Inside Iran: An Analysis of the Factors Influencing Success of Bank-Issued Micropayment Systems

Background and Introduction

Lacking payment systems becomes a bottleneck for the vision of the Information Economy. In many cases, the payments of a fraction of a cent, the so-called micropayments, are of particular interest [1]

According to the Central Bank of Iran, a payment of less than 50 million Iranian rials ($4,794) is considered a micropayment. This amount may strike readers as high. A great proportion of transactions in Iran therefore fall under the definition of micropayment. Electronic micropayment in Iran is going through a revival. Banks and financial institutions have started to pay attention to the potential of the micropayment market. They are cooperating with organizations that have captive markets, such as convenience stores that make use of loyalty cards to issue e-micropayment programs. This allows them to extract commercial benefits for both themselves and their partners.

Data on this subject were presented by Keramati et al. in 2008. Research was also undertaken for a master’s thesis in eCommerce (at a joint program in Lulea and Chabahar University in 2011). We examined consumers’ opinions of e-micropayment programs and their intentions to continue using them. Since the payments industry in Iran has received very little attention outside that country, this study also provides an introduction to the particular challenges facing this market.

History of Micropayment Systems in Iran

Electronic payment is widely used all over the world, but it is not common yet in Iran. [2]

According to the Central Bank of Iran (CBI, 2009), payment instrument trends have gradually moved from notes to various kinds of checks, particularly travelers checks. Changes in payment trends can be traced back to the early 1990s when the Sepah Bank launched a debit card with ATM services called Aber Bank. Since then, almost all Iranian banks have produced their own debit cards. In 2002, an inter-bank card called Shetab was introduced. Now, all card-issuing banks in Iran are connected to the central hub of this single card. Each bank at this point has its own ATMs, point-of-sale systems and other e-payment instruments, all of which are connected to Shetab interbank information transfer network and available to all customers. In other words, from the point of view of customers, it does not matter which cards are used in which ATMs or POS machines.

Data and Statistics

The data provided below was gathered from the Central Bank of Iran (http://www.CBI.ir) and structured to present a clear picture of the payment instruments and settlement volume, past and present.

Table 1: Inter-bank Card Transactions  

Table 2: Inter-bank Card Transactions Volume

Table 3: Card-based Payment Instruments in 2005

Table 4: Card-Based Payment Instruments 2010 Compared with 2005

Table 5: Card-Based Transaction Number and Volume in 2010

E-Micropayment in Iran Today

There are two main categories of micropayment programs in Iran. The first is bank-issued micropayment. This category of micropayment uses POS, ATM, mobile, telephone, Internet, as well as Web kiosk with a variety of cards (debit, credit, prepaid, gift and smart). All banks (private and government-run) in Iran offer most of those instruments. A customer with a card can pay anywhere between a few rials to 50 million rials in a micropayment by any of these means. It is notable that, regardless of the size of the micropayment transaction, the methods for using cards in transactions are the same. All POS are bank-owned and display the bank’s logo.

The second main category of micropayment program in Iran is non-bank-issued micropayment. Non-bank-issued micropayments include the metro e-ticket system and public bus service systems. These are the first actual examples of “true” small-value micropayment programs in Iran. This category of micropayment program uses Near Field Communications (NFC) technology with a variety of cards and magnetic stripe tickets.

There are three types of tickets in the Tehran metro ticketing system:

1- Seasonal credit cards: tickets that are valid for a limited period of time. Only rechargeable in metro stations; NFC-enabled.

2-  Stored-value cards: tickets that bear a specified credit. The minimum value is 20,000 rials. The card may be recharged for at least 10,000 rials. Only rechargeable in metro stations; NFC-enabled.

3-  Magnetic tickets: tickets for a limited number of trips. Cannot be recharged.

There is a discount per trip (5-10 percent) for seasonal credit cards and stored-value cards. This incentive creates what we call “indirect compulsion” to use this payment technology. Using the third method (magnetic tickets) means buying a magnetic stripe ticket good for a limited number of trips. Nevertheless, although the discount that a traveler who uses a seasonal credit card or stored-value card receives on each trip is significant, there is evidence that many people prefer magnetic tickets. The long queues for buying magnetic tickets in metro stations are visible evidence of this preference, the logic of which requires further investigation.

