Digital Wallets: Making Change for Wireless Transactions

From the race to 3G to spectrum auctions to handset compatibility, wireless providers have very full plates. Yet in that rush for new revenue opportunities, the ability to pay for a small-ticket item such as a ringtone download is fairly high on the list.

“I’ve seen the temperature change,” says Cynthia Hswe, senior analyst at the Strategis Group. “In the beginning, people were really hot about mobile payment and m-commerce, because they saw it as one of the few ways in which they’d actually make money off the wireless Internet. They understood that end users wouldn’t be happy about paying for access and paying for content, so they perceived m-commerce as a way of driving off some revenue.” That attitude has cooled off over the past few months, and now operators are starting to realize that they can make money from m-commerce but that users aren’t going to buy big-ticket items. “Mobile payments will be made on goods that are urgent, habitual and small-ticket,” she says. “I think even a $20 book is too much.”

“You need a compelling reason to buy,” says Kris Cone, director of business development for AT&T Wireless’ PocketNet service. Cone says that m-commerce has been a priority for AT&T, whose PocketNet service currently allows customers to purchase goods from merchants such as Barnes & Noble through credit card transactions. AT&T is currently developing a wireless wallet product, but the company can’t comment on specifics or when it might be available.

Even if mobile service providers are working feverishly to ride the mobile payment wave, will end users be interested in this new form of payment?

The answer seems to be mixed. Many people have yet to make their first purchase through the wired Internet, yet others are already willing to purchase goods through their phones. The Strategis Group surveyed 500 wireless users about how comfortable they would be with purchasing goods and services over their wireless phones. 41 percent said they were extremely, very or somewhat comfortable, while 59 percent said they weren’t very or at all comfortable.

Within those percentages, 37 percent said they were not at all comfortable, and 17 percent said they were extremely or very comfortable.

The Strategis Group also asked the wireless users how they would want to pay for a transaction. 36 percent wanted to charge purchases to a credit card, 35 percent wanted it added to their monthly wireless bills, 20 percent wanted it debited from a bank account and 9 percent wanted it to be taken from a special online account that the end user had set up.

However, it will take time for users to get over any security concerns and other tribulations. For more on secure wireless payments, see “Putting a Lock on Your Wallet.”

A January 2001 report from Celent Communications entitled “Wireless Payments: Into Thin Air,” estimates that the number of mobile payment users worldwide will increase from the current 4.6 million to 61 million by 2004.

With such a substantial increase looming on the horizon, industry players from the mobile operators to billing companies to wireless wallet vendors are all looking very intently at this next evolution in payment systems.


Cash Value
Most mobile operators that offer even the most rudimentary of wireless Web access have teams working on these new payment schemes. Today, mobile users generally can type in a credit card number into their microbrowser to complete a transaction, but this is not considered optimal. “You can’t escape the fact that the existing systems are really structured around paper flow if you look at the way authentication occurs,” says Brad Rode, CEO of iPIN, which develops wireless wallet technology. “It’s predicated on the notion that you’ll stand in front of a clerk with credentials—something that’s not optimized for electronic transactions. New requirements are growing increasingly difficult to fill with these existing systems.”

The idea of wireless wallets would greatly expand on the idea of entering credit card numbers into a cell phone and basically give users options that are very similar to those that exist within their regular, physical wallet.

“When you open your wallet, you’re confronted with a wide variety of payment mechanisms,” says Chris Merrick, market strategy manager for wireless at Geneva Technology, a subsidiary of Convergys. “You have cash, credit cards, debit cards, store account cards, loyalty cards for airlines, and cards to gain entry to places like a gym. I want to choose how to pay, and the virtual wallet will encompass a number of methods.”

But defining which transactions get charged in which manner could be a big challenge. For example, downloading a 25-cent ringtone may be charged simply on the monthly phone bill. But a book purchase makes more sense on a credit card. Whatever the choices, it’s fairly clear that the mobile service providers will be the ones driving the business decisions.

According to Robert Chen, wireless market development manager at Portal Software, initially operators will want to see most charges appearing on the phone bill. “If the operator is providing billing and payment functions on behalf of third-party merchants and content providers, then they can take a bigger cut of the revenue stream,” he says. “That approach will be the most profitable especially for operators interested in building a walled garden.” He says anything happening outside the walled garden poses complications for operators because they don’t want to relinquish control of the consumer’s payment information.

