Merchant Risk Council: busting myths on carrier billing

Merchant Risk Council: busting myths on carrier billing

Fortumo recently had the pleasure of presenting at MRC Dublin, Europe’s leading event for payment professionals. We are now glad to share with you the content of that presentation, given together with our good partners over at Badoo.

The audience of digital service providers is bigger than ever before. Smartphone ownership globally exceeds 2.5 billion users. But getting these users to make online payments has become more challenging, because proportionally less people have access to traditional online payments.

In the UK, 74% of people own a smartphone while 61% have a credit card. In India, there are 12x less credit card owners than smartphone users (340M). In Russia, the difference is three-fold and in Brazil two-fold. Unlike the UK, emerging economies are seeing rapid digital user base growth but the majority of new users are unable to pay for digital content.

The situation is further complicated by other factors impacting the digital ecosystem in these countries:

  • Lower income which effects both eligibility for bank accounts and the amount of disposable income available
  • Shift towards mobile-only consumption which makes some existing marketing and acquisition channels redundant
  • Lack of access to cheap and fast mobile data which creates a contradiction for how service providers intend their service to be used and actual consumption patterns
  • Significant digital content piracy which has created an expectation in consumers that online content should be free

How then to monetize the growing proportion of 2.5 billion smartphone users who not only lack payment access but are also less prone to spend and engage with online content differently from consumers in Western markets?

One way is through alternative payments, more specifically carrier billing. By today, all of the world’s leading digital companies - Apple, Google, Amazon, Spotify, Netflix and Facebook - have begun to resolve the payments challenge by adopting carrier billing and other localized payment methods.

But many other digital service providers remain skeptical about carrier billing, which is caused by myths related to its past:

  • Commercials are low. When talking about digital content, the standard payouts in most countries to merchants today are above 70%. In case of physical services and goods where volumes are huge, telcos are willing to discuss commercial terms equal to credit cards
  • Technology is outdated. In the past, Premium SMS (PSMS) was the primary technical solution for charging with carrier billing. Today, there is essentially no difference between the technology used by card providers and the server-to-server, token-based charging that direct carrier billing (DCB) supports
  • The user experience is not great. Related to the previous, consumers needed to go through several steps to complete Premium SMS payments. Today, 2-step charging allows service providers to authenticate users once and charge them again without repeated authorizations in the future

Another important aspect to consider is customer data. While GDPR focuses on the EU market, companies are being pushed towards adopting it as a global standard. In this context, collecting the information that is necessary for processing card-based payments can become a headache.

With carrier billing, the issue is mitigated as only the user’s phone number is needed to process transactions. Direct carrier billing has also moved towards tokenization in many markets, which means service providers do not even have to worry about processing, storing or potential leaks of customer information.

Working together with telcos also gives additional opportunities for user acquisition and engagement. As telcos have marketing channels in place through which to reach consumers, partnership with them means the opportunity to run co-marketing campaigns.

We at Fortumo are of course slightly skewed towards the payment method that we provide, so it’s also important to understand that carrier billing is not the only option. In digital gaming, here is how the payment mix breaks down globally:

2017 Digital Gaming Sales

Our co-presenter Badoo recommended merchants not to stick with just the current payment solution (which for most today means credit cards) and not to assume the same approach will work in each country. As an example, they showcased two countries with extremely different user spending behaviour (click for bigger):

Payment method share difference between countries

Here’s what they recommend when thinking about alternative payment methods:

  • Is my current payment solution in the country I’m analysing good enough?
  • How do the monetisation KPIs of this country look like compared to my top markets?
  • Is there a big gap?
  • Is the gap because of the wrong pricing strategy or wrong payment methods?
  • Ask your PSPs to provide insights on the market and check what PSPs other popular service providers from the same category merchants are using
  • Consider your pricing, average transaction value and compare them with the market averages

After deciding which new payment methods to implement, Badoo recommends to test heavily and look at all performance metrics, not just payout:

  • Don’t be afraid of lower payouts of some payment methods, the end result (payout + conversion + total revenue) is what matters
  • A/B test adding a new payment method vs not adding it with your users, and test replacing the new payment method with your current, lowest-performing one
  • If the new payment method works, create healthy competition between your PSPs and keep A/B testing for flow optimisations and payout improvements
  • Don’t underestimate the importance of traffic balance between your key PSPs; it might make sense to accept slightly lower commercials with a PSP in a specific country or with a specific payment method to get the most out of your partnership in other countries

One topic we at Fortumo often debate with merchants is the risk of cannibalization from adding new payment methods - existing users switching to another method, rather than new users starting to make payments. Data shared by Badoo indicates this concern is often overrated. In countries with low card penetration (countries A and B), alternative payments substantially boost revenue while in mature markets (country C), the effect of cannibalization is minimal, especially with smart segmentation of users (click for bigger):

Payment cannibalization of direct carrier billing

Want to explore carrier billing as an additional path to revenue? Get in touch.