Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services

Mobile Payments and Virtual Currencies: The Emergence of the New Mobile Products and Services

Lucy Setian

Vrije Univeriteit Brussel
Faculteit Letteren en Wijsbegeerte
Study area: Communication Studies
Supervisor: Prof. Pieter Ballon

Mobile Payments and Virtual Currencies:
The Emergence of the New Mobile Products and Services

Thesis submitted to obtain the grade of Master of Communication Studies – New Media and Society in Europe

Academic year 2011/2012

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Table of Contents

Abstract ..................................................................................................................................... 4
I. Introduction ......................................................................................................................... 5
II. Theoretical Framework ......................................................................................................... 7
1. The Mobile Economics .............................................................................................................. 7
2. The Mobile Innovation Horizon ................................................................................................ 10
2.1 The Historical Appearance of the M-Commerce and M-Payments Trend ................................... 10
2.2 From E-Commerce to M-Commerce .................................................................................... 11
2.3 The Emergence of M-Payments .......................................................................................... 12
3. Social Influence and Impact .................................................................................................... 14
4. Alternative and/or Conventional Currencies for M-Payments ........................................................ 16
III. Methodology ..................................................................................................................... 18
IV. State of Art Consolidation and Analysis ............................................................................. 22
IV.1. Currencies ....................................................................................................................... 22
1. Definition .............................................................................................................................. 22
2. Regulatory Framework in the EU .............................................................................................. 22
3. Conventional Currencies ......................................................................................................... 23
4. Nonconventional Currencies .................................................................................................... 24
4.1 Complementary Currencies ................................................................................................. 24
4.1.1. Virtual Currencies ............................................................................................... 28
IV.2. The M-Payment Business Model ...................................................................................... 33
1. Ecosystem Stakeholders ......................................................................................................... 33
2. Billing ................................................................................................................................... 39
2.1 Billing Control Categories ................................................................................................... 39
2.1.1 Operator-Centric Model ............................................................................................ 39
2.1.2 Bank/Credit Card – Centric Model.............................................................................. 41
2.1.3 Peer-to-Peer Model .................................................................................................. 44
2.1.4 Collaboration Model ................................................................................................. 46
2.2 Transaction Type ............................................................................................................... 48
2.3 Transaction Settlement Type .............................................................................................. 48
2.4 Validation Settlement ........................................................................................................ 49
3. M-Payments’ Context Categories .............................................................................................. 49
3.1 Proximity Payments ........................................................................................................... 50
3.1.1 Contactless Payments .............................................................................................. 50
3.1.2 Mobile as a PoS Terminal ......................................................................................... 51
3.2 Remote Payments ............................................................................................................. 51
3.2.1 Mobile Money Transfers ........................................................................................... 51
3.2.2 Online M-Payments ................................................................................................. 52
4. Technology Design .................................................................................................................. 52
4.1 Functional Characteristics .................................................................................................. 52
4.2 Functional Architecture ...................................................................................................... 53
4.2.1 Premium SMS/USSD based Transactional Payments .................................................... 54
4.2.2 Direct Carrier/Bank Billing ........................................................................................ 55
4.2.3 Mobile Web Payments (WAP/GRPS) ........................................................................... 55
4.2.4 Phone-based Applications ......................................................................................... 56
4.2.4.1 Mobile Wallets .......................................................................................... 56
4.2.4.2 2D Barcode (QR) Code Application............................................................... 58
4.2.4.3 Custom Solutions for Virtual Currency Systems ............................................. 58
4.2.5 SIM-based Application ............................................................................................. 58
4.2.6 Dual Chip ............................................................................................................... 58
4.2.7 Contactless NFC and RFID ........................................................................................ 59
4.2.7.1 Contactless NFC ........................................................................................ 59
4.2.7.2 Contactless RFID ....................................................................................... 60
4.2.8 Bluetooth ............................................................................................................... 60
5. Generic Architecture for M-Payments........................................................................................ 61
5.1 Public Key Infrastructure and SIM Cards .............................................................................. 62
5.2 Protocols .......................................................................................................................... 63
6. M-Payments’ Initiation ............................................................................................................ 63
7. Regulatory Issues .................................................................................................................. 64

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V. Challenges and Opportunities .............................................................................................. 65
1. Key Attributes of M-Payments ................................................................................................. 65
1.1 Consumers as Users: Acceptance and Adoption ..................................................................... 65
1.1.1 Convenience ........................................................................................................... 65
1.1.2 Cost ...................................................................................................................... 67
1.1.3 Security ................................................................................................................. 68
1.1.4 Privacy .................................................................................................................. 71
1.1.5 Merchants .............................................................................................................. 71
1.2 Merchants as Users: Acceptance and Adoption ...................................................................... 72
1.2.1 Convenience ........................................................................................................... 72
1.2.2 Cost ...................................................................................................................... 73
1.2.3 Security ................................................................................................................. 74
1.2.4 Consumers ............................................................................................................. 74
1.3 Technological Standards ..................................................................................................... 74
1.3.1 Interoperability Standards ........................................................................................ 74
1.3.2 Security Standards .................................................................................................. 75
1.3.3 Performance Limitations........................................................................................... 76
1.3.3.1 Network Resiliency .................................................................................... 76
1.3.3.2 Database Requirements ............................................................................. 76
2. Key Attributes of Virtual Currencies .......................................................................................... 77
2.1 Currency Regulations ......................................................................................................... 77
2.2 Service and Product Offering: Conventional and Virtual Currencies .......................................... 78
2.3 Consumers as Users: Acceptance and Adoption ..................................................................... 79
2.4 Merchants as Users: Acceptance and Adoption ...................................................................... 80
2.5 Solution Providers as Users: Acceptance and Adoption ........................................................... 80
3. Market Development: The Rise of New Products and Services ..................................................... 80
VI. Business Models’ Overview and Analysis ........................................................................... 82
1. Business Models based on M-Payments .................................................................................... 82
2. Overview of EU Case Studies ................................................................................................... 83
3. Belgian Case Studies .............................................................................................................. 91
3.1 Ping.Ping .......................................................................................................................... 91
3.1.1 Value Network ........................................................................................................ 91
3.1.2 Functional Architecture ........................................................................................... 93
3.1.3 Financial Model ....................................................................................................... 94
3.1.4 Value Proposition .................................................................................................... 95
3.2 CoMobile .......................................................................................................................... 97
3.2.1 Value Network ........................................................................................................ 97
3.2.2 Functional Architecture ........................................................................................... 99
3.2.3 Financial Model ...................................................................................................... 101
3.2.4 Value Proposition ................................................................................................... 103
3.3 Comparison ..................................................................................................................... 103
VII. Conclusion ...................................................................................................................... 105
Declaration of Honor ............................................................................................................. 106
Acknowledgments ................................................................................................................. 107
Bibliography .......................................................................................................................... 108

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Abstract
The following Master thesis is build upon three core thematic pillars: the business models for mobile
payments, the concept of virtual currencies, and the choice for the implementation of the first two within
business models for the creation of new products and services for mobile.
The thesis explores how the rapid development of mobile ICTs influences the different stakeholder groups
and the creation of new business opportunities for mobile.
A key aim is the discovery of the driving forces, responsible for the choice of the concrete m-payment
method, the related technology and the respective payment medium allowed – both conventional and
virtual currencies. This choice is the natural basis in the development of the business models for the
creation of new products or services for mobile.
Several examples of products and services for mobile using m-payments and/or virtual currencies from
the EU market landscape would be overviewed. Two Belgian business models for new services will be
explored. The first the Belgian case study will look into the already commercial service, while the second
one is looking into the currently developed business model for a new service to be introduced in the
coming 2 years.

