Changing the Contactless Payment Mindset

We’re still a long way from real “smartphones,” but the dumbed-down version of online banking we can now have on our two-inch screens definitely lays the groundwork for ubiquitous devices that work as cash, as well as for contact management and content downloads.

Either the banks or the telecom operators will dictate the models for proliferating smart phone technology. Until recent AT&T announcements around mobile banking, it seemed the banks would be the first-movers toward contactless payment cards and adoption of RFID chips.

Just this spring, MasterCard ran pilots with McDonald's through its PayPass system in Europe, Scandinavia, Canada and the United States. The latter involved a national rollout to 13,500 quick-serve restaurants. And American Express's ExpressPay contactless system went live with 5,000 CVS drug stores.

But now that AT&T has stepped up its mobile banking initiatives with an increasing number of banks, it seems there is a chance for wireless carriers to dictate the business model for future machine-to-machine applications. If wireless carriers succeed in becoming the “issuers,” or the mobile wallet account “keepers,” it will be their brands to which consumers associate “killer apps” down the road. Other than driving up loyalty, it would mean wireless carriers, not the banks, could dictate how the fees and usage structures evolve. It would also mean wireless carriers would have power to drive merchants and content providers to their networks, and to their customers.

It will be an interesting battle for the customer. Banks already look at wireless networks as a way to drive more people to their Web sites. For example, AT&T customer BancorpSouth noted a 15 percent traffic increase to its Web site after going live with mobile banking on AT&T handsets earlier this year.

One can look abroad at NTT DoCoMo to see how important contactless payments are expected to be. The Japanese giant predicted it would spend nearly $1 billion to buy a 34 percent stake in the credit card unit of Sumitomo Mitsui Financial Group Inc., Japan’s third largest bank. The goal is to make DoCoMo’s “mobile-wallet,” i-mode FeliCa the leading choice for contactless quick purchases at various stores.

KDDI and Vodafone also use NFC chips and sell Mobile FeliCa handsets to generate revenue from merchants, like Japan’s giant commuter rail operators.

In Europe, secure chips and SIM cards are already powering contactless payments.

In the United States, however, consumers are still somewhat attached to physical credit cards. They remain the dominant payment method, and PCs are the prevailing method for Internet connection. According to Celent, approximately 46 million households bank online.

But more and more, the Generations X and Y, as well as Baby Boomers, are demonstrating a willingness to consolidate devices. Rather than fumble with BlackBerries, phones, keys, credit cards and wallets at every checkout line, customers want convenience. It’s for that reason that ABI Research predicts that by 2010, at least half of all mobile handsets will incorporate NFC chips.

It will be interesting to see if the AT&T announcements galvanize the industry as a whole.

Of course, resolving billing and payments will be a key deciding factor. Merchants can sign contracts with either telcos or banks so as to enable accounts to be credited with cash whenever consumers pay for goods or services.

IBM, which last month in Singapore launched a Smart Poster Management System, predicted that companies like utilities will want to partner with either banks or wireless carriers that can offer faster receivables for millions of dollars in bills. If users can receive text messages from an electric company on their cell phones, IBM believes bills will be paid much faster because of the flexibility to pay on the spot and on the fly. That will mean wireless carriers would possibly be sought out by the likes of large utilities. Of course, they have the advantage over banks, because they already support pre-paid and post-paid billing models.

The difficult part will be settlement among partners. Credit cards, stored values and a combination of SMS charging, direct bill charging and direct-to-bill payment arrangements will complicate things as the number of stakeholders and services grow.

Billing and settlement platforms will have to support different models, whether merchant-to-consumer (charge to bill) or person-to-person payments analogous to PayPal.

Carriers will have to seek out billers that have built platforms flexible enough to accommodate myriads of customers. The bundles, promotions and complex merchandising will require complex financial settlement. Either carriers will turn to third-party interactions with billing systems to manage the process, or they will attempt to build systems in-house.