Mobile Payment Systems - the wallet in your cell phone

It’s one thing to say mobile payments will gain traction in the US, and in their NFC variety, what we did in an editorial last year, extrapolating from the experiences of other countries, and another to amusingly watch how things actually played out a year later. By now it’s already widely accepted by analysts that mobile payments are set to explode in the US come 2012, but which of our last year contestants made the cut, and who is most likely to come out on top next year, if the world is still intact?

Most surprising were the announcement of Google Wallet, and the downsizing of the carrier-backed model ISIS. On the other hand, it certainly seems that the traditional payment processors like Visa and MasterCard are winning the battle once again. Bi-winning, we’d say, since they are both planning their own mobile payment networks, layered on top of their existing ubiquitous infrastructure, and will be providing the backend for other initiatives, like Google Wallet.

That explains to a huge extent why the carriers toned down their plans for mobile payment domination with ISIS. Actually carrier-billing is something they can roll out successfully – after all, they are huge as revolving payments processors – but because Visa and MasterCard are so superior in brand recognition and an already established global payment network, people are naturally inclined to trust them before anyone else with the issue of cash stored in your cell phone.

Osaifu-Keitai

But let’s recap a bit of what we wrote before about the fascinating history behind the NFC-driven mobile payment revolution, which started in Japan. If you have ever been there, you’ve certainly noticed people waving their high-tech looking cell phones in front of soda machines, metro sensors and at cash registers in grocery stores. No fumbling with cash, no card swiping, effortless and classy.

Notorious for their high-tech way of life, the Japanese love and trust their gadgets like hardly any other nation. Nowhere is that relationship more explicitly displayed than in the most private of all gizmos – your cell phone. What is even more stunning, though, is not just the hardware of the Japanese handsets, it is the services offered for them from the mobile carriers in the land of the rising sun. Of greatest interest for this article is “Osaifu-Keitai”, translated as “mobile wallet”.

On July 10th of the distant 2004 the joint venture of Sony, NTT DoCoMo and a couple of local banks, introduced a mobile payment system for the carrier’s customers, that was subsequently licensed by the other Japanese cell phone operators, and today more than 60 million subscribers have cell phones with Sony’s near field communication FeliCa chips. The technology, in a nutshell, can serve as your mobile wallet, credit card, access card, loyalty card, or fare collection on public transits like metro, trains, buses, even planes – all combined in your phone.

Europe

Europe is steadily advancing towards a unified payment system but it faces many hurdles before a common system is introduced, especially now with its financial system woes. The EU market is more ragtag than the ones of US or Japan, for example, as it has to reach consensus among 27 member nations before anything is introduced, and that is a lot of red tape to overcome.

Maybe that is why Visa Europe and MasterCard chose Turkey for their pilot NFC projects. Stopgap contactless payment methods have been developed to cover the time until smartphones begin shipping with NFC chips inside - like Visa’s microSD card solution for the Samsung Vibrant, provided by the Texas-based DeviceFidelity, and the MasterCard project executed through a SIM card plus antenna contraption, courtesy of Gemalto, both of which are being tried in Turkey. The Dutch from Gemalto were also contacted by Apple for a programmable SIM card and possibly NFC chips inside the iPhone.

France is trying to be at the forefront of contactless mobile payments by creating the AEPM (Association Européenne Payez Mobile) alliance. It has all the ingredients for a mobile payments pilot to succeed – the largest French banks and mobile carriers, as well as a couple of hundred of retailers are participating. It is probably the first effort that allows for both payWave and PayPass to be used simultaneously, and is using the above mentioned SIM-based NFC solution by Gemalto, until the first phones with NFC chips inside become available. The AEPM members announced last month the publication of the target version of Payez Mobile specifications. This achievement will permit the roll-out of mobile payments in France in the spring of 2012.



Not to be left in the dust, the biggest UK carriers hammered out an NFC alliance under the Everything Everywhere carrier cooperation initiative, for the "rapid development and delivery of new mobile marketing and payment services". Ericsson launched a mobile payment network of its own in seven key European countries, called Ericsson Money, which allows anyone with such an account to send and receive money from their cell phone.

