early 2 billion people worldwide (almost a third of the planet's population) carry cell phones. This group represents a golden opportunity; it's larger than all PC and Internet users combined. And the payments industry is paying attention.

Through the ISO/merchant level salesperson (MLS) channel, a number of companies already offer solutions that enable merchants to accept bankcard payments via cell phones or PDAs equipped with a peripheral card-swipe device.

These mobile solutions are sold primarily to mobile merchants: cab or limo drivers, in-house services like carpet cleaners or plumbers, or event concessionaires. They can also be used by servers at restaurant tables and line-busters in retail stores and movies theatres.

But new advances in contactless technology - radio frequency identification (RFID) and especially near field communication (NFC) - will soon enable consumers to make payments with ease by tapping or holding up their cell phones, just like some already do with contactless bankcards.

According to Dan Schatt, Senior Analyst at Celent LLC and author of a recent research report "Mobile Commerce Dealing with the Devil in the Details," the number of third-generation handset mobile subscribers in the United States has just topped 50 million, paving the way for a critical mass of very high-speed data transmission handsets.

"This has ignited a commerce market that generated more than $15 billion in revenues at the end of 2005. NFC payment processing straddles the online and off-line world," Schatt said.

(Opportunities for ISOs and MLSs are in providing merchants with payment processing services and contactless readers. See "Small is the new big: Cashing in on contactless payments," The Green Sheet, May 22, 2006, issue 06:05:02.)

Boom, bust and boom again

The hype about so-called mobile wallets began during the tech boom, but enthusiasm waned because cell phone coverage was spotty. And it plummeted when the tech bubble burst. Cell phone coverage has vastly improved since then, and NFC technology innovations have turned the concept of mobile wallets from mere vision into near-reality.

Consumers already use cell phones in imaginative ways: They take photos, play games, text message friends, search the Internet, listen to music and even vote for "American Idol" contestants, all via cell phone.

According to Patrick Besnard, a representative for the French watchmaking industry, Gen Xers no longer wear watches because they use cell phones to tell time. Some say wallets will soon go the way of watches.

NFC applications allow consumers to store credit card, debit card, loyalty card or preloaded card account information in their mobile and select a preferred method of payment at the time of the transaction.

"Carriers, card Associations, device manufacturers and banks are trying to strike the right economic balance that will allow mobile phones to become a payment form factor at the digital as well as the physical point of sale," Schatt said.

"In the North American and European markets, telcos and banks may finally become bedfellows with the help of third-party technology platforms [that are] agnostic to all parties," he said, adding that development of NFC standards will expand mobile commerce markets for all parties.

Up with ticket prices and loyalty

Some experts say that the engineering of mobile payment devices is now quite simple. The difficulty lies in achieving widespread adoption, not on the consumer end (they have most of what they need and can easily upgrade), but on the merchant end.

"Merchants with high-volume, low-price-point businesses are frequently reluctant to take credit cards, or invest in equipment to do so, because of high interchange rates," Schatt said. "In weighing the economic value proposition, they may not see the value of contactless cards.

"But the DoCoMo initiative in Japan has showed that convenience stores that accepted mobile payments saw an increase of 5 to 15% in average ticket prices. The retention benefits are very strong as well. Consumers could look at their mobile at the time of payment and know just how close they are to reaching a loyalty goal, for example.

"That communication is something you just can't do with a credit card. The combination of communication and commerce is very powerful and is much more enticing to a merchant, regardless of interchange."

Mobile wallet possibilities

A range of mobile wallet options are under development including:

• Touch-and-go designs: With this system, consumers merely position a mobile in proximity to a reader, which picks up and reads the data. This is ideal for public transit payments, event ticketing and vending machines. It could also work for nonpayment applications like unlocking keypad locks.

• Touch-and-confirm designs: In this variation, the consumer must confirm acceptance of a transaction and/or enter a PIN to verify and authorize payment.

• Touch-and-connect designs: This is peer-to-peer data transfer. Two NFC-enabled devices are used to exchange information. This technology is used now for music downloads and photo or address book information exchanges.

