Mobile Networks Find That Charities Can Turn Nasty

Macbeth says at one point “I am in blood stepped in so far, that returning would be as tedious as to go o’er”
It would seem to be a fitting comment for the directors of Britains Mobile Networks to make about payment.

The strategic problem for mobile networks is the age old “how do we avoid being a pipe” which is another way of saying at “how do we add value beyond just moving bytes of data.

From a functional perspective, mobile networks look something like retail banks or at least credit card companies. They shift bits of information and they bill for them and they have lots of customers. Admittedly they don’t have a proper risk function and have weak balance sheets. But then again most banks these days seem to have been operating for the last 10 years without proper risk functions and as for their balance sheets…

Over the past 15 years becoming a payments institution has gone in and out of favour with different individual MNOs, but at any one point in time at least the half the MNOs have believed it was a strategic opportunity for them to explore, which meant tactically they all had to (just in case). These days there is probably some consensus that the opportunites for mobile lie in developing third world payment processes, handling remittances and in partnership with the banks through NFC.

The managing director of Barclaycard was on the BBC happily forecasting that NFC meant that plastic cards would be dead as a payment mechanism within the next 10 to 15 years – which is a story in itself, but I digress.

The payment mechanisms that sit in no mans land are Premium SMS (PSMS) and a WAP payment wallet called “Payforit” (“PFI”). PFI can be ignored – no one likes it and it is expensive. It would be an essay on its own to list its many hideous faults. It is the person with bad breath at the payments cocktail party.

Premium SMS (“PSMS”) is essentially a micropayment systems bolted onto a messaging system. I text a keyword to a special number and get back a message that says thank you and tells the netork to deduct say £5 from my mobile airtime account and pay X to a merchant that owns the number that sent the message.

The advantages of PSMS are that it is easy and familiar – the average UK person sends over 100 texts a month – immediate and can be promoted across any medium.

The disadvantages from a merchant perspective are that payment is not guaranteed, it is inaccurate and the networks take a huge cut – it is a micropayment after all.

The relationship of the MNOs to PSMS has always been somewhat ambiguous. Lets be honest the £0.5bn is used primarily by what are euphamistically caled “content” companies and they don’t really care about non payment or customer service.

From a payment persons perspective it is amazing that VAT (sales tax) is automatically deducted from the payment by the payment processor. The truth is that when a mobile phone is topped up VAT is deducted by the top up retailer. Given that annually about £4.5bn is topped up in the UK that is a lot of VAT. If a PSMS payment is then deducted it changes the nature of the airtime top up. Strictly speaking they should have started accounting for VAT as and when the airtime is used up. But neither HM Revenue & Customs (the tax man) nor the MNOs want to change the status of the airtime for VAT purposes, because it would mean a £4bn delay in receipts for the government and it would be a somewhat material re-statement of accounts of some of Europes biggest companies because they currently take the value of the top up into profits as a pre-payment when the phone is topped up. Who was it that said there was no OUCH in their vOUCHer? A £4bn write down in profits even prior year is not top of the MNO’s to do list.

The problems was that plenty of my clients (who are all charities) use Premium SMS to collect donations and charitable donations are not subject to VAT.

When I (with the help of my local MP) asked a question about donations to charity made by PSMS in Parliament the answer from Jane Kennedy MP Secretary to the Treasury was “of course charitable donations made by VAT are not VATable in line with EU legislation”. Effectively it was a denial by the boss of HMRC that what HMRC were doing was going on. The campaign was then taken up brilliantly by the Charities Aid Foundation and the Institute of fundraising who lobbied through the Mobile Data Association to remove VAT.

Two years later and HMRC and the MNOs introduced a solution (a manual work round in fact) that means the networks can now make PSMS payments to charities without charging VAT.

The problem is now that the MNOs find the charity sector have real PR teeth and now the MNOs “greed” is exposed with companies like Virgin Mobile who sponsor the London Marathon and have recently launched a rival to Just Giving are left having to justify taking 44% of a £5 donation to charity. . . Ouch! The first network to crumble in fron of the pressure was O2 which announced they would pay charities 90% of anything collected and the rest are following. The weighted average payout on a £5 donation is now probably around 87% up from 64% and I would confidently predict that 100% payouts will be normal. Why? Because the regulator forces everyone to desiclose how much is being received by the charity when you donate by text.

When you consider that there are no call centre costs involved even a charge of 13% is pretty cheap. Still the charity sector are quite good at putting the PR squeeze on companies and I expect it to fall further.

The real test for the networks is now what will they do? The strategic initiative has been taken away from them. To some extent PSMS is an embarrassing love child of a messaging system and a pre-paid account, but if charity payments take off will this force a rethink by the Mobile Networks? The problems are in four areas:
1) SMS is a messaging system – it needs considerable development on a cross network basis to create a reliable payment system
2) Airtime is booked as profit the moment a top up is made. If customers give to a merchant or to a charity and then the custoemr does not re-top up then the MNO is kissing profits goodbye
3) The capital adequacy rules will start to be questioned if PSMS becomes a serious payment mechanism. At the moment the MNOs largely use e-money licenses to “get away” with taking customer deposits – but that becomes less defensible if banks are being squeezed and the MNOs are being seen to process more payments
4) Changing the amount spent through mobile accounts changes the risk profile of the customer base without he commensurate improvement in profits

The test for whether the MNOs will now take Premium SMS seriously instead of treating it as a youthful dotcom indiscretion will be whether they extend the range of VAT free payments. The obvious sector is gambling which should not be charged VAT either. If they get that past HMRC then expect all hell to break loose.

Notes: There are about 120 mobile phones per 100 people in the UK and mobile phone minutes are at about 45% of the total combined fixed and mobile traffic. Broadband access in the UK is 30% from unbundled land lines and 30% (probably the same 30%) from mobile device.