IES2͛͝

January 2012

Alcatel-Lucent: Marketing the Cell Phone as a Mobile

Wallet (A)1

It was late 2010. Danny Goderis (Vice President Bell Labs Benelux) and Rudi Broos
(Innovation director) wrapped up an exhausting but thrilling day in Alcatel-Lucent’s Antwerp
office. Earlier in the day, they chaired a global committee of high-level Division VPs and
international CTOs to review six innovations from all over Europe that were brought forward
in their annual innovation bootcamp process (see Appendix 1 for more information on
Alcatel-Lucent’s bootcamp process). Such discussion naturally culminated in the evaluation
of the latest developments in a very promising proposal from one of the earliest innovation
bootcamps, a team that branded itself as touchatag.

Launched three years ago, touchatag proposed using a new technology available in cell
phones – Near Field Communication (NFC) – for advertising purposes (see Appendix 2). After
several changes in the application case for this technology, the mobile wallet service was
born in Alcatel-Lucent Antwerp. It had become a venture and was currently taking off. The
idea was simple: consumers carry around their cell phone more often than their wallet, so
why not enable the cell phone as a wallet?

The opportunities for mobile wallet solutions were huge. Mobile operators, like Vodafone or
Telefónica, were in need of new revenue opportunities and any service that made the mobile
even more central in consumers’ life served their interests. Retailers, like Spar grocery stores
or chains such as McDonald’s or Starbucks, suffered high payment charges from debit and
credit transactions on ever tighter margins. They knew that the payment value chain
represented a huge market which could help them grow. The present value chain for such
payments was owned by banks (like ING), transaction acquirers (like First Data) and payment
network operators (like Visa). The major share of transaction fees were charged by
transaction acquirers and banks. They would be under attack as the mobile wallet solutions
forced transaction acquisition to shift toward the mobile operator, at least in part.

1 This case study is the first of two cases on mobile payments. The second case study is M-1286-E, “Rabobank Corporate
Netherlands: Turning the Smartphone Into an Engine of Bottom-line Growth (B)”.

This case was prepared by Nuno Camacho, Professor at the Erasmus School of Economics, Isabel Verniers, Professor at
Ghent University, and Professors Carlos García-Pont and Stefan Stremersch as the basis for class discussion rather than
to illustrate either effective or ineffective handling of an administrative situation. January 2012.
The authors would like to thank Sharif Jano for writing the case with us and providing invaluable help in data collection and
preparation.

Copyright © 2012 IESE. To order copies contact IESE Publishing via www.iesep.com. Alternatively, write to iesep@iesep.com,
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Last edited: 2/5/13

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M-1279-E Alcatel-Lucent: Marketing the Cell Phone as a Mobile Wallet (A)

The original Belgian touchatag team thought of NFC as an enabling mobile technology for
money transactions. However, NFC in new phones still showed limited penetration and a
large percentage of the population still carried around mobile phones that did not have NFC.
More and more people within Alcatel-Lucent saw the low NFC penetration as a problem for
signing on mobile operators to their mobile wallet solutions. An intermediate solution –
pasting NFC tags on mobile phones without NFC inside – revealed high consumer resistance
in test markets. Alcatel-Lucent was currently researching solutions for this limitation and
already owned multiple patents on alternative enabling technologies which promised to
allow mobile wallet transactions from any phone, whether it was NFC-enabled or not.

Being responsible for innovation (which at Alcatel-Lucent means turning invention into
commercial business), Danny and Rudi were very excited by Alcatel-Lucent’s business
opportunities in this area. However, the repeated presentations they had seen both at
Antwerp and from other sites on alternatives to NFC revealed important challenges they
needed to address. They had learnt that, even though they were in a business-to-business
environment, they needed to understand the full value chain from Alcatel-Lucent to end
consumer. The likely response of the various value chain parties was also still uncertain.
Thus, Alcatel-Lucent’s market approach was still up for debate. There were still unclear
issues, like the identification of the ideal target customer for the solution, partners and
position in the ecosystem, pricing and business model and time of entry in different markets.
Contemplating the various options at hand, they looked back at what they had learnt so far.

Alcatel-Lucent
Headquartered in Paris, France, and with more than 70,000 employees worldwide, Alcatel-
Lucent, is a global provider of telecommunications equipment, services and solutions. It was
formed when Alcatel S.A. merged with Lucent Technologies on December 1, 2006. Alcatel-
Lucent originated from the merger between Alcatel and Lucent Technologies.

Alcatel has a long history in the telecommunications industry. In 1898 CGE – Compagnie
Générale Électrique – was created as a result of the merger of two electricity companies and a
bulb manufacturer in France. In the 1970s, CGE acquired French company Alcatel, forming
CIT Alcatel. In 1982, François Mitterrand nationalized CGE and merged it with Alsthom, the
large telecommunications subsidiary of Thomson-Brandt. 2 Later, in 1986, after re-
privatization under Jacques Chirac’s government, CGE acquired the European telephone
equipment operations division of the American ITT Corp. 3 The merger of CGE's CIT with
Alcatel resulted in Alcatel N.V., the world's second-largest telecommunications company at
that time ($27.6 billion revenues in 1990). In 1991, the company rebranded as Alcatel
Alsthom Compagnie Générale, more commonly known simply as Alcatel-Alsthom. In 1998,
the company decided to focus on the telecommunications industry and spun off its Alsthom
activities, becoming simply Alcatel. By 2005 the group had three divisions: (i) fixed
communications, (ii) mobile communications and (iii) private communications, reaching a
global turnover of almost $16 billion.

2 http://www.sjsu.edu/faculty/watkins/socFrance.htm.
3 http://www.alcatel-lucent.com/aboutus/companyoverview.html.

