From its early beginnings as a convenient way to purchase a ringtone or game with a premium rate SMS message, paying with your mobile bill has come a long way. Today, Direct Operator Billing (DOB) (sometimes referred to as Direct Carrier Billing) is recognised globally as a highly convenient way to pay for all kinds of digital goods and services. At the same time, the plethora of mobile payment wallets which have been launched over the last year and the global consumers’ increasing appetite to pay for physical goods over their mobile presents a challenge to existing incumbents.

So what does the future of DOB hold and how will the business transition as consumers expect to pay for a wider array of physical goods and services?  Here MEF CEO Rimma Perelmuter explores the global opportunities with additional input from MEF members, Bango, Boku, InternetQ, Neomobile and Mobile Technology Tomorrow.

Analyst firm, Analysys Mason predicts that DOB will grow to provide Telcos with more than $12 billion in revenue by 2022. Elsewhere Juniper Research pegs the value of digital content billed via direct operator billing will reach more than 5.2 billion Euros (US$7.1 billion) in Europe by 2017.

What’s fuelling this growth?

A key goal for mobile payments has to shift towards payment simplicity.  DOB certainly makes payment over the mobile a nearly frictionless experience.  There’s no need to register personal details to complete a transaction and requirement to key in lengthy credit card details and some providers are now able to identify a repeat user and reduce their purchase path to a single click.

DOB is especially compelling in growth markets where feature phones are still popular and smartphones are not yet dominant.

 Fadi V. Maalouf, chief commercial officer at MENA DOB provider Mobile Technology Tomorrow (MT2Pay) explains:

The mobile has become the FIRST screen where customers are in a relationship with the Telco operators and find this the most convenient method of payment over credit/debit and cash payments.

Champions of the DOB payment channel also point out that it vastly improves conversion rates – completed digital content purchases – which can be six to ten times higher than by offering other mobile payment options.  Or put another way, around 35% of customers abandon payment during checkout in mobile and online environments due to the cumbersome process of entering payment information and lengthy card numbers whilst with DOB, the volume of digital goods that achieve a completed transaction up-weights the payment made to the content developer or publisher.

Bango, points out that in a scenario where 1000 customers are each buying a $10 item under DOB, the transaction fee (charged by the mobile operator) would typically be 20% yet since the conversion rate is an expected 60%, the developer would achieve $4,200. Compared to a credit card the transaction fee would typically be 1% but the conversion rate shrinks to just 10% with the developer achieving $980.  Hence, developers, content aggregators and operators benefit from the revenue options available under DOB.

For this reason, DOB fits neatly alongside all kinds of digital content services that require a transaction. German based, InternetQ has established a global DOB payment business with Kanzaroo.  Marco Priewe, Managing Director explains:

Typically any kind of digital good may be sold using kanzaroo. Today, the main areas are gaming, video on demand, streaming, music, dating, file sharing and news.

Within the app economy all app stores apart from Apple (Firefox, Google and Microsoft) are now accepting DOB as a payment option too.  And, since most developers and publishers of mobile content operate within the narrow margins in the freemium model, it’s also a simple way of introducing in-app purchases for unlocking new game levels or renewing a subscription.

The same is true for the new wave of OTT providers like WhatsApp which on one hand have cannibalised operator voice and messaging revenues but ironically give back by charging for their services via the DOB model (albeit generating much smaller revenues).

DOB is also particularly appealing to the unbanked and under-banked social segments that aren’t likely to have access to credit cards and financial services.  This includes younger mobile users (who may not have a bank account) and to the pre-paid sector as well as large sections of the population in growth markets where mobile devices have a much more comprehensive distribution compared to that segment’s financial access.

MT2’s Fadi V. Maalouf continues:

Credit cards in this region [MENA] have a very low penetration among
certain segments and people are not comfortable using cards for purchases digitally, cards are also not the preferred choice for smaller transactions in a region where credit fraud has very serious implications for people.  Operators are now seamlessly integrating mobile payments as part of the value chain and are the first point of contact in the transactions, thereby being able to offer the customer a hassle free payment option and one that can be validated, verified and tracked easier than the credit card cycle.

The question remains whether direct carrier billing is ready for the physical point of sale and whether it can compete with mobile wallets?

Since mobile operators take a significant slice of the revenue generated within the DOB channel it’s hard to imagine how it could compete with credit cards or more recently, NFC payments at the till in a shop.  However, DOB payment providers are bringing products to market that enable mobile payments beyond the purchase of digital goods are making progress.

Until now, in Europe, what has restricted DOB is the regulatory framework under the European Union’s Payment Services Directive (PSD), limiting the channel to the purchase of digital goods.  Whilst it’s important to protect consumers with the PSD, this regulatory framework was largely established to deal with the purchase of ringtones and wallpapers.  Now that it’s possible for DOB providers to apply for an e-money licence, enabling them to become the transaction mechanic in the world of physical purchases there is a new opportunity.

Boku is one such company partnering with mobile operators to offer DOB as an option for low-cost convenience related purchases like bus and train tickets or to pay-ahead for a coffee as ‘a click-and-collect item.’ Boku estimates that 25% of click-and-collect transactions come via the mobile (rather than from within an ecommerce environment) so there is a good fit with DOB.

Outside the US and Europe, there are also plenty of examples of how DOB is changing into a channel for the purchase of items that fall in to the physical/digital hybrid.  Recently Turkish mobile operator, Turkcell worked with Neomobile’s DOB service, Onebip, to enable mobile ticketing for three Turkish international football matches.

Marco Priewe, Managing Director at InternetQ continues:

We see tremendous potential for DCB for ticketing services, such as buying a ticket for public transportation or parking.

Whilst DOB has huge potential for growth it does have limitations.  Today, the type and value of goods that can be purchased is typically restricted to micropayments for purchases under $20 and the transaction fee charged by the mobile operator makes it hard to compete against an established and trusted credit card payment infrastructure or indeed a mobile wallet option.

Whilst payment simplicity is highly appealing to consumers, the success of DOB for digital goods and services as well as some physical items like tickets, parking fees and click-pay-and-collect goods rests on the intersection between local regulation, mobile device penetration and access (or lack of it) to financial services.

Clearly, if DOB is to grow beyond these segments to offer a convenient payment for physical goods, a more compelling business model must be evolved by regulators, operators and payment providers who increasingly compete against a wealth of mobile wallet players.

This article first appeared in Telemedia Month (November 2014) and is re-blogged here with the editor’s kind permission.

MEF members can download the latest Mobile Money Bulletin here, supported by Mahindra Comviva, which contains in-depth interviews, case studies, graphics, news and analysis, examining just how the mobile money ecosystem is taking shape.

Also be sure to take a look at our Global Mobile Money Landscape infographic (right), created by an international Working Group of MEF Members to help identify the key areas and players in the space. In it Mobile Money is defined by six categories: in-store payments, online payments, P2P payments, direct operator billing, mobile wallets and mPos.