uthor: IBM

Date: June 2001

Size: 34 pages

Relevance rating: Medium-High

Web address: http://www.ibm.com/pvc/tech/pdf/Pvwee02.pdf

Last year, Visa International CEO Malcolm Williamson gave a speech in Chicago in which he described "one billion potential points where Visa can connect buyers and sellers."¹ He then went on to detail the evolution of the card business from the perspective of "points of service:"

Phase 1: POS Model - Physical card at a physical merchant in a face-to-face transaction. Today, this represents 21 million points of service globally for Visa.

Phase 2: MO/TO Model - Mail order/telephone order transactions have migrated into e-commerce, where personal computers have moved the points of service to almost 400 million.

Phase 3: Mobile or m-commerce Model - Cellphones, Personal Digital Assistants (PDAs), pagers and other wireless devices have expanded the combination of points of service to well more than one billion.

Executive Summary

According to Yankee Group, there are more than 120 million wireless phone users in the U.S. This year, virtually all of them have been upgraded to comply with the wireless application protocol (WAP), thus allowing widespread Internet access and secure e-commerce. In less than three years, better than a quarter of them will be using these devices to authorize payments for Internet content and physical goods.

Digital content services represent the first wave of wireless purchases. Mobile POS is probably 2-3 years out, but this white paper from IBM defines how wireless payments operate and what solutions IBM is building to ensure that its retailer clients receive more than their fair share of this new form of revenue. Beyond IBM's commitment to mobile payment, this white paper is relevant to ISOs because this year most of the major manufacturers have unveiled wireless card terminals, and both MasterCard and Visa have issued their standards for secure wireless transaction capture and settlement.

What are wireless payments? IBM answers this question by explaining two dimensions of this new method of payment: timing of settlement and whether the funds are transferred within an open or closed network of users.

Relative to timing, IBM refers to what it calls "pre-pay" and "post-pay." Since this document was written, a third form of settlement classification has been identified: "pay-now."

The Pre-Pay option is when a stored-value transfer is made and loaded on to a wireless device. Gradually, these funds are depleted and then replenished. The classic examples of this type of payment are the EZ-Pay toll booth or Mobil's Speedpass gasoline purchase system. For those of you familiar with these two examples of mobile payment, you know that Radio Frequency (RF) devices are issued as a part of sign-up for using these services.

With EZ-Pay, a small transmitter is provided to be installed on your windshield for cost savings by the public transit authority and convenience for the commuter of not having to stop at a toll booth or boarding a ferry. The Mobile Speedpass uses a key-ring fob transmitter for the Mobil Speedpass service.

Pay-Now type services are demonstrated by cash withdrawals from an ATM or bank online debit cards. These are payment types where funds are transferred almost immediately.

Post-Pay transactions occur when some form of credit card is used where delayed billing occurs following the transfer of funds to the seller. In the wireless world, instead of the billing agent being a bank, it just as easily might be your cellular phone company that carries this credit risk and the income generated from interest charged for delayed payment.

IBM describes a "Closed Community" as when "the Buyer, Seller and Billing Authority form a binding agreement to exchange value for goods or services within that community." Both the EZ-Pay and Mobil Speedpass systems are examples of Closed Communities. Others cited include casinos, resorts or cruise ships that issue scrip or chips negotiable only at their facilities. Other examples include employee vending machine tokens or cafeteria programs.

An "Open Community" is characterized by having a widespread acceptance of the payment method. They require trust by both the buyer and seller, and internationally branded credit cards most clearly represent this type of payment. Once the timing of settlement and open/closed payment communities are explained, IBM moves on to help the reader understand the unique aspects of adding the dimension of mobility to payments.

Wireless Transaction Models

IBM explains that a paradigm shift occurs when you disconnect the buyer and seller from their traditional dependency upon the physical card exchange/swipe/signature/paper receipt-generation process. Businesses can radically reduce their costs and increase their customer's convenience at the same time. New market sectors open that weren't possible in the wired world. To make this point, IBM describes that wireless payments assume that they are:

• Always on, always available.
• Reduced (or transparent) complexity to the users.
• Secure, reliable and scalable.

Examples of new markets for ISOs when wireless infrastructures become available include the following transaction types and examples:

• Goods - Vending machines, sidewalk sales, patio dining, golf courses, craft fairs, farmers markets.
• Security/access - Self-storage, apartments, hotel rooms.
• Services - Digital content service providers, local government services-parking meters.
• Ticketing - Travel, theaters, entertainment, sporting or cultural events.

This white paper expands our thinking in another dimension when it describes the various devices that contain the storage, connectivity, intelligence and security needed to move funds, information and services:

• Cellular phones
• PDAs
• Two-way pagers
• Electronic book pads
• Embedded automotive devices
• Set top box/interactive TVs
• Games consoles
• Wearable Pcs

They also can be fixed-location transmitter/transceiver type devices such as the following:

• Toll booth/toll-road sensors
• Vending machines
• POS terminals/cash registers
• Kiosks
• Networked line-of-sight antenna stations
• ATMs

IBM goes on to define the major players in mobile commerce and their respective roles in making this new world possible. Network Service Providers Typically, these are major cellular network providers that own and manage the wireless communications and are able to:

• Identify who is using their network.
• Have the billing systems to charge users.
• Hold the contract with the mobile device owners.

While these features seem like extremely strong positions in the delivery of wireless payment services, this impression is deceiving. These network providers do not have a trusted brand for banking services, nor do they have a great deal of knowledge or risk-management experience with extending credit and preventing online fraud. This leads us to the second leg on the stool of wireless payments ...

Financial Institutions

This segment includes the retail banks and, of course, the card-branding institutions: Visa, MasterCard, AmEx and Discover. Some people might argue that a few large retailers have their private-label cards, but in reality these programs are managed by large credit companies such as GE Capital and Household Financial.

Today, only four of the top 25 banks provide wireless banking services. More common than banks are the brokerage houses, such as Fidelity, Schwab and eTrade - all of which have substantial PDA or cellular availability across national networks. Programs that originally were designed to report portfolio tracking and place orders are being expanded into research reporting, funds transfer, bill payment and other services. Providing access to money market funds via wireless devices can't be far behind. The third leg on the stool, of course ...

Retailers

While the consumer is purchasing the mobile unit, the retailer is expected to fund the POS terminal upgrades needed to accept and settle this new stream of payments. Where is the justification for these capital investments? IBM has some suggestions to offer to answer this question.