Key Words: mobile, ICT, m-payments, virtual currencies, business models
Amount of Words: 39 963

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I. Introduction
Many social scientists define the social construct of today and the last decades as the one of the
Information Society. Despite of the numerous and often strongly varying definitions, overall the theories
yet remain always within the context of the human society and information technology. However, only
few of these many attempts to explain what actually the Information Society [1] is, can properly reflect
the changes in the understanding of interconnectedness, interdependencies and innovations from the
past decade brought up by the Mobile Information and Communication Technologies (ICT).

It is important to grasp that the emergence and further vast development of the mobile ICT was the
result of mutually influencing factors within a cyclic process of bringing change. The human needs,
desires and the innovation capacity and drive altogether were among the leading factors for the
deployment of a new set of converging technologies, part of the global network, being the wireless
telephony technologies, which completely changed and are still changing the ideas for the identification of
physical and virtual realms of location, time, social affiliation, connectivity and identification. In addition
the globalization reflected on the society, states and organization not only in the increased ability and
possibility to physically cross-borders but also in the mental mind-shift of the humans.

The term “Mobile Communication Society” slowly began to replace the “Information Society” both in
terms of theories and practice. When Motorola and Bell operated the first commercial mobile telephone
service MTS in the US in 1946, few could have expected the forthcoming developments. The creation of
Internet as we know it was one of the main reasons for the huge change of perceptions of what mobile is
and what major part it has in the human’s life. The convergence of telecommunications and IT leads to
the development of new perception regarding mobile for the society and the business. This new
perception reflected into placing new roles in the functions mobile has such as the ones related to the
users’ ability to conduct purchases without cash while being on the move, or the ability to make such
transfers without even using a traditional currency.

Before new services and/or products based on m-payments could be launched, it is crucial to understand
what previous studies have discovered about the acceptance of m-payments methods, systems and
currencies and about mobile services markets. It is also important to be determined what issues have
remained unresolved and which of them could turn into key bottlenecks in regards of the further market
development. This will be examined in the following chapters with the goal to present successful
innovative products and services’ examples from Europe and Belgium in particular, based on specific m-
payments and concepts of currencies.

The following Master thesis will first study the developments of mobile ICTs and the way it affects the
different stakeholders. Second, it will propose an in-depth focus on the developments and trends related
to the m-payments technologies in particular and separately from that look into the introduction of new,
nonconventional currencies. Third, how this two leading themes affect and influence the creation of new
business models based on the usage of m-payments and a combination of new and old systems of
exchange will be examined. Some of the most innovative examples from the EU and Belgium in particular
will be presented.

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In the coming Chapter II the current mobile paradigm development and the different points that affect it
will be outlined within a theoretical perspective. First, the reasoning behind the concept about the rapid
expansion and development of mobile, the appearance of m-commerce and m-payments in particular will
be presented. Afterwards, the concept of nonconventional currencies in relation to the m-payments
further development and focus in the situation specifically in the EU will be introduced. The borders
blurring between virtual money and conventional currencies, lead by the creation of new e-business
models and strategies with a focus on mobile and their impact leading to the consideration of new policies
and regulations, will be studied.

In Chapter III the methodology, chosen for this research, will be explained from analytical, empirical and
critical perspective.

In Chapter IV State of Art of currencies, with a special focus on new virtual currencies and of the building
blocks of the m-payment business model will be presented and examined.

In Chapter V the Challenges and Opportunities, resulting from the implementation of m-payments and
virtual currencies are examined.

In Chapter VI an overview of European case studies will be made. Two case studies from Belgium will be
identified and analyzed on the basis of their business models. The aim is the differences and similarities
in the functioning of varying business models based on m-payments and conventional or virtual
currencies to be demonstrated and validated.

Chapter VII will contain final a conclusion on the key findings. The aim is the creation of basic forecasts
and recommendations for the future developments of business models based on m-payments and
conventional and/or virtual currencies.

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II. Theoretical Framework
The success of a new payment service would be determined by a number of interdependent factors. To
describe the relations between these variables, the example framework shown in Figure 1 [41] could be
applied. It represents a meta-model to describe the m-payment services market based on previous
research outcomes. The framework represents different standpoints present in professional, academic
and legal m-payment literature. It gives a good insight into clearly determining which factors impact the
m-payment services market and services development, another issue in need of clarity.

Figure 1. Framework of factors impacting the m-payment market

1. The Mobile Economics
The Mobile Penetration
The mobile penetration both globally and regionally in Europe grows with a high-speed: Currently there
are 6.6 billion mobile phone connections, 3.6 billion subscribers with 1.3 billion phones supporting mobile
broadband globally, stated the Director General of GSMA 1 Anne Bouverot in her keynote opening of the
Mobile World Congress 2012. In 2015 the estimations for the growth of mobile predicts 9.1 billion mobile
phone connections, 4.6 billion subscribers with 3.2 billion phones supporting mobile broadband [2].

Such a rapid expansion of the mobile ICT would lead to such developments, which have influence over
the whole economics. According this new data from the GSMA, the global mobile industry revenues will
grow from US$1.5 trillion dollars in 2011 to US$1.9 trillion in 2015. This statistics show the incredible
increase of mobile penetration and their further rise.

1
GSMA stands for global association of mobile operators - the world's leading body of mobile operators
and device makers

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The situation in the EU follows the general trend with a visible development of the mobile market within
the 27EU member states [3].
Figure 2: Mobile subscribers and penetration rate at EU level, October 2004 – October 2010

Figure 3: Mobile penetration rate, October 2009 – October 2010

As it is visible on Figure 2 according to the latest statistics the amount of phones – 622.3 million in
October 2010 – is even larger than the number of EU citizens, which are around 502.52 million people
according to the latest Eurostat statistics [4]. This means that currently the average EU citizen has 1 or 2
mobile phones, allowing him to be almost constantly reachable due to his connection to the various
networks. As Figure 3 shows the difference in the member states mobile penetration rates is not that
substantial, although there is certainly variation between big and smaller member states.

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Mobile vs PC
In January Google and the research firm Ipsos MediaCT Germany [5] released a study made over the 5
mobile markets US, United Kingdom, Germany, France and Japan. Its key takeaway is that across the
five countries more consumers use a mobile phone (feature phone or smartphone) than a computer
(desktop or laptop), as you can see on the Figure 4 bellow.

It also reveals that users are clearly shifting from feature phones to smartphones and are increasingly
using their smartphones to access the web. However, smartphone owners are continuing to get online on
their computers.

Figure 4.

According to a recent research of Canalys [6] last years the vendors shipped 488 million smart phones,
compared to the 415 million client PCs2 worldwide.

This market share points out the rising consumer preference in buying smartphones, which usually are
cheaper, but still with a substantial cost. The unique multifunctional smartphone makes it a good
replacement for the consumer because of its fast day-to-day usage main characteristic both on the go
and during other activities over the day.

2 The definition of client PCs in this case includes not just laptops and desktops, but also Netbooks and
"pads" or tablets, which were the fastest growing segment by far.

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The Global Network Connectivity
Although the mobile devices were initially purely telecommunications tools, the appearance of Internet
didn’t surpass them. It leaded to the gradual conversion of telecommunications and IT and respectively in
the creation of devices allowing the Internet.

Around 1/3 of the mobile phone owners in Western Europe were connected to the mobile Internet at least
once monthly in 2011, which equates to 100 million individuals, showed a Forrester Research [7]. The
number of Internet users surfing via their mobile phones increases gradually.

Specialists from Ericsson predict that by 2020 there would be 50 billion connected devices [8]. This
finding illustrates the substantial increase in the connectivity level between machines, humans and
networks, allowing the users to be almost all the time part of the global network. Hence the focus is not
only on connectivity anymore, but also on mobility, as the Ericsson statistics demonstrate.

2. The Mobile Innovation Horizon
2.1 The Historical Appearance of the M-Commerce and M-Payments Trend
An experiment, done with the Google Ngram Viewer tool, reveals an overview of the usage of the words
“mobile payments”, and “mobile commerce” within the past decades. As it is visible in the Figure 5
already in 1950 the term began to occur in the literature, which was even before the start of the first
attempts for the creation of Internet. This was 10 years later, around the same time when the term
“mobile payments” became visible. At this moment we can see the rapid boom of “mobile commerce”-
related topics in the literature and its gradual development into a trendsetter with stable growth. While
the mobile commerce became a popular topic, the m-payments-related topics remained still
underdeveloped.

