Cell Phones Move Into POS Payments

  More industry observers are acknowledging an emerging truth: Many U.S. consumers today are more likely to leave home without their wallets than without their cell phones. Unless the payment industry addresses this trend, possibly through collaborations with telecommunications companies, consumers' need to stay connected could result in new competitors venturing into the point-of-sale payments market, experts say.
  This scenario already is playing out on a small scale, as some U.S. telecos today enable their customers to buy low-ticket digital content using their cell phones without the need of a payment card. Such transactions are applied to monthly billing statements, which many consumers settle from their checking accounts via bank online bill-pay services.
  Whether U.S. telecos want to venture into the processing of higher-ticket purchases made with cell phones remains to be seen. Their near-term strategy, though, appears focused elsewhere, observers say.
  "Mobile carriers in the U.S. have a lot on their plates," says David Evans, founder of Market Platform Dynamics, a Cambridge, Mass.-based payment card consulting firm. "The notion of going into the payments business, I'm not sure any have it on the radar screen at the moment."
  As of the end of October, an estimated 197.7 million U.S. consumers subscribed to cell-phone service, up 104% from 97 million in 2000 (see chart, page 20). Teleco revenue from music and content downloads, game playing and Web access during the first half of this year totaled $3.8 billion, up more than 85% from the same period last year, according to the Washington, D.C-based Cellular Telecommunications Industry Association.
  "If this is a style-of-life change and the market grows to hundreds of billions of dollars, maybe we need to get into the game," says Robert Egan, director of TowerGroup, a research and consulting arm of MasterCard International, referring to the payments industry. "One dynamic is that credit card companies know a lot about transactions. Sprint and Verizon know how to sell voice and data service, but little else."
  On a global basis, particularly in Asia and Europe, more mobile operators are starting to believe they can, and perhaps need to, take a larger role in payments, Egan says. "A battle ground is being staged that threatens the bank card population in general if they don't get their act together," he says. "The business problem these mobile carriers face is that the profit they can make selling voice and data services is collapsing. It's down seven to eight times from just a few years ago."
  Major efforts are under way in Europe and Asia to install contactless chips in cell-phone covers to enable the phones to serve as payment devices tied to a selected payment card or billing statement ("Japan's Tap & Go," June 2005). The U.S. is experiencing a similar major contactless-payments push, but the chief supporters are the sponsors of nationally branded bankcards and their issuing members. They are embedding their chips, though, primarily in payment cards or in key fobs, not cell phones.
  That may soon change. In November, Discover Financial Services, issuer of the Discover card and owner of the Pulse electronic funds transfer network, announced it was testing contactless cell-phone payments. Discover intends to make its payments via cell phone "an ATM at the hip" for Discover credit cardholders and Pulse debit network cardholders, says Rick Reese, Discover vice president of enterprise architecture.
  Besides purchases at the point of sale, Discover network cardholders will be able to use the phone to check their card or account balances, transfer funds, and conduct other banking functions, Reese says. The pay-by-cell-phone application is fully integrated into the Discover network and the Pulse PIN-debit network that Discover bought early this year, he says.
  Consumers buying a cell phone will be able to add a payment application with a Discover network-linked account in deals Discover is discussing with cell phone retailers, Reese says. The phone buyer also would be able to apply for a Discover card when buying the phone, and the buyer would receive instant approval if qualified, he says.
  Discover network cardholders would be able to register for the service at Discover's Web site or add the application when buying a phone.
  On the merchant side, Discover is leveraging its exclusive card-acceptance deals with retailers Sam's Club, Dollar General and KinderCare to promote its payments for those services by cell phone. Discover plans a major rollout in 2006 after the completion of the pilot at its Riverwoods, Ill., headquarters and a few unnamed Chicago-area retailers.
  ACH Option
  The U.S. contactless movement involving the leading card brands, however, is doing little to quell merchants' growing concerns about the rising cost to accept payment cards. Their outrage has resulted in more than three dozen lawsuits against Visa USA and MasterCard International (see Cover Story, page 28).
  Boston-based MobileLime believes it has a more merchant-friendly POS payment alternative. And its service does take advantage of consumers' growing attachment to cell phones.
  The 3-year-old company, which has been testing its cell-phone based payment system in Massachusetts, now wants to take the service to other regions of the country. To entice merchants, MobileLime supports a customized loyalty program. And, unlike the contactless payment programs sponsored by the leading card brands, MobileLime also enables consumers to pay merchants via the interchange-free automated clearinghouse system.
