Global Economics

Contactless Payment Comes to Cell Phones


Flash your handset and buy. An industry group wants to bring that facility to the world. But is it secure? And who gets what share of the profits?

Thirsty? Short of cash? As long as you've got your mobile phone with you in Japan, that's not a problem: simply by pressing your handset onto a sensor on a vending machine, you can buy a can of Coke.

Such "contactless" forms of mobile commerce have been a hit with consumers in Japan and a handful of other Asian countries for several years. But now an industry group of handset makers, mobile operators, and service providers have been working feverishly to develop a universal standard that will give it widespread appeal.

It's easy to see why so many players are keen to get in on the act. Consultancy Strategy Analytics, in Milton Keynes, England, forecasts that mobile-phone-based contactless payments will account for more than $36 billion in consumer spending by 2011, up from $900 million now. The bulk of that should be in Asia.

Security Issues

But while the concept of a mobile "wallet" is intriguing, experts caution that industry players will need to allay consumer concerns about security to ensure wide uptake. What's more, they say, industry players could be shooting themselves in the foot and hampering momentum unless they resolve payment issues that currently discourage mobile operators to adopt the service.

Those living in large cities such as New York and London are already familiar with the technology, so-called near-field communication. It's the same short-wave wireless communication commonly used in contactless subway tickets.

Migrating the technology onto your mobile is the next logical step says the industry group, known as the NFC Forum. A mobile NFC device can act in the same way as a contactless smart card, which communicates with a reader over just a few centimeters. This leaves little margin for error and minimizes security risk.

Wider Applications

Forum members including former Philips chip unit NXP Semiconductors, handset maker Nokia (NOK), and Visa International and MasterCard (MA) are at the vanguard in promoting the effort and have been conducting trials for more than two years. Most schemes entail using phones such as Nokia's 3220 in the same way a person would use a debit card to pay for small items such as bus or train tickets, or retail goods at sporting events.

While most of the focus now is on using it as a cash substitute, possible applications are far wider. Norway's Telenor (TELN) is piloting NFC in a business setting to help departments check goods, for example, and find other ways to manage assets more efficiently. The NFC forum has recently come out with a standardized format for a so-called "smart poster" which will enable a handset user to obtain data such as a URL or a ringtone from a poster or other printed material.

And downloading film promos and movie times is not far off, says Christophe Duverne, senior vice-president and general manager for identification at NXP Semiconductors, and chairman of NFC Forum.

Success in Japan

If Japan is anything to go by, the contactless pay system should be a roaring success with European consumers when it's rolled out commercially. Since NTT DoCoMo (DCM) debuted mobile phones using Sony's (SNE) FeliCa contactless system three years ago, it has sold more than 13.8 million handsets, for a penetration rate of 27%, according to Strategy Analytics.

Applications are increasingly sophisticated and two-way. The readers can be programmed to zip coupons, ads, or other promo information to the phone while the payment is being made.

That's what the NFC Forum envisions on a global basis. Although one commercial project has just begun in the German town of Hanau that allows phones to be used as electronic bus tickets and loyalty cards, and for discounts at local outlets, Duverne says there will be a wider commercial rollout in 2007.

To make this a reality, on Nov. 20 NXP Semiconductors and Sony—both members of the NFC Forum—say they're teaming up to develop a secure chip that will facilitate interoperability of the companies' contactless technologies. That will allow handset makers and service providers to roll out offerings that work on all the different contactless-payment operating systems (see BusinessWeek.com, 11/20/06, "Sony, NXP Team Up on Wireless Chips").

Potential Privacy Problems

NFC-enabled phones eventually will become full-fledged electronic credit cards, just as FeliCa phones have already done in Japan, Duverne says. To allay consumer security fears and encourage uptake, this will go hand in hand with a variety of protective features. Most commonly, it will require consumers to enter a code to confirm a transaction, just as they do now with a "chip and pin" smartcard.

Not everyone is convinced consumers will be so easily swayed. The potential for crime with a mobile "wallet" is like putting petrol and matches together, argues Mike Bowen, British spokesman for the European Security Transport Assn., a lobby group. The topic also raises privacy issues, he says, because authorities can closely monitor buying patterns and behaviors. "The benefit of cash is its anonymity," he says. Consumers may not even get a chance to test the waters if the industry players can't sort the business model out, however.

According to a Visa study, purchases using contactless technology are as much as 25% faster than those made with cash—which is good enough incentive for any retailer to invest in the NFC readers.

Who Gets What?

It's more complex for mobile operators amid uncertainty about the merits and costs of incorporating the technology into their handsets, writes Nitesh Patel of Strategy Analytics in a recent report. NFC's Duverne argues that mobile contactless services will serve as a platform to drive traffic to operators' other data applications. There's also the thorny question of how revenues will be divvied up among banks, mobile operators, and service providers, and others involved in the transaction.

"Both banks and mobile operators are used to keeping control," says Jonathan Collins, a senior analyst at ABI Research, who adds he's "cautious" about a quick uptake until these issues are ironed out. ABI, which earlier this year expected 50% of all handsets to be NFC-enabled by 2011, recently downgraded its forecast to 30%, or 450 million units, citing continued friction between banks and operators.

Still, a recent joint venture between Nokia and Germany's Giesecke & Devirent, the world's second-largest maker of smartcards, may go some way toward resolving the issue because it effectively creates a third party to handle over-the-air payment instead of leaving the primary players to resolve the issue.


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