Are we ready for international mobile payment?

Abstract

After the internet era, mobile usage became popular around the world providing a new solution for payment systems and an alternative for traditional financial services. Along with rapid development of fintechs, government and central banks are also making changes on some fiscal rules and regulations to keep up. They started to license liable fintechs for mobile money solutions. But in many countries, governments lagged behind the developments of fintech new technology. This research sends a gentle reminder to Mongolian government to improve rules and regulations for the mobile payment industry as there’s a high probability of international players entering the local market before relevant regulations are introduced.

M-pay research has started since the first mobile payment transaction in 1997. One of the earliest m-pay researchers Tomi Dahlberg (Dahlberg, Mallat, Ondrus, & Zmijewska, 2008) proposed a definition of mobile payment as follows:

“payments for goods, services, and bills with a mobile device by taking advantage of wireless and other communication technologies.”

Mongolian market analysis

PEST analysis covers political, economic, socio-cultural and technical factors. For Mongolian market, analysis is as follows:

Political factor:
Heavy regulation can be seen in KYC requirements and agent restrictions for Fintech companies, so that banks can play a main role in the mobile payment ecosystem (Evans, 2015). In Mongolia new regulation of e-money states that users have to sign paper contracts for mobile payment services. Failure to sign one, the user is only allowed to make payment with a maximum limit of $35 a day, $7 per transfer (Central Bank of Mongolia, 2018). This is the biggest barrier to Fintechs to reach critical mass, only innovators and people who are interested in trying new technology would go and find the physical store to fulfill the KYC requirements.

Regulators should choose whether to encourage shared platforms for cost efficiency or encourage competition between platforms for innovation and competitive pricing. Research and Development expenditure is a good example of showing financial support for science and innovation of a country. As (World bank, 2018) shows world average R&D expenditure is 2.2% of total GDP. Mongolian maximum R&D expenditure reached 0.337% in 2008. Since then the rate has fallen to 0.1% in 2018.

Technological factor:
In Mongolia, the most commonly used device is POS machines. Almost all merchants accept bank card payments via NFC chip or by traditional magnetic strip. Last 2 years, QR code payment has become popular amongst youngsters. QR active scanning is more used than passive scanning. Because merchants usually do not have QR code scanners.

Cyber-crime rate for mobile payment is relatively low in Mongolia. According to (Central Bank of Mongolia, 2020 Q2) report, total fraud transfer made through bank payment card was over 11 thousand dollars. 56% of the amount was international payment.

The national data center enabled national database. Currently, user identification is completed by just tapping on the fingerprint reader in many places. Fintechs started to use this opportunity for KYC for their new subscribers. But a need for paper contract e-money regulation remains intact.

Economical factor:
According to Mongolian Statistical Information Service, GDP per capita of Mongolia was $4,317 in 2019, which is a 4% increase compared to the previous year. But due to pandemic situation, this number dropped by 3.4% to $4,167 in 2020.

According to (World Bank, 2019), internet usage rate of 51 internet users per 100 inhabitants is slightly below the world average. But a domestic data resource declares there are 3.2 million smartphones in usage with 4.4 million active SIM cards (Communications Regulatory Commission of Mongolia, 2019).

Social factor:
Convenience to use internet banking and other banking services since adequate amounts of ATMs and bank branches exist. According to (World Bank, 2019) there are 148.8 ATM and 63.9 bank branches per 100,000 adults in Mongolia. Which is 6 to 7 times higher than the average of lower middle income countries.

Along with the development of the country, living standards for people are improving. Household income has shown 2.4% increase in 2020 IV compared to 2019 IV. For instance, salary has shown 3.9%, pension and welfare has shown 36.9% increase.

