A case for initiating a due diligence process for investing in MEE – possibly the most cost effective payment scheme in the world!
Written by: Søren Peter Kvist, firstname.lastname@example.org
Date: June 6, 2016
During the last couple of years, I have been in dialogue with CEO of MEE (www.meewallet.com), who is looking to onboard the right investors. MEE is a digital payment scheme technology with an open infrastructure, which allows multiple and different sources of funds to be used for very secure authorization of payments – either in the physical shop or online. With MEE, cards, traditional bank accounts, operator or pre-paid accounts can serve as sources of funds (SOF) – and they can all co-exist within the MEE payment scheme. The payment scheme makes use of Bluetooth for two-way communication with the contact point, and the mobile / IoT device of the consumer is not connecting directly or independently to the Internet during payment authorization (as this happens through Bluetooth). The Consumers either have to have the MEEwallet app or a white-labeled version thereof to authorize their payments (see the Consumer experience here). The Merchant needs to have an Internet connection and a Bluetooth chip – either in his cash register or as an external terminal with Bluetooth chip provided by MEE. MEE works across all Mobile OS and it does not use Host Card Emulation (HCE). Using HCE would entail high up-front costs and MEE would anyway not get access to the NFC chip for payments purposes in the iPhone. The MEE solution also includes an API, which can do digital non-payment authorization. There may be several other use cases for MEE than just payment authorizations.
The purpose of this article is to build a case for initiating a due diligence process for the potential acquisition of MEE by the right investor. During the due diligence, it will be necessary to both verify the technology and see if is possible for the investor to build a financial business case for the acquisition. Furthermore, this article will also elaborate on, why this acquisition opportunity may be interesting for the right investor.
MEE payment scheme is enabling an entire payment eco-system, which may consist of some or all of the following key actors: Consumers, Merchants, Banks, Operators and MEE. The following paragraphs will consider each actor.
Consumers are generally interested in doing payment authorizations via a mobile device. Although the Danish MobilePay is a proprietary solution developed by Dansk Bank and not MEE, it serves as a valid case on what can happen, if the consumers have a very easy and free way to authorize payment transfers to their friends and/or payments in shops. Out of a population of 5 million Danes, more than 3 million use MobilePay on a regular basis. They primarily and predominantly use it for P2P money transfers, but Merchant transactions are growing. MobilePay penetrated the country mainly through word-of-mouth due to a strong network effect, i.e. it becomes more valuable for me if I can easily transfer money to all my friends using their phone number. Hence, I will personally ask all of them to install the MobilePay app. At the same time, it is now becoming more and more common to see the MobilePay terminal in the Danish shops for Merchant payments – but we are still at the beginning in Denmark. The problem for Danske Bank is that their solution use the traditional card infrastructure. This means that Danske Bank is most likely paying a fee to the card acquirer every time they execute a P2P transaction, but without earning a fee from the Consumer. Problem for Danske Bank is that they do not have access to the bank accounts, as all the 100 other banks in Denmark are probably not interested in doing this for a Danske Bank solution (although this may change with the PSD2 directive). MobilePay is a showcase for effective Consumer penetration of the right service, i.e. that it can be done. However, the technology and payment scheme needs to be different in order to make it feasible for anyone but a bank with very deep pockets to do the same. This is where MEE appears in the picture.
Merchants are the ones, who has the most to gain from a disruption in payment scheme industry, as they are paying large sums to the card providers and banks for the card transactions they are currently doing in their shops – both for physical and online shops. If someone were to provide them with an alternative payment scheme, which would circumvent the likes of VISA and Mastercard they could possibly gain 0.5% – 1.5% on their bottom line margin – depending on card penetration in the country. From an investor/MEE perspective, I believe it would of critical importance to have a dialogue with some of the largest Merchants (retail chains). In principle MEE and the right investor could possibly establish a coalition of Merchant / retail chains, who would be interested in sponsoring MEE to drive the MEE eco-system. Through MEE, we know that large Danish retail chains are interested in this topic, but they may not necessarily be the perfect owner of MEE, as they may not be the right ones to achieve great scale beyond their own retail chain. However, they could possibly seek to create a coalition of Merchants, who could invest in MEE for the benefit of themselves and also earn new revenues. They could even invite an outside System Integrator to be part of the coalition – in order to have someone, who can effectively run the service and further develop MEE.