The situation is different for bus service. Before 2010, one could purchase paper bus tickets in every bus station. Now, using seasonal credit cards and stored-value cards in Tehran is nearly mandatory. Besides these cards, the only option that travelers have is to make cash payments for each bus trip. Paper bus tickets are no longer available at all.

Unfortunately, until very recently there had been no link between bank-issued micropayment and non- bank-issued micropayment programs and services. This meant that any passenger on a public bus service would have to go to a metro station to recharge a card (usually quite a distance). This could mean a significant detour. Many still prefer to pay cash rather than take the time to visit a metro station .

Table 6: Comparison of Numbers of Passengers Using the Metro Systems in Tehran, Tokyo and Cleveland (Source: www.tehranmetro.com)

Table 7: Comparison of E-ticket Prices for Metro Systems in Tehran, Pyongyang and Yokohama (Source: www.tehranmetro.com)

A second example of non-bank-issued micropayment programs in Iran is MCI (Mobile Communication Company of Iran), the largest mobile network operator (MNO) in Iran, and indeed, the whole Middle East, with over 40 million subscribers. MCI launched a new program in 2011. Mobile phone numbers are defined as account numbers for MCI subscribers. This program allows subscribers to charge their account, transfer money from their accounts to the accounts of other subscribers and pay bills. This service is now is free of charge and can be used via cell phone. (www.jiring.ir). The user enters *123# in his/her cell phone, then zero and a welcome SMS is sent with a password. The user can now charge an account in most MCI offices. Unfortunately, MCI’s subscribers cannot charge their account via the banking system yet.

Success Factors of Bank-issued Micropayment Program

We analyzed factors influencing the success of bank-issued micropayment systems in Iran. The study was based on an existing model that considers well-known factors (“Satisfaction,” “Perceived Usefulness,” “Confirmation,” “Continuance Intention” (i.e., intention to continue using a form of payment) and “Network Externalities”) and added a new factor related to “Compulsion” (direct and indirect), that is, whether a customer is required to use the e-payment system or has a choice of payment at the point of sale. “Direct Compulsion” was defined as a mediator variable between “Satisfaction,” “Perceived Usefulness,” “Network Externalities” and “Continuance Intention.” The data have been analyzed at three levels. First, descriptive statistics were derived in order to obtain an overview of the characteristics of the sample. Second, bivariate correlations between variables were analyzed with respect to the correlation between scales of variables and mediator variables. The final stage adopted a regression analysis in order to identify the associations and relationships between the dependent and independent variables.

The success of an e-micropayment program depends on network externalities. An e-micropayment program is a networked good in a two sided market. [3] When the value of a product depends on the number of users, the product exhibits network effects. When the value increases with the number of users, there are positive network effects.

The success of an e-micropayment system also depends on direct compulsion by the government or other authority to use an e-micropayment system, and the indirect compulsion provided by customer “lock in.” First, banks and other service providers require electronic payment of various bills and/or have incentivized the use of electronic payment systems. In Tehran, some branches of government banks refuse to accept payment of utility bills (telecommunication bills, electrical bills, water bills, etc.) in any form other than via ATM or other e-payment system. Bank tellers require customers to use ATM machines and the other e-payment media. In Tehran, customers who pay mobile phone bills at a physical branch face-to-face must pay 2000 rials extra charge. Second, a number of “lock-in” programs provide indirect compulsion to use e-micropayment systems: gifts, bonuses and zero transaction charges for customers who use e-micropayment services. These are highly noticeable to consumers and lead to stronger inclinations to use such services.

What Is Direct Compulsion?

First Scenario: go to a physical branch of a bank in Tehran and pay (face-to-face) your mobile bill or other bills (for instance, electrical bills).What happens? The teller informs you that if you pay cash you must also pay a 2000 rial fee, or you can use a card payment method with no added fee.

Second Scenario: go to the physical branch of a bank in Tehran and see a board on the teller’s desk announcing that you cannot use cash for bill paying, only card-based e-payment methods.

Third Scenario: go to the physical branch of a bank in Tehran and see that there are some desks without tellers. Instead, you see a barcode reader and POS on there. You have no choice for bill payment except to use those devices.

