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Cell phone payment system options multiply

Slow to catch on in U.S., trend gains momentum

By Karen J. Bannan

With nine out of 10 American adults owning a cell phone, it's not surprising that a growing number of companies are creating payment options that take advantage of the ubiquity of cell phones, some of which may make credit cards obsolete.

Cell phone payment system options multiply

On May 17, DeviceFidelity released In2Pay, an   iPhone case that holds a  microchip enabling iPhone users to make payments by waving their phones in front of contactless payment terminals.

Source: Company press release

These companies aren't pulling the technology out of the air, so to speak. While it remains avant-garde in the States, using cellular phones to make purchases and transfer money to friends and creditors has been business-as-usual in South America and Asia for a while. There, a large proportion of unbanked consumers and the proliferation of cellular phones have created an economy where someone might pay for a coffee -- or a refrigerator -- by waving a cell phone close to a terminal or texting with a special code to have that purchase put on a monthly cellular bill, bypassing any credit card network.  

"The rest of the world is kind of ahead of us in this area," explains Beth Robertson, director of payments research for Javelin Strategy & Research. "There are a number of global markets where you can essentially hold your phone near a device and authorize payment from your bank account or cellular bill or do person-to-person payment by texting someone. Most of the options take the credit card out of the equation."

Massive potential market
The mobile payments for digital and physical goods and person-to-person payments worldwide will grow from $170 billion in 2010 to the $630 billion mark by 2014, and about $100 billion of that will come from offline purchases, according to a Juniper Research report.

The American market, however, is different. According to a May 17, 2010, analysis by the Boston Federal Reserve Bank, mobile payment systems here have a chicken-and-egg problem: "... [Ccnsumers will not demand them until they know that enough merchants accept them, and merchants will not implement the technology until a critical mass of consumers justifies the cost of doing so," concludes the report.

Today, the majority of U.S. cell phone payment systems aren't designed to eliminate the credit card from the equation. Instead, they augment them. For example, Apple has an iPhone app called Bump that lets two iPhone users tap their phones together to transfer cash from one credit card-funded PayPal account to another.

Another company, Square, takes this paradigm one step further by letting anyone with an iPhone or iPad accept credit card payments from Visa, MasterCard, American Express and Discover. The technology provider asks people to download an app, which works in conjunction with a tiny credit card reader that plugs into the phone's audio jack. Retailers can accept Square, too, using the Apple device and photo identification. And all of the major cellular phone manufacturers and cellular carriers are working on built-in card readers or chips that will work across different cellular networks, says Robertson.

No-card-needed systems
But more credit card-independent offerings are launching. Xipwire, another new mobile payment system, also lets people make retail purchases or do peer-to-peer transfers via texting. The catch in a retail situation: the retailer has to be set up with a customized Apple iPod Touch. The cashier texts the person making the purchase who in turn replies with their personal security code. Another mobile company -- Think Computer Corp. -- has introduced FaceCash, which uses barcode technology to facilitate payments. Users hold their cell phone screen, which displays a barcode and a photo ID, up to a barcode reader. Once authenticated, the purchase is debited directly from a bank account.

Bling Nation is another example of the cell phone as a payment device. Users who set up an account with the company get a BlingTag -- a small, sticky microchip that attaches to any cellular phone. When they go to a retailer that accepts the payment option, they tap the phone and the microchip against a special reader. The money is withdrawn directly from the consumer's bank account, and the cell phone owner gets a text message that functions as a digital receipt. Bling Nation has been signing up financial institutions and retailers, adding more monthly, says Meyer Malka, founder and co-chief executive officer of the company.

Another company, Zong, forgoes the banking and credit card systems completely, tapping Facebook's Credits system. Zong users can enter their mobile number on websites to make payments. The sites then text the person, sending them a code that is entered into the Web form. Charges appear on the user's mobile phone bill.

[C]onsumers need to be educated on this and get familiar with the mobile products.

-- Sandy Shen
Gartner Research

Credit cards may stick around
Still, it may be the credit card-linked model that has the best chance of taking off, says Sandy Shen, a Gartner Research analyst. "From the technical perspective, security is achievable and can be the same level as people pay with credit card or bank transfer, but consumers need to be educated on this and get familiar with the mobile products," Shen explains. "Most payments will involve banks, so your purchase is not carried by your phone bills, but on your credit card to ensure there is sufficient risk management in place."

