Download Mobile payments are the polar opposite of other emerging payment

Mobile payments are the polar opposite of other emerging payment technologies. They put POS
opportunities directly into the hands of consumers.
The Delicate Balance in Mobile
Payments
Two models are emerging in the U.S. for handling payments via handsets—one based on text
messaging, the other on near-field communication. Success will depend on finding a balance
between the convenience of the latter and the security of the former, says Michael Friedman.
Michael Friedman is director of the emerging technologies practice at Mercator Advisory Group, Waltham,
Mass. Reach him at [email protected]
Not long ago, I attended a wedding for a friend. At our table was a young woman who had recently
recovered her lost cell phone. For her, the process had been a nightmare. On her phone were all of her
business and personal contacts, a date book, and a recently recorded home movie of her newborn
daughter’s first steps.
After repeatedly calling her cell phone, she called the cab company she had used the night before. She
called the local police station (Note: the Martha’s Vineyard PD does not consider lost cell phones a
departmental priority) and finally recovered her lost mobile from the hotel desk. Ever the vigilant payments
analyst, I asked her if, after all that, she would ever store her credit card in her phone. Her response: “If it
were password- protected, absolutely.”
Mobile payments are payments initiated with a cell phone for goods and services in the physical world.
In the span of recent months, two very different mobile-payment platforms have entered the U.S. market.
One, which is based on short-message-service (SMS) transmissions, quite literally puts a point-of-sale
terminal in the hands of every consumer. The other, based on near-field-communication (NFC) technology,
provides consumers with a secure electronic wallet offering safety, convenience, and the potential for a rich
set of value-added services.
The success or failure of either platform depends less on its ability to compete with the other in merchant
acquisition than on the willingness of the public to adopt this payment mechanism. To that end, the challenge
for mobile-payment companies will lie in providing customers with a payment mechanism that balances
convenience with control.
Many of the payment technologies we research at Mercator (e.g., wireless POS, contactless payments,
virtual POS, and micropayments) are designed to push electronic payment out to more merchant categories.
For example, wireless payments are designed to reach the mobile merchants of the world. Contactless and
micropayment solutions allow traditionally cash-based segments like fast food and vending to accept
payment cards. Virtual POS introduces a cost-effective approach to accepting electronic payments in
segments requiring connectivity to existing PC-based back-office systems. All of these technologies are
fundamentally merchant-focused, leaving, in some respects, the consumer out of the equation.
Distrusting Contactless
In a sense then, mobile payments are the polar opposite of the emerging payment technologies on the market
today. Mobile payments put POS opportunities directly into the hands of consumers. In combining a nearubiquitous form factor with the ability to conduct both peer-to-peer and traditional merchant-related
electronic commerce, mobile payments extend through the invisible barrier between merchants and
customers in electronic payments.
Because mobile payments are largely a consumer-side instrument, market adoption is the critical metric
for success. True, merchant acquiring has a role. PayPal Mobile’s Text to Buy and MobileLime’s textpayment option rely significantly on merchant participation. The association-driven NFC model, playing off
the backbone of the contactless infrastructure (now with 30,000-plus merchant locations), also relies on a
network of merchants. However the availability of merchant locations is only one piece of customer
acceptance. It bears repeating that current implementations of mobile payments will require a balancing of
security and convenience before widespread adoption will occur.
NFC-based payments place a premium on convenience. Customers hold their mobile phones in front of a
card reader, punch a few keys on the POS terminal, and the transaction is completed. The process is the same
as for contactless radio-frequency ID payments and is very efficient in practice. Adding security would
actually reduce both the speed and the convenience of the payment mechanism.
SMS payments, on the other hand, arguably place a premium on security. PayPal’s program, for
example, uses a two-way authentication scheme after an SMS payment is requested. Following the request,
the payer receives a callback via an automated system. The system first identifies itself to the payer by
using of the caller ID feature. Second, a PayPal-specific tone is played to further identify the call as coming
from PayPal. Finally, the interactive-voice-response system uses the payer’s name to verify the transaction.
Once the user is assured the follow-up call is from PayPal, the payer can enter a pre-selected PIN number
to complete the authentication process.
The problem, of course is finding that happy medium between security and convenience. For NFC-based
offerings, a lack of consumer-side education on contactless devices in general has given rise to trepidation
among some consumer segments about using these payment systems. Despite the security measures already
in place—distance requirements, chip-generated security codes, and even zero-liability assurances—many
Americans still distrust contactless technology.
SMS-based systems will need to identify a means of speeding up the payment process. The act of typing
a text message for each payment made will undoubtedly deter some user segments from adoption. In
addition, SMS payers will need to learn and remember a simple but necessary language or syntax to use text
payments.
Interestingly, it may not be the payment providers that eventually solve these problems. Given the stake
that handset manufacturers and network carriers have in seeing mobile payments take off, the solution may
come from the Nokias and Motorolas of the world. One option, already announced by Motorola and others,
is a mobile wallet. A password-protected software tool that stores and selects payment accounts would allow
NFC-based payment systems to store their payment information with some security. Similarly, a mobile
wallet could be used to store SMS messages and payee information to facilitate the typing of payment
messages.
Cellular Addiction
Yet another option might be a biometric reader. A fingerprint scanner or voice reader would allow
convenient and secure access to payment information stored in the phone. For NFC payments, this would
be much simpler even than typing a password into the phone. On the SMS side, payments could be
authenticated before the payment is made—improving the transaction speed and opening new markets to
SMS usage.
The key to mobile payments will lie in convincing consumers to merge their use of payment technology
with their addiction to cell phones. Both contactless payments and SMS messaging are expected to grow at
a very healthy pace for the foreseeable future. In early May, MasterCard announced that over 7 million
PayPass payment devices had been issued, and a recent study by the Pew Internet and American Life
Project found a 97% growth in the use of SMS messaging between 2004 and 2005. With U.S. cell-phone
subscriber penetration approaching 70%, surely there must be an opportunity for mobile payments.
Mobile-payment adoption on a large scale will come with time, but only after we have
provided consumers with a payment option that is
secure, convenient—and does
not interfere with the Martha’s Vineyard Police
Department.