These scenarios involve what we call direct compulsion. You have to use a card of some kind (debit, credit, gift, or prepaid) in order to make a payment. In addition, the government sector allocates some bonuses for employees via gift cards. These gift cards only allow recipients to make purchases, not to access cash.

What is Indirect Compulsion?

Many companies and operators have given millions of rials worth of prizes, gifts and discounts to their consumers who use electronic payment services to pay their bills. This has become a common strategy for these companies. MCI, the MNO mentioned above, is an example. Every two months, MCI allocates more than $1 million for subscribers who pay their bills electronically (this includes gifts such as cars, cash, mobile phones, discounts, free SMS, etc.) and encourages them to use e-payment services to pay their bills (http://www.mci.ir).

Data Analysis

We conducted a study of a sample of 409 individuals and explored micropayment success factors as related to gender, age and education. Based on our analysis, Direct Compulsion is a mediator variable between 1) “Satisfaction” and “Continuance Intention,” 2) “Perceived Usefulness” and “Continuance Intention,” and 3) “Network Externalities” and “Continuance Intention,” in each case having positive effects. On the other hand, when we asked participants to rate the “Compulsory use of e-payment systems in Tehran” on a Likert scale [4]  of 1 to 5 (5 indicating that respondents thought e-payment use in Tehran was completely compulsory and 1 indicating that they thought it was not compulsory at all), respondents on average believed the use of e-payment systems to be compulsory (mean: 3.91 out of 5). Indirect compulsion or customer lock-in is positively associated with Continuance Intention. In other words, the strategy of giving away millions of rials in prizes and discounts to their consumers who use e-payment services to pay their bills works: it leads customers to continue to use the e-payment service.

Age

Overall, users aged 15-19 years use e-payments of all types more than any other age group but are less interested in “Indirect Compulsion” loyalty or prize schemes. The 50 and above age group, in contrast, uses e-payments characterized by “Indirect Compulsion” more than the other age groups.

Table 8: Scale of Level of Acceptance of Respondents in Case of Age (1= First and Highest Grade; 5= Last and Lowest Grade)

Gender

Table 9 illustrates that the scale of level of acceptance of “Confirmation” and “Direct Compulsion” in e-payment for men is greater than for women. For the other five main factors (Satisfaction, Continuance Intention, Network Externalities, Perceived Usefulness and Direct Compulsion), the scale of level of acceptance for men and women are the same. In other words, men confirm use of e-payment more than women and participate in e-payment schemes involving Indirect Compulsion more than women.

Table 9: Scale of Level of Acceptance of Respondents in Case of Gender

 
Education

The respondents in this research who reported education levels of “high school” and “university degree” and “secondary school” respectively accepted e-payments at moderate to high levels. Table 10 shows these relations between acceptance of e-payment factors and education of respondents.

Table 10: Scale of Level of Acceptance of Respondents in Case of Education

Figure 1: Men and Women’s Attitudes Toward Seven Factors of Success of Bank-issued Micropayment Systems in Iran (2010)

Figure 2:  Impact of Compulsion in Success of Bank-issued Micropayment Systems by Education Level in Iran (2010) 

Dependent and Independent Variables to Explain the Success of an E-Payment System

We define “Confirmation” and “Continuance Intention” as dependent variables and “Satisfaction,” “Perceived Usefulness,” “Network Externalities,” “Direct Compulsion” and “Indirect Compulsion” as independent variables. As a result of the regression analysis to assess the dependency of seven factors:

I) There is a mathematical relationship between “confirmation” as a dependent variable and three factors as independent variables (“Perceived Usefulness” and “Direct Compulsion” are excluded variables by this regression analysis) as follows:   

1. Model 1 as a Linear Regression could be: “Confirmation” = f (“Satisfaction”) and equation related to this model denoted by  “Confirmation” = 0.352 (“Satisfaction”) + 1.552

 

2. Model 2 as a Binary Regression could be: “Confirmation” = f (“Satisfaction,” “Network Externalities”) and equation related to this model is “Confirmation” = 0.297 (“Satisfaction”) + 0.114 (“Network Externalities”) + 1.383.

 

3. Model 3 as regression of triplet (Plane) could be “Confirmation” = f (“Satisfaction,” “Network Externalities,” “Indirect Compulsion”) and equation related to this model is “Confirmation” = 0.278 (“Satisfaction”) + 0.116 (“Network Externalities”) + 0.038 (“Indirect Compulsion”) + 1.351.