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 Alcatel-Lucent: Marketing the Cell Phone as a Mobile Wallet (A) M-1279-E

Lucent Technologies was originally the telecommunications division of AT&T, which was
spun off in 1996.4 Yet, its history dates back to the 19th century and to the Western Electric
Manufacturing Company. Western Electric was the largest electrical manufacturing company
in the United States In 1891, the American Bell Telephone Company bought a majority stake
in Western Electric and became known for their traditional “black telephones.” By the end of
the 1990s, Lucent technologies had become one of the top players in the telecommunication
industry, known for its highly innovative culture and for being a major provider of systems,
equipment and software. Lucent Technologies owed much of its innovation strength to its
subsidiary Bells Labs, formed in 1925 in New Jersey. Bell Labs, originally created by
Alexander Bell in 1880,5 had an impressive repertoire of successful innovations including the
transistor, laser, UNIX operating system and the C programming language. 6 Research
conducted at Bell Labs over the years had resulted in an impressive wall of awards, including
seven Nobel Prizes in Physics, nine U.S. Medals of Science and 12 U.S. Medals of
Technology.7 In 1999 alone, Bell Labs scientists registered more than 1,000 patents. In 2005,
Lucent employed more than 30,500 workers and its sales reached $9.4 billion.

The merger of Alcatel with Lucent Technologies in 2006 created an unparalleled global
communications solutions provider, a company well-known for its very complete end-to-end
portfolio of solutions and services.8 Yet it also brought severe challenges to the new giant. In
July 2008, Alcatel-Lucent announced that both its chief executive, Patricia Russo, and its
chairman, Serge Tchuruk, would step down amid shareholder complaints over billions of
dollars in losses following the merger.9 By the end of 2010, the company seemed prepared
for a comeback, with CEO Ben Verwaayen announcing that the company would be able to
meet the goals set in 2008. Shareholder confidence in the financial situation of the company
also grew, translating into a steady rise in share prices.

The Mobile Wallet Solution

Birth of the Mobile Wallet

Mobile payment entails servicing transactions that are typically performed using cash, debit
cards, credit cards or even travel or gift cards, using mobile communication technologies. At
Alcatel-Lucent, the goal of the Mobile Wallet was to offer consumers a technology capable of
simplifying their transactions (payments and money transfers) as well as making it easier for
them to keep track of these transactions via their mobile devices. The 2007 idea to use NFC
to develop a mobile payment system was one of the first outcomes of a new business
incubation strategy at Alcatel-Lucent called innovation bootcamps (see Appendix 1).10

4 http://www.corp.att.com/history/milestones.html.
5 Robert V. Bruce, Bell: Alexander Bell and the Conquest of Solitude, (New York: Cornell University Press, 1990).
6 http://www.alcatel-lucent.com/wps/portal/BellLabs/AwardsandRecognition#tabAnchor2.
7 Idem.
8 http://www.alcatel-lucent.com/aboutus/companyoverview.html.
9 http://www.nytimes.com/2008/07/30/business/worldbusiness/30alcatel.html?_r=1&dbk.
10 http://connectedplanetonline.com/wireless/news/ALU-RFID-contactless-0612/.

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Anthony Belpaire and Toon Coppens incubated the idea within Alcatel-Lucent. They decided
to leverage on the interaction of mobile phones with various objects using fast-growing
communication technologies like Radio-Frequency Identification (RFID) and Near Field
Communication (NFC). The team designed the new platform with less than $10 million in
corporate funds.11 It was supported by Alcatel Lucent Ventures, a corporate incubator that
invests in home-grown ideas coming from Alcatel-Lucent’s internal research and helps
developing such ideas into commercial success.

The team’s idea was to bridge the digital and the real worlds by offering a technology that
allows physical electronic tags to trigger digital actions in hardware devices, like cell phones.
The actions may include opening a webpage, sending text messages or running a custom
application. Hence, the technology had the potential to allow mobile operators and
companies (e.g., retailers) to offer interactive advertising and loyalty services to consumers.
Later, the team came up with the idea of also offering wallet 2.0 services to consumers, i.e.,
services like mobile payment and cash transfer between mobile phones.

Between 2007 and 2010 the idea evolved considerably both in terms of positioning and
branding (see Appendix 3). The first launch of the service occurred in October 2008 under
the brand name Tikitag. Given that no major technological or cost barriers stood in the way
of an NFC launch, the team reasoned that most cell phones would soon be NFC-enabled,
bringing mass-market aspirations to Tikitag. In fact, at that time, NTT DoCoMo, the
predominant mobile operator in Japan, was already including a contactless payment
technology similar to NFC in about 80% of the phones sold.12 Research conducted by Gartner
also bolstered the team’s optimism. Gartner’s research indicated that mobile payment users
would reach 43 million worldwide in 2008 and that number should increase more than 70%
in 2009, reaching 74 million.13 In February 2009, Alcatel-Lucent changed the brand name of
Tikitag to touchatag, which brought a sensorial touch to the brand. However, in 2010, apart
from the case of Japan, the number of NFC-enabled smart phones sold was still small.

The Mobile Wallet Business Model

To reduce the dependence of the growth of their business on the diffusion of NFC, the
touchatag team decided to focus on multiple transaction initiators (Short Message Service or
SMS, Unstructured Supplementary Service Data or USSD, mobile applications, Wireless
Application Protocol or WAP, etc.) for their mobile payment services. Yet, such a technological
solution did not solve the challenge of finding a suitable business model for Mobile Wallet, one
that guaranteed that Alcatel-Lucent could draw value from their deployed solution.