With the MEE payment scheme operated and owned by either a coalition of Merchants and/or a System Integrator, the Merchants would be able to better influence and control requirements for the payment scheme. For example, they could require MEE solution to enable collection and use of loyalty points. Furthermore, MEE provides the opportunity to digitize the receipt (through a partner of MEE), i.e. the Consumer receives the actual receipt as a pdf-file after each purchase.
However, for the Merchants to be truly interested in accepting MEE transactions and even help drive the MEEwallet penetration in their shops, they need a setup, where the fees are lower than for cards, so that they can save substantial money. This can only happen by circumventing the big cards. There are only two actors, who can ensure this: Banks or Operators.
Banks are generally conservative and sensitive to any reduction in revenue. They are currently earning revenue from cards, but not necessarily a huge profit, as I guess there are probably also many costs associated with running a payment card. This topic shall be further investigated and verified during a due diligence process.
Generally, it would greatly improve the success of the MEE solution if many banks were to allow bank accounts as SOF in the MEEwallet app in a given country. MEE definitely has the technology to connect with these bank accounts in a very secure manner. MEE has already integrated with a financial service center serving 124 Scandinavian banks and is currently live with the first bank. When entering a new country with MEE, the trick is to onboard enough banks to allow a broad penetration with the consumers – as broad penetration is required for the merchants to be interested. The perfect investor would already have relationships to the banking industry and definitely utilize these relationships to onboard the banks. Furthermore, in EU the new PSD2 directive (active from February 2017) will most likely force the banks to open up their bank accounts for third parties such as MEE. PSD2 may therefore be a great enabler for both Merchants and MEE. Recommendation is therefore to consider the impact (positive or negative) of PSD2 during a due diligence of MEE. I assume that the current financial service center integrated with MEE, can act as switch between Consumer accounts and Merchant accounts – at least within EU (to be confirmed during due diligence).
Mobile Operators may also play a role in the MEE eco-system – as either an alternative or a supplement to Banks. Participating Operators need to fulfill a number of functions to be relevant. They need to:
- Provide a SOF, e.g. a sort of special mobile account to hold the Consumer’s funds (see further details below)
- Verify KYC (Know-Your-Customer) details, i.e. provide a means to ensure that the person using MEEwallet is the right person
- Provide destination accounts for the Merchants, i.e. when they receive a payment from a Consumer
- Provide a way to handle inter-Operator transfers (interoperability) to ensure participation of multiple Operators, e.g. similar to when calls originates in one mobile network and terminates in another
My experience is that Operators are generally not eager to engage in new business opportunities as they have their own limitations in their IT development pipeline. This means that their own core products and services always seem to have the highest priority leaving very little room for new business to be established from scratch. Implication is that for Operators to participate in a MEE setup, MEE needs to provide the minimum viable way they can enter as an actor in the MEE eco-system, i.e. with the least amount of IT development and complexity on their side. The due diligence will have to verify it, but I imagine that the Operators could create a pseudo mobile SOF mobile subscription product with the following characteristics:
- 0 hours of talk time
- 0 GB data
- Automated top-up from card (minimum top up amount = $50) just like they do for mobile products today (to avoid card transaction fee during each payment transaction)
- Account is automatically topped up, when it reaches 0
- If a transaction amount exceeds the available funds on the mobile account, then funds will be immediately drawn from the card + top up to at least $50, however in this situation the card validity will need to be confirmed before MEE authorizes the payment
- In countries with low card penetration the account is topped up in whatever method the normal mobile account is topped up (normally in cash)
- Maximum payment amount $1.000 per day or transaction (at least as a start and depending on the country)
- During registration of Operator account in MEEwallet, they also need to do KYC. Together with an Operator, we need to investigate, if either we can use the SIM pin code for this purpose or maybe even the PUK code of the SIM or even some form of embedded software on the SIM pushed out by the Operator for this purpose. In some developing countries, the account owner may have to show up at the telco shop with his national ID card to do KYC.