Several reasons for that could be distinguished. With the rise of Internet, mobile commerce and
electronic commerce were rather understood as similar terms. First because around 1950 the invention of
the two of the most well known types of mobile devices was actually still very far away - the first hand-
held mobile phone was demonstrated by Dr Martin Cooper of Motorola in 1973, using a handset weighing
around 1 kg [15]; the IBM 5100, the first commercially available portable computer, appeared in
September 1975, and was based on the SCAMP prototype [16].

Second, it was rather conceptual question of the similarity in the terms “mobile commerce”, as we know
it today, and “electronic commerce”. At that time the concepts of the first online shops were related to
the idea of “mobility” in terms of the physically abolishing the distances by not being into the same
physical location as the shop as much as this was true for electronic commerce. This possibly led to the
overlapping of understanding about definitions in these early years, while actually the real m-commerce
activities required more time to get into the light of interest of authors in the sense we put about it
today.

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Figure 5: Frequency of presence of the expressions “mobile commerce” and “mobile payments” between
1940 - 2010, Google Ngram Viewer tool

As mentioned earlier, it was just in the late 90s and early 2000s when m-payments became a topic of
interest and remained so even after the Internet bubble burst. For its key contributors it attracted
researchers such as Tomi Dahlberg, Jan Ondrus, Yves Pigneur, Key Pousttchi, Agnieszka Zmijewska and
others [41]. Hundreds of m-payment services as well as access to e-payment and Internet banking were
introduced across the globe. Noticeably many of these efforts failed among which the majority of the
dozens of m-payment services available in the EU member states and listed in the 2002 ePSO database
[62].

2.2 From E-Commerce to M-Commerce
“By 2014 mobile internet will overtake desktop internet usage for shopping,” predicted Nigel Morris, chief
executive of Aegis Media Americas.

Electronic commerce changed a lot since the boom of Internet. The engine behind it is the capability to
pay electronically coupled with a website. E-commerce has been facilitated by ATMs and shared banking
networks, debit and credit card systems, electronic money and stored value applications, and electronic
bill presentment and payment systems.

Today the mobile commerce comes as its natural successor. It is seen as one of the enablers for the 3rd
generation of mobile communication networks. A huge number of applications can be imagined for mobile
commerce, including ticketing, banking, shopping, betting, trading, entertainment, gaming, logistics and
etc.

The majority of the m-commerce applications have one common feature: in the end the consumer would
have to pay via his mobile device for the services he has used or goods he has purchased.

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2.3 The Emergence of M-Payments
A mobile payment or m-payment may be defined as any payment where a mobile device is used to
initiate, authorize, transmitted and confirm an exchange of financial value in return for goods and
services [17]. This can apply to online or offline purchases of services, digital or physical goods.

Mobile devices may include mobile phones, PDAs, wireless tablets and any other device that connect to
mobile telecommunication network and make it possible for payments to be made [18]. The realization of
m-payments will make possible new and unforeseen ways of convenience and commerce.

Hundreds of m-payment systems have been introduced worldwide in the late 1990s and early 2000s. And
even after the burst of the Internet bubble, the m-payment remained a hot topic. In 2010 globally 4.6
billion m-payments transactions have been completed [70]. As the statistics show this figure is expected
to grow 48.8% per year through 2013 to 15.3 billion. Non-bank providers handled about 6% of m-
payments in 2010 and are expected to handle 1.2 billion or 8% of all m-payments in 2013. In 2010 the
value of global m-payments reached €62 billion, and is expected to grow aggressively at a sustained
annual rate of 52.3% from 2009 to 2013, putting global m-payments at €223 billion.

Unfortunately, back then the EU didn’t and still today don’t manage to reach its potential in terms of m-
payments compared to, for example, the Asia/Pacific region. According to estimates [19] there were 7.1
million m-payment users in Western Europe in 2010, compared to 62.8 million users in Asia/Pacific, a
large share of them in Japan.

Probably one of the key reasons regarding EU is exactly its special geopolitical nature, one that enables
the coexistence of both emerging and established markets. This creates a special situation in which the
same restricted geographic area plays host to diverse markets where the circumstances for providers and
users of mobile services are visibly different. At the same time, Europe - the world's second-smallest
continent – is also a rather “compact” ecosystem, known as the world’s largest single market. Moreover,
in Europe the majority of payment solutions are targeted at specific countries and driven by local
requirements. It thus emerges that the key to grasping EU’s mobile landscape and tapping the
considerable European revenue stream lies in understanding how adoption drivers vary between
developed and developing regions.

In the past, one of the main reasons for the limited EU success was partly due to the fact that mobile
technologies were too complex and not sufficiently mature. Also the legal framework was too vague and
unclear legal, compared for example with Japan, where m-payments have gained large adoption, and are
still increasing in user base.

Even today with the appearance of new innovations such as NFC m-payments the situation in the EU
doesn’t appear to be really moving ahead. The lack of a concrete pan-European framework to address
main concerns such as technical standards, security, interoperability, and the cooperation between
market participants, risks perpetuating a EU fragmented m-payments market.

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The lack of cooperation between key European players is one of the core reasons for the EU m-payments’
market to lag behind. The EU businesses from the different sectors involved cause a fragmentation due to
their strongly diversifying interests. Hence, they don’t manage to find a resolution to agree upon a
business model enabling inter-operable payment solutions. As a result, all leading companies like Apple,
Google and Visa that have currently launched the largest and most promising global m-payment
initiatives, reside outside the EU.

In addition both for e- and m-payments, (potential) market participants seem reluctant to invest as long
as the legal situation regarding scope for applying collective fee arrangements such as for payment cards
or for the usage of new alternative currencies, hasn’t been settled.

Still, as the EC3 clarifies in their 2012 green paper on m-payments [20], the EU still has the possibility to
grasp the m-payments opportunity thanks to the rapid proliferation of smart phones with the option of
installing sophisticated payment applications. In result, the volume of payments made through mobile
phones is currently the fastest growing of all payment methods and with a strong will for mutually
beneficial resolution the public private collaboration can lead to a real m-payment integration at European
level. Currently that happens on a self-regulatory basis and through for example cooperation, such as the
one between the European Payments Council and GSMA.

The green paper quotes statistics from recent studies, according to which the value of m-payments
worldwide will “surpass USD 1 trillion in 2014, totaling USD 350 billion in Europe alone” [20]. Thus, the
finding of a resolution about the m-payments business modeling will be one of the most important goals
and discussions for Europe in the coming years. A successful resolution has the potential to bring not only
a pan-EU success to all of the stakeholders in the m-commerce ecosystem, but also to repeat the GSM
2G network standard success story of Europe on the international scene [67].

The Influence of the Mobile Apps and Platforms
The mass adoption and increased popularity of smartphones and tablets, together with the emergence of
app stores, such as Apple’s App Store or Google’s Android Marketplace, has proven to be a complete
game-changer for the mobile ecosystem and for consumer perception of m-payments, particularly in
developed markets.

Mobile apps are implemented on top of existing infrastructure by both the companies themselves but also
by independent, third party developers. The result is more extensive and specific functionalities for the
smartphone (and other existing mobile devices) with greater user experience. This also has its effects on
the payment industry: many financial service providers have either considered or already opened up,
offering APIs4 for developers to create new, innovative m-payment apps.

With its launch of a developer library for m-payments in February 2010 [60] PayPal became one of the
frontrunners in this area. The library, which is part of the PayPal X Payments Platform, enables app

3
EC stands for European Commission
4
API stands for application programming interfaces

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developers to accept in-app purchases directly via PayPal without having to store customers' personal
financial information. Customers are able to make a payment from a merchant or developer’s app without
leaving the app.