In fact, inside Alcatel-Lucent there were concerns that the business model needed to support
mobile payment relied heavily on business skills outside the core competencies of the company.
Alcatel-Lucent is particularly comfortable in B2B contexts, with mobile operators as their main
clients. Current proposals to directly serve merchants in order to speed up uptake of mobile
payment, for instance, required the installation of hardware at merchants’ point-of-sale and

11 http://gigaom.com/2008/09/08/demo-meet-alcatel-lucents-services-play/.
12 Businesswire, January 2008.
13 ComputerWorld, May 2009.

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promotion of the service next to end consumers. Thus, it was a business model which relied
heavily on relationships with retailers and on a deep understanding of the needs, attitudes and
preferences of the end consumer regarding payment methods. Toon Coppens, one of the
enthusiastic managers within touchatag, feared those competencies were not sufficiently strong
within Alcatel-Lucent. Consequently, with alternative mobile payment solutions looming in the
horizon, Toon feared that it could take too long for the company to build the required network
and infrastructure to make mobile payment an attractive source of revenue for Alcatel-Lucent.
The challenge Toon Coppens and Rudi Broos faced was to build on Alcatel-Lucent’s strengths
and core competences but at the same time guarantee sufficiently quick uptake in order to gain
a first-mover advantage in the mobile payment ecosystem.

Defining the Mobile Wallet Space

Apart from the specific business model adopted, Alcatel-Lucent also needed to define its
position in the mobile payment value chain and clarify the scope of its core service within
mobile payments. Touchatag was originally planned as a solution for the provision of
marketing services, namely loyalty and couponing services, interactive marketing and remote
ticketing. Yet, by the end of 2010, there was an increasing agreement within Alcatel-Lucent
that payment services would represent the bulk of the revenues stemming from mobile wallet
services; these payment services include proximity payment, mobile money transfer and
mobile wallet (allowing consumers to conveniently check their balance and transactions; see
Exhibit 1). Yet, to enter such a market, Alcatel-Lucent needed to carefully draft the
positioning of its mobile wallet services, carefully define which customers to target and
guarantee a deep understanding of the payment value chain, including the role and position
of existing players (i.e., merchants, banks, transaction acquirers and card issuers). Armed
with such knowledge, the company should then define an attractive value proposition for its
mobile wallet business, a proposition capable of leveraging the company’s core competencies
and take advantage of emerging opportunities. At the same time, the company needed to be
conscious of its weaknesses and fend off possible threats.

Current Methods of Payment and the Payment Value Chain

When consumers pay for a product or service, be it at retailers’ checkout counters, in
restaurants or even taxicabs, they need to decide whether to swipe a credit or debit card or to
pay with cash. While cash is still the payment instrument most frequently used in many parts
of the world, in Western countries plastic (i.e., debit or credit cards) is substituting cash. In
the United States, for instance, debit cards are expected to replace cash as the main payment
method by 2012 (see Exhibit 2).

Unbeknownst to the consumer, the quick transaction performed after swiping a card triggers
a complex series of operations which need to be carried out by different parties which
constitute the payment value chain. In order to accurately charge the consumer for the
transaction and pay the merchant for the goods or services provided, these different entities
are responsible for different tasks. The payment value chain includes banks (who can be card
issuers for consumers or merchants’ banks), merchant acquirers, third-party transaction
processors and payment card networks like Visa or MasterCard, as summarized in Exhibit 3.

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Card issuers, i.e., retail banks, provide credit and debit cards to consumers and connect such
cards with consumers’ accounts, also providing the credit needed in the case of credit card
transactions. On the other side of the transaction, in order to accept card payments, the
merchant has to sign a contract with a transaction acquirer, like First Data. Merchant
acquirers offer the front-end processing of the transaction. In other words, they route the
transaction from the merchant’s point-of-sale to the payment card network (e.g., Visa). Large
merchant acquirers typically execute all the necessary steps to electronically process and
authorize the transaction. Smaller merchant acquirers, however, often use the services of a
third-party processor for carefully routing the transaction in such a way that the payment
network communicates with the card issuer and guarantees that the right customer is billed.
Only financial institutions are allowed to join payment networks like Visa, so it is also
common for merchant acquirers to partner with a bank.

Transaction Process and Pricing

A transaction has two major steps: (i) authorization and (ii) clearing and settlement. During
authorization, the different parties process the transaction in order to obtain permission from
the card issuer (i.e., the card issuer has to check and confirm that the customer has enough
funds to pay for the transaction and the card is not blacklisted for some reason). Next, the
transaction is sent to the payment card network for payment to be executed. Settlement
closes the contractual cycle. It is the actual process of guaranteeing money is transferred to
the merchant’s account. Clearing involves the exchange of all necessary information for the
settlement to occur as smoothly as possible (reporting requirements, handling of
communication issues and errors, etc.).

The average fee charged to a merchant by a payment network, like Visa, is a flat fee per
transaction, a percentage of the transaction volume or a combination of both. Thus, the exact
fee paid on each transaction depends on the type of card used by the consumer (see Exhibit 4)
and on the payment network and transaction value (see Exhibit 5). It typically lies between
0.5% and 1.5% of the transaction value for debit transactions and between 1.5% and 2.5% of
the transaction value for credit transactions.

Market Structure and Size

In 2008, global payment revenues surpassed $1 trillion for the first time, with about 50% of
this revenue coming from fees and the rest from net interest income charged by banks. In
terms of payment card networks, in February 2010 Visa credit cards accounted for 43.4% of
the total volume of purchases made by credit card in the United States, and the rest was split
between MasterCard (27.1%), American Express (23.8%) and Discover (5.7%).14

Exhibit 6 summarizes the global split of payment revenues. Although payment revenues
have increased steadily worldwide, regional differences are clear. While European and North
American markets have witnessed moderate growth, the Asia-Pacific market has seen
explosive growth. Latin America, the smallest market in terms of volume, has the biggest
increase in compound annual growth rate.

