Article

Giving `pay-by-phone' new meaning

Contactless payment systems are gaining ground, which has some operators looking to put payment information in a device we all have in our pockets at any given moment: the cell phone.

August 14, 2005 by James Bickers — Editor, Networld Alliance

The look of the credit card has changed much since its creation. Never mind the superficial changes, the see-through polymers and fancy designs; not content to stay in the customer's wallet, the card has shrunk and stretched to fit on a key chain, and been reduced to ones and zeros to make e-wallets and biometric payment methods.

Today, a number of companies are looking to take that "virtual card" data and put it inside the near-ubiquitous cellular phone.

"Two to three years ago, we started looking at how you can take the information from a mag-stripe of a card and put that information in a phone," said Sue Gordon-Lathrop, vice president of emerging consumer environments for Visa International. What resulted was two pilot programs, one in South Korea and one in Japan.

In the former, 3 million handsets from provider SKTelecom were equipped with the chips needed to facilitate the contactless payments. Some 470,000 corresponding POS devices were part of the pilot, which saw average ticket sizes of $39, chiefly in restaurants, coffee shops and c-stores. More than 89 percent of participants said they were willing to use phone payment again.

In the Japanese pilot, average ticket size was $43, and again restaurants and retail fared well. In both instances, convenience was heralded as a major factor.

"It combines all of your functionality into one device," Gordon-Lathrop added. "If you've ever heard people interviewed, the funny thing they'll say is, `I may leave my wallet at home, but I always have my phone with me.' The phone becomes that all-encompassing device that has everything in it that I want."

Visa Contactless is a work in progress, but MasterCard's PayPass is already on the ground. The program offers dual-purpose cards, equipped with chip and antenna that can pay with a tap at PayPass merchants, as well as a conventional mag-stripe for all other merchants. According to Oliver Steeley, vice president in MasterCard's "Mobile/Wireless Center of Excellence," taking that tech to the cell phone is an idea being explored.

More research on these key terms: Payment methods Contactless Wireless

"We have some development projects underway, but I would stress that they are still very much development projects," he said. "There is no doubt from our consumer research that the phone is a very popular form factor for making proximity payments, however many other form factors such as key fobs were also very popular with consumers."

According to Japan's NTT DoCoMo, such a program is already a success. The company recently announced that its Mobile Wallet offering is in use by 3 million cell phone customers and 20,000 vendors and retailers.

Integration options

Two primary options exist for the payment provider looking to place his tech inside a cell phone: integrate the process with the handset's software, or simply treat the phone as a carrier for a chip.

In the former, payment information would be stored in the phone's memory, and consumers would activate a menu on the handset to enable payment. According to Gordon-Lathrop, this motif is attractive because it allows multiple cards to be stored.

"We view the phone as analogous to the wallet you have in your pocket," she said, "and the card detail that gets stored in the phone becomes your cards, per se. And we believe that over time, multiple cards will be stored in a phone."

To Forrester Research senior analyst Ivan Remsik, this system is not attractive because it requires too many steps and is simply not an improvement over pulling a card from a wallet the old-fashioned way.

"This is quite new, and we'll see how this develops, but mobile phones are quite bulky, and are just not good devices for initiating payments," he said. "Plus, there is a lot of competition there - the phone will be competing with the key fob or the MasterCard, which is just handier."

Remsik also said that deployers looking to implement such a solution face a logistical nightmare.

"We have looked at how some of the mobile authentication systems are implemented, and we have found that they're basically not implemented at all, because the applications are model-dependent," he said. "So if you would like to launch an e-bank application in a particular market, and there are 60 mobile phone models in that market, you'll need to deploy 60 different applications in that market."

Tools that promise uniformity and compatibility - Java, for instance - definitely have the potential to tackle this problem, but many phones still will not run Java apps. Remsik said that he recently spoke with representatives from a Finnish bank that had just pulled the plug on a mobile banking system, saying they might re-enter the game when and if the mobile phone industry standardizes hardware.

The other approach is to simply place a contactless chip inside the phone's shell, enabling customers to wave or tap the phone over an enabled POS the same way they would a contactless card. This notion obviously jumps the hurdle of integration with the phone, at the cost of the "multiple cards in one virtual wallet" promise.

Remsik said one possible upshot of this might be the proliferation of interchangeable mobile phone "jackets," which would allow consumers to pop in the contactless chip of their choice, regardless of phone model.

The usual concern: security

The contactless arena as a whole is grappling with the potential security risks of beaming payment information through the ether, even if it is only a few inches. Putting the transmitter inside a phone raises a few extra eyebrows: Remsik points to data which shows that people are three times more likely to lose a cell phone than a wallet.

"We have to ensure that the phone can meet our security requirements," said MasterCard's Steeley. "Again, this is more complex than in a card, but we don't think any of these are insurmountable."

Gordon-Lathrop agreed, and noted the domino effect of new technologies.

"The operators are looking and watching, we all know that," she said. "I think what you're going to find is, as contactless payment using a card grows, that's when you're going to see their interest. They'll let the banks lay the groundwork.

"What you find is, once one FI goes, it's awfully difficult for others not to follow along, especially when it's something new and sexy, and it quickly gets a life of its own."

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