This research takes an Alipay internationalization example in Malaysia. In 2018, there were 48 mobile payment companies in Malaysia with 3.4 million m-pay users. Main m-pay providers are Touch ‘n Go, Grab Pay and Boost. International players like Wechat Pay, Alipay and Samsung Pay have already entered the market. (Chew, Shen, & Ansell, 2020) believes that Alipay’s market entry strategy to enter Malaysian market was an International strategy. Companies choose to operate international strategy when there’s low pressure of cost and local responsiveness. Chew states “The international strategy centralised m-payment research and development activities in China, while other functions such as marketing and transaction were decentralised to the national units in Malaysia… Ant financial first set up a wholly owned subsidiary, Alipay-Malaysia, which formed strategic alliances with the three largest Malaysian banks.” As Malaysian government requires e-money licensees to be established in Malaysia, Ant financial opened its wholly owned subsidiary named as “Alipay-Malaysia”. In this way, Alipay can provide it’s m-payment technology solution in Malaysia lawful and wholly owned subsidiary system it has full control over strategic decisions.

In terms of market choices, there are 2 different cases. If target customers are Chinese tourists, then hot destinations of Chinese tourists are the focus countries. In this case, local merchants and the government welcomes Alipay and Wechat pay with lower requirements. Because paying like a home for Chinese tourists increases merchants sales. However, if target customers are local people, requirements of governments are higher and Alipay and Wechat pay have to make use of their competitive advantage. Biggest competitive advantage of Alipay is high technology solutions that are tested in Chinese market. Local people and governments are expecting technical innovation from these tech giants. On the other hand, Wechat pay choose markets that have a higher number of Wechat messenger users.

In terms of entry mode, if target customers are Chinese tourists, then cooperating with local merchants of touristic areas and local banks for seamless transactions. This way, Alipay and Wechat can go with low resource commitment. If target customers are local people, Alipay chooses an international strategy with investment alliance/joint venture or subsidiary establishment because Alipay lacks access to the local networks and legitimacy in the foreign market. Subsidiary establishment is needed when the government requires e-money licensees or mobile payment providers must be established in that country.  Local market can benefit Alipay’s experience in information technology & AI technology. On the other hand, Wechat pay chooses an international strategy- wholly owned subsidiary establishment to access local networks and most importantly protect its technology.

Conclusion

As mobile payment tech giants become aggressive towards seizing a share in foreign markets, Mongolian government should establish mobile payments-related regulations even if the market hasn’t yet attracted international service providers’ attention. Having said that, the government should deal with international service providers with caution considering both the benefits and risk that it may bring. This paper has made analysis on market entry cases of Alipay and Wechat pay. Government should seek to benefit from technological innovations of foreign m-pay providers for faster development of the m-payment industry in Mongolia. But low requirements of law and regulations could lead to the mobile payment market to be controlled by a foreign company.

Future trend of mobile payment is biometric payments and this could ultimately replace QR code and other payment tokens. China is leading in biometric payment studies and real test environment. Fingerprints, facial recognition will eventually replace payment tokens such as QR code and their host devices such as mobile phones. Taking this into consideration, the government should increase R&D investment and local fintechs should start investing in biometric payment research & tests.

Bibliography

Central Bank of Mongolia. (2018, 2 13). E-money regulation. Ulaanbaatar, Mongolia.
Central Bank of Mongolia. (2020 Q2). Payment System Report. Ulaanbaatar: Central Bank of Mongolia.
Chew, B., Shen, X., & Ansell, J. (2020). Alipay entered Malaysia: a closer look at the new market entry strategy driven by Chinese tourists. Emerald Publishing Limited, 1755-4179.
Communications Regulatory Commission of Mongolia. (2019). Report of Telecommunication service. Ulaanbaatar: Communications Regulatory Commission of Mongolia.
Dahlberg, T., Mallat, N., Ondrus, J., & Zmijewska, A. (2008). Past, present and future of mobile payments research: a literature review. Electronic Commerce Research and Applications, 165-181.
Evans, D. P. (2015). An empirical examination of why mobile money schemes ignite in some developing countries but flounder in most. No.723, Coase-Sandor Working Paper Series in Law and Economics, School of Law, University of Chicago.
World Bank. (2019). ATM . Retrieved from The World Bank data: data.worldbank.org