CA. Reach her at

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