Tuesday, March 29, 2005

The Cell Phone Gets Another Job

From Bankrate.com Paying by cell phone on the way .

Cell phones have revolutionized the way we live. In addition to enabling us to stay in touch with family and friends while on the go, our mobile phones also play music, download sports scores, send text messages, receive GPS directions and snap photographs.

What's next? Soon your cell phone will very likely replace your wallet for making payments on the fly.

It's just part of the growing "contactless" or proximity payment movement. The stars have finally aligned among telecommunications service providers, credit card issuers, cell phone manufacturers, merchants and busy consumers to make such payment methods the next logical step to streamline everyday commerce.

Cellular carriers view payments as a way to boost user minutes and instill customer loyalty. For credit card issuers, cell phones offer a golden opportunity to cop a share of the lucrative cash payments market. Cell phone makers need new functionality to sell more units. Merchants speed up the payment cycle without expensive equipment changes. And busy consumers save time standing in line for their lunch or latte.

This year, McDonald's plans to expand its pilot with MasterCard's PayPass proximity payment program into a national rollout to its 13,500 quick-serve restaurants in the United States. Major drug store chain CVS is going national as well with American Express's ExpressPay contactless system at all 5,000 of its U.S. locations.

"This year, you're going to see lots of trials, both in contactless cards and cell phones," predicts Erik Michielsen, director of radio-frequency identification (RFID) and ubiquitous wireless research for ABI Research of Oyster Bay, N.Y. "You're going to see these companies really hammer the small-payments space for a while; they don't want to cannibalize their existing card business. We really see this taking off and gaining momentum in 2006 and full speed ahead in 2007 and 2008."

Flash instead of cash

Contactless payments rely on radio-frequency identification and near-field communications to carry account information from a chip embedded in a form factor (credit card, key-chain fob, cell phone, wristwatch, etc.) to a merchant's point-of-sale terminal. Once the two connect via wireless network, a credit or debit transaction can be completed within seconds.

No more fumbling for a credit card or cash, no more swiping a card and waiting for the green light, no more signing a receipt. Just flash your phone within inches of the merchant's receiver and you're outta there.

Cards won't disappear, of course; your phone, after all, won't fit in an ATM or be usable at nonwireless merchants. But don't be surprised if you receive a radio-frequency-enabled card, minicard or fob from your credit card company in the next two years. The thinking is that contactless cards will catch hold first, with cell phones to follow.

Americans have used proximity payments for several years, sometimes without knowing it. The most visible contactless payment systems enable commuters to whisk through tollbooths in the tri-state New York area, Florida, California, Washington, D.C., and elsewhere. The most ubiquitous consumer program to date has been the ExxonMobil SpeedPass, which enables participants to gas up and go by waving their fob at the pump. You may even use an RFID card to gain entry to your office building.
The good news from the card issuer's perspective is that American merchants and consumers generally like what they've seen of contactless technology so far. There's none of the negative baggage or technical mumbo-jumbo that hampered, say, smart cards.

"Merchants lose money by having customers stand in line," says Sue Gordon-Lathrop, vice president of consumer products platforms for Visa International. "Waving your card or your phone really does speed things up. I watch people and, while the [smart card] chip is nice, how do you orient your card with the chip? Does it face me or the terminal? There's a fumble factor there. With magnetic stripes, how many times have you seen someone swipe their card and it didn't pick up the read? So there were a lot of merchant drivers toward faster consumer experience."

The card companies found another pleasant surprise during pilot testing: Contactless buyers spend more.

"Our studies show that the length of time for an ExpressPay transaction is less than both cash and credit card transactions, and customers using ExpressPay increase their average transaction size 20 to 30 percent compared to cash spending," according to American Express spokeswoman Judy Tenzer.

Ah, sweet words to the card companies and bank card issuers; they've been trying for years to figure a way to tap the lucrative small-payments space where busy Americans tend to spend cash instead of digging out their credit card. Discover card and other issuers even invested in mini-cards such as Discover2Go in an attempt to get that mag stripe out of your pocket and onto your key ring where you'll use it for small purchases.

