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(originally published by Booz & Company)


Making Mobile Payment Work for Everyone

The key is cooperation among all the stakeholders.

For most of the world, turning the dream of mobile payments into reality has long met with frustration. M-payment — shorthand for using a cell phone to pay for goods and services — has morphed over the years. In its early form, it involved using a voice or SMS connection to initiate and settle a transaction; lately it has evolved into a far more convenient process that turns cell phones into one-step instant payment devices. Customers simply wave their phones over a sensor and the transaction is completed on the spot. For consumers, mobile payments mean no more fishing for credit cards or cash, and, with prepaid services, no more monthly bills to worry about. M-payments are catching fire in Japan and Korea, but have so far failed to spark much interest in Europe and the U.S. The efforts in those two regions have faltered mainly for two reasons: The technology wasn’t in place, and the stakeholders — banks, credit card issuers, handset makers, and telecommunications companies — have worked at cross purposes. But all that’s changing. Recent advances in handset, chip, and mobile network technologies and upgrades to the point-of-sale infrastructure along with better teamwork among the players have dramatically improved the environment for mobile payment solutions across the globe.

Lessons from Asia
To understand why m-payments face an uphill battle in Europe and the U.S., it’s instructive to understand why they’re taking off in Japan and Korea. The chief driver of mobile innovation in Japan is NTT DoCoMo, far and away the country’s leading wireless provider. So dominant is its position that DoCoMo can impose a new system from the top down, as it did in 1999 with i-mode, its breakthrough digital data service, which now claims 45 million subscribers. Although i-mode did not initially provide for mobile payments, it successfully laid the groundwork with customers for that functionality.

The latest step in the evolution of the cell phone is DoCoMo’s venture with Sony. The wireless company is now implanting Sony’s FeliCa contactless chips, which were initially used in public transit smartcards, into its cell phones, giving customers the ability to pay for train fare, theater tickets, and a growing array of other products by passing their phones over a sensor. The results are impressive: Five months into the program, at the end of 2004, DoCoMo had sold more than 1 million FeliCa-equipped phones and expects to hit 10 million by the end of 2005, exceeding the rate of adoption of the wildly popular i-mode.

The important point here is that NTT DoCoMo’s complete dominance of its market allows it to impose its new cashless, contactless payment scheme from the top down with relative ease. Customers, who’ve had six years to get used to using their phones as lifestyle tools rather than just as communications devices, have demonstrated that they’re eager to take advantage the m-payment function. Merchants want to tap into a large and growing market (DoCoMo tempted those who weren’t initially ready to pay for the new point-of-service technology with subsidies). And DoCoMo didn’t need the buy-in of banks and credit card companies at the outset to make the whole thing fly (although it does plan to work with both to expand its business beyond the prepaid model).

The situation in Korea is slightly different. All three of the country’s biggest mobile operators, SK Telecom, KTF, and LG Telecom, are now offering cell phones that can be used as credit cards and FeliCa-style prepaid smartcards. While telecommunications companies are driving the new systems, they’re working arm-in-arm with credit card companies, which are taking care of the financing and operations, taking less than half their usual 2.5 percent cut. One percent goes to subsidize the cost of the phones for customers, and 0.3 percent goes to the telecoms, which own the m-payment technology, leaving just 1.2 percent for the credit card companies. But, for now at least, that highly cooperative arrangement works well for everyone as the stakeholders join together to build their customer bases and increase revenues.

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  1. Raul L. Katz, “Irrational Exuberance: How the Telecom Industry Went Astray,” s+b, Summer 2003, Click here.
  2. Helmut Meier, Roman Friederich, and Hanno Blankenstein, “A Master Model for Mobile Multimedia,” s+b, Spring 2004, Click here.
  3. Helmut Meier, Roman Friedrich, Hanno Blankenstein, and Alexander Froment-Curtil, “How Wireless Carriers Will Make Mobile Data Pay,” s+b enews, 10/23/03, Click here.
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