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.
DoCoMo’s near-universal market reach has allowed it to essentially impose its m-payment system on tech-crazy Japanese customers who are typically open to new shopping and banking channels. And with a potentially huge customer base to tap, merchants are more than willing to work with NTT DoCoMo to implement m-payment sensors in their outlets.
In Korea, the telecommunications market is more pluralistic. The country’s three biggest mobile operators — SK Telecom, KTF, and LG Telecom — are currently offering cell phones that can double as credit cards and smart cards. The telecommunications companies take the lead in promoting these systems, while credit card companies manage their financing and operations and share a 2.5 percent cut of all m-payment transaction fees with the other companies involved. One percent goes to subsidize the cost of m-payment phones for customers and 0.3 percent goes to the wireless carriers, leaving 1.2 percent for the credit card companies.
Since the launch of its m-payment system in 2003, SK Telecom, which commands slightly more than half the wireless market in Korea, has signed up 1.5 million m-payment users, approximately 5 percent of the total Korean wireless subscriber base. In other words, by aggressively courting alliances, SK Telecom has reached the same kind of “tipping point” in its customer base — a point where so many people are connected that more and more companies and, in turn, additional customers feel compelled by market forces to join in — that DoCoMo reached through market control.
No single U.S. or European wireless company has the overwhelming market share to set up m-payment systems alone the way DoCoMo has. Instead, they will have to follow the Korean model and work closely with established financial firms — banks, POS network operators, and credit card issuers — along with handset manufacturers and retailers to design a viable mobile payments infrastructure that reaches its own tipping point. This will require a greater degree of standardization than has occurred in the past. For example, the pioneering ExxonMobil Speedpass, a proprietary system for quick, one-step POS transactions, is being eclipsed by its more inclusive open-system rival, the MasterCard PayPass.
Even with industry cooperation, it will be difficult to overcome the traditional cultural bias against using cell phones for exotic applications like financial transactions. However, young consumers in the U.S. and Europe appear to be more open than older generations to customized specialty cell phones on which they can play games, send text messages, conduct GPS location scans, listen to music, and watch videos. With this range of activities, m-payment shopping is a natural outgrowth. Moreover, as new electronic payment systems such as MasterCard PayPass present highly promoted alternatives to debit cards, m-payment cell phones may not seem so unusual.
Two forms of cultural change seem to be required at once for a new infrastructure to take hold. The producers — in this case, banks, mobile phone operators, credit card companies, handset suppliers, and merchants — must embrace alliances to reduce the costs of transactions and work together to achieve coordinated success. Meanwhile, consumers must see and appreciate of the increased speed, convenience, and capacities of the new system.
In short, m-payment systems will meet with little success in the U.S. and Europe unless it is demonstrated to mobile phone users that m-payments are much more attractive than other, more familiar, electronic payment approaches. In the next few years, m-payment features — safety, security, availability, speed, and convenience — will be marketed individually, most likely to target groups with young demographics, the early adopters of new mobile technologies. If these groups indeed change their habits accordingly, they will alter the financial structure of the world around them as well.
Olaf Acker (email@example.com) is a senior associate in Booz Allen Hamilton’s Frankfurt office. He focuses on technology strategy development in the telecommunications industry.
Niklas Dieterich (firstname.lastname@example.org), a principal in Booz Allen Hamilton’s Frankfurt office, specializes in credit card and other consumer lending businesses.
Christopher Schmitz (email@example.com) is a principal in Booz Allen Hamilton’s Frankfurt office. Mr. Schmitz’s areas of focus are strategy and transformation for financial-services, back-office, and IT operations units.