• Touch-and-explore designs: Most experts say this is where we're headed. A mobile will store data for multiple functions (much like wallets do now) such as a debit card equivalent, a credit card equivalent (or two) and a plethora of loyalty programs. Consumers will then select the appropriate function or functions at the time of payment.

To integrate, or not

There are two options for mobile payment systems: You can integrate the process with the handset's software (mobile wallet), or simply treat the phone as an NFC chip carrier, placing the chip in the cell phone itself or in the phone's replaceable jacket (smart card).

Most experts say that the first option, integrating the data, is preferable to consumers; it allows multiple "accounts" to be stored in one place. "Using your cell phone as a smart card is convenient, in that you don't have to dig through your wallet looking for your card," Schatt said. "But it lacks the true functionality of a mobile wallet."

Although there are only 25,000 to 30,000 contactless POS locations in the United States now, a wide range of carriers, handset manufacturers and card issuers have cell phone payment systems in development.

Erik Michielsen, Practice Director, RFID and M2M, ABI Research, expects that over 50% of all mobile handsets will incorporate NFC chips by 2010. "Consumers will be able to download content by simply holding their phone close to a poster or advertising billboard," he said. "They can purchase merchandise, food, tickets, and have these transactions charged to a credit card using account information stored in the mobile phone."

Working it out together

Japan's largest mobile communications company, NTT DoCoMo Inc., working with Sony Corp., was the first to enter the market with its mobile FeliCa products. The company conducted a market trial using 5,000 FeliCa-equipped phones between December 2003 and June 2004.

The following month, DoCoMo released its first FeliCa-equipped phones for the Japanese public. By December 2004, DoCoMo had sold 1.3 million mobile FeliCa phones. It recently announced that FeliCa is in use by 3 million cell phone customers and 20,000 vendors and retailers. Ultimately, the company anticipates 7 million subscribers.

Interestingly, what is basically a financial services product was released first by a mobile communications company. According to a Harvard Business School case study written by Stephen Bradley, Thomas Eisenmann, Masako Egawa and Akiki Kanno, the impetus for releasing FeliCa came from DoCoMo.

Approaching market saturation, DoCoMo was looking for ways to expand its reach. It didn't originally partner with a card issuer, but it has since acquired a 34% stake in Sumitomo Mitsui Card.

According to Schatt, the difficulties in the U.S. market are primarily that disparate businesses (banks, handset manufacturers and carriers) have rarely worked together, have different business models and agendas, and are finding it necessary to work closely together. "It's not the technology that is slowing this," he said. "It's the business arrangements."

Michele Janes, Director of Product Innovation and Coordination for Visa U.S.A., agrees. "While there have been tremendous strides in the technology development, business arrangements between mobile and financial stakeholders must be resolved before broad commercialization will be realized in the U.S.," she said.

In early February, Motorola announced plans for M-Wallet, a mobile payment system consisting of a software application that consumers can download to their phones and the Wallet Service Center used by the wireless carrier to manage accounts.

M-Wallet is compatible with Motorola handsets and with other handsets and PDAs. It is designed to take advantage of contactless card readers once they take off in the United States. While Motorola doesn't have agreements with card Associations or carriers yet, it is currently negotiating with them.

Innovations at Philips Arena

Nokia reached agreements with Philips Semiconductors, Chase Paymentech Solutions LLC, Visa U.S.A., ViVOtech (a software developer) and Cingular Wireless to test a mobile payment system at the Philips Arena in Atlanta.

During the pilot, over 150 Atlanta Thrashers and Hawks season ticket holders with Chase-issued Visa credit accounts and Cingular accounts were able to make contactless payments at concession stands (150 POS systems were installed in the Arena) with their Nokia 3220 mobile phones.

Fans could also download content such as ring tones, wallpapers, screensavers, and music or video clips by holding an NFC-enabled cell phone in front of posters embedded with NFC tags.

