Japanese Telco Seeks to Expand Use of Mobile Credit Service

  When Japan’s largest mobile-network operator, NTT DoCoMo, launched its own credit brand in late 2005, following a nearly US$1 billion investment in the country’s No. 2 credit card issuer, banks and payment card organizations looked on nervously. One executive from the telecommunication company boasted the brand would become the “Visa International” of mobile payment.
  Two years later, the numbers– at least on the surface–look impressive: DoCoMo and its partners have registered more than 5 million users for the brand, iD, and have signed up merchants with more than 100,000 locations to accept it, according to sources. That is about 40% more outlets than take contactless payment in the United States, where the technology began rolling out a year earlier.
  And the estimated numbers of iD merchants do not include the thousands of vending machines that also accept the mobile-payment brand. All told, DoCoMo has sold more than 25 million wallet phones since mid-2004, most of which carry its payment application, waiting to be activated.
  But just how many consumers use the phones to pay at the point of sale with iD or other payment services available on the wallet phones is another question entirely.
  Neither DoCoMo nor Sony Corp., whose chips power the wallets, have released hard data. And market observers, including bloggers, report merchants still rarely see consumers tapping their phones to pay with iD or a competing contactless brand from Japan’s largest credit card company, JCB Co. The same goes for the gaggle of other contactless-payment services available on cards and phones that vie for attention in Japan (see chart on page 21).
  â€œStill, people want to pay with cash,” says consultant Masayuki Yamamoto, former head of emerging technologies for Visa Inc.’s Japan office. “People need more time to get familiar with it. [And] even as time goes by, it seems like there have been no big incentives for people to use it.”
  While features of the Japanese market often are lost in translation overseas, mobile operators, banks and other mobile-commerce players outside of Japan considering deploying similar technology are monitoring how well consumers take to the DoCoMo-led mobile-payment rollout.
  Combined, DoCoMo and Japan’s two other major mobile operators, KDDI and Softbank Mobile, had distributed more than 40 million wallet phones as of last November, according to FeliCa Networks, the DoCoMo joint venture with Sony that controls the technology platform used in the phones. That is far more handsets than the paltry hundreds or few thousands of phones supporting Near Field Communication mobile operators have distributed elsewhere, mainly for trials.
  Both NFC and the “osaifu keitai,” or wallet phones, in Japan embed short-range wireless technology to enable the devices to act like contactless payment, transit or other cards. Unlike cards, however, the contactless phones offer a screen, a keypad and a network connection, enabling issuers and merchants to communicate at the point of sale with their customers. And NFC handsets and some of the Japanese wallet phones also can serve as contactless readers.
  No other major mobile telco anywhere has launched a credit brand and service, says John Ure, director of the Hong Kong-based Telecoms Research Project, which produced a recent report on mobile payment in Asia Pacific with consulting firm KPMG.
  DoCoMo sees an opportunity because cash-toting Japanese consumers use credit cards infrequently, he says. DoCoMo’s purchase of a one-third stake in Sumitomo Mitsui Card Co. in spring 2005 helped in its move into the credit card business.
  â€œMost mobile operators don’t really want to go beyond their comfort zone and get into the banking or the credit card business,” he said. “DoCoMo has the audacity that comes with being a very dominant player.”
  DoCoMo has one thing in common with its new direct competitors, the credit card issuers: All believe contactless phones can help them capture a sizable share of transactions Japanese consumers now overwhelmingly conduct with cash. The credit card companies and telcos estimate low-value purchases annually amount to 60 trillion yen (US$550.2 billion), more than 90% of it in cash.
  DoCoMo sees a substantial new revenue stream here, one that could bolster its stagnating voice and data business. The telco charges interchange from merchant acquirers each time a consumer uses its DCMX mobile-credit service, which flies under its iD brand. It also takes a small brand fee, about 0.1% of the sale, from both the acquirer and other issuers of iD applications, although DoCoMo remains the major issuer. Interchange amounts to roughly 1.5% of the transaction amount, observers say, although that depends on merchant fees, which vary.
  Looking For Volumes
  All DoCoMo has revealed about transaction volume is that about 30% of subscribers carrying its wallet phones are “active” users, who tap their handsets at least once per month for any service stored in the wallet. This may include not only payment but transit ticketing, loyalty programs and airline check-in.
  An online survey conducted in mid-2007 by Japan-based Goo Research appears to bear out the DoCoMo estimate (see chart above). And results of a survey from December 2006 by online marketer infoPLANT showed that only about 4.5% of a sampling of 500 DoCoMo subscribers had used iD-branded mobile credit at least once.
  Use of the wallet phones to pay at the point of sale is likely to grow, predicts Hiromichi Yasuoka, senior consultant for Japan-based Nomura Research Institute. The company estimates phone users made up about one-fifth of the 43 million consumers who used any type of contactless e-money last year. Most of those e-money users tapped cards, not phones, and spent more often with argeable e-purses, such as Nanaco from retail giant Seven-Eleven Japan, than with such postpaid applications as iD and QUICPay.