14 http://education.cardhub.com/statistics/market-share-by-credit-card-network/.

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At Alcatel-Lucent, management also typically distinguished between banked (i.e., North

America, Europe and Asia-Pacific) and unbanked (large part of Latin America and the rest of
the world, i.e., Middle East, Africa and Russia, for example) markets. Consumers in different
markets may also have different needs and preferences for alternative payment methods.
Exhibit 7 plots different countries in terms of their consumers’ preferences for (i) cash versus
cards for points-of-sale (POS) transactions and (ii) check versus electronic payments for bill
payments. Large variation in consumer payment preferences was seen as a challenge for new
payment methods like online payment services (e.g. PayPal and Google) and mobile payment
services (like Alcatel-Lucent’s Mobile Wallet).

Outside Japan, where mobile payment was already popular, mobile payment transactions
were related to e-commerce, in particular games, music, ringtones and software for phones, a
market of approximately €16 billion in Europe and $10 billion in the United States.15 Yet
research by McKinsey16 showed that the potential for mobile payment in bricks-and-mortar
retail was much larger, easily reaching €185 billion in Europe and $200 billion in the United
States for micropayments alone (i.e., payment of small amounts like parking, transit fares
and fast food meals). The medium-value transaction segment (groceries, retail shopping,
restaurants), should be able to yield even greater returns, according to the same study. The
opportunity of each specific market would depend on the type of transaction and the player
launching or branding the mobile payment service (i.e., banks, payment networks, merchant
acquirer). Exhibit 8 depicts the distribution of payment methods across different transaction
types in the United States.

Besides being a replacement for cash or cards, mobile payment offered a new possible
solution for unbanked customers (i.e., customers without access to banking and financial
services) willing to make money transfers (see Exhibit 9). In some markets this was a very
attractive value proposition, as it would represent a quick transaction method that would
allow consumers to avoid sending money through insecure, sometimes even corrupt,
channels. Moreover, mobile payment was a major opportunity not only for traditional
entities in the value chain network (banks, payment card networks, merchant acquirers) but
also for new players like Google, PayPal, mobile phone operators and providers of
telecommunication solutions like Alcatel-Lucent.

The Mobile Operator Space

Besides the traditional (i.e. banks, transaction acquirers) and new (i.e. online payment players
such as Google and PayPal) players in the payment value chain, mobile operators were also
showing active interest in mobile payment. Mobile operators, nowadays, dominate an
extremely large and attractive market. Gartner estimates that by 2014 worldwide mobile
voice and data revenue will exceed $1 trillion a year. 17 Yet, growth was stalling in most
developed economies. Thus, by 2010, in many Western economies, like the United States and

15 Monica Adractas, Yran Dias, Yves Enkels, Diogo Rau and Hiroko Sasaki, “Mobile Payments: Ringing Louder”. McKinsey on
Payments, April 2009.
16 Idem.
17 http://www.gartner.com/it/page.jsp?id=1455314.

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Europe, mobile operators were increasingly focused on customer retention rather than
customer acquisition, and on new business opportunities that could extend their profits.

Three types of players characterize the mobile operator space: (1) large national or
multinational mobile network operators, (2) smaller regional, local or niche-focused mobile
network operators and (3) mobile virtual network operators. Large national or multinational
mobile network operators include AT&T Wireless, T-Mobile, Vodafone and Telefónica. With
market maturity looming and large national players entering each other’s markets,
competition had been intensifying among these large players.

Regional, local or niche-focused mobile network operators included firms such as Bouygues
Telecom, the third largest operator in France (serving about 10 million mobile customers, a
market share of about 20% of the French market) 18 as well as smaller niche-players.
Bouygues Telecom gained this market share by using aggressive pricing and offering bundled
packages clearly targeted at the consumer market. 19 Across Europe, there were several
regional players which, in some cases, gained a significant share of the market, for example
Max.mobil in Austria (18%), E-plus (14%) in Germany, Wind (13%) in Italy, Optimus (21%)
in Portugal, Amena (16%) in Spain, Europolitan (15%) in Sweden and One2One (21%) in the
U.K.20 There were also many smaller players like Cosmo (4%) in Bulgaria, Viag Interkom (7%)
in Germany, Meteor (1%) in Ireland, Blu (2%) in Italy and Telfort (9%) and Ben (6%) in The
Netherlands. In the United States there are also many regional and local operators (e.g., the
former Baby Bells, such as Cincinnati Bell, the leading operator in the city of Cincinnati,
Ohio, and in its suburbs, which extend to the neighboring states of Indiana and Kentucky).

More recently, a number of mobile virtual network operators (MVNO) have also appeared in
different countries, some of which gained quite some popularity (e.g., Lebara Mobile, which
operates in about 10 countries with large ethnic and immigrant populations, their primary
target customer). An MVNO is a company that typically does not own a spectrum license or
the necessary infrastructure, which they in-source from a mobile network operator.

