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The Green Sheet Online Edition

June 22, 2009 • Issue 09:06:02

The road ahead for mobile payments

As the avalanche of legislative and executive decisions continues to reshape the economy, breeding uncertainty about what the future holds, mobile commerce is being touted as a new and exciting sector of economic growth and vitality. And with good reason, since giving merchants and consumers the ability to initiate transactions from mobile handheld devices promises faster, more convenient payments.

It seems natural that payments should migrate to mobile phones, since a majority of the world uses them. Just over 60 percent of the global population employ cell phones, said Gary Yamamura, President of banking and payment consultancy édept LLC.

In the webinar "Mobile payments - Is now the time to get into the water?" held during a virtual conference presented by Bankerstuff.com, Yamamura stated that close to 90 percent of all adults in the United States use mobile devices. But according to Yamamura, that number is low compared to other regions of the world.

In Argentina, 99.8 percent of adults use mobile phones, he said. In Russia, the number stands at 121 percent saturation - with many Russians employing two or even three cell phones: one for work, one for home and one for friends, Yamamura said.

But cell phone usage is also expanding rapidly in remote areas of the developing world, he added. In third-world countries where villages lack landlines and traditional payment infrastructures, upward of 50 percent mobile phone adoption exists, Yamamura reported.

Up close

With the globalization of mobile phone usage underway, Yamamura sees "exciting opportunities" ahead for U.S. payments industry professionals. Perhaps the biggest and most discussed opportunity is proximity mobile payments, which involves the much-hyped contactless payment technology known as near field communication (NFC).

An NFC chip embedded in a mobile device renders the instrument into a payment mechanism. When the phone comes into proximity - within a few centimeters, according to a Smart Card Alliance white paper - with a contactless reader at the POS, a payment is initiated.

According to Yamamura, proximity payments allow businesses, like quick service restaurants and convenience stores, to move customers "in and out" quicker. "A few seconds of time per customer means a significant increase in revenue," he said. Additionally, proximity payments are more convenient for consumers. Instead of fishing for cash or payment cards, consumers reach for mobile handheld devices, which are always at the ready.

NFC pilot programs, which have taken place in locations around the world, have reportedly proven the viability of proximity payments.

One such pilot occurred in the San Francisco Bay Area, where First Data Corp. partnered with the San Francisco Bay Area Rapid Transit District (BART), Sprint Nextel Corp. and Jack in the Box Inc. to gauge consumer behavior with mobile payments.

First Data reported that over the four-month trial, 230 users employed the NFC-enabled phones 50 times on average per individual to pay for BART fares and Jack in the Box meals. And participants averaged five reloads on their accounts using their phones' over-the-air reload feature. The trial suggested to First Data that the technology worked and the participants were satisfied with the experience.

Chris Cox, Vice President, Mobile Commerce Solutions at First Data, said that to roll out proximity payments en masse, mobile network operators must make NFC-enabled handsets widely available and merchants must upgrade their card readers to accept contactless payments.

"The connection between contactless payments and mobile payments is the point-of-sale infrastructure," he said. "Those same readers are going to be what enables mobile payments."

On the up-and-up

But getting merchants to upgrade has been a tough sell to date. Visa Inc., with its payWave system, and MasterCard Worldwide, with PayPass, have not caught on significantly with merchants.

"Visa and MasterCard put a ton of money into [contactless payments]," said Douglas Hardman, founder and Chief Executive Officer at stored-value network provider SparkBase. "At the end of the day, not a lot of places adopted it. "If you're not a big-box [retailer], and you don't have three, five hundred locations, you're realistically not going to have a lot of money to put into a terminal that has a five, six hundred dollar add-on that might save you a tenth of a point on your transaction. It's really just not worth it."

While the price of upgrading was evidently too high, consumers are not clamoring to use radio frequency identification- (RFID) enabled smart cards either. What finally may spur merchants to upgrade their terminals is the desire by consumers to pay with their mobile phones.

"That's exactly what we think will happen eventually," Cox said. "The appeal of mobile commerce is the convenience. ... The convenience of mobile commerce is going to drive consumer requests, which will hopefully start to accelerate merchant adoption."