AT&T Wireless is looking very closely at what types of charges to put on the phone bill and what to charge to a card. Cone says that there’s a lot of cost for a transaction that uses the credit card network, meaning less revenue on those transactions. “That’s one area where we need to step up and do work so there is more money in the value chain for the content provider, the carrier, and anyone else,” Cone says. He adds that Japan’s NTT DoCoMo has been a success because it acts much like a financial institution in settling revenues among partners. “They provide a clear way for content providers to make money, and the cost of doing that is very small.”

Cone adds that most of DoCoMo’s charges are under $1, yet content providers are willing to develop compelling applications. “If you look at the cost of producing content, it’s pretty small,” he says. “We in the U.S. have a ways to go because we’re not used to paying for content at all; people don’t seem to have a problem paying 50 cents for a newspaper, but they do when it comes to online content.”


Behind the Payment

Regardless of type of payment, transactions consist of similar processes, according to iPIN’s Rode. First, there’s the identification and authentication of the customer, which could involve typing a username and/or password into the handset. Second, the transaction needs to be authorized. “This happens online and involves going to the source of funds, guaranteeing it exists, as well as getting information about settlement rules,” Rode says. “The source of funds can be many things such as a bank account, credit cards, gift cards, or stored value accounts.”

The third piece of the transaction involves clearing and settlement of funds, and fourth is customer support and service.

Boston Communications Group, Inc. (BCGI) is approaching the idea of wireless wallets from the prepaid angle, a space it’s been involved in on the voice side.

“Our existing technology processes 70 million transactions a month, so when it comes to having the reliability and scale to handle micropayments in a cost-effective way for mobile commerce, we’re in really good shape,” says Tom Erskine, vice president of product development at BCGI. In March, the company introduced the bcgi Wireless Wallet, an XML-based platform that integrates with merchant systems and provides prepaid capability for fixed or mobile Internet transactions.

BCGI has been working with Cincinnati Bell to deploy its wireless wallet technology. Cincinnati Bell already uses BCGI technology for prepaid wireless voice. The wireless wallet trial started in January 2000, but it’s still not in production deployment.

“The idea is to have a single prepaid account tied to a mobile device, so everything you want to do from that mobile device you can pay for using that account,” Erskine says. “This could include making voice calls, sending messages, making purchases such as going to Best Buy for a CD, or downloading ring tones.”

Erskine says there are advantages to using a prepaid model with wireless wallets. An argument that comes up time and again deals with the mobile operator wanting to function as a bank and dealing with credit risk of customers, he says. “I know putting charges on the phone bill is already happening to an extent in Europe for some micropayment transactions, but there are a lot of problems with that model,” he says. “If someone skips town on $150, the carrier is out soft network costs. But if they skip out on a $150 bill and the carrier owes Amazon.com $50, it’s a whole other story.”

Sticker shock is another argument for the prepaid model. Esrkine says that carriers in the U.S. that have been bundling minutes have done a good job of helping people manage and understand wireless costs. However, he adds, when carriers start introducing third-party merchant aggregation on a bill, that customer understanding of the billing process could diminish. “I can imagine getting a bill at the end of the month and wondering did I really buy 50 MP3s last month at $1 each? It’s a little more psychological; in prepaid you know you what you bought but in postpaid you don’t.”

Another interesting payment method that can actually involve prepaid, credit card, or direct debit from a bank account comes at the point of sale (POS). The idea is that customers will be able to purchase items in any brick-and-mortar store and through communication between their handsets and the stores POS terminal, complete a transaction.

“The fundamental shift is the POS terminal is migrating off the merchant’s counter and into the consumer’s hands,” says iPIN’s Rode. But while many companies are developing applications and the ability for wireless devices to function as payment facilitators, upgrading POS technology seems to be a bit further down the road.

“We definitely see the POS model as next-generation,” says Erskine. “The whole issue around POS is one of matching up handsets with POS locations and the whole chicken-and-egg ubiquity problem that has to get solved.”


Storing Payment Information
One of the main questions involving wireless wallets has to do with where the payment intelligence will reside. The obvious choices are on the mobile operator’s network or on the handset itself. Most mobile users are still on 2G networks and use 2G handsets with their limited capabilities, making them far from the logical choice for storing payment information today.