In the months following the introduction of PayPal X, other payment networks launched innovation labs
and open platforms. MasterCard Worldwide introduced its proprietary payment and data services as an
API and allowed 3rd party developers to build new payment applications in May 2010 [61], followed by
Visa in October 2010 [62].

Apps are increasingly being used for m-payments, developed both by the owners of the infrastructure
and by 3rd party developers. Nowadays payment services are developed for social platforms such as
Twitter, e.g. Twitpay or Twippr, notably both linked to PayPal. Most banks are developing apps for mobile
banking and some also allow m-payments through the same app. There are many other functionalities
enabled by a variety of apps, such as the mobile cheque deposit like Instant Checkby developed by the
Spanish bank Banco Sabadell, Bump - implemented by ING Direct USA, the QR barcode scanning app by
Starbucks or through hardware attached to smart phones such as Intuit and Square.

Overall the landscape for m-payments has been truly altered in a positive way thanks to the apps and the
connected to them products and services. With the added functionalities and enhanced user experience
mobile apps become a serious driver for m-payments innovation and the creation of new viable business
models based on m-payments.

3. Social Influence and Impact
Nowadays, people prefer carrying a simple device during travel, such as a mobile for talking, web surfing,
business meetings, and mobile working instead waiting to get to their offices or homes in order to
connect to the global networks from their desktop computers.

Exactly the context of usage of technology is rooted in the shift from the idea about the Information
Society towards the Mobile Communication Society in terms of social effects and impact.

For example in their research on the functional uses of the technology, Ling and Yttri [9, 10] identified
some primary categories for mobile phone use. Two of these categories depict new forms of coordination:
micro- and hyper-coordination. Micro-coordination entails instrumental uses of the mobile phone, such as
coordinating basic logistics, redirecting trips that are already under way, or making plans with others
entirely “on the fly”. Hyper-coordination refers to the expressive and relational dimensions of mobile
communication, such as chatting with family or friends via text messaging.

These new forms of coordination demonstrate the highly personal, intimate nature of mobile telephony.
In the case of micro-coordination, schedules are managed more flexibly as individuals use their mobiles
to overcome the physical restrictions of space and time [11]. In this way, space and time are
personalized through mobile communication. The mobile communication has taken the personalization of
space and time to new levels as individuals exploit the flexibility afforded by the technology through

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micro-coordination.

Normally space and time aren’t personalized to the same extent and in the same ways by all types of
users, but that new meanings for them, however varied, are shaped through the use of network
technologies, especially those that can be used virtually anytime anywhere. Or as Manuel Castells put it
“the diffusion of mobile communication technology greatly contributes to the spread of the space of flows
and timeless time as the structures of our everyday life” [12].

This phenomenon based on the blurring of borders between space, time and location had been greatly
examined by John Tomlinson [13] in his theory about the emergence of the culture of instantaneity
within the context of the Information Society vision: “But what is immediacy? The concept has two
relevant connected connection with space: 'freedom from intermediate agency; direct relation or
connection, …proximate, nearest, next, close, near'. And in relation to time, “pertaining to the time
current or instant…occurring without delay or lapse in time, done at once; instant”. Although it is the
relation to time that may seem most relevant to speed, as we shall see, both these senses are suggestive
for an analysis of the transformations of speed culture in our era of modernity.”

Exactly this culture of instantaneity accustomed to rapid delivery, ubiquitous availability and the instant
gratification of desires managed to fully accelerate and reach its peak within the vision of the today’s
Mobile Communications Society. Mobile ICTs more than any other ICTs have this intimate “relationship”
with the individual user, based on the features of the mobile devices itself – to be all the time with the
person, allowing him to be almost always connected to both human and machine networks and to cross
time-space-location borders being extremely digitally flexible. Bridging the desire and its actual subject
are the core of the e-commerce and hence of the m-commerce.

With the current technological and business concepts’ developments the mobile becomes even closer to
the individual, a true “extension of the hand” as the mobile phone is commonly referred to in Finland
[14]. This need for close-to-real time gratification of the desired is the main characteristic of the e-
commerce and with the increased penetration of mobile – became the main characteristic of m-
commerce.

The change of consumer behavior becomes clearly observable with the mass adoption of smart mobile
devices and the development of apps, extending their functionalities. The access to financial services,
easy to control on the go, becomes one of the most interesting features for consumers [44].

A recent research [63] reveals that e.g. 41% of iPhone users expressed an interest in conducting
payments via their mobile. According it iPhone users carried out more mobile purchases and did a higher
number of mobile transactions than any other smart phone user segment: 18% of them carried out m-
banking activities and respectively 16% carried out m-payment transactions from their devices.

In comparison only 10% of non-iPhone smart phone users showed interest in m-payments, while only
5% of all mobile users engaged in mobile banking. Similarly, only 6% of other brands’ smart phone

15

owners and 3% of all mobile users did an m-payment.

Additionally, the research indicates that 9% of iPhone users employed mobile coupons, compared to 4%
of users who own smartphone devices from another brand and 2% of all mobile users.

On the other hand, according to another research, conducted online by the market research company
Tealeaf [64], as smartphone adoption grows, UK consumers for instance are increasingly expecting a
faultless experience across all online channels. 10 million UK online consumers made an online
transaction on a mobile device in 2010. However, 83% of them also experienced problems when carrying
out mobile transactions. 74% of UK consumers in the survey claimed not to see any reasons for a mobile
transaction to fail on the first try and 66% of UK respondents said that upon experiencing a problem
conducting a mobile transaction, they would be less likely to buy from the same company via other
purchase channels.

51% of the surveyed, who conducted a mobile transaction in 2010, expressed that they expect a better
shopping experience on their mobile device than the one in a store. As the key problems experienced,
34% of the UK interviewees pointed out the error messaging and 24% of them - navigation difficulties.
When questioned about their reaction upon experiencing a m-payment problem, 29% of the respondents
who experienced m-commerce problems in 2010, stated they would abandon the transaction on their
mobile and try again later on a computer, 13% claimed they would switch to a competitor’s app or
website and 9% answered they would not conduct a mobile transaction again due to their dissatisfaction.
Independent from that, 23% of UK respondents said they would call customer service to solve the issue,
when faced with m-commerce problems.

In conclusion, the growth of smartphones beside to the enhancements of their capabilities makes people
more open towards m-payments. Nevertheless, as the given above examples show, there are still hurdles
to overcome in terms of security, trust and user experience to convince consumers about the true
benefits of m-payments and the new product/ service offerings relying on them. Which challenges have
to be overcome and which opportunities exist would be further examined in Chapter V.

4. Alternative or/and Conventional Currencies for M-Payments
Not only the tools and networks around m-payments would completely change the perceptions, but also
the means of payment. In result of the new innovative business models, completely new concepts related
to currencies already appeared and new ones are on their way. These currencies have a direct effect over
the traditional perception of money, changing the consumer, business and governmental behavior in
these regards.

The idea of conventional currencies slowly begins to be shifted by the idea about the mixture between
conventional and alternative, unconventional currencies. As one of the most fast developing concepts for
such currencies could be considered the one of complementary currencies, a combination between well-
known and accepted money media and the new ones, entailing both marketing and financial strategies in
their creation.

16


With the fast development of ICTs and mobile technologies in particular, a number of business models
and concrete scenarios relying on virtual currencies, as an example of digital complementary currencies,
already emerged.

Thanks to the continuous fast evolvement in digital the m-payments in combination with virtual
currencies and conventional money within digital environments and over various devices would create a
completely novel perception about the unification of currencies. In result new legislative, policy, and
business concepts would emerge and lead to a radical change of perception in regards of payments over
and with devices with “new” and “old” money.

In the State of Art section the specifics around the currencies and the virtual currencies in particular;
together with the features and characteristics of m-payments business models will be examined. Which
challenges and opportunities exist in relation to virtual currencies would be further explored in Chapter V.

