Mobile phones equipped with near-field communication chips are unlikely to become widely used payment tools for at least five years, according to a report from the Federal Reserve Bank of Boston.

While banks and payments companies have been working on the technology for years, the report said there are numerous hurdles that must still be overcome, notably the lack of a business model that would benefit card brands, issuers, mobile operators and handset manufacturers. This has made it difficult for any one company, or group of companies, to take the lead in promoting NFC mobile payments.

Another adoption barrier is cost. The report estimated that NFC chips would add $10 to $15 to the price of a mobile phone. The report was released Sunday.

Because consumers typically replace their mobile phones roughly every two years, wireless carriers and handset manufacturers would have a limited amount of time to recover the costs associated with offering NFC phones to customers.

An even bigger issue, according to the Boston Fed, is the lack of contactless readers at U.S. merchants. While some merchants have installed them, widespread adoption has stalled, the report said. It estimated that each terminal costs about $200, and many merchants will opt to not upgrade their point of sale systems until it is absolutely necessary.

Several executives discussed mobile payments last week at the Federal Reserve Bank of Chicago's 2010 payments conference, and some payments executives question whether consumers are even interested in NFC-enabled phones.

"Consumers in the U.S. don't see a burning need for it," Jeff Semenchuk, head of growth ventures at Citigroup Inc., told conference attendees. "They want it but are not clamoring for it."

Despite the severe barriers to adoption, the Boston Fed said it believes the potential long-term benefits that mobile payments could bring to consumers are hard to ignore. Some of those benefits include the possibility of a "fully enabled digital wallet" that includes the storage of payment accounts and health records.

Some companies are trying introduce mobile payments applications that do not require NFC chips.

Starbucks Corp. and Target Corp. both accept payments charged to prepaid accounts with phones that display bar codes on their screens. The images can be read with scanners at the point of sale.

This technology is software based, and enables merchants and issuers to offer mobile payments without involving the carriers or handset makers. It also lets users manage their accounts through the phones, a step closer to the mobile wallet concept.

The Boston Fed said it believes a public transit system could lay the foundation for mobile payments in the U.S. That's been the case in Hong Kong, Japan and the U.K., where consumers can pay transit fares with their mobile phones. A closed-loop transit environment at first might be the best option for NFC in the U.S.

The report also suggested three policy initiatives for the Federal Reserve to help regulate mobile payments.

The Fed could conduct research to learn how mobile payments could benefit consumers and businesses.

It should also promote and participate in establishing appropriate regulatory policies for mobile payments, and help the major stakeholders — issuers, carriers and handset makers — establish common standards.

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