“I have a feeling that from an end-user perspective, they’d be more comfortable with having it be server-based payments,” Hswe says. “Having everything on the phone makes people a little nervous, and it’s not because they are worried about their phones getting stolen, rather they don’t have a lot of confidence in privacy and security.”

From a security standpoint, storing wallet features at a central server controlled by the mobile service provider makes sense, but look for mobile service providers to experiment with different business models. Merrick adds that there may be some options for putting payment information on the handset. “With UMTS, you have an enhanced SIM card that you will be able to store encrypted information for authorization and even electronic cash. But my personal view is having intelligence of this kind can be risky in terms of security.”

Merrick adds that in the European prepaid telephony market, operators that had prepaid information on the handset had more fraud problems that those operators that stored information on the network. “My intuitive feel is to have the physical control of balances held centrally,” he says. He also says that in future always-on, packet-based networks and real-time rating and billing systems, for all intents and purposes the customer might think the payment information is on the handset when it’s really on the network. “The network can store prepaid and postpaid balances and do authentication and authorization in real time if it’s necessary,” Merrick says.

Another option that could work in GSM networks is to store identification information in the SIM card and the payment profile stored within the billing system. “The operator would have control of that in a central location, so the information doesn’t go over the wireless connection,” says Chen.

Not only will wireless wallets need to be flexible in terms of payment methods supported, they will also have to accommodate payments for different types of transactions. But these different services will require different business models. “If I go to a store and use a mobile terminal to buy a CD, that’s definitely mobile commerce,” says Merrick. “But what if I download an MP3 to a terminal? Is that value-added content or mobile commerce? I’m not sure because there are no hard and fast borders.”

Most likely, mobile operators will be the ones driving how transactions are defined. “Content will be paid for in a very different manner,” says Strategis Group’s Hswe. “It could be part of a subscription service where you pay ahead of time. We foresee a tiered pricing structure much like there is today in the cable industry.”

“I think there is a significant difference between content and commerce,” says Chen. “With content, the operators are building out networks and are taking a lot of ownership of that; they won’t be building restaurants to build out the commerce value chain.”

There’s also the issue of being able to identify the nature of the transaction prior to payment because sometimes method of payment is predicated on what’s being purchased. For example, a future application of viewing streaming video on a mobile handset may be paid for on a postpaid basis since the user may not know the full value of the content until the transaction is completed.


Rating and Billing Issues

“The challenge for billing systems is that they need to have complex rating functionality especially when you’re talking about different types of content,” says Portal’s Chen. “Also, with 3G networks the billing system may not know what to charge until after a download is complete, so there’s a need for operators to develop relationships with content providers.” He says forging those relationships will become key as billing and pricing models move beyond per minute or per byte.

It may take moving to 2.5G or 3G wireless network before much in the way of wireless wallets even becomes a reality, and that’s due partly to old billing systems. “It gets easier as we move to the next generation of billing systems, but US carriers haven’t gotten there yet and a lot of them have outsourced billing systems,” says AT&T Wireless’ Cone.

For its part, AT&T Wireless is working on upgrading its voice network to GSM technology and will also include GPRS data capabilities. The company plans to launch its new network this year and plans to have 40 percent of its POPs upgraded by the end of the year.

Most other major wireless players are also developing wireless wallet technology, which we may start to see trickle out later this year. BCGI, whose client list includes Verizon Wireless, Cingular Wireless, and AT&T Wireless, says that it is in talks with all the major wireless players about its new wallet product.

Early Adopters

“We are very far behind in North America,” says Portal’s Chen of the mobile commerce market. “A lot of m-commerce [in Europe] is transacted over two-way SMS, which we don’t have here outside of maybe VoiceStream. So to transact m-commerce you need WAP phones, which haven’t been widely deployed or adopted by customers since operators in the U.S. are still very much voice focused.”

However, the backlash against WAP may delay things further in North America. “It might take 2.5G and 3G services to really propel demand and adoption to the level that people have been talking about for so long,” says The Strategis Group’s Hswe.

In a few short years paper currency and checkbooks may go the way of gold and silver as forms of everyday payment. But it will take technology upgrades and significant cooperation among vendors, merchants, and financial institutions to make it happen.