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 / Spring 2006 / Issue 42(originally published by Booz & Company)


Dueling Technologies at the Point of Sale

Paying with a mobile phone is big business in Japan and Korea, but hasn't yet caught on in the United States.

Are the United States and Europe destined to be economic also-rans to countries that have learned to use cellular telephones in place of cash or credit cards? Commonly known as mobile payment or m-payment, cell phone–based payment systems have evolved in recent years. Initially, a voice connection or a text message was required to initiate and settle a transaction, but today’s m-payment customers simply wave their phones over a sensor to complete a purchase on the spot.

M-payments are big businesses in Japan and Korea, used for millions of transactions a month at restaurants, cinemas, convenience stores, and elsewhere. M-payments have a lot to offer consumers and companies: easier and faster checkout, lower transaction and operational costs, and built-in passwords that ensure security.

Mobile phones can also support innovative security measures like virtual credit cards, in which customers use randomly generated credit card numbers for each purchase to avoid identity theft. Unlike credit cards, mobile phones can also tell consumers at the point of sale (POS) how much money they have available to debit or borrow.

But although they could transform the purchasing experience, these systems have so far failed to spark much interest in the United States and Europe. The reasons reveal a great deal about the prospects for innovative financial services, and about the underlying nature of infrastructure change.

One problem is that in the U.S., credit and debit cards processed over established POS networks are already entrenched, accounting for 70 percent of retail transactions. Moreover, U.S. and European consumers tend to be conservative about electronic payments; they do not yet perceive the handset to be a secure way to pay. The use of mobile phones as de facto identity authentication devices makes some people uncomfortable. And in the U.S., where mobile phone companies charge for incoming calls, customers may perceive bank messages as an irritant that “nickel-and-dimes them to death,” as one expert put it.

But the experiences of companies that have developed m-payment systems in Japan and Korea suggest that all of these issues are resolvable. At heart, m-payment systems have foundered in the U.S. and Europe because proposed programs have lacked sufficient cross-industry cooperation from banks, credit card issuers, and telecommunications companies. For example, the biggest European m-payment initiative yet was Simpay, a project developed by some of the largest wireless carriers in the European Union — including Orange, Vodafone, T-Mobile, and Telefónica Móviles — but with no partners from the financial-services industry. When T-Mobile backed out, the project was scuttled because it could no longer promise seamless transactions on virtually every major European cellular network, its main advantage over proprietary payment models.

Two quite different business conditions are responsible for the success of m-payments in Japan and Korea. In Japan, the wireless telecommunications market is dominated by NTT DoCoMo Inc., which has used its near-monopoly position to drive mobile innovation. In 1999, DoCoMo introduced a Web-based wireless system called i-mode that offers subscribers access to nearly 100,000 Internet sites for information, entertainment, and online shopping. In short order, as many as 45 million subscribers signed up for i-mode — 50 percent of Japanese cell phone users.

The latest i-mode device, introduced in 2004, is a handset equipped with Sony’s FeliCa semiconductor chips, which were initially implanted in public transit smart cards. These phones can be operated at 24,000 DoCoMo-installed m-payment sensors throughout Japan. The results are impressive: Five months into the program, at the end of 2004, DoCoMo had sold more than 1 million phones equipped with FeliCa chips. It expects to hit 7 million in the first quarter of 2006, exceeding the rate of adoption of i-mode.

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