Even though mobile payment represented a huge opportunity in the coming years, it was not
clear whether mobile operators – either large ones or the smaller niche players and MVNOs –
would be actively looking for a position in this new value chain. The discussion was being
closely followed by large mobile operators, which needed to find solutions for growth given their
maturing voice and SMS businesses. But many operators were afraid that adding such a service
to their portfolio would make consumers perceive such transactions as part of their “wallet share”
for communications and, consequently, lead consumers to compensate the increased expenditure
on mobile payment with a decrease in their consumption of higher-margin voice and SMS
services. Some smaller players seemed to be less worried with such threats of cannibalization.
French operator Bouygues Telecom, for instance, was actively searching for a space in the
mobile-payment market and had actually held its first NFC trials, in France, back in 2006, in a
collaborative experiment with the Paris Metro operator, RATP.21

18 Claudia Imhoff, “Bouygues Telecom: The Intelligent Telecommunications Company,” Intelligent Solutions Report, March 2011.
19 IDC 2001, European Telecommunications Services Monitoring European Telecoms Operators: Final Report.
20 Idem. Shares represent the market share, in terms of subscribers, in the year 2001.
21 http://nfctimes.com/company/bouygues-telecom.

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Coppens and Belpaire were however still hesitant about partnering with small players. Would
they inspire enough trust in consumers to be able to handle their financial transactions? If
Alcatel-Lucent’s customers, which were typically large mobile operators, didn’t start to move
proactively into this market, could Alcatel-Lucent consider partnering with a financial
institution?

When brainstorming about what business model to implement, Toon Coppens and Anthony
Belpaire scanned the market and noted that besides these two options (called mobile-
operator-centric or financial-institution-centric models), Alcatel-Lucent could also consider
(i) forming an independent joint venture with partners that were not active players either in
the mobile operator or the financial services spaces or (ii) going to market alone by
positioning the mobile wallet service as an independent and trustworthy service to customers
(a model typically called trusted-services-management). All models have their pros and cons
and this was a major strategic decision for the success of mobile wallet.

Penetration Speeds in Mobile Applications and Financial Markets

Another issue that was worrying the Alcatel-Lucent team, besides the possible hurdle of low
NFC penetration, was the time it would take for mobile payment to reach critical mass.
Forecasting the number of years needed for penetration in the target markets chosen by
Alcatel-Lucent was particularly critical given the company’s recent financial history, which
left little margin for future adjustments in the financing needs of the new venture. The first
step was to find reliable statistics on the time-to-takeoff of new products and services. Rudi
found large cross-category differences, with products like digital cameras gaining critical
mass (i.e., moving from the introduction to the growth phases of the product life cycle) in
little more than two years, while other products, namely mobile phones, needing more than
six years (see Exhibit 10). Moreover, there were also vast differences in time-to-takeoff of a
new product across countries (see Exhibit 11).

Alcatel-Lucent also collected data on credit card penetration across OECD countries (see
Exhibit 12) and carefully looked at the diffusion pattern for online and mobile banking
(see Exhibit 13). This analysis left the team with the impression that diffusion of financial
services is slower than in most of the categories within high-technology markets. One reason
for this could be the added concerns consumers have with security. Moreover, differences
across countries also seemed more extreme than for other categories. For example, data from
wireless intelligence for 2010 indicated that mobile penetration was slowing down but that
growth rates were still high, especially in developing economies. In some regions like Asia
Pacific, Middle East and Africa, for example, growth rates were even above 30% (see
Exhibit 14). All this meant that, to reduce the risk of failure, a careful plan for the
international launch of the mobile wallet needed to be carefully prepared. Where should
Alcatel-Lucent launch the service first? What would be the roll-out plan?

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The Challenges Ahead

As the mobile wallet initiative was scaling up, Danny Goderis and Rudi Broos were
considering all challenges lying ahead. Especially worrying was how financial value chain
participants, such as banks, transaction acquirers and card issuers would react to the new
technology in the value chain. How big of a threat could any of these reactions pose to
mobile wallet’s market penetration? Could Alcatel-Lucent ally with any of these financial
players to foster a more beneficial ecology for the mobile wallet solution to take off?

Also the go-to-market strategy in this space is complex. Several challenges lied ahead. How
should the business model work? Who should charge how much to whom in the value chain
and how much of the value could be extracted by Alcatel-Lucent itself? Who should be
Alcatel-Lucent’s customer? Should it be the mobile operator or also retailers, as they would
have to install the sensing equipment? And then, within these customer segments, who
should they primarily target? And for which type of transactions – micro payments or any
type of payment consumers could currently make with cash, debit or credit? In what region
of the world would such a service become popular the fastest? Some within Alcatel-Lucent
speak of huge potential in developing countries in Africa (e.g., Nigeria) or Latin America
(e.g., Brazil). Others mostly see this technology taking off in Europe (e.g., Germany). How
quickly would the new payment solution take off? And finally, who should brand the service,
Alcatel-Lucent, the mobile operator or a card issuer such as VISA?

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Exhibit 1
Touchatag’s Business Solutions

Business Solution Short Description

Proximity payment Allows fast and convenient payment at the point-of-sale. Consumers simply
use their phone’s NFC or camera to get pricing information. Mobile operators
can then offer this service to their customers and to enterprise customers and
receive a transaction fee, as well as added loyalty.

Mobile money transfer
Consumers can send money to other consumers or to firms using their mobile
phone. Mobile operators can charge a fee for this service. Their vast network
of distribution points should allow them to be significantly more cost-effective
than traditional money transfer options. This service can be used using a web
application or even a SMS or USSD message.

Remote ticketing Allows consumers to buy tickets (e.g., parking or transportation tickets) using
their mobile phone. This service can be used using a web application or even
a SMS or USSD message.

Mobile wallet Consumers can manage their payment and loyalty accounts, view their
transaction history and transfer money to other people using their mobile
wallet. This wallet can be topped up in multiple ways, e.g., by credit card or
debit card. The Mobile Wallet Service relies on a Stored Value Account
component, which allows the management of cash and virtual cash, and does
not rely on the prepaid billing and rating account of the telecom operator.
Instead, a money license is required for which Alcatel-Lucent and
Clear2Pay™ can support the operator with a variety of solution options.

