For many years, banks have been trying to remove cash from our wallets. Not, as some might argue, in the form of high charges, interest rates and penalties, but by replacing it with an electronic equivalent. Notes and coins are said to be too old-fashioned for the 21st century, not to mention unwieldy and expensive to process by institutions and retailers.
However, plans to exploit Europe’s love affair with the credit card by introducing a plastic equivalent of cash have not so far succeeded. Despite being heralded as the first step towards the cashless society, past trials by companies such as Mondex, using a smart card loaded with cash from a bank cash dispenser, have fallen disappointingly flat.
‘In trials such as the one by Mondex in Swindon, the card could be used in shops, but not in some parking meters outside,’ says David Birch, director at strategy consultant Consult Hyperion.
But if a plastic replacement for cash hasn’t caught on, there is now a new groundswell of schemes trying another tack: mobile payment – in which transactions authorised by mobile phone replace cash or cards.
The failure of a smart card as an alternative to cash trials was not solely a British phenomenon. In Germany the Sparkassen savings banks and institutions, including Dresdner Bank, introduced a cash card ‘micropayment’ system in 1999, employing similar methods to the Mondex scheme. Despite attempts to introduce the cards for high-street use, they did not catch on. Cardholders preferred to use credit or debit cards, which were accepted in as many outlets as the new system. Also, if lost, money on the trial card was no more secure than cash.
However, headway was made in some areas neglected by the Mondex experiment. Despite disliking them for payments in shops, customers were keen to use cards for parking fees and bus fares, where they might not have change handy.
Observing both this and the explosion in mobile phone ownership, banks tried again. Initially it was thought that introducing a credit card slot to a mobile might be the way forward. But again customers showed little interest.
‘Although attractive and technically mature, the idea of turning a mobile handset into a portable point of sale by adding a credit-card-sized slot is slowly being left aside by those who tested it,’ said Jean-FranÃ§ois Durix, marketing manager of telecoms card and tools business at smart card maker Gemplus.
‘Reasons for this are numerous: there are no real compelling services offered to consumers, the business model is complex and handset manufacturers have seen this as a niche market that was incompatible with their mass-market industrial requirement.’
Now alternative vendors have decided to try their luck. Launched in March, Vodafone’s M-pay micropayment system, dealing with payments under £5, enables the firm’s 13 million users to pay for services including financial information alerts, games, ring tones or icons via the web or WAP via their mobile phone after registering for M-pay on the company’s website. Provided the amount is between 5p and £5, the charge is added to the customer’s next bill.
Given that the system has been in action for only six months, the company is unwilling to disclose the size of M-pay’s revenues to date. It says only that they are in line with business expectations.
But something must be going right. The firm is now broadening its reach into ‘macropayments’, enabling customers to buy items of larger value. In March 2002 an alliance with T-Mobile was announced, along with the pair’s plan to launch an open platform macropayment system towards the end of the year. Both are keen to stress that the programme will be open to other service providers.
A spokesman explains: ‘If the service remained a proprietary system for ever this would not benefit the whole network. We are working towards rolling the system out across all providers to offer the service to all users, and not just Vodafone’s customers. We believe that Vodafone’s position as a trusted supplier will help us gain a foothold.’
This issue is crucial. ‘Reaching critical mass is the largest barrier, as people already have cash in their pockets and are familiar with it, despite occasional problems,’ says Dale Eaton, market strategy and research director for telecommunications billing at SchlumbergerSema. ‘Having enough participating vendors is key, as various Scandinavian trials using mobile payments for parking and vending machines have shown. You cannot depend on getting rid of cash and switching over unless you are confident vendors will accept this.’
The initial launch in Germany and the UK will allow customers to store personal details and preferred payment options in a virtual wallet, so they can choose which method they wish to use when making payments, similar to using a conventional wallet. Vodafone is still debating whether to add an option allowing users to choose to have smaller purchases put on to their bill or paid from a prepaid top-up card.
Trial and error
Britain is not alone in its participation in mobile payment schemes, and these have produced some interesting results.
A continuing trial in Helsinki allows tram and subway travellers to buy tickets via text message. After sending a message, confirmation is received and can be shown to ticket inspectors via the phone’s screen. However, the process is so fast that wily travellers are buying tickets only when inspectors board the service, causing providers to consider building a delay into the text message transmission system.
Even the US, whose first exposure to the texting phenomenon came earlier this year, has been flirting with mobile payment. Nokia has just begun to conduct trials using a Smart Cover for its 5100 telephone: the cover is equipped with radio-frequency identification technology that uses short-range frequencies to act as a debit card when scanned. This follows the popularity of loaded wallet smart cards among Starbucks customers, which allow people to pay for their coffee in advance and have the cash deducted from the card at each visit.
Meanwhile, the Vodafone system is not the only new option open to the British public. Undeterred by previous problems suffered by bank-backed systems, NatWest is testing a new mobile and e-mail person-to-person service using technology from Magex, a company headed by former Mondex chief executive Michael Keegan.
Just like the telecoms provider, in a bid for dominance the bank plans to roll out its FastPay system to all UK residents, regardless of whether they are NatWest account holders. All that is required is a mobile phone number and the ability to register online. According to the company, users of the service will be able to e-mail or text money to other people with a FastPay account instantaneously. Money will be paid into the system using debit or credit cards.
‘The need to be able to stand next to someone in the pub and give them £5 without having to go to the cashpoint and physically give it to them is there,’ says Hyperion’s Birch.
But there is a flaw in the system. The mobile payment system may be effective at transferring e-cash between accounts, but if customers want to transfer money to their bank, clearing the money would take the normal frustrating three to five days.Arguably, Vodafone’s biggest threat is Paybox. This German company has a total of 750,000 consumers and 10,000 retailers registered for its service, which can be used by customers regardless of their mobile phone, network or bank account.