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III. Methodology

The goal of the following Master thesis is to explore the influences over the different stakeholder groups
and the creation of new business opportunities, which the rapid development of the mobile ICTs caused.
In essence, a key aim is the exploration of the driving forces behind the choices about the creation of
business models for mobile with a special focus on m-payments and the used in them m-currencies.

There are several purposes for that: the identification of key findings and the presentation of how this
reasoning affects the trends, which develop onwards; the identification and hence deduction of key
stakeholders’ configurations leading to the establishment of innovative successful new products and
services based on m-payments and conventional and non-conventional m-currencies. Finally assumptions
and recommendations related to the further development of m-payments business models using those
old and new currencies will be made.

In conclusion, the subject and approach of this thesis fits nicely in the methodology of business modeling
[56, 57], where take into account the different interests, resources and competences of the different
stakeholders from the mobile technologies and the related domains. The key pillars of the business
modeling design are visualized in Figure 19.
Figure 19. Business modeling design

The general definition of business modeling is “the description of the organizational
prerequisites/requirements necessary for the creation of a specific product/service, the technical
characteristics/architecture of that product or service, the roles and relations between the company, its
customers, partners and suppliers, and the different value-creating - be it physical, virtual or financial -
flows between them”.

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Four business modeling design phases are used to describe the business modeling scenarios:
 Organization design phase: This phase involves defining the business players’ configuration. It tries
to identify who are customers to be reached and how is this to be done. This includes the
identification of distinctive competences, and taking business governance decisions.
 Technology design phase: In this phase the technology scope is defined, including the architecture of
the technical design and the approach to achieve it. The systemic competences that will contribute to
the business strategies need to be determined, and decisions on the developing or acquiring of
technical competences have to be made.
 Service design phase: This phase involves the creation of an offering with a specific value proposition
towards the end customer. Companies have to make a choice about the delivery channels they will
use and calculate the share of the overall profitability of each sales channel. Issues such as the choice
of sales channels with a higher cost structure have to be kept in mind in the cases where this will be
more important to the overall business – e.g. an important customer segment prefers this costlier
alternative. The business players have to take into account the degree of flexibility of each channel,
i.e. whether channels can be expanded and/or reconfigured depending on the customers’
expectations. Finally, the bottlenecks and their effect on discontinuations of daily operations of each
channel have to be examined.
 Financial design phase: In this stage, the financial prerequisites for the interlocking roles are mapped
in a financial model. The financial modalities are formalized in binding contracts that clearly describe
each partner’s responsibilities and the financial/other benefits they will receive in return. Depending
on the legal structure of the partners involved, different forms of financial exchanges could take
place.

In Table 1 you can see the different control and value parameters, defining the key aspects of the
proposed business model.
Table 1. Business Model Design Parameters

The focus of the thesis falls on the description of the impact of interrelated organization, technologies,
revenue models and service design aspects on business model scenarios for m-payments with
conventional and unconventional currencies. Key elements and findings will be estimated.

19

Figure 20. Business modeling cycle

The overall research approach of the thesis is based on the usage of mixed methodology of research
design. By using the mixed method between qualitative and quantitative research methods, different data
collection sources and procedures will be triangulated. The triangulation of theoretical research methods
will be done together with multiple case studies analysis and an input based on brainstorming, expert
interviews and surveys.

The theoretical research is based on the data collection and analysis of a large number of literature
outputs including academic, industry, legal (regulatory), research, business and technology journalism
sources. The choice to rely on this method is due to the novel character of the thesis topic in order to
follow the whole historical development and achievements of the relevant issues up until today.

It is the aim to gather a broad range of various outputs from different sources, such as articles, reports,
whitepapers, analyses, books, market studies, legal documents such as regulations and
recommendations, presentations, and etc. The main topics, covered by them are related to conventional
and unconventional currencies, mobile industry trends and innovations, m-payments systems, mobile and
overall technology players’ specifics in European and global markets, mobile business models, and more.

Still, according to Dahlberg et al. [59] most academic research related to m-payments cover technical
issues related to security, protocols, systems architectures, or consumer-centric studies, e.g. adoption.
He explains the rather limited and fragmented scope partly due the complexity of the proposed m-
payment solutions. Thanks to the increased interest it is to be expected the increase in diversity in the

20


next years while the research in the domain matures. Only a limited number of studies have looked at m-
payment innovation and diffusion in a systemic manner. Most investigations covering the topic have been
carried out by consulting or industrial organizations [58].

My qualitative research part would be based on 2 main case studies from Belgium and an overview of
other case studies from Europe.

The choice lies upon the case study method, as this research strategy is the best at demonstrating an
understanding of a complex issue or object. It can extend experience and add strength to what is already
known through previous research. Case studies are the demonstration of detailed contextual analysis of a
limited number of events or conditions and their relationships. This would best visualize concrete real
business product/service examples with their differences, similarities, achievements, room for
improvement.

The overview of the European examples is based on documentary findings and a survey - consultation
with a number of stakeholders from the industry done via a number of online networks. This case studies’
overview would strive to demonstrate key trends and changes within the overall business modelling
landscape, and demonstrate possible development patterns for the future.

By using the business modelling methodology within the Belgian case studies analysis and presentation,
the induction of a valid framework with distinct and comparable parameters, encompassing all the key
aspects relevant to the case study, will be possible. The first Belgian case study is based on a currently
developed project “Co-Mobile”. During the project the input from few group expert interviews and
brainstorming sessions with representatives from each of the company partner organization has been
used.

The research literature [57] defines an expert as a person, responsible for the development,
implementation or control of solutions/strategies/policies, and who has privileged access to information
about groups of persons or decision processes. The conducted expert interviews were from an explorative
nature in order to try to better define the techno-economic aspects of the project. The consortiums’
experts have been interviewed about the ways in which their current business models operate, about the
possible business requirements they deemed necessary in view of their project, and about their imagined
views of the business models of the other partner members and overall market competitors and leaders.

The input acquired by way of the business case study and expert interviews serves as a basis for our
description of the identified actors, roles and requirements, as well as for the several business
collaboration scenarios. Finally, all project partners’ input has been solicited and used it to make last-
minute changes to the presented current status of the possible business scenarios. The second case
study from Belgium is based on existing literature sources. It observes an existing business offering and
analyses its current success depending on all of the elements defining the business model behind it.

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IV. State of Art Consolidation and Analysis
In the following chapter the State of Art two of the core thesis themes will be examined and a final
conclusion based on the interconnections and interrelatedness of those two areas will be done.

The first one is dedicated to the currencies as means of payment. A review of conventional currencies and
with a more specific focus on the new generation currencies – the complementary currencies will be
made. As a key example for the trends in the usage of the complementary currencies overall and in m-
payments in particular, the introduction, implementation and development of virtual currencies will be
explored.

The second one is dedicated to m-payments’ business models. There the main two types of m-payments’
business models based on the perspective of the business actors’ configuration will be examined. A
special attention would be placed at the organizational, technological, service offering and financial
aspects of those and demonstrate the links and outcomes depending on the choice made. The reason to
look into the business models of m-payments is that they are directly reflected into the creation of
business models for products/services based on m-payments.

The knowledge from the first state of art section will be linked to the second one and deduct the
relationship between the business models’ configurations and the currencies to be used. This would be
reflected into the analysis of the model for products/services, which rely on m-payments and
conventional or/and virtual currencies.

IV.1. Currencies
1. Definition
In economics, currency refers to a generally accepted medium of exchange. However, in order to give an
appropriate definition of a currency, the configuration of a number of features has to be evaluated. These
features build the currency topology and define the context of its usage.

Until today there have been only a limited number of attempts to classify the existing topologies. As the
Jens Martignoni points out in his research [21] among the most important criterions in the general design
of a currency we can distinguish 3 main ones. The first one is the commercial value - of a currency, be it
a soft or a hard currency. The second criteria concerns the material: natural money such as whale teeth,
shall money and etc; coins or metal money; notes or paper money; giro money; electronic money and
more.

