A mobile-payments effort seemingly designed to exclude banks may accomplish the exact opposite.
Financial companies for years have been pushing the concept that consumers could use mobile phones to initiate transactions, and while test after test has validated the technology, they always come up against the same barrier: wireless carriers have shown no interest in including the necessary hardware in their phones.
Until now.
According to reports that emerged Aug. 2, several major wireless carriers are collaborating to create a system that would enable consumers make purchases with their phones.
Analysts agree that a payments network driven by phone companies would pose a significant threat to banks and card companies, but they also say 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 payment system, excluding someone else is difficult,” says James Van Dyke, 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,” he says. “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 (
Banks and carriers have collaborated in the past on mobile-payments trials, but analysts say 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. These phones were used to make purchases charged to users’ existing card accounts. Though similar to the chips used in contactless payment cards, NFC chips support two-way communication with other NFC chips, enabling users to download rewards at the point of sale or movie trailers from posters.
The new approach also is most likely based on NFC, but it could involve different payments accounts. But Philip Philliou, a payments-industry consultant and managing director with Philliou Selwanes Partners LLC in New York, speculates that carriers, not banks, would administer the accounts.
The funds could be stored at Barclays–the phone companies have no interest in becoming depository institutions, he says–and the transactions could move across the Discover network.
“This could very well be the creation of a new payment system that resides on the mobile device,” Philliou says. “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) and Barclays declined to comment; Discover did not respond to inquiries.
The carriers’ project likely would 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,” says Todd Ablowitz, founder and president of Double Diamond Group LLC, a Denver-based payments consultancy.
The lack of NFC chips in phones has been one of the major barriers for banks that have wanted to offer mobile-payment services. By installing the components to develop their own network, the carriers also could open the door to other companies that want to use the same contactless capabilities, Ablowitz says.
However, carriers could make it very difficult for banks to capitalize on the NFC features, he adds.
AT&T, for example, uses a technical format called the single wire protocol within its phones 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 applications that could access a smartphone’s NFC chip, only the carriers can access SIM cards, which are used to control access between the handset and wireless network.
“That makes it impossible for banks to tap” any financial data that might be stored on a phone, Ablowitz says. “This freezes out banks to a point, (but) not entirely.”
Banks still could find other ways to use NFC chips, though they might not be as efficient as a system that comes with them built into the phone, he says.
Moreover, increased consumer interest in mobile payments could spur wider use of a system available now that incorporates NFC components into a card consumers may install into the microSD memory slots included in many phones, Ablowitz says. The carriers’ system, “oxymoronically, could help launch the microSD product,” he says.
A MasterCard Worldwide spokesperson wrote in an e-mail Aug. 2 that the company is “confident that we will be at the center of delivering the next generation of mobile payments.” A Visa Inc. spokesperson did not return calls.
Not everyone views 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 says. “There has to be a true value proposition to drive change, and that’s the piece that is still less than obvious.”
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