  While some observers doubt MobileLime's chances for success, at least in the near term, one merchant that now supports the company's program believes retailers will embrace the system. Broadway Marketplace, a Cambridge, Mass.-based upscale grocery store, in September rolled out a modified version of MobileLime's cell phone-enabled loyalty program.
  A service of Boston based Vayusa Inc., MobileLime enables cell-phone users to use their phone numbers to secure personalized discounts on products and services. Merchant clients also can enable participants to pay using preregistered credit card, debit card or check information, or they can use a bankcard to replenish a prepaid account when the balance reaches a certain floor limit, says Robert J. Wesley, MobileLime president and CEO.
  MobileLime serves as a payments gateway in connection with Chase Paymentech Solutions LLC, a joint venture in which J.P. Morgan Chase & Co. owns 51% and First Data Corp. 49%.
  Consumers pay nothing to participate. They can enroll online, at participating stores or by calling a toll-free number. They also can monitor their transaction activity from a dedicated Web site. Depending on their size, participating merchants pay from $1,000 to $5,000 per year for service access, POS software, activity reports, tools to send marketing messages to customers' cell phones and the ability to change loyalty programs instantly, Wesley says.
  'Baby Steps'
  Broadway Marketplace initially plans to use the service to offer discounts for participants and not as a payment option, says Richard Sabounjian, the store's director of marketing, noting that the merchant did not previously offer a rewards program. The goal is to add the payment function in February, he says.
  "I just believe in doing baby steps because of the type of store we have and the clientele we have," Sabounjian says.
  Sabounjian believes many merchants will find MobileLime attractive. "It's going to be incredibly successful," he says. "It's not pie-in-the-sky thinking. I know it's going to happen. It's different from any other program."
  Broadway Marketplace's initial use of MobileLime does not require users to have their cells phones with them; they just need to give the last seven digits of their cell-phone numbers to the clerk to secure discounts and other benefits, Wesley says. Ordinarily with MobileLime, consumers would call a toll-free number and select the PIN assigned to the retailer just before or during their visit to begin the authentication process and to hear any marketing messages from the merchant. They would then give the clerk the last four digits of their cell-phone number to secure the merchant's loyalty discounts and initiate payment, he says.
  More than 80 merchants and more than 12,000 consumers in the Boston area are participating in MobileLime, which now plans to promote the service in other parts of the country, Wesley says. Initially, MobileLime will offer the service to local and national merchants and let them decide on other markets, he says.
  Other Boston-area merchants that support MobileLime include select Quiznos and Subway restaurants and Kabloom florist locations. "If we can interact with people in real time and can change the way they pay and get rewarded and make it a much better experience for them, they will spend more," Wesley says. "It's all about improving customer experience while shopping."
  Wesley says MobileLime also is developing a contactless version that uses the Near Field Communication protocol developed by Sony and Philips. This would enable two-way wireless communications between a cell phone and the merchant's POS terminal to support coupon and information exchanges. He says the company is working with cell-phone maker Nokia to bring that product to market once the protocol gains some maturity.
  Unlike other countries that are able to adapt quickly to change, U.S. companies such as MobileLime that are trying to push alternative payment methods will require the resources to stay viable for the long haul, observers say. At least one other company that offered a similar cell-phone based payment service was unable to do that (see story below).
  While mobile payments may be at the forefront in Japan, they are likely years away in the United States, says Andrei Hagiu, also of Market Platform Dynamics. "In Japan, credit card usage is very low," Hagiu says. "Only 10% of payments are made by credit cards in Japan. In the United States, it's more like 20% to 25%." So card issuers and telcos are looking for ways to spur Japanese consumers to use credit cards, Hagiu explains.
  Hagiu maintains that the so-called "Generation Y," generally defined as those born in the 1980s and 1990s, who have grown up with mobile phones and computers could be an ideal target for mobile payments in the United States.
  "In the future, Generation Y might change it," Hagiu says, because of their affinity for using mobile devices. "If I were a mobile operator today, I would really try to target that audience and come up with these kinds of services."
  In the end, convenience will determine whether consumers embrace an alternative payment option. Payments executives might want to keep a close eye on the things their sons and daughters find convenient. Ignoring them could cost them their jobs.
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