Sunday, July 26, 2009

Charge My Mobile or Who Swiped My Wallet?

With the recent announcements by Visa, Google, Chase and Nokia, mobile phone payments in the US are a near-term certainty. The forces driving adoption and market penetration are entrenched players in wireless and financial transaction markets. Soon you’ll be hearing a lot about a wireless technology known as near-field communication (NFC). Near-field is about to do for mobile media what e-commerce did for the Internet, only on a much larger scale.

Credit issuing banks are going to increase their share of retail market spending or customer wallet by providing the convenience of mobile payments and advantage of mobile tracking of spending and expenses. Using radio frequency identification (RFID), mobile phones are to be used for small ticket item purchases instead of credit cards. Already available in Malaysia, Thailand, Japan, The Netherlands and now the UK, NFC enables mobile phone payments at retail terminals, transit systems and vending machines. In the US, “proximity” payments will enable consumers to pay with their mobile phones in place of plastic.

According to the Smart Card Alliance, there are already close to half a million contactless NFC terminals in the US. These readers support RFID wireless technology currently deployed for smart cards (a credit card embedded with an RFID chip). Smart card technologies include MasterCard’s Tap – I know that’s an unfortunate choice of words these days – and Visa’s Wave. Catchy branding sounds good but no one’s waving any credit card bills and most Americans are tapped already. Smart card penetration has reached about 10 percent of the credit card market but that’s not really the end game for credit issuing banks. I have yet to see anyone physically tap or wave a credit card. I doubt there’s any added convenience to waving a card at a terminal, certainly not enough to change behavior. People have learned to slide credit cards through payment terminals – ironically the term for this action is called “swipe.” Smart cards were clearly an interim step on the path to mobile proximity payments.

There’s nothing inherently “smart” about smart cards, so privacy advocates, please don’t get unraveled. The RFID tag in your credit card is a storage device, not a processor. RFID tags embedded in smart cards, are intended for reading by an external card reader in the terminal. If you’re thinking that wireless transmission of your personal credit card data may be a bad idea, you’re not alone. There are numerous articles written about security, fraud and privacy. RFID has been the subject of heated debate. An RFID tag is basically used for wireless tracking of items. Although the broadcast range in smart cards is limited to a few centimeters and the data has been securely encrypted, third party readers that get within range could access those cards. Hacking RFID tags has become a pastime for Stanford undergrads and makes great fodder for industry trade rags.

The major difference between smart cards and mobile proximity payments is that mobile phones are equipped with RFID readers. Mobile NFC payments do not use the same write-once-read-many (WORM) configuration as smart cards. For one thing, the mobile phone uses an NFC reader writer device configuration. NFC can be activated and deactivated as needed by the mobile phone user. For another, the mobile phone can both send and receive signals using multiple protocols. Mobile phone payments offer far more robust functionality in terms of payment security, verification, access and tracking than read-only smart cards.

There’s plenty of incentive for wireless carriers to deploy RFID readers through their handset manufacturers for transactions. US mobile network operators have an installed base of more than 260 million subscribers from which to monetize transactions. Within the GSMA (an international wireless industry trade association) there are 721 mobile phone operators across 218 countries. Nearly half of the mobile network operators (MNO’s) in the Global System for Mobile Association (GSMA) are involved in the world-wide NFC initiative and reach more than 800 million customers.

Most retailers are familiar with RFID for supply chain management, inventory and shipping but mobile media is altogether different and still fairly new to marketers. The retail industry began implementing RFID for managing and tracking inventory as early as 2000. Manufacturers tag pallets using RFID embedded with an Electronic Product Code (EPC) to track shipments and manage inventory. In retail security, items tagged with RFID will set off alarms at security kiosks located at store exits. As early as 2004, Prada, an upscale retailer in New York installed RFID technology in smart closets. RFID tags on products trigger corresponding product video to play on displays located in store dressing rooms. A similar configuration using smart shelves was recently deployed this year in Germany for merchandising P&G hair care products. While retailers are familiar with the various implementations of RFID for security, tracking and even merchandising, most US retailers haven’t implemented mobile for payment systems, loyalty and point-of-sale (POS) redemption. Retailers just now seeking answers about mobile media are already behind the technology curve. Fortunately, there are several options for brining mobile payments to retail including mobile loyalty, pre-paid credit cards, stored value, and third party merchant transaction services.

Mobile proximity payments along with other NFC uses will change everything we understand about retail, merchandising, mobile and traditional media. Consider the matter of consumer and industry adoption a relative certainty. Mobile phone payments will replace credit cards and ultimately cash for retail purchases. Which players will most effectively leverage mobile NFC technology to offer customer convenience, extend reach and grab media market share is still the only mystery.

The mobile phone-as-payment method broadens the retail, financial transaction, wireless and media network playing fields. In the m-commerce environment, network operators and media distribution networks have as much at stake in financial transactions as credit issuing banks. Last year, Visa formed partnerships with Chase, Google, Nokia and US Bank with a launch of mobile payments targeted in Q4 2009. Soon, brick and mortar retail should offer all the advantages of e-commerce. The fact that more than seventy percent of purchases searched online are transacted in-store seems to indicate that mobile proximity payments may already be more aligned with consumer behavior.

Within the year, alliances will be drawn between online media networks, transaction services and wireless network operators. Wireless carriers may become banks, handset manufacturers may become media networks and media networks may purchase handset manufacturers. If activity in Japan is any indicator, DoCoMo’s purchase of a 35% stake in Packet Video as well as acquiring interests in several banks globally should tell us something about media and technology convergence. As wireless MNO’s are running out of new subscribers to sell plans to, they’re looking for new sources of revenue. There is certainly opportunity in this scenario for new entrants to invent wireless media and mobile purchases in a way that consumers will embrace.

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