The third criteria takes into account how the money is backed, for example the historical backing by gold
or silver; the fiat-money; backing by other commodities, services and so forth.

2. Regulatory Framework in the EU
A number of regulatory initiatives are causing the change in the payments’ landscape and in particular
the ones related to e-transfers and m-transfers [70].

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Today the Payment Services Directive (PSD) is fully in force in all EU countries with the exception of
Poland at the time of writing, and the adoption of Single Euro Payments Area (SEPA) instruments, in
particular the SEPA Credit Transfer, is starting to grow. PSD and SEPA represent sweeping changes
seeking to create a common legal framework and a standardized environment for euro payment services
in the EU. They aim to transform the fragmented national payments markets of the (still expanding)
Eurozone countries into a unified and highly competitive internal market based on a single currency.

Other initiatives being formulated and implemented around the globe also have an impact on payments.
These measures, including examples such as the EU Digital Agenda5 and the IPFA6 initiative to name but
two, are further pushing the payments market toward increased levels of standardization, interoperability
and de-fragmentation.

The main European regulatory and industry initiatives are:
 FSA Liquidity Regime
 PSD
 SEPA / eSEPA
 e-Money Directive
 Pressure on Card Interchange Fees
 Evolution of TARGET2
 UK Faster Payment Services
 Digital Agenda for Europe
 ACH Frequent Settlement
 Alternative Card Schemes

3. Conventional Currencies
Probably the widely accepted perception about conventional currencies is the one, which refers to them
as the coins and banknotes of a particular government, which comprise the physical aspects of a nation's
money supply or of a monetary union, an example of which is the Eurozone in the EU. Another part of a
nation's money supply consists of bank deposits7, ownership of which can be transferred by means of
cheques, debit cards, or other forms of money transfer. Deposit money and currency are money in the
sense that both are acceptable as a means of payment [22].

In most cases, a central bank has monopoly control over emission of coins and banknotes (fiat money)
for its own area of circulation (a country or group of countries). It regulates the production of currency by
banks (credit) through monetary policy. This type of currencies could be defined as conventional.

In order to facilitate trade between these currency zones, there are different exchange rates, which are
the prices at which currencies (and the goods and services of individual currency zones) can be
exchanged against each other. Currencies can be classified as either floating currencies or fixed
currencies based on their exchange rate regime.

5
The Digital Agenda for Europe is part of the Europe 2020 Strategy of the EC.
6
International Payments Framework Association
7
sometimes called deposit money

23

4. Nonconventional Currencies
Nonconventional currency is a term referring to any currency used as an alternative to the dominant
national or multinational currency systems, usually concerning national or fiat money [23]. This kind of
currencies have different designs, but have the same idea to serve purposes other than the ones served
by our conventional money. They could be created by an individual, corporation, or organization, they
can be created by national, state, or local governments, or they can arise naturally as people begin to
use a certain commodity as a currency.

The terminology classifying those different types of nonconventional currencies is rich and varying in its
conceptual understanding: community currency, local (regional) currency, private currency, alternative
currencies and etc. However, despite of the terminological distinction used, more often the entailed
concepts are overlapping, substitutable or in a type of a relationship with the conventional currencies’
systems [24].

In this sense the most precise categorization, possible to be made, is the one allowing the distinction
between two types of nonconventional currencies: Alternative Independent from conventional currencies
systems and Complementary Currencies.

One of the best examples to demonstrate the differentiation between those two types is through the
concept of Private Currencies. The idea here is that essentially Private Currencies could be issued by
anyone: individuals, businesses or NGOs as opposed to ordinary currency issued under the authority of
the government. However, although one part of the Private Currencies are independent from any form of
conventional currencies, it is more often true that the majority of Private Currencies are being designed
as complementary to the conventional monetary systems [25].

Hence most of the business models relying on nonconventional currencies are based actually on a Type of
Complementary Currency, on which the focus falls further bellow.

4.1 Complementary Currencies
A complementary currency is an agreement to use something else than legal tender, i.e. national money,
as a medium of exchange, with the purpose to link unmet needs with otherwise unused resources [26,
27]. Complementary currencies exist on many levels and for many purposes.

One example is what has happened with frequent flyer miles issued by the airline industry around the
world. Initially, frequent flyer miles have been considered only as a marketing gimmick for each
individual airline in order to secure the client’s brand loyalty, and to reconstitute a captive clientele. The
simple reallocation of cash flows within the company was a fraction of customer revenues, used to
finance these awards given to the most loyal passengers. They could only be used to purchase airline
tickets of that specific airline.

However, soon more elaborated models followed, in which a monetization of reward points was
developed so that they could be used to acquire goods or services in other brands and shops.

24


By 2006, fourteen trillion airline miles have been issued by five global airline alliances – more than all the
dollars or Euros bills combined [28]. They can be earned without setting a foot in a plane, e.g. through
the use of specific credit cards, and they have become redeemable not only for air travel, but for car-
rentals, long-distance phone services, and an increasing range of products. Two thirds of all British
Airways miles are cashed in for something else than for purchasing an airline ticket. In review, airline
miles have become corporate ‘scrip’, a complementary currency with a specific commercial objective to
increase the customer loyalty. They mobilize the otherwise unused resource of an empty airline chair to
achieve that aim [29].

Another good example of multi-enterprise programs is the one that has been set up in France, revolving
around the national railway company, SNCF. In the beginning six major outlet brand names and one bank
reward spending and cash withdrawals through a common system: loyalty points or tokens can be
redeemed for gifts, vouchers, train tickets, gift cards and “Savings certificates”, i.e. money. In
conclusion, this model communicates with the real economy, but it was designed to primarily operate in-
house, by redirecting customers towards the goods and services provided by companies that are
members of the network [30].

Design criteria
The design criteria involve the technical aspects of the complementary currency, which are partly
influenced by the aims and purposes of the complementary currency.

Currencies can take different forms. Hence the first criterion in regards of the design is the “Support
Medium”. Commodity currencies are “goods” used as a generally accepted means of payment. Historically
these have been for example salt, wheat, cattle, shells, cigarettes, precious metals such as gold, silver,
bronze and etc. Nowadays, we are more familiar with money in the form of paper and coins. Finally,
electronic money – being card-, internet- or m-payment based - can be distinguished as one the most
fast-developing support mediums.

Each support medium has its own advantages and disadvantages in relation to counterfeiting and fraud,
involved costs, trust, accessibility, creating, storing and transporting. You can see one example of such
pros and cons estimation in the Table 2 bellow [31].

Table 2. Pros and Cons of each Support Medium of Money
Commodities Paper & Coins Electronic
Infrastructure
Low necessity Medium Necessity High Necessity
(legal, social, technical)
Transport, Store & Exchange
Very Inconvenient Convenient Very convenient
Convenience
Fraud & Counterfeiting Low Risk Medium-High Risk Medium-High Risk
Costs of creation High Low Very Low
Operational Costs Low Low High (Labor/ Capital intensive)
Very Trustworthy; Less Trustworthy; Less Trustworthy;
Trust in value
real (intrinsic) value face/nominal value face/nominal value
Creation Limited Unlimited Unlimited

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Secondly, money can be identified according to one of its three main functions as a medium of exchange,
a store of value and a standard of value - unit of account/ measuring. Not all complementary currencies
fulfill these functions equally. The choice to implement or not to implement interest, transaction bonuses,
demurrage (hoarding tax), transaction fees, and expiration dates, affect the extent to which a
complementary currency fulfills the functions of saving and exchanging as visible in Table 3 [31].

Table 3. Mechanisms to encourage and discourage spending and/or saving
Spending Saving
Encourage Spending Bonus / Inflation Interest
Discourage Transaction Fee Demurrage / Negative Interest / Expiration

With regard to the standard of value, most complementary currencies simply denominate their unit of
account in terms of conventional currencies, for example an apple worth €5 is also worth 5 barter credits.