Loyalty and coupon Consumers can have their loyalty card and coupons always available in their
services mobile NFC phone (or in a contactless card or even a key fob). Retailers can
then offer coupons while consumers are shopping based on their profile.

Auxiliary contactless Touchatag technology can be used for a wide range of applications beyond
applications payment and loyalty services, like interactive advertising, information retrieval
(e.g., for tourists or consumers from urban ads), time registration and mobile
workforce…

Source: http://www.touchatag.com/business/content/welcome-business-site and Alcatel-Lucent (2010), Alcatel-Lucent Mobile Wallet

Service – Release 1.0.

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Exhibit 2
Consumer Payment Methods in the United States
160 billion transactions
Electronic
140 Other paper
Checks
120

100 27.4% Cash

80 Other cards
60 Credit cards
40
20 29.0% Debit cards

’02 ’07 ’12

proj.

Source: The Nilson Report, available here: http://www.nytimes.com/imagepages/2010/01/04/business/20100105_VISA2_graphic.html.

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Exhibit 3
The Payment Value Chain

5 5
4
Transaction Acquirer
Card Issuer 2a Payment Card Network 2a
(e.g. First Data ; typically Merchant’s Bank
(e.g. ING Bank ) 2b (e.g. Visa) 2c associated with a Bank ) 2a

6 2a 2d Third -party Processor

Merchant 2a
Consumer 1 (e.g. Carrefour )

1. Consumer presents a card to pay for goods or services at a merchant’s.

2. Authorization process: (2a) the merchant processes card and transaction information
(via its points-of-sale system) and requests authorization to process the transaction
from the consumer’s bank (card issuer). This authorization process is mediated by the
transaction acquirer (possibly in partnership with a third-party processor and/or a
bank, like the merchant’s bank) who (2c) receives the authorization from the payment
card network (e.g., Visa), which is the institution receiving the authorization from the
card issuer (2b). The transaction acquirer then communicates authorization to the
merchant (2d). Upon receiving authorization, the merchant completes the transaction
by proceeding to step 3.

3. Merchant deposits the transaction in its bank.

4. The merchant’s bank credits the merchant’s account and submits the transaction to
the payment card network.

5. The payment card network facilitates settlement by debiting the card issuer account
and paying the merchant bank.

6. The card issuer debits the cardholder’s (the consumer’s) account and updates the
cardholder’s monthly statement, which he/she will receive at a pre-specified date.

Source: Federal Reserve Bank of Atlanta (2006), “Merchant Acquirers and Payment Card Processors: A Look Inside the Black Box,”
Economic Review, First Quarter, 27-42, and http://blog.unibulmerchantservices.com/credit-card-transaction-processing-basics/.

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Exhibit 2
Consumer Payment Methods in the United States
160 billion transactions
Electronic
140 Other paper
Checks
120

100 27.4% Cash

80 Other cards
60 Credit cards
40
20 29.0% Debit cards

’02 ’07 ’12

proj.

Source: The Nilson Report, available here: http://www.nytimes.com/imagepages/2010/01/04/business/20100105_VISA2_graphic.html.

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Exhibit 6
Global Payments Revenue (2008)

Source: McKinsey, “The McKinsey Global Payments Map: A Global Eye on Local Opportunities,” October, 2010.

Exhibit 7
Payment Preferences and Market Typology

* Electronic consists of credit transfers and direct (ACH or Automated Clearing House Networks) debits. For this purpose it excludes
card transactions.
** Excluding ePurse and prepaid.

Source: Olivier Denecker, Glen Sarvady and Anna Yip, “Global Perspective on Payments: The McKinsey Global Payments Map,” Mckinsey,
April, 2009.

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Exhibit 8
Distribution of Payment Methods at Points-of-Sale in the United States
(percentage of transactions, 2006)

Source: McKinsey, “Mobile payments: Ringing louder,” April, 2009.

Exhibit 9
Wireless Penetration Versus Access to Financial Services

180%

160%
Wireless penetration (% of population)

140%

120%

100%

80%

60%

40%

20%

0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Composite measure of access to financial services (% of population with access)

Source: Analysys Mason, World Bank (2010). Available in http://www.analysysmason.com/About-Us/News/Newsletter/Communique1/Mobile-

banking--will-the-banks-lead-the-next-wave/.

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Exhibit 10
Years from Category Inception until Sales Takeoff (average across 55 countries)

Average Number of
Product Category
Years for Takeoff

CD Player 3.93

Digital camera 2.81

DVD player 2.15

Internet 4.39

ISDN 4.38

Mobile phones 6.05

PC 2.89

Video camera 6.47

Source: Yvonne Van Everdingen, Dennis Fok and Stefan Stremersch, “Modeling global spillovers of new product takeoff,” Journal of
Marketing Research XLVI, October 2009, pp. 637-652.

