The Mobile Pay Revolution

Morgan Stanley Blue Papers, a product of our Research Division, involve collaboration from analysts, economists and strategists across the globe and address long-term, structural business changes that are reshaping the fundamentals of entire economies and industries around the globe.

Mobile payments promise to merge one of the oldest tools of society—money—with one of its newest: smartphones. This will improve ease-of-use and security for shoppers currently carrying wallets bulging with paper and plastic. But more than that, mobile payments represent the latest evolution and expansion of the global marketplace. It has the potential to reach into all the places where there are no bank branches or ATMs distributing cash, and where credit and debit cards aren’t accepted, via the nearly ubiquitous tool known as the cellphone.

Here is the potential of mobile pay in a nutshell: The global count of active credit- and debit-card accounts is 1.3 billion, according to credit card processer First Data, compared with nearly 7.3 billion active mobile phone accounts, according to the International Telecommunications Union, of which some two billion are smartphones.

The nascent mobile payment industry can leverage these existing routes to reach a growing base of consumers, giving them access to mobile credit and currency. This in turn translates into more customers and revenue, enlarging the market for financial services and players. “Mobile payments can expand the global revenue pie from $175 billion to $250 billion, including $45 billion in developed markets and $30 billion in emerging markets,” says Smittipon Srethapramote, who covers the North American payments industry for Morgan Stanley.

Whether mobile payments will disrupt or amplify the marketplace for financial transactions depends on the market. The current electronic payment structure—involving customers, issuers, merchants and merchant acquirers linked by card networks—has been in place for nearly a half century. Developed markets could face some disruption. In the US, for example, retail merchants who accept card-based payments paid about $67 billion in fees in 2012. This was split between card issuers, acquirers, networks and payment processors. New players could emerge as mobile payments take off, for example, IT hardware and software companies or telecommunications providers, and share part of the card-based payments revenue stream.

Meanwhile, new revenue models are emerging. Cloud-based digital payment and wallet solutions have had a head start. However, hardware-based options, which allow users to make seamless and secure payments with their mobile devices, may be ascendant right now, as major players line up behind dominant hardware makers pushing into mobile payments. There are also retailer-sponsored groups offering their own mobile payment systems to lower the cost of accepting cards.

The mobile payments arena remains fragmented and wide open. Success will largely depend on consumers and merchants, whose adoption of mobile payments will hinge on whether the system is widely accepted, makes transactions easier, has robust consumer protections and security, can target and drive sales, and has low costs for merchants.

Also intriguing are the opportunities for “Big Data.” Mobile pay offers a rich trove of information on consumer behavior and unprecedented direct access to shoppers. Retailers, marketing firms, Internet giants, and analytics companies that can aggregate and make sense of the data stand to be big winners. Waving a smartphone to pay for your purchases at the checkout is just the start. Based on specific consumer behavior, GPS and other data points, retailers can reach out directly to potential customers with tailored offers, rewards, loyalty programs and so on. Consumers can act on those offers right from their mobile devices.

It’s not just about impulse buying. Mobile pay could also offer consumers greater transparency into, and control over, their finances and budget planning. Instead of acting on that offer that just popped up on your phone as you passed by a store, you could check the status of your credit balance or bank account and make an informed decision. Parents could receive detailed updates on what and where their children are spending their mobile allowances.

The most tantalizing possibilities for mobile pay are in markets that traditional forms of cash and credit have failed to penetrate. These payment infrastructures are costly to build, run and maintain. Yet, even in some of the most remote places on the planet, mobile phones and access have become commonplace. For example, sub-Saharan Africa has 60% mobile phone penetration vs. 25% banking penetration. Mobile pay systems can allow emerging markets to leapfrog the landline-based infrastructure of traditional cash and credit, and drive the adoption of electronic payments.

The spread of mobile pay could financially empower people in emerging markets. Over the next five years, new mobile point-of-sale solutions, which are already making inroads in developed markets, could double the locations around the globe that accept mobile payments. Low-fee mobile payment systems can turn anyone with a smartphone into a small business, catering to customers who are also using their phones to pay for goods or services.

As smartphone adoption rates rise in emerging markets, so does the potential for mobile pay. Globally, online commerce channels have grown four times faster than brick and mortar, and are increasingly going mobile. Juniper Research forecasts that mobile transactions via smartphones and tablets will increase to $3.2 trillion by 2017 from $1.5 trillion in 2013. The financial pie is getting bigger, and more businesses and customers will be able to get their slice of it.

Morgan Stanley Research has reported extensively on the development and potential for mobile pay in its Blue Paper “Mobile Payments: The Coming Battle for the Wallet” (Oct 1, 2014). Explore more Ideas and Research, or contact your Morgan Stanley representative for the full report. Find a Financial Advisor to discuss your investment goals and strategy.