However, there are some exceptions, such as in time banking where currencies are denominated in
hours, while in other cases they are denominated in physical units: miles in case of Air Miles, the kWh in
case of the WAT (a complementary currency in Hokkaido, Japan), coal in case of the Wära, crops in case
of the LEAF and etc.

Every standard of value has its own specifics and best possible use cases. Currencies referring to
conventional currencies have the advantage of familiarity and don’t need a multitude of complex pricing
systems, whilst time denominated currencies are useful when a currency is primarily intended for valuing
services rather than goods.

A third design criterion is the issuing procedure or the basis on which money is brought into circulation
and taken out of circulation - redemption. Money sometimes has real value (intrinsic value), represents
something of real value (representative money), and sometimes doesn’t have or represent any real value
at all.

Backed currencies are issued on the basis of a specific good, like gold or silver, and have a guarantee of
the issuer that they can be redeemed at all times for a fixed amount of this specific good at the issuing
organization, usually banks. Non-backed currencies on the contrary, are not brought into circulation on
the basis of a specific good and do not represent anything of real value. It can be exchanged for
something of value (that is you can buy something with it) only for as long as there is confidence in the
money itself. The money is therefore often referred to as fiduciary money or fiat money.

In some cases complementary currencies are backed by, and redeemable for other (usually conventional)
currencies rather than a specific good like gold. In their guide Lietaer and Hallsmith refer to these as
“purchased and redeemable vouchers”. Commercial vouchers differ in one respect, as these are
purchased with conventional currency but are not redeemable for conventional currency. Instead, one
can redeem them for a limited variety of products, such as CDs, books, food and others, at a certain type
of shops, where those are accepted.

26


Being in their core a marketing strategy, the loyalty points can also be exchanged for a limited range of
products and services only. But contrary to commercial vouchers these are received for free with every
purchase in conventional money.

Finally mutual credit can be perceived a distinct issuing procedure, where currency arises by
simultaneously creating a debit (for the buyer) and corresponding credit (for the seller) with every
transaction. In this case the currency is backed by a promise of the indebted person to provide goods or
services in the near future. In some cases signing a contract is required, making a promise legally
enforceable.

Table 4. The issuing procedure possibilities of complementary currencies

Non-backed
Backing and By national By By a Promise or
By commodity (Fiat-money/
redemption currency Collateral contract
fiduciary money)

Gold-backed Local Exchange
Local currency; National
currencies; Wära; Trading System
Examples Commercial Credit Barter currencies;
commercial (LETS); Time-
System (C3) Ithaca hours
vouchers Banks

Currencies are not always 100% backed either by commodities, national currencies, goods, collateral or
promise [32]. In other words, the commodities, currency or good in deposit is insufficient to back all
money in circulation. In fact, most currencies are only partially backed, a practice known as fractional
reserve banking. Fiat money, that derives its value from government regulation or law8, is 0% backed.

It is possible to design a complementary currency backed by for example multiple commodities or
multiple national currencies. An example of the former would be the Bancor, a currency proposed by
Keynes after World War II, containing thirty different commodities. An example of the latter would be the
Special Drawing Rights, an international currency based on a basket of national currencies. It is not also
unimaginable to think of hybrid currencies, partially backed by commodities and partially backed by
national currencies.

The final design criterion end essential for the survival of a complementary currency is cost recuperation.
Naturally the creation, and continuous management of a complementary currency involves costs and the
challenge is to keep them as low as possible. Most of the time some funding is required but also multiple
possibilities exist for the recovery of costs involved. Income can be generated both internally and
externally. The first option is to attract funding through sponsorship or for example advertisement
income. The second is to charge the users of the complementary currencies through for example entry
fees, periodical membership fees, transaction fees (Value Added Tax or Income Tax) exchange fees,
interest (on debts), expiration dates and demurrage (hoarding tax). Although internal cost recuperation

8
the initial value of fiat money is established by government decree

27

might turn out to be an impediment for citizens to start using the complementary currency, the
advantage is clear: it can sustain itself and is not dependent on external sources of funding. It is also
important to notice that in case of some complementary currencies the costs are recuperated in
conventional currencies, whilst in others complementary currencies themselves are accepted.

Based on the developments of the Information Society towards the Mobile Communications Society, the
related trends presented in the introduction, and the criterions determining the success of the various
Complementary Currencies, the emergence and the fast implementation of the Virtual Currencies is a key
development.

Similar to the example of the French SNCF case regarding the network of brands where the
complementary currency has been successfully introduced, the virtual environments could be considered
as the next great area of future developments.

4.1.1 Virtual Currencies
Definition
The "virtual currency" is any medium of exchange, other than real currency, used to facilitate online or
other electronic transactions. People can use virtual currencies to make payments in virtual environments
like for example gaming, social networking or e-commerce deals’ sites. It is possible to earn it by
completing tasks in the virtual environment or simply participating for a set period of time. However, the
main advantage for both owners of the currencies and of the platforms where it is being used is when
users buy it, converting real-life currency into a virtual one.

The rise of virtual payments began in the early 2000s and quickly gave way to a number of legal and
ethical issues [33]. Today, a number of companies are attempting to use forms of virtual currencies as a
corporate marketing tool to engage users more with a site and to facilitate frequent site visits. As users
invest more time, and sometimes also money, they are more inclined to stick with a site to reap the
rewards of those investments. They may also attract their friends to join the game or platform, especially
when they can benefit by the bonuses for new signups are offered in virtual currencies.

Usage areas
Virtual currencies have an application in a number of areas. Bellow you will find the current most
important of them.

 Virtual Games
Users can become extremely involved with other users in virtual worlds or/and in a gaming context,
where the virtual currency is often available for buying in-game goods. Players can earn currency, find it,
or take it from other players in compliance with the rules of the game. It can provide a faster way of
moving through game levels by providing users with tools they can use to surmount in-game challenges
or facilitate the richer user experience in virtual worlds, where players can buy goods for their characters.
Thanks to this it will support the increase their feeling of connection to the character and the game.

28


Players can also trade goods or currencies with other players. This facilitates cooperation between players
and creates a social network.

 Social Networks
Social networking platforms started using virtual currency to offer buying virtual gifts for friends,
accessing premium site features, or making edits to a profile. They also started combining the virtual
currencies with gifts, products and services, within the real world, through loyalty programs and group
discounts’ gamics.

 Loyalty Programmes and E-Commerce Platforms
As already mentioned, as a complementary currency the virtual currencies slowly begin to blur the
borders between digital content and real-life merchandise. By allowing the consumers to feel engaged
through various gamification strategies within their loyalty programs, brand attract new customers,
enhance the relationships with the existing ones and manage to turn them into their brand ambassadors
towards their peers – friends, family, followers on social media/networks. For example by attracting new
friends to participate in the loyalty program or the respective platform, you receive additional amount of
the particular virtual currency, a discount by the purchase of more of that currency or maybe a discount
by the purchase of real or virtual goods or/and services with that particular currency, as the only allowed
means of payment on the dedicated e-commerce (or as we would later on discover m-commerce)
platform.

Market Trends
A Juniper Research study [34] predicts that the amount of money being spent on virtual currency in
mobile apps is going to more than double in the next four years, going from $2.1bn last year to $4.8bn
by 2016.

On one hand the virtual currencies don’t necessarily directly reflect on the real currencies, which makes
them unique for the existing global monetary systems. On the other they don’t necessarily represent an
exchange system, which is universal and globally usable. As we slightly touched upon this, sometimes
they can have worth only in the concrete sector, where they are introduced – e.g. to buy only concrete
goods or services with these, or to exchange them for intangible assets.