There were a couple of meetings last year moderated by the Atlanta Federal Reserve branch, putting representatives of the big mobile carriers and the banks in one room to discuss the future of mobile payments in the US. The remarks by the branch's president in the meeting minutes reveal that the Fed will be trying to facilitate agreement between the telcos and the banks, but the government won't be imposing any standards.

However, Consumer Reports, the guys that always bang the drum when there is a product or service problem in the making, have recently demanded from the US government to hammer out regulations for the upcoming mobile payments revolution. They state that if the payment is linked to your credit card, you receive the fraud protection that comes with it, but if it is a carrier-billed or prepaid deposit solution, you are out of luck. The group wants the same extensive security protection with zero liability policies that comes for your credit or debit card, to be expanded to include the mobile payments, regardless of which technology ends up most popular. That is probably one of the main reasons Visa and MasterCard automatically become the most viable contestants for the mobile payments pie, that is expected to hit 2.5 billion users in 2015.

Last time we covered those in the US that could take the lead, like the traditional players – banks and the carriers with ISIS – as well as alternatives like PayPal, Boku, Bling Nation, even Apple itself. As of today, none of those has an active and popular mobile payment option. The big surprise actually came from another company, the almighty search engine that introduced Google Wallet.

Its solution is complete with the NFC-capable phone to make it work, the merchants network that will be provided NFC POS extensions, and a big payment processor like MasterCard to back the whole thing up, bringing piece of mind to Google Wallet users with its extensive security protections. Not to mention the loyalty and coupon system Google Offers that goes with it. The only thing missing is widespread adoption, as it only launches in a few pilot cities, and it would have won our praise as the most complete active payment system in the US to date. Until more phones with NFC chips are available, the search giant will supply stickers for the back of your phone, that will work with Google Wallet and Google Offers.

Apple, in its turn, started selling the Square credit card dongle in the Apple Store, which is a big endorsement, and on top of that Square just got a $100 million investment, which values it at more than a billion. Verifone is also prepping a module to accept bank cards with your phone and tablet. From those with big potential last year, PayPal didn't move much, and is suing Google Wallet for poaching the people who worked on its own mobile wallet initiative. Still, it has 100 million subscribers and processes more than $10 million worth of mobile payments a day, so it could be a matter of time until PayPal elbows its way in. Most of the other players, like the carrier-backed ISIS, announced they will work with the traditional payment processors like Visa and MasterCard, instead of going solo.

And we don't blame them – Visa announced it will be gunning for a vast mobile payment network itself, equipping millions of POS terminals that accept it with NFC capabilities, and it's impossible to fight Visa on such a scale. The trials for this one are set to begin in the fall. MasterCard announced a mobile payment app for every major platform, including iOS and BlackBerry, which don't even have NFC-enabled phones at this point. The app is supposed to use virtual credit for mobile payments, however this project is targeted mainly at corporate credit cards.

Conclusion

All these different paths and methods will probably merge, or be standardized in a way, as consumers are increasingly buying smartphones, and getting accustomed to research, shop and pay through them. The issue is that Americans have a lot of cashless payment options to choose from. It is not like Africa or parts of Asia, where a lot of the population is underbanked, but owes a cell phone, and mobile payments are picking up steam even with technologies like text messaging.

Still, Jupiter Research predicts the money flow through this channel will reach more than $600 billion by 2014, and there are a lot of commissions to be earned, so mobile payments will be jammed down our throats in one way or another. Has the time come to leave your wallet at home, but never leave your cell phone at the back of a cab for the US? We are sure that in a year's time this thought will be much more mainstream than we are currently imagining. Tell us, after you have been gradually leaving at home your map, notebook, calendar, voice recorder, camera and music player because of your smartphone in the last few years – are you willing to ditch your wallet with all those bank and loyalty cards in it too?

After all, most likely you'll still have to enter a PIN if a debit account is stored in your phone, or sign for big ticket items, if a credit card account is in there, which should minimize the damage should your phone get snatched. If you are worried that someone will get your info while walking around the street, NFC is only active when the screen is on, at least in the case of Google Wallet, plus the information you exchange with the NFC terminal is encrypted. A very good overview of how it will all work is given by Peter Ho, Product Manager of Wells Fargo's Credit Card Services in the video below. Bummer, you won't be able to buy a Ferrari by just flashing your phone in the showroom any time soon.