Users are distributed through a number of European countries, including the UK, Germany, Spain, Austria and Sweden. The system is gaining a foothold in London, where consumers can pay for drinks or dinner at restaurants in the West End and the City, as well as car hire from selected outlets.
Registration takes place online, with an annual charge of £14.99. However, the company provides an annual benefits package worth £25. All transactions are free, and it is claimed that no mobile operator charges more than the national rate for each call to the system.
When paying a bill customers give their mobile phone number to the retailer instead of a credit/debit card, cash or cheque. Their phone number is entered into the retailer’s existing payment system, integrated online with the mobile payment provider’s system. As the transaction is initiated the person’s mobile phone receives a call asking them to key in their four-digit PIN number for authorisation. The account is then debited and the retailer is informed. Afterwards, the consumer receives a receipt by text message or e-mail.
Paybox allows users to avoid the risk of credit card cloning, where details from the card’s magnetic strip are copied by swiping it through a handheld unit while out of the owner’s sight, as no financial details are supplied to the retailer. Users may also choose to be issued with an alias mobile phone number, should they not wish to give their real mobile number to a waiter.
The company now plans to allow the system to authorise cashpoint withdrawals remotely, for example to send money to children who have lost their purse and are stranded.
‘The fact that our system can be used across all networks sets us apart from Vodafone,’ says Barry Shrier, Paybox UK vice-president for sales and marketing. The system is already accepted by leading retailers including Amazon and Yahoo in Europe and, in a significant move, Paybox has recently formed an alliance with retail till and system provider IBM, which will be marketing it to clients.
However, Vodafone is fighting back through a joint trial with Ericsson and Hull Council, in which drivers will be allowed to pay for parking with their mobile phones.While some observers are still sceptical of the possibility of mobile payments taking the market by storm, others admit to cautious optimism. ‘At the end of the day people don’t care if Sainsbury’s takes mobile payment or the like and they will not go out of their way to use it, but if they can avoid a queue when buying a ticket for the train it becomes more attractive. The first wave of implementations made the process too hard.’
‘There is a lot of hype over this at the moment, just as there was with 3G,’ says SchlumbergerSema’s Eaton.
‘However, the feedback from the Spanish trial (sees sidebar) is very good, as their system uses existing point of sale devices and GSM phones. The project shows a lot of promise, but I believe vendors must remember they have to crawl before they can walk.’
Sidebar:the pay in spain is mainly cashless
Spain already operates a replacement cash payment scheme, supported by Vodafone. Mobile telephone payment platform Mobipay Spain launched an experimental service in Valladolid in May with the intention of extending the service to the whole of the country before the end of the year.
As with M-pay, the service is linked to the holder’s charge card. It lets users pay for their purchases in stores and restaurants, as well as allowing them to shop online and pay for takeaways, taxis and car parking.
The scheme was created in July 2001 by the merger of two earlier projects, Movilpago and Pagomovil, both of which had experienced limited success. Mobipay is owned by a banking/telecoms consortium: telephone operators Amena, Telefonica Moviles and Vodafone have equal shares of a 40 per cent stake, while 48 per cent is owned between 92 banks, savings banks and credit institutions that together handle 80 per cent of Spain’s card payments. Three payment systems providers own the remaining 12 per cent.
However, Mobilpay faces competition from two other projects, and it remains to be seen whether the country can support so many rival schemes.The first, developed jointly by the La Caixa bank and credit card giant Visa, was launched in March.
Meanwhile, Deutsche Bank has chosen to back the Paybox scheme, which has already concluded agreements with 1,000 retailers across Spain.
Sidebar:What’s in it for banks and mobile operators?
Banks, retailers and mobile operators have much to gain from involvement in the latest round of electronic payment projects.
Handling cash costs UK banks around £2bn a year. With mobile payment institutions can not only reduce this, but also gather marketing information. Data about individuals’ spending habits may be accumulated and used to build profiles for cross-selling purposes. Financial institutions can also co-market their mobile payment service with participating retailers, thus increasing the value of their ‘brand’.
For mobile operators the value of involvement is extremely simple. If devices have more functions, more people will use them more often, raising revenues.
Small retailers also have a vested interest in signing up. Lower transaction-processing costs mean outlets such as newsagents, for whom the cost of processing small credit or debit card payments is prohibitive, can install card-reader systems.
Sidebar:A yen for a clever card
Over the past year some of Japan’s largest corporations have joined forces to press ahead with trials of card-based micropayments.
BitWallet’s Edy electronic money system is aimed at replacing small-change transactions such as buying newspapers or vending machine items.
Unlike the UK’s unsuccessful Mondex experiment, Edy, launched in October 2001 by a 25-member consortium headed by Sony and telecoms provider NTT DoCoMo, received a major boost in July this year when 1,400 convenience stores across the country began accepting its contactless integrated circuit cards.
The announcement represented a significant expansion of the system, previously accepted in around 100 shops mainly located around major Sony buildings in Tokyo.However, BitWallet is confident of reaching targets of having 23,000 retailers online and 8.5 million cards in circulation by the end of March 2004.
Edy is a stored-value card, which means it must be charged with money before it can be used. Participating stores not only accept Edy but also issue cards, for a small deposit, and act as charging points.
Users need only place the card within 10cm of an Edy sensor to have money debited in a process that takes 0.2 seconds to complete.
As the card is preloaded there is no need for a time-consuming connection with the bank to check for funds. Such fast payment makes it an ideal replacement for cash, and helps to protect users from being presented with a large bill at the end of the month.
However, if the card is lost, so is any money stored on it.