For example, Apple provides iTunes users the option of buying prepaid iTunes gift cards, which contain
credits that can be redeemed for music and movies. Many online games allow players to earn and
purchase "points", "tokens", etc. that can be redeemed for virtual and real-world prizes. Facebook also
started a system of "credits" that has a wide variety of applications apart from gaming, such as making
charitable donations using a particular charity's Facebook page.

Looking into the future, Google has announced that it acquired the start-up company Jambool and its
proprietary "Social Gold" virtual currency platform. According to an industry speculation Social Gold will
be used to supplement Google's current online payment system, Google Checkout.

29

"Points”, “credits”, "coins," "bucks" and other forms of virtual currency are becoming standard offerings
for social network platforms, online game sites, retailers and other businesses. Examples include Bitcoin,
Facebook Credits, Second Life Linden Dollars, and World of Warcraft Gold. Virtual currency systems
generate revenue, provide low cost alternatives to credit cards for micropayments, offer prepaid solutions
appealing to youth and other users without credit cards, and help companies build attractive loyalty
programs [35].

Virtual currencies are more often used to sell digital goods or services. However, they continue to
become more complex in turning into complementary currencies by approximating conventional money.
They allow purchase of physical goods and services from multiple merchants, offer cash redemption
options, and facilitate peer-to-peer payments.

Despite of being called virtual, these currency systems pose real legal issues for the issuers of the virtual
currency, the network service providers, partners and users. Issuing virtual currency could subject an
issuer to various regulatory regimes on international, national, regional level with wide ranging
operational, financial and liability implications. These could involve restrictions on an issuer's ability to
expire the virtual currency or impose inactivity fees, requirements to give cash back for unused virtual
currency, obligations to remit unused virtual currency balances to states, potential regulation as a
financial institution, requirements to structure systems to avoid illegal lotteries, and privacy and data
security issues. Also the businesses and consumers relying on using the virtual currencies have to have a
clear idea about all of the possible drawbacks.

In countries such as the USA, Japan, China [36] and etc, the impact of virtual currencies begins to be
taken seriously into account and for some of the countries, those currencies face already very concrete
regulatory obligations and restrictions.

The usage of virtual currency in e-commerce business models is on the rise, a significant part of which
due to the advantages that virtual currency affords to a vendor. Virtual currency platforms allow issuing
companies to lower costs by eliminating the need for a third-party company, such as a bank, to process
each payment transaction. Further, a vendor has significant control over the value of, and authorized
uses for, virtual currency, which turns him into a gatekeeper of all transactions. This control enables
companies to realize higher revenues, cut costs, and build more-attractive customer loyalty programs.

And although virtual currencies offer a number of potential benefits, there are a host of legal issues to
consider, which is the core of the current state of art of virtual currencies. The main purpose of a
currency is to facilitate commercial transactions and regulation of virtual currencies is a largely untested
field. And while they become popular, for example online game and social networks’ companies and their
legal advisors start making their best guesses as to how these systems will be treated by courts and
regulatory bodies.

The EU legislation

30


According new eMoney Directive, electronic money is defined as the digital equivalent of cash, stored on
a device, server, mobile phone, electronic purse, etc [70]. The definition of e-money as included in article
2.2 of the Directive provides that products must be "issued on receipt of funds" to qualify as e-money
[71].

Hence platforms, m-commerce sites and applications that allow collection of credits, points or other
virtual currencies by performing certain activities distinct from the direct purchase of such credits or
points, reside outside the scope of EU e-money legislation. The question arises then what is the status of
platforms where the same credits or points can be both purchased and earned, since these platforms
generally store purchased and earned credits in one user account.

Macro- and Microeconomic Implications
Taking into account the universal character of a virtual currency, accessible through almost everywhere,
one of the important questions, which currently still remains unanswered, is related to the price and
worth implications of virtual to “real money”. If for example a European consumer owns a number of
virtual credits and wants to cash them out into an old-fashioned “euro” currency, does that mean that he
would receive as much euro as an American would receive dollars or he would receive less? That could
mean also that by buying virtual currency you’re in the financial golden zone of “currency neutrality”
even if the banking system in your country or union crashes, just because you can cash out your “points”
in another country where there are no market fluctuations, inflation, deflation or else. That of course
would be true until the concrete virtual currency is stable on the digital market and there is still interest
in buying or using that currency in a concrete type of virtual goods and services.

Another important issue would be control of ownership. Being a digital unit, such virtual currency could
be replicated almost untraceably and since it would be a type of a private currency, the actual question of
control about how much of this currency has been issues, remains open. It could appear that the virtual
currency looses its value not only in the virtual world, but also in the real one, resulting in financial
capital meltdown for payers and businesses.

Taxation issues
One of the most important legal issues, which the online businesses have to comprehend, concerns the
tax consequences of the conversions of online currencies, as they could have significant ramifications for
international transactions.
"The characterization of these transactions for tax purposes also has direct implications for operating
structures social media companies may select for non-U.S. activities," explained the international tax
consultant from KPMG, Jim Carr regarding the usage of online currencies by US social media companies
[37]. He observes that "because of sparse tax guidance to date, social media companies engaging in
cross-border transactions with consumers may be unsure whether and how their virtual currency
transactions will be taxed," noting that analysts project a $14 billion global virtual trading market this
year.

31

The same consideration would be then valid for the EU regulatory landscape and business activities. “How
income related to virtual currency is characterized for tax purposes is a key to assessing the tax
consequences. To the extent that companies using virtual currencies conduct activities through foreign
corporations, the characterization of income resulting from virtual currency will determine which tax rules
are relevant,” added Carr’s colleague Jason Hoerner.

According to Carr to reach an informed conclusion regarding characterization companies should carefully
consider the terms of service they offer players. For example, is virtual currency properly characterized
for income tax purposes as property, a deposit, a software license, a service, or could it actually be
treated in the same way as a foreign currency? Each answer may carry different tax consequences.

Accountability by Fraud
Scammers, however, use the unclear characterization of these virtual currencies also to hit the “real-
money” economy. Such example is the falsification of credit card numbers or their theft from real
consumers, including for example iTunes users in the US or in Europe. Then they wholesale their credit
card details on Chinese platforms like Taobao, known as the eBay of China, to purchase all kind of things
- including virtual goods in games. As it has been reported, on Taobao, a gamer can buy virtual currency
or paid apps at a discount of 50% or more. The seller will provide him with an iTunes login tied to a
fraudulent or stolen credit card number, which can be used to purchase the goods [38]. One may also
ask if the consumers buying virtual currencies with a big discount can’t cash their value back into
conventional currency, how could these frauds be detected and who within the transactions chain shall be
then held responsible.

Another interesting example regarding for the “gray area” of virtual currencies is the handled in front of
the UK court Zynga case in 2011. Zynga, a US social network game developer, develops browser-based
games for social networking websites. The company claims to have more than 240 million active monthly
users and last year filed with the Securities and Exchange Commission in America to raise $1bn (£611m)
in an initial public offering, reportedly valued at $15-$20bn. However, in the same year the conviction of
a hacker from Devon for hacking into Zynga's accounts, put companies like Zynga into the regulatory
spotlight regarding the questions of worth and value of virtual currencies [39].

The British hacker Ashley Mitchell stole around 400bn virtual poker chips and began selling the currency
on the black market for people to use on the Zynga site. He managed to pocket £53,612 before his
arrest, exploiting the growing market for the online sale of virtual goods. For Graham Hann of City law
firm Taylor Wessing, Mitchell's prosecution was a great example of how lawyers are trying to figure out
how real laws apply in the” virtual world". Highlighting the issue, Hann commented: "Are virtual online
chips actually property that can be stolen? What right does a user have if his chips are taken from
him? Can the people who bought the 'hot' chips be guilty of handling stolen property? Can flooding the
market with illicit chips devalue the Zynga currency, like the Bank of England printing money?"

Mitchell's conviction suggests that, so far as the UK courts are concerned, virtual currency is "property",
albeit that it is wholly intangible and theoretically limitless. This case reveals that on one hand we have

32

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