- Integrate with MEEadapter for tokenization and access for MEE backend to authorize payment releases
- During registration, it is possible to define a maximum monthly spend, e.g. to allow parents to set this up for one of their children. Transactions will be rejected if this monthly spend is reached.
When the above is in place the Operator of course also needs to release the amount being authorized to the correct Merchant account – and facilitate the pay-out of the Merchant owned funds to the Merchant’s bank account at an appropriate time interval (in the meantime, the Operator may earn a little interest).
Furthermore, the Operator also has a role to play for ensuring the penetration of the MEEwallet app among their mobile subscribers. Alternatively, the Operator self-service app could contain the MEEwallet functionality with MEE secure element – also driving higher usage of the Operator self-service app.
Why would an operator do the above?
- Merchants are also their B2B customers, and they want to provide new services and generally be friends with them
- Opportunity to earn a share of the transaction fee, when a transaction is involving the Operator SOF account
- Operator logo exposure during each payment transaction also the many P2P transfers (i.e. marketing)
- Opportunity to drive higher usage of existing Operator self-service app if MEEwallet functionality and secure element is embedded into it
- Opportunity to earn extra revenue from the SIM cards potentially to be part of MEE contact points, i.e. a monthly fee to be paid by Merchant
- May drive new Customer acquisition wanting to use the Operator to provide SOF, and then this new Customer may possibly becoming a real telco customer with Operator
In the above scenario, we also need to consider insurance and/or protection of Consumers, Merchants, and Operators in case of misuse (if this is possible).
The investor will also have an important role to play in the eco-system – at least if MEE is acquired. It probably depends on the characteristics of each country, but there seems to be fundamentally two (maybe more) go-to-market strategies:
Option 1 is to take the role as payment scheme owner and eco-system driver. The roles and responsibilities for the investor in this setup are:
- Onboard Merchants and their retail chains into the eco-system
- Onboard Banks into the eco-system
- Onboard POS providers into the eco-system
- Onboard Operators into the eco-system
- Perform system integration work
- Enhance and develop MEE technology, e.g. apps, frond-end, back-end
- Perform application maintenance & support
- Drive roll-out to merchants, if not outsourced
- Collect transaction fees from merchants and distribute share to banks and operators
- Provide 1st, 2nd and 3rd level support for all actors in the eco-system
I believe that Option 1 is well suited in countries where there is a high fragmentation of Banks and/or Operators, as someone needs to connect and onboard several of them into the MEE eco-system in order to ensure enough penetration and scale for the Merchants to be interested.
Option 2 is to sell the technology to interested parties possibly in combination with SI and AMS. The roles and responsibilities for the investor in this setup are:
- Sell technology to one major bank (or other relevant party) with dominating position
- Sell technology to one major operator with dominating position or at least enough scale
- Integrate MEE to relevant systems
- Enable banks or operators to onboard POS providers, retail chains and merchants
- Enhance and develop MEEwallet technology (apps, frond-end, back-end), i.e. new releases
- Perform application maintenance & support
I believe Option 2 is well suited in countries, where one Bank or one Operator may have a very dominating position, which would ensure great penetration with a single SOF provider. However, even in this situation the investor could play same role as for Option 1.
In order for the investor to be successful with MEE it would be necessary to create a coalition of Merchants, who are also willing to invest. Recommendation is to initially meet with a few large retail chains in order to do the following:
- Explain that investor is contemplating setting up an alternative payment network to their benefit (possibly with them as co-investors in a JV)
- Prove and demonstrate that the MEE is a world class solution for a cost effective payment scheme
- Ask each of them the following questions:
- Are they willing to get behind it?
- Will they put their money behind it?
- Would you introduce us to other Merchant chains to work with us as well and to be part of the coalition
Merchants are probably (and hopefully) already contemplating how to move on this (due to upcoming PSD2 directive), but someone needs to step in to make it happen across Merchants. This someone could be MEE, but with the necessary funding and support from the perfect investor.