On the go

The other main branch of mobile payments is merchant-initiated. Mobile merchants are always on the go: plumbers, door-to-door salesmen, landscapers, taxi drivers and pool cleaners, for example. They employ standalone handheld POS terminals or mobile phones hybridized to accept plastic.

But phones that double as POS terminals have drawbacks. "If you're making me spend six hundred bucks on a cell phone that also has a card swiper on the side, you're cramming a payment application in a cell phone," Hardman said.

A new, more elegant solution may be a payment application downloadable from a Web site, such as the increasingly popular App Store for Apple Inc's iPhone. Yamamura said Apple's store contains over 25,000 separate applications, from an application that stores medical histories on mobile devices to a program that turns handhelds into levels to hang pictures straightly.

One payment application now offered at the App Store is Merchant Warehouse's Capital Bankcard Mobile, which turns iPhones into virtual POS terminals that process credit card transactions in real time. Merchants download the free app, establish merchant accounts with Capital Bankcard (a registered brand name of Merchant Warehouse) and connect to wireless phone networks to accept plastic while conducting business on the road.

"A merchant doesn't need a second piece of hardware now that is only capable of credit card payments," said Henry Helgeson, President and co-CEO of Merchant Warehouse. "You can take something that you already have in your pocket and use that to process payments and no longer need the stand-alone device."

According to Helgeson, payment app downloads make ISOs' lives easier. "Now we only have to deal with software, not hardware," he said. "[In] the old terminals, there was a software component in the hardware itself, and now we're just dealing with the software."

ISOs can leverage payment apps to board mobile merchants. "There are a lot of merchants out there that were too small to be able to justify the mobile terminals, or maybe the process of keying it into a virtual terminal at home was a little bit cumbersome," Helgeson said. "And now we're opening it up to these merchants who traditionally only would take cash, or maybe some of them would take checks."

However, mobile payment through the iPhone has a few downsides. Since the devices are not equipped with PIN pads, merchants cannot take advantage of the lower interchange rates for PIN debit transactions. Therefore, debit cards are processed as credit card transactions on iPhones, resulting in higher interchange costs for merchants.

Additionally, merchants are subject to the higher keyed-in interchange rate as opposed to the lower swiped rate.

On the fly

According to Theodore Svoronos, Vice President, Business Development & Strategic Partnerships with Group ISO Inc., the first functional mobile wallets for consumer-initiated payments became available in the Asia-Pacific region around the year 2000. Thus, Svoronos believes the United States is three to five years behind countries like Japan and South Korea in mobile-payment technology and availability.

In Asia-Pacific countries, consumers use mobile wallets primarily for micropayments - small-value purchases for such things as ringtones and vending machine items like candy and soda, Svoronos said. But making larger purchases using mobile payments may be problematic. "Can you see yourself making a purchase in the vicinity of $500 off your mobile wallet?" Svoronos said. "I would have a difficult time saying that I'd like to purchase this watch and like to buy it off of my mobile wallet. I don't know. I'm not very comfortable with it.

"If I can use my phone to purchase a candy bar, I can control it. I'm comfortable with a small purchase on a new methodology." Svoronos thus believes consumers would reach for cell phones to purchase "hotdogs at a ballgame, lunch at a corner café, taxi rides," and other "small ticket, day-to-day" items.

On top of

Many ancillary services can piggyback on a mobile payment application, including money transfers, bill payment and text messaging. This marriage of additional features to the basic payment function is what seems particularly to pique the interest of payments industry professionals. The total package of features and functions transforms the mobile phone into its own payment ecosystem, creating a compelling form of mobile commerce.

"Mobile payments is exactly what it is - a payment," said George Peabody, Director, Emerging Technologies Advisory Service at payment consultancy Mercator Advisory Group. "But mobile commerce can include things like REI [Recreational Equipment Inc.] with the iPhone application that provides the downloader with instant ski condition reports from 2,500 ski resorts around the world," he added. "It comes with an invitation to visit the REI store. ... That's mobile commerce."