Indeed, the hardest part with all of these mobile offerings, says Scott Kveton, CEO of Urban Airship, is that, unlike the existing credit card structure, which is worldwide, there is no common denominator for many of the new players in the market. "The hardest part is how to hook all these multiple cellular platforms together," he says. "There's no infrastructure in place, which is why it's so hard. How do you support all the different handsets and all the different networks and not have to charge the consumer a huge chunk to make it happen?"

That's why traditional credit and charge card vendors, which have been slow to announce new products, may actually break out in the space -- and soon, says Javelin Strategy & Research's Robertson. "All of the [credit and charge card] networks have some sort of initiative in the area. MasterCard is putting MoneySend, a peer-to-peer payment system in place in the U.S. market., Visa has many ongoing global activities. Discover has trialed Discover Zip, a contactless card," she says. "Mobile devices are gaining greater sophistication and functionality and people love to use them, carrying with them at all times. It's not surprising that we're seeing so much activity in this area."

Visa has been running trials with Near Field Communications -- technology that lets the user wave a cell phone near a contactless payment terminal. Visa's offering will make use of a smart phone's MicroSD slot and software application called Visa payWave, says Michele Janes, mobile maven and senior business leader in the company's mobile initiative. "We're looking to leverage the payment system that is in place today, but give people a new form factor," she says. "We know consumers are looking for these options, and we're providing them something that has the same security and protection that they're used to using their Visa card." The company is also looking at text-based transaction offerings and peer-to-peer payment options, says Janes.

In addition, Visa is working with DeviceFidelity, a Richardson, Texas-based contactless technology firm, which on May 17 unveiled an iPhone special carrying case that contains a payment chip that lets people wave an iPhone in front of a contactless payment device -- such as Visa's payWave. 

How soon?
So how soon will Americans be emulating their Asian consumer counterparts and using cell phones as payment options on a daily basis? It's hard to predict, says Jon Swallen, senior vice president, research, at consulting firm Kantar Media North America. "Technology trends often spread from East to West," he says. "Generally, when we see these kinds of things beginning to emerge in the space it's a precursor of something larger, so although we're at a very nascent stage now, the expectation is, over time, mobile payment options will become a more widely available payment system."

MONEY BY CELL: PHONE PAYMENT SYSTEMS PROLIFERATE
Product How it works
Fees, status, limitations
Zong Users enter their cell phone numbers online, receive a passcode by text, which they input. Charge appears on their mobile telephone bill. No fees to the consumer. Only available on certain websites.
Bump Consumers bump their phones together to transfer money. Only available on the iPhone, although a BlackBerry app is also in the works. PayPal fees apply.
Square Turns any mobile device into a credit card reader. Only available for iPad. Company expects to release iPhone and iTouch apps this year. Users pay $.15 per transaction plus 2.75% of total.
Xipwire Users who sign up for the service can send and receive money via text message. Isn't compatible with the Verizon Wireless network. No fees to consumers in 2010; businesses pay $.50 plus 2.5% for credit card payments.
Bling Nation
Company provides a "BlingTag," to be stuck on the back of the phone. The BlingTag is linked to a bank account and transfers money when the phone and tag are tapped on a point-of-sale device. Limited retail adoption. No fees to consumers. Retail fees vary.
MasterCard MoneySend
Person-to-person service that lets users transfer cash from their MasterCard prepaid or charge cards using texting.
Must have a MasterCard. No fees for receiving money. Senders pay per-transaction fees based on dollar amount.
DiscoverZip Consumers place magnetic stripes on any device, including a cellular phone. Works just like a credit card. Program was piloted only to 1,000 internal Discovercard employees. No rollout planned.
Visa payWave Chip installed on phone or in cell phone case will allow users to wave the device near a point-of-sale reader.   Program is in trials.
FaceCash Barcode and photo ID on the cell phone are held up to a barcode reader. Money is debited from a bank account. No fees to the consumer. Limited number of merchants accept FaceCash.

See related: Merchants eye mobile phones to transact card payments, Mobile payments predicted to skyrocket, Contactless credit cards spark concerns for data privacy, Cell phone plus contactless credit card

Updated: May 24, 2010


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