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Exhibit 11
Years From Category Inception Until Sales Takeoff (average across the categories in
Exhibit 10, in each of the countries)

Number of Average Time Number of Average Time

Country Country
Cases to Takeoff Cases to Takeoff

Switzerland 4 1.50 Hungary 7 4.17

Norway 3 1.67 Italy 5 4.20
New Zealand 4 2.00 Russia 7 4.20
United Kingdom 5 2.00 Netherlands 4 4.25
Hong Kong, China 3 2.33 Bulgaria 6 4.25
United States 6 2.50 Spain 6 4.67
Finland 7 2.57 Slovakia 7 4.67
Sweden 5 2.60 Peru 4 4.67
Australia 5 2.60 Argentina 5 5.00
Portugal 7 2.71 Japan 5 5.00
Israel 7 2.71 Mexico 6 5.17
Canada 5 2.80 Brazil 6 5.20
South Africa 6 2.80 Belgium 4 5.67
Austria 3 3.00 Thailand 8 5.67
Taiwan 3 3.00 Vietnam 7 5.80
Greece 8 3.25 Croatia 5 6.00
Germany 6 3.33 Philippines 7 6.00
Malaysia 6 3.40 Romania 6 6.00
Denmark 4 3.50 Turkey 6 6.20
South Korea 6 3.50 Colombia 7 6.29
Slovenia 5 3.60 Singapore 4 6.50
Estonia 6 3.83 Chile 5 7.60
France 6 3.83 China 8 7.86
Venezuela 6 4.00 Pakistan 5 8.00
Ireland 3 4.00 Morocco 8 8.00
Czech Republic 6 4.00 India 7 8.50
Ecuador 5 4.00 Indonesia 7 9.33
Poland 6 4.17
Total/Weighted
308 4.46
Average

Source: Yvonne Van Everdingen, Dennis Fok and Stefan Stremersch, “Modeling global spillovers of new product takeoff,” Journal of
Marketing Research XLVI, October 2009, pp. 637-652.

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Exhibit 12
Credit Card Penetration among OECD Countries

Country 1998 2005

Argentina 24% 35%

Australia 85% 105%
Belgium 28% 32%
Brazil 14% 38%
Canada 140% 179%
Chile 14% 19%
China 1% 3%
Colombia 4% 7%
Czech Republic 0% 7%
France 15% 23%
Germany 19% 27%
Hong Kong 112% 205%
Hungary 0% 9%
India 0% 2%
Indonesia 0% 4%
Israel 40% 47%
Italy 25% 51%
Japan 195% 174%
Malaysia 10% 30%
Mexico 6% 13%
Netherlands 26% 43%
Poland 2% 8%
Portugal 20% 46%
Russia 0% 2%
Saudi Arabia 2% 4%
Singapore 52% 94%
South Africa 8% 13%
South Korea 88% 150%
Spain 33% 75%
Sweden 34% 49%
Taiwan 49% 214%
Thailand 4% 20%
United Kingdom 71% 135%
United States 180% 253%
Venezuela 13% 12%

Source: Credit Cards: Economist Intelligence Unit, European Marketing Data and Statistics, London: Euromonitor International, 2007;
and Visa International, available in: http://corporate.visa.com/_media/ita-credit-card-report.pdf.

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Exhibit 13
Mobile Banking and Online Banking Penetration Patterns in the United States
Mobile Banking vs. Online Banking
Actual: 1995-2006, Forecast: 2007-2016
70.0

60.0

Online
50.0 Banking
US Households
(Millions)

40.0

30.0

Mobile
20.0
Banking

10.0

0.0
03

07

11

15
97

99

01

05

09

13
95

20

20

20

20
19

19

20

20

20

20
19

Source: Mobile Marketing Association, Mobile Banking Overview, January, 2009.

Exhibit 14
Evolution in Number of Mobile Phone Subscribers in Different Regions

2000 80 Africa
1800 70 Americas
1600 Asia Pacific
Subscribers (millions)

60
1400 Europe: Eastern
Percentage growth

1200 50 Europe: Western

1000 40 Middle East
800 North America
30
600
20
400
200 10

Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 2001 2002 2003 2004 2005 2006 2007 2008

2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: https://www.wirelessintelligence.com/print/snapshot/101021.pdf.

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Appendix 1
Alcatel-Lucent Bootcamps as a Grass-Roots Innovation Initiative
In the years after the 2006 merger, Alcatel-Lucent found itself under unprecedented pressure
to come up with novel technologies and seek new business opportunities. The period was also
fruitful for process restructuring. With thousands of engineers and scientists on its payroll,
Alcatel-Lucent knew that internal company knowledge was probably its most important
asset. The challenge was to find a systematic process to harness such knowledge and create
value and a sustained competitive advantage for the company. Alcatel-Lucent decided to
implement innovation bootcamps to stimulate submittal of ideas for new businesses, train
intrapreneurs to polish their ideas, create winning business plans and prepare them for the
market battleground. In these efforts, the company collaborated with MTI2 (The Marketing,
Technology & Innovation Institute), a Belgium-based boutique consulting firm specialized in
boosting innovation.

How Does an Innovation Bootcamp Work?

A bootcamp follows a set pattern, as depicted in Figure 1. At the kickoff, there is an

inspiration phase whereby the company launches an idea call encouraging all employees to
submit their ideas through a special-purpose platform. The company then starts an idea
selection phase to filter this pool of ideas.

The goal of the next step – the team formation phase – is to help idea owners identify their
staff needs and market such needs internally in order to attract new members for their team.
A marketplace event is organized at this stage to help idea owners recruit three to five new
members to their team, preferably with strong complementary skills. In this event, idea
owners present their ideas (pitching) and informally meet with other intrapreneurial
employees who are not yet connected to a specific initiative, which leads to spontaneous
team building (matching). The teams created in this event become the basis for the final
teams that will incubate the initiative later on.

The bootcamp workshop phase constitutes the backbone of the Alcatel-Lucent bootcamps, as
teams receive professional coaching and skill facilitation training. The goal is to transform
intrapreneurs’ original ideas into a consistent and convincing business concept. The process,
which extends over several weeks, requires intrapreneurs to invest time, above and beyond
their normal duties, to polish their ideas. They also participate actively in two intensive
events, held mostly in locations outside the company, which take between three to five days
each (including weekends). The bootcamp workshops are organized by MTI2.

