Mobile payments

As mobile markets continue to mature, being able to pay using the mobile handset will be key to the development of next generation services. Ever since the launch of DoCoMo’s i-Mode service in 1999, mobile operators the world over have rubbed the their hands with glee at the prospect of mobile commerce. The payment process is crucial – although Forrester Research claims that the mobile payment market will be worth $22 billion by 2005, the evolution of payment services has been hampered by, among other things, the absence of a ubiquitous security standard. This issue is not new: indeed, the spectre of credit card fraud on the fixed internet largely informs the wireless industry’s concerns.

As such, there has been a plethora of standards groups established to create a trusted solution – Mobey Forum, MeT and PayCircle to name a few. Comprised of mobile operators, banks and device manufacturers, their efforts have been at the expense of unanimity. One group, Radicchio, favours the use of a technology called PKI (Public Key Infrastructure) to encrypt the payment channel between customer, operator and merchant. A cutting edge technology, for sure – but has such rigour come at the expense of the consumer and a convenient service?

One of the most successful mobile payment services to date comes in the form of Paybox. Available in UK, Germany, Sweden, Austria and Spain, it ignores the mobile internet and PKI, relying instead on just a four digit PIN in addition to the customer’s mobile number. In this way it works with any terminal and on any network – a level of convenience that has allowed the company to steal an early march on other European competitors. Backed by investor Deutsche Bank and working with retailers, Paybox teamed up with US-based PayStar in February 2001 in order to launch a ‘PizzaFone’ service with an as yet unnamed national pizza franchise where orders are paid for on delivery using a cellphone.

The United States is the scene of further innovation courtesy of big brands such as McDonalds and Starbucks. In the Seattle area, both firms are allowing customers to create pre-selected menus on a web-site for one-click orders from mobile terminals. McDonald’s McQuick service uses a pre-paid account – both services levy a transaction fee of between 15 and 25 cents.

As consumer giants clamour to exploit the mobile channel in a bid to boost the convenience factor, mobile operators are taking a variety of routes towards secure m-payments. Taking a lead from Paybox’s network independent success, Finnish operator, Sonera is promoting its new payment platform, Sonera Shopper. Dependent on SMS, it operates with the same payment protocols as the major cash and credit card networks. This is telling when you consider that, a year ago, Sonera was one of the pioneers of cutting-edge payment solutions. It has since ceased marketing its wireless vending machines – low cost items such as sweets and drinks need a high volume of sales and the ‘tromboning’ between handset, network and vending machine can be problematic.

Although mobile payments must be easy-to-use and fit with existing payment structures, this is not to say that simple SMS services are all that is on offer. Vodafone’s February announcement of its m-pay bill service is important, paving the way for mobile operators to build on their existing billing relationship with customers without banks muscling in. Allowing UK customers to pay for low-cost goods of between five pence and five pounds, the Vodafone service has signed up content providers such as Arsenal FC and the Rugby Football Union. Its target segments are customers who don’t have a credit card or would rather not use one for small purchases.

Credit and debit card companies may serve high-end transactions well, but the Vodafone service paves the way for operators to corner the burgeoning micro-transaction market. Moreover, it caters for both the fixed and mobile internet, accommodating WAP and SMS platforms while retaining a consistent experience thanks to an XML-based user interface. It redefines the SMS model by charging for receiving texts from content providers – transactions are then simply added to the user’s monthly bill.

If the Vodafone service finally shows operators waking up to a lucrative revenue stream, co-operation between banks and operators is still the name of the game for high-end transactions and mobile banking. Advances on this front have been haphazard – each fears the other will steal its market, despite a grudging acknowledgement that only through partnership can either side prosper. Banks have the trusted brand while operators want to extract value from their subscriber bases without the involvement of players from the financial sector.

Mobilkom in Austria has taken some unique steps to ensure it retains its position in the mobile payments chain. Taking advantage of the recent EU directive on EMI (Electronic Money Institute), it is to offer micro-payment and billing solutions via a fully-owned subsidiary – A1 Bank. During 2001 the operator handled 42,000 mobile ticketing orders and is keen to capitalise on this by way of its bank. Such a move also ‘locks in’ customers, increasing their loyalty to the network.

Nevertheless, some of the most successful mobile payment initiatives have resulted from solid bank-operator partnerships. Mobipay in Spain is leading the way as a service that brings together both mobile carriers and financial institutions with the promise that both sides will benefit. In other markets, the relationship is less generic – between one operator and one bank (e.g. Postbank and Telfort in the Netherlands) or one operator and several banks (e.g. TIM and Italian banks). That the Mobipay platform is available to all four mobile networks is a first for any mobile payment project.

The result of the merger of rival projects , the quest for a common platform prevailed – meaning the service is within reach of 80% of Spain’s banking customers and all its mobile users. The broad involvement of both banks and operators is a distinct advantage while the focus on established payment systems, namely credit/debit and pre-paid cards, made it appeal to banks wishing to grow their card business. Another inclusive project is underway in Singapore, where a payments trial is underway involving all the island’s operators.

Nevertheless, much dust has yet to settle – at the end of 2001 yet another consortium was formed in the interests of standards. This time Mastercard, Visa and American Express teamed up to tackle issues such as security and user authentication. A move by credit card companies to assert their role in mobile payments, it again ignores the need for universal, compatible solutions.

Nor is it just a question of when banks and operators can learn to live together – the technology used varies and each standard has its own supporters. The Mobey Forum, for example, advocates a ‘dual-chip’ handset where the bank supplies a chip in addition to the operator SIM. Such an approach has been piloted by Nokia and Nordic banking group Nordea, but the dual-chip is a damp squib for subscribers who use more than one credit card or bank. At present, Nokia is still to decide if dual-chip phones will become commercially available.

Another option is a single chip with enhanced security – PostBank and Dutch operator Telfort offer a WAP banking service protected by a SWIM card. But again this is a proprietary service, only available to Telfort subscribers. SMS has been widely used, to date, because it is available on any phone – more secure and advanced solutions cannot be tied to competing technologies.

In terms of security, PKI, as the technology of choice, makes common payments standards much more likely. However, there are still questions surrounding regulation for the ‘digital’ signatures that will identify and authenticate users. US legislation is loosely defined, with individual states taking different approaches. However, global recognition of the validity of digital signatures has been forthcoming thanks to laws passed in Japan and the EU.

These precautions are important, but must be weighed up against customer satisfaction. A user-friendly service, especially for micro-payments, is vital; otherwise the use of PINs and digital signatures will complicate what should be a simple process. With other UK operators sure to follow Vodafone’s innovative payment service, payment functionality is something every operator will deploy to underpin their m-commerce offerings. The Vodafone service is a whole-hearted attempt to tap the micro-payment market and uses an iPIN platform that is device-agnostic. A single sign-on process for subscribers and various security features make it a service that will lead the way into new territory for operators.

Nevertheless, the success of cross-operator initiatives, such as those in Spain and Singapore, will also reveal whether the mobile payments channel can be a win-win scenario for all the players, financial and telecoms, involved in bringing it to market.

Written by Adrian Baschnonga for PMN Mobile Industry Intelligence.

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