  The firm predicts consumers will tap all forms of e-money at the till to the tune of 1.4 trillion yen (US$13 billion) this year, about two-thirds of them with prepaid applications, mostly on cards. But Yasuoka believes e-money users tend to spend more when they are paying with phones than with cards, perhaps because they can check their balances in their e-purse accounts on the screen and recharge them over the air.
  But, in general, use of m-payment is still low, agree most market observers. For example, the “vast majority” of QUICPay users and transactions so far are from the more than 3.4 million credit cards on issue carrying the contactless application, says Takashi Kohari, an assistant vice president at JCB. That is despite the fact QUICPay has come preloaded on all wallet phones sold by Japan’s No. 2 telco KDDI since September 2006. “One possible factor is that you need a credit card account to use ‘QP,’ and many younger mobile-phone users do not have a credit card,” he says.
  This may be one reason JCB and other payment card schemes are worried about iD. DoCoMo allows subscribers as young as 12 to use a limited form of its mobile-payment service, called “DCMX mini,” to pay for purchases up to 10,000 yen (US$91.69) per month with no annual fee, notes Yasuoka. “So it is earlier-than-normal credit card users,” he says. “Credit card companies are afraid of DoCoMo.”
  Where’s The Demand?
  But DCMX mini, which is easy to register for, is a big reason DoCoMo has been able to rack up such high numbers of “users.” And there are a variety of reasons behind the telco’s success in signing up thousands of merchant locations and selling millions of wallet phones. All in all, the figures do not yet offer evidence consumers are clamoring for the technology, say observers.
  In Japan, unlike nearly all other markets, mobile operators tightly control which features get included in new handsets. The FeliCa wallet chip from Sony comes as a default feature on an ever-increasing share of new models. For its winter 2007 and spring 2008 lineup, for example, DoCoMo says more than 90% will have contactless wallets inside. Few subscribers, however, choose phones because of this feature.
  And DoCoMo has been able to sign up customers for its mobile-payment service, in part, because it preloads the iD application and its credit service, DCMX. This enables subscribers to avoid the hassles of downloading the application over the air.
  DoCoMo makes it easier still to register for DCMX mini, with just a few clicks necessary on the Web site. The purchases show up on the subscribers’ monthly phone bills, which are paid by direct debit from the customers’ bank accounts. Full DCMX allows for much-higher spending limits. But it also requires subscribers to qualify for a credit account.
  Of the estimated 5 million subscribers who have registered for DCMX or other iD applications,90% are DCMX-mini customers, a source tells Cards&Payments. JCB’s Kohari notes DCMX mini is not a credit service, so it does not compete directly with QUICPay.
  Preloading the application and making it easy to activate can go a long way toward recruiting users. Tokyo-based commuter-train operator East Japan Railway, or JR East, found this out the hard way.
  JR East has been disappointed with the numbers of customers who have signed up for its Mobile Suica transit-ticketing and e-purse application, about 800,000 in two years. To begin service, customers must complete up to three separate downloads. The rail operator also initially restricted service only to holders of its cobranded credit card.
  Merchant ‘Buy-In’
  As of December, 240,000 iD-branded terminals had been installed in stores, restaurants and other locations, more than any other contact-less-payment scheme in Japan. That includes about 20,000 Coca-Cola vending machines. Some taxis also take iD, as do hypermarkets. The biggest share of the merchant-acceptance points are in outlets of Japan’s ubiquitous convenience-store chains.
  But DoCoMo has not been shy about using its cash hoard to encourage the big chains to install iD terminals. Last year it announced it would spend 9 billion yen (US$73.7 million) to buy a 3% stake in Japan’s third-largest convenience-store chain, FamilyMart. A year earlier it bought a 2% share of Lawson, the No. 2 chain. “These companies use the money that DoCoMo has given them to subsidize the rollout of readers in the stores,” says Terry Graham, an analyst at the Telecoms Research Project.
  The telco is beginning to offer incentives for consumers to use its payment service. One of its latest projects is with McDonald’s restaurants of Japan. The 300 million-yen (US$2.8 million) venture will result in iD mobile-payment terminals being installed in nearly 4,000 of the fast-food chain’s outlets nationwide.
  Holders of iD mobile credit have been able to tap for Teriyaki McBurgers and other menu items since last fall. But just as importantly, McDonald’s will be able to deliver electronic coupons to customers through the terminals. Kiyohito Nagata, senior vice president of DoCoMo’s product department, says the venture is a sign of things to come.
  â€œThis joint venture can gather all the information: how frequently users visit this McDonald’s or which hamburger this person likes,” says Nagata. “This is the new framework of our new business.”
  If the concept works, it could drive home the value of putting payment on phones. Discount coupons and other promotions will display on colorful screens and, as with contactless and other smart cards, consumers could redeem the discounts immediately. McDonald’s already sends e-coupons over Japan’s mobile networks, but the transmissions are not timed for when the consumers are at the point of sale or take into account their buying patterns.
  Nagata indicates similar joint ventures with merchants are in the offing. And DoCoMo plans to continue to expand the number of registered iD users and the number of merchant outlets that accept the brand.
  The telco considers it vital to give its subscribers many places to pay with their wallet phones. Only with more transactions and the fees they generate, however, will DoCoMo’s bold move into consumer retail credit begin to pay off.
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