During the first intensive training week, the teams learn how to convert their early-stage idea
into a full-fledged business concept. Divergence among team members is stimulated to find
the best business opportunity for the idea. Participants also receive training and coaching on
business concept and business plan development and learn how to write a marketing plan.
The goal of the second bootcamp workshop is to help participants pitch their business plan to
senior management and ask for the resources they need to turn their ideas into successful
commercial propositions (a process of convergence and presentation).

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Appendix 1 (Continued)

Figure 1

Different Phases in Bootcamp Innovation Process

Idea Selection

Team Selection

Incubation Selection

Incubation of ideas

The last phase of the bootcamp process consists of a grand jury event. Teams make a final
presentation of their business concepts to a group of investors who join the entire
management team to evaluate the attractiveness of the business cases. After these
presentations, the jury deliberates and decides together which teams may actually start their
project and move to the incubation phase.

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Appendix 2
The NFC Technology
RFID uses radio waves to allow a radio frequency transmitting and receiving device (also
known as reader or interrogator) to exchange data with an RFID tag.22 NFC, which stands for
Near Field Communications, is an extension of proximity-card or short-range RFID
technology, which allows readers to read tags at a distance of up to 4 cm. 23 NFC is a
standard defined by the NFC Forum, a global consortium (headed by Sony and Philips) of
hardware, software/application, credit card companies, banking corporations, network-
providers and others who are interested in the advancement and standardization of this
technology primarily aimed at usage in mobile phones. This short-range wireless
communication technology works like Bluetooth but with a shorter range, reducing the
likelihood of interception.

The ISO 18092 standard defines two communication modes for NFC interface and protocol:
one for communication between an active NFC-enabled device (e.g., a smartphone) and a
passive one (e.g., a tag) and another for dialog between two active devices. NFC-enabled
devices are able to communicate in a short distance via magnetic field induction. In the first
mode, an active NFC-enabled device (normally a smartphone) sends a signal to a passive NFC
element (usually an RFID tag) which transforms the signal by adding the appropriate
information needed by the device to perform a certain operation (e.g., paying for a product
or service) and sending the signal back to the initiator. In the second mode, two active NFC-
enabled devices establish a dialog and interchange the appropriate information such as prices
or personal information cards.

22 http://rfid.net/basics/190-what-is-rfid.
23 http://www.touchatag.com/faq.

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Appendix 3
Mobile Wallet Business Concept Evolution (2007-2010)
The idea behind the Mobile Wallet Solution could be traced back to 2007. Since the original
idea emerged in Alcatel Lucent’s annual innovation bootcamp in 2007, the concept that
eventually led to the mobile wallet idea underwent significant changes in positioning.

QTouch

A first predecessor of the Mobile Wallet Solution was an idea submitted by a Belgian team in
Alcatel-Lucent’s bootcamps (late 2007), called QTouch. The idea behind QTouch was to enable
mobile phones to interact with billboard advertisements. First, NFC was thought of as an
enabling cell phone technology increasing in penetration fast. Second, substantial amounts
of money were spent on billboard advertising. But at the same time, the advertising industry
became increasingly aware of the need to build integrated communication strategies (across
multiple media platforms). QTouch was the solution to let billboard advertising integrate
fluently with other forms of digital communication. Big billboard agencies, such as JC
Decaux, could equip their billboards with RFID tags that subsequently could enable digital
content and services to be loaded on an NFC-equipped mobile phone.

Incubation and Tikitag

After an initial enthusiastic response to QTouch from Alcatel-Lucent management, Anthony

Belpaire and Toon Coppens led the idea’s incubation, to leverage on the interaction of mobile
phones with different objects using fast-growing communication technologies like Radio-
Frequency Identification (RFID) and Near Field Communication (NFC). The startup team
designed the new platform using less than $10 million in corporate funds.24 It was supported
by Alcatel Lucent Ventures, a corporate incubator that invests in home-grown ideas coming
from Alcatel-Lucent’s internal research and helps developing such ideas into commercial
success.

The team’s idea was to bridge the digital and the real worlds by offering a technology that
allows physical electronic tags to trigger digital actions in hardware devices, like cell phones.
The actions may include opening a webpage, sending text messages or running a custom
application. Hence, the technology had the potential of allowing mobile operators and
companies (e.g., retailers) to offer interactive advertising and loyalty services to consumers.
Later, the team came up with the idea of also offering wallet 2.0 services to consumers, i.e.,
services like mobile payment and transfer of cash between mobile phones. The first launch of
the service occurred in October 2008 under the brand name Tikitag and subject to the
promise of “building the Internet of things.”

24 http://gigaom.com/2008/09/08/demo-meet-alcatel-lucents-services-play/.

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Appendix 3 (Continued)

Touchatag

In February 2009, the brand name was changed to touchatag, which brought a sensorial
touch to the brand. Touchatag applications were based on an extended open Application
Program Interface (API). Anthony Belpaire expected such an open standard, and an
application development toolkit associated with touchatag, to facilitate the development of
applications, attracting developers and final users and speeding up diffusion of the new
technology.25

The new reading application within touchatag also allowed any mobile phone with a camera
to read a 2D barcode tag which would then be used by touchatag’s online system to initiate
the right application.26 This was an intermediate solution, envisioned by the Mobile Wallet
team, to reduce the dependence of touchatag on the diffusion of NFC, considered the main
hurdle to the widespread adoption of touchatag. Yet, consumers seemed to resist this solution
in test markets, which was worrisome. Some industry analysts were also concerned that if
consumers became underwhelmed by these interim technologies for mobile payment, it could
hurt the adoption of the NFC devices down the line.27

25 PR Newswire, February 2009.

26 Idem.
27 http://connectedplanetonline.com/wireless/news/rfid-lead-nfc-0602/index.html.

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