 

II) There is a mathematical relation between “Continuance Intention” as a dependent variable and two factors as independent variables (“Network Externalities” and “Direct and Indirect Compulsion” are excluded variables by this regression analysis) as follows: 

1. Model 1 as a Linear Regression could be: “Continuance Intention” = f (“Perceived   Usefulness”) and equation related to this model denoted by “Continuance Intention” = 0.799 (“Perceived Usefulness”) + 0.812.

 

2. Model 2 as a Binary Regression could be: “Continuance Intention” = f (“Perceived Usefulness,” “Satisfaction”), and equation related to this model denoted by “Continuance Intention” = 0.488 (“Perceived Usefulness”) + 0.437 (“Satisfaction”) + 0.269.

 

For more details of these regression analyses, please contact the authors. (Full text will available at http://pure.ltu.se/portal/en/ by the end of June 2011)

Recommendations and Predictions

Our questionnaire asked respondents if they would like to have a “general-purpose” payment card for all banking and micropayments combined. Out of 406 valid answers, 218 respondents (53.7 percent) strongly agreed with this idea, 109 (26.8 percent) agreed, 30 (7.4  percent) were “Neutral” and only 33 (8.1 percent) disagreed. Respondents were also questioned about a cutoff amount before requiring a password. 15 of them (3.8 percent) suggested 1,000,000 rials, 10 (2.5  percent) suggested 500,000 rials, 69 (17.4  percent) said 100,000 rials, 115 (29 percent) said 50,000 rials, and 32 (8.1  percent) suggested 10,000 rials. These questions provide a guide to creating a general-purpose card (a combination of banking payment and micropayment card system). We also recommend that CBI must define a new category for e-micropayments. The definition of EPS (Electronic Payment System) size could be as follows:

1. Tiny value transactions: below 100,000 rials ($10).

2. Medium value transactions: between 100,000 rials ($10) and 50,000,000 rials ($5000).

3. Large value transactions: above 50,000,000 rials or $5000.

We predict that an electronic linkage between bank-issued and non-bank-issued e-payments can and must happen in the near future.

[1] Schmidt, C and R, Muller, “A Framework for Micropayment Evaluation,” Institut für Wirtschaftsinformatik, Humboldt-Universität zu Berlin, Spandauer Str. 1, D-10178 Berlin, Germany, 1999.

[2] Keramati, A., B. Hadjiha and M.S. Saremi, “A Proposal Framework for Adoption of Electronic Payment Services by Iranian Customers,” IEEE International Conference on Industrial Informatics, INDIN 2008.

[3] Baddeley, M.. “Using E-cash in the New Economy: An Economic Analysis of Micropayment Systems,” Journal of Electronic Commerce Research 5(4): 239-253 (2004). See also Tan, Wee Kheng and Shih Kuo Chen,  “Factors Affecting Non-bank Issued POS E-micropayment Choice: A Study of Taiwan Market,” Journal of Internet Banking and Commerce 13(3): 1-12 (2008).

[4] A Likert scale is a standard psychometric scale according to which questionnaire respondents indicate their level of agreement or disagreement with a statement or situation.

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Editorial assistance was provided by Elizabeth Reddy, PhD student in Anthropology and Research Assistant at the Institute for Money, Technology and Financial Inclusion, University of California, Irvine (www.imtfi.uci.edu).

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Bios

Abbas Keramati is an Assistant Professor of Industrial Engineering at the University of Tehran. He received his BS, MS and PhD from Sharif University of Technology, University of Tehran and Tarbiat Modarres University in Iran, respectively. He has published several papers in international journals such as Industrial Marketing Management, Computers & Education and Telecommunications Policy. He is interested on topics in IT/IS investment evaluation, CRM, multivariate analysis and intelligent systems and modelling.

Behrooz Mashreghi born and raised in Iran, he has got Bsc in pure Math form Ferdowsi University of Mashhad (www.um.ac.ir). His Msc thesis in E-commerce (Chabahar & Lulea University, joint program) was about E-Micropayment ‘s success factors in Iran. He is working with Payment systems in Telco and Banking sectors more than 19 years. His desire major is researching on Iranian behaviors on E-Payment methods and systems.