While Visa is now analyzing results, Elvira Swanson, Visa's Director of Corporate Communication, said anecdotal evidence shows that fans loved the trial. "We have pilots rolling out throughout the rest of 2006 and into 2007, and one of the things we are very interested in looking at is using this type of functionality for coupons or other merchant promotions," she said.

Philips developed the NFC semiconductor chips with Sony. Christophe Duverne, Vice President and General Manager, Identification, at Philips, is pleased that this major trial affirms how easy to use and intuitive the technology is.

"With NFC, the application possibilities are substantial," Duverne said. "By simply touching two devices together, consumers will be able to make payments, enter sports grounds, obtain information from posters and more. We're excited about the many opportunities NFC is opening up in the U.S. market."

The NFC implementation at Philips Arena is an indication that chip makers, card issuers, device makers, mobile carriers and content providers are becoming more willing to collaborate on NFC solution development. "This type of co-development is essential to NFC market growth and maturation," Michielsen said.

Other players on board

Visa is not alone in the rush to develop cell phone payment products. MasterCard International has been testing phone-based versions of its PayPass contactless payment technology since 2003. Discover Financial Services announced that it plans to launch an NFC-based cell phone payment product by the end of 2006.

PayPal has circumvented the RFID and NFC technologies completely, rolling out Paypal Mobile in early April. It is a text-message-based transaction process used by PayPal's customers in the United States, Canada and the United Kingdom.

"The two things people say they never leave home without are their keys and their mobile," said Amanda Pires of PayPal. "We talked to our customers and they said they'd like to be able to use their PayPal account wherever they are, so mobile seemed to be the answer. ... [W]e've been delighted with the response so far." Three types of purchases can be made with PayPal Mobile: peer-to-peer, (individual to individual), text-to-buy (individual to merchant), and text-to-give (individual to charity). PayPal has 105 million accounts, so it views PayPal Mobile as a huge opportunity, even if it doesn't reach new customers. But the company has growth in mind. "Texting is even more popular in Europe and Asia than it is here, so those are clearly markets that are ready for something like this," Pires said.

Hurdles to overcome

The stickiest physical concerns the mobile payment sphere faces are compatibility and security. But experts say those are easily solved compared to the challenges of creating partnerships and convincing merchants to upgrade their readers.

Programming tools like Java have the potential to ensure compatibility, but many phones do not currently run Java applications.

However, several industry leaders, including MasterCard, Matsushita Ecology Systems Co. Ltd., Microsoft Corp., Nokia, NEC Corp., Renesas Technology Corp., Koninklijke Philips Electronics, Samsung, Sony Corp., Texas Instruments Inc. and Visa International, have created the NFC Forum, a nonprofit group established to standardize NFC technology so that all devices conforming to the standards will be compatible.

"There are potentially more security safeguards with this sort of thing," Schatt said. "In Japan, FeliCa has the capability to cancel the account or lock your phone remotely, and of course there are capabilities in the biometrics realm well beyond even that. You can lock your phone, after all, but you can't lock your wallet."

Some handsets in development will have voice authentication or fingerprint authentication built in. PayPal Mobile's text-messaging system has a built-in interactive voice response system: After transferring money, an automated system rings back and asks the consumer to enter a PIN before processing the transfer.

Sunny days ahead

According to Swanson, no matter how relationships among key industries evolve, there should be plenty of opportunity for the existing sales channel. "I would think that the relationship of ISOs to merchants wouldn't change just because the technology changes," she said.

Sam Pitroda, Founder of C-Sam, the company that created the OneWallet cell-phone platform, said this technology will create new opportunities for banks as well as carriers, cell phone manufacturers and merchants. "There are 1.8 billion cell phone users, but there aren't 1.8 billion checking accounts," he said. "So there's a big potential for banks if they can get more people to open accounts."

Schatt thinks that the U.S. market will be well worth watching as carriers, content providers and card issuers figure out the roles each party will play. "The opportunities will be too great for most parties to miss out as mobile commerce and communication grow over the next several years," he said. "It's a huge opportunity. Just huge."