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American Banker  |  Tuesday, August 3, 2010

A mobile payments effort seemingly designed to exclude banks may accomplish the exact opposite.

Financial companies have for years been pushing the idea that mobile phones could be used to initiate transactions, and though test after test has validated the technology, the banks have always come up against the same barrier: wireless carriers’ apparent lack of interest in including the necessary hardware in their phones.

Until now.

According to reports that emerged Monday, several major wireless carriers are collaborating to create a new system that would let consumers make purchases with their phones.

While analysts agreed that a payments network driven by phone companies would pose a significant threat to banks and card companies, they also said that such a system would increase consumer interest in the technology, and that once the hardware is widely available, financial companies also could find ways to take advantage of it.

“Once you build the rails for a payments system, excluding someone else is difficult,” said James Van Dyke, the president and founder of Javelin Strategy and Research in Pleasanton, Calif.

If the wireless carriers are able to create a functioning financial network, “it’s a way to get more mobile payments out in the world,” Van Dyke said. “Visa and MasterCard and the banks aren’t going to get frozen out.”

Bloomberg News was the first to report that AT&T Inc., Verizon Wireless and T-Mobile USA were working together on a payments system, along with Discover Financial Services and Barclays PLC. The consortium plans to test the system in Atlanta and three other U.S. cities.

Banks and carriers have collaborated in the past on mobile payments trials, but analysts said this effort appears to go further. In the model that has been most commonly used, an issuer and a carrier would team up to offer consumers phones featuring near-field communication chips — the same chips used in contactless payment cards. These phones were used to make purchases charged to users’ existing card accounts.

The new approach also is most likely based on NFC, but it could involve different payments accounts. Philip Philliou, a payments industry consultant and managing director with Philliou Selwanes Partners LLC, speculated that carriers, not banks, would administer the accounts. The funds could be stored at Barclays — because the phone companies have no interest in becoming depository institutions, he said — and the transactions could move across the Discover network.

“This could very well be the creation of a new payments system that resides on the mobile device,” Philliou said. “I read this as the telcos forming a consortium focused on payments. ‘Game on! We’re the new kid on the block in the payments world.’ “

Verizon, AT&T, T-Mobile (a Deutsche Telekom AG unit), Barclays and Discover all declined to comment.

Todd Ablowitz, the founder and president of Double Diamond Group LLC, a Denver payments consulting company, said that the carriers’ project would likely generate more consumer interest in using phones to make payments, and whether it involves an upstart system or traditional card networks, “this will drive more interest in what banks can do.”

The lack of NFC chips in phones has been one of the major barriers for banks wanting to offer mobile payments services. Ablowitz said that by installing the components to develop their own network, the carriers could also open the door to other companies that would like to use the same capabilities.

However, he also said there are ways that carriers could make it very difficult for banks to capitalize on the NFC features. AT&T, for example, uses a format called the single wire protocol that enables it to sequester a user’s financial data within a phone’s SIM card.

While third-party designers might be able to write apps that could access a smartphone’s NFC chip, only the carriers can access SIM cards, which control access between the handset and wireless network. “That makes it impossible for banks to tap” financial data stored on a phone, Ablowitz said. “This freezes out banks, to a point. Not entirely.”

He said banks could find other ways to use NFC chips, though they might not be as efficient as systems that are built into phones.

A MasterCard Inc. spokeswoman said by e-mail Monday that the company is “confident that we will be at the center of delivering the next generation of mobile payments.” A Visa Inc. spokeswoman did not return calls.

Not everyone sees the value of the carriers’ efforts. Jason Kupferberg, an analyst with UBS Securities LLC, questioned whether consumers have an interest in making purchases with their phones.

Mobile payments are “solving a problem that doesn’t exist,” he said.

A breakout hit for real-world mobile payments in the U.S. is still a year or two off, despite the emergence of superphones and rich ecosystems with hundreds of thousands of apps, said panelists at VentureBeat’s MobileBeat2010 conference today.

While there are notable mobile payments startups cornering the virtual goods market, like Zong, a viable phone-based rival to the credit card has yet to emerge. The primary barrier isn’t the technology itself, but rather the level of credit penetration in developed markets. In contrast to the U.S., in Asia and Africa, where the majority of phone owners have virtually no access to credit, sophisticated SMS-based mobile payments systems like Safaricom’s M-Pesa have emerged.

“The value-add has to be clear,” said Tarang Shah, the senior vice president of innovation at Bank of America. “In developing countries, the pain of moving cash is high. That’s not the case in developed countries.”

He added, “We’re still a few years away from real products.”

Still, he did say that finance institutions like his employer recognize that consumers are starting to demand banking solutions on their phones. Competitor JPMorgan Chase & Co. began letting customers deposit their checks via iPhone earlier this month, for example.

Panelists agreed that big brands and small businesses alike stand to benefit from mobile payments. Small businesses could use phones to track loyalty and offer rewards, while big brands could use payments apps as another avenue to market to consumers. Operators might be able to step in but only if they add “real value,” said Mohammad Khan, the founder of Vivotech, a provider of near-field or contact-free payments software.

Mobile payments applications may also raise privacy concerns as banks and credit cards companies like Visa collect even more granular data about consumer habits.

“We have data points about consumer behavior that are unbelievable, but we don’t use it unless we get consent,” Shah said. Indeed, other consumer-based location-apps like Loopt have been approached for aggregate check-in data by hedge funds that want to predict the performance of retail stocks. (If a store receives more check-ins, that could serve as evidence that its earnings might fare well during a financial quarter.)

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Tags: mb2010, mobile payments, MobileBeat

Companies: Bank of America, Vivotech

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