Dialing for dollars

And what do we tend to have in our hands most often these days? You guessed it.
"When you start talking to people, they'll say, 'You know what? When I leave home, I may not have my wallet, but I do know I have my cell phone,'" says Gordon-Lathrop.
Oliver Steeley, vice president of wireless payment devices for MasterCard International, agrees.

"We did some research last year and consumers consistently tell us that the cell phone is the form factor that they are most interested in having PayPass in, in addition to their existing card," he says. "So we've been working for some time with cell phone manufacturers to make this happen."

Cell-phone manufacturers Nokia and Motorola have been working with the credit card companies to develop new wireless payment features. Steeley says Motorola plans to introduce a payment-enabled shell for its 3220 model this spring.

Several factors would seem to portend rapid adoption of contactless payment in the United States:
· It works with existing mag stripe payment infrastructure. Merchants can inexpensively add on a wireless receiver or upgrade to the new point-of-service terminals that are already integrating near-field communications. Consumers will simply have a broader choice of form factors with which to pay (under consideration: pens and even earrings).
· There are few security issues. Your device must touch or pass within a couple inches of the reader to complete a transaction. The process might even be more secure than your credit card.
· It's an open architecture. The card companies have agreed to standardize the protocols for radio-frequency identification in the payment arena (impress your geek friends: it's called ISO 14443), much as they did with the mag stripe. That means that one day, your phone, like your wallet, will contain a variety of credit accounts from which to choose; you won't need a separate handset for each card brand.

Just how all of this will work in your phone is still being worked out. In Visa's as-yet-unnamed contactless program, there would be no air minutes involved; you would power on your phone solely to enter a password or PIN number to initiate the transaction.

"We strongly recommend password protection so that, if I drop my phone, you can't pick it up and conduct payment," says Gordon-Lathrop. "This may be sacrilegious to the card world, but that is more secure than a card transaction because if I drop my card on the ground, you could go under the floor limit (buy less-expensive items that wouldn't flag the fraud prevention system) and still conduct payment."

Steeley says MasterCard has been exploring ways to integrate contactless payment with other cell phone functions in an effort to boost the business case for handset manufacturers to integrate near-field communications chips into their phones. Because this would enable the phone to operate as both an radio-frequency tag and a reader, it could be used for unlimited promotional opportunities.

For instance, in PayPass pilots with the Seattle Seahawks, Philadelphia Eagles and Baltimore Ravens, your phone might access an embedded URL in a poster that would take you to a Web site where you could enter a contest for tickets.

"In the commercial model, banks don't buy cell phones, the carriers do. So there needs to be something in it for the cell phone carrier, otherwise why are they going to buy a more expensive handset that helps the banks but doesn't make them any money?" says Steeley.

Added plus for card issuers: They could load account information directly onto the handset.
"In the U.S. last year, MasterCard banks sent out around 60 million credit cards through the mail. You save 20 cents postage on that alone and that's about $12 million," Steeley adds.

Moving beyond the saturation point

Coincidentally, the three driving industries have all been struggling with the same issue: saturation.

Simply put, everyone has a credit card who wants one, everyone has a cell phone who wants one, and quick-serve restaurants (QSRs) and other fast-service businesses are moving as fast as they can with the present payment systems. Credit card issuers now look to cash spending, not other credit cards, as their chief competition. New functionality is the holy grail for cellular providers, and fast-moving merchants need a way to put more customers through the registers.

"If you take QSRs for example, 86 percent of those transactions are under $25 and the mean is about $12, and yet we probably get less than 10 percent of those transactions paid by card today," says Steeley. "If we can shift that from 10 to 20 percent, we will double our volume in a huge sector. And for McDonald's, even if all we do is shave two seconds of fumbling in the line per transaction, two seconds for somebody like McDonald's is a huge productivity improvement."

Bottom line: Ka-ching! Contactless payments are coming your way soon. Recharge your phone battery and prepare to pay.

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