Card issuers, already fighting the threat of mobile wallet initiatives that draw funds directly from bank accounts, must now contend with a new partnership that makes carrier billing a more viable replacement for bank cards at the point of sale.
SCVNGR's LevelUp, a software-based mobile payment system, is adding Danal's carrier billing service as a funding option. Previously, carrier billing has been favored for sales of digital content such as music and apps, which typically have a lower price point and risk than sales in physical stores.
But LevelUp is comfortable enough with the potential risk to offer a 10% bump in rewards to any consumers who use carrier billing to fund their purchases. "By charging goods to a phone bill, the card networks are excluded from the transactions, thus reducing LevelUp's costs," said Jordan McKee, a senior analyst at 451 Research.
Danal's service works with one of the U.S.'s top-tier carriers (which the companies did not name). It is the latest in a series of experiments LevelUp has conducted with payment options and pricing to encourage more use of its mobile wallet. LevelUp's earlier efforts include an Interchange Zero pricing model and incentives for linking a debit card instead of a credit card to its app.
"This move is an initial step towards what could be an expansion of the carrier billing marketplace, which has big implications for the carriers' collective futures in payments as well as for the current wallet players," said Rick Oglesby, head of research for Double Diamond Payments Research.
But the overall economic benefits of using carrier billing for in-store payments are complex. Merchants could face added costs and consumers may be annoyed by unexpected monthly spikes in their phone bills. On the other side, the shopping and transaction experience for consumers is very good and lacks the navigation of other digital payment options.
"Carrier billing is expensive to merchants, it can easily cost a four- to five-times multiple of traditional card acceptance costs," Oglesby said, adding mobile carriers are not banks, so they don't have a great way to manage consumer risks, billing disputes or chargebacks. "[Carrier billing] therefore normally has been a digital goods play, where transaction values and volumes are small, merchant margins are high and risks are low."
But carrier billing is also convenient, Oglesby said, enough to cast a contrast with other mobile in-store payment options.
"For the first transaction at a merchant, consumers normally need to enter payment card information into their phones to complete payment. However with carrier billing this is unnecessary since the payment can simply be charged to the carrier's bill," Oglesby said. "It's a good competitor to Apple Pay, Google Wallet or PayPal, but only in the circumstances outlined above."
LevelUp did not return a request for comment by deadline to discuss details of its Danal partnership.
Carrier billing has been picking up steam over the past year.
Google in 2014 added the ability to use carrier billing when purchasing apps from a tablet (previously this feature was supported only on smartphones). Sony has been expanding carrier billing as a payment option for purchases of games and media content on PlayStation devices, and carrier billing has made some headway at parking garages.
"There seems to be a growing interest in extending carrier billing beyond its traditional domain of digital goods into the physical goods space," said Zil Bareisis, a senior analyst at Celent. "The interest from mobile [carriers] is understandable. So far, most of them have been struggling to break into mobile payments in a meaningful way, and continue to look for alternative strategies."
In the U.S. and the U.K., two carrier-backed mobile wallet initiatives have recently flared out. The U.S. telcos' Softcard wallet shut down this year after selling its assets to Google, and this week the U.K.'s Weve joint venture consolidated under O2 after failing to come to market with a product.
But even if carrier billing provides an easier and time-tested model for carriers, the system's use at the point of sale adds several variables that are not present with digital content sales, McKee said.
"The ongoing issue with direct carrier billing in the physical world has been the concept of bill shock," McKee said. "While the purchase of a mobile app or song added onto a phone bill may not raise any eyebrows, larger purchases will."
Many carriers have seen their customer service departments inundated by erroneous complaints about bills because the consumers had simply forgotten about a purchase made via direct carrier billing, McKee said.
"When a perceived error appears on a billing statement, carriers are often stuck in the middle, regardless of whether or not they are at fault," McKee said.