Text messaging is no longer just the latest teen addiction, Peabody pointed out. Texting has become ubiquitous. Yamamura said 85 percent of all mobile users text message on a daily basis.

"When have you ever got a text message you didn't look at?" Hardman said.

"That's what I tell people. Here's an example. My wife was literally in labor. I got a text message and I looked at it. No, I didn't get a discount. I wish. There was my Mom in the lobby, 'Is he born yet? How are you guys doing?' But I looked at the darn text message in the labor room." Accomplished with simple message service technology, text messaging has become an effective, if not invaluable, way for businesses to communicate with their patrons.

"Now Ed's Ice Cream store is having a slow day," Hardman said. "He hits a button; he can let a thousand know that he's got chocolate ice cream on sale today. How cool is it for a small mom-and-pop shop to be able to reach out to 100 cardholders instantly. And reach them and get a return on investment. It cost them two bucks to send 100 text messages."

Up and over

While mobile commerce holds great value for merchants and consumers in the United States, many both inside and outside the payments industry see the global potential for mobile commerce to improve peoples' lives. Yamamura is intrigued at how mobile payment ecosystems are evolving in third world countries.

A remote village in Africa may have no landline infrastructure, and yet a farmer can go to the village kiosk, buy a prepaid phone card and give the card to the kiosk operator in exchange for the operator sending funds via mobile money transfer to the farmer's sister living in another village, Yamamura said. "They are naturally creating payment ecosystems to create an infrastructure that allows them to barter and trade and sell goods and to use the current prepaid minutes as a traditional, common form of currency," he noted.

A report from international management consulting firm Arthur D. Little predicts mobile payment adoption in the developing world will drive the global mobile payments market, with worldwide transaction volumes hitting $250 billion by 2012.

The Bill & Melinda Gates Foundation recognizes an opportunity to raise the living standards of the poor in Africa and Asia through mobile payments. The foundation, backed by Microsoft Corp. founder and billionaire philanthropist Bill Gates, made a $12.5 million grant to the Mobile Money for the Unbanked program in February 2009 as part of the foundation's Financial Services for the Poor initiative.

Hold on

Despite the positive economic and social potential of mobile payments, Svoronos cautions the payments industry against a full-throttle, gung-ho approach.

"E-commerce for the most part is still in its infancy," he said. "So, 15, 20 years? I'm still saying it's a toddler. We haven't explored nor secured it to the point where people are actually doing their banking and purchasing online as they should be. Only a fraction of folks are actually using it." Svoronos pointed out that online banking is utilized by a paltry 5 percent of computer users, and only 45 percent purchase online.

"Here comes, for all intents and purposes, e-commerce's brother - m-commerce," he said. "Well, wait, we haven't got the kinks out of e-commerce yet, and all of a sudden we're going to adapt a new payment technology?" Before rolling out mobile payments on a grand scale, Svoronos wants to see the usage of online purchasing - as well as online banking and bill pay - substantially increase. That would signal that consumers were confident about the security of those payments.

However, a February 2009 Javelin Research report stated the instances of identity fraud in the United States jumped 22 percent in 2008, with 9.9 million adults affected.

"I'd love global e-commerce to pick up, identity theft and fraud security issues to slow down, love to see a nice twist in that market, or at least a plateau," Svoronos said. "Once that happens, we can look at what we've done in e-commerce ... and extrapolate that out and push that down onto the phone, which would give us the same level of confidence, security and usability for the phone as well."

Svoronos also listed other important issues that must also be addressed:

  • What entities will fill the role of facilitating and managing the relationships between mobile network operators on one end and service providers on the other?
  • Who will set the risk tolerance levels for dollar amounts on mobile transactions?
  • And where do you cap mobile payments? At $100? At $1,000?

Estimates vary as to how long it will take before mobile payments arrive as a mainstream form of commerce in the United States and elsewhere. Some say it may take two years; others say it may take as many as 10. But if a methodical and carefully planned approach trumps a headfirst plunge, a few extra years seems a small price to pay to change the world for the better. end of article

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