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This story appears in the February 2009 issue of Cards&Payments.
Since the hype began in the 1990s over prospects for soaring growth of mobile payments, banks have worried that mobile operators were after their payments business.
Mobile payment still has yet to take off, but banks continue to regard telecommunication companies with suspicion. Those suspicions may not be entirely unfounded, at least in Germany and Austria, where mobile operators have launched mobile-payment schemes that cut conventional banks out.
The schemes remain small and only involve transactions for goods and services bought on the Internet and, in Austria, parking, transit ticketing and purchases from vending machines. But operators in both countries hope to expand to stores and other physical points of sale. All this is in addition to the digital content, such as ring-tones and games, mobile operators have enabled their subscribers to buy for years over their networks.
To be sure, telcos plan to work directly with banks in most places where subscribers will make purchases in stores or on their PCs with their phones. That includes using phones that support Near Field Communication technology, which likely would carry bankcard applications subscribers would tap on contactless readers at the checkout counter to make purchases.
But in some cases, mobile operators will choose to go it alone. Japan's largest mobile operator, NTT DoCoMo, already has done so with its iD mobile-payment brand. It bought a one-third share in one of Japan's largest credit card companies and launched its own brand, available on contactless wallet phones, in late 2005.
In Europe, telcos will get help from regulators, which are opening the payments market to new players and pan-European transactions.
Those regulations have not yet taken effect, but some telcos are not waiting. For example, German mobile operators Vodafone Germany and Telefónica O2 Germany are giving subscribers another way to pay for purchases on the Internet, and they plan to offer the new payment service for buying goods and services on mobile Web sites before expanding to the physical point of sale.
To do that, the telcos, both branches of large European mobile-operator groups, would have to one day take on German banks and the entrenched payment card schemes with their mobile-payment service "mpass," which the operators introduced in mid-October.
The service enables subscribers to shop on their home computers, then pay using their mobile phones mainly by entering their phone numbers and special PIN codes on the Web sites, then confirming the purchase with a mobile text message. The mpass PIN and the second factor of authentication, the SMS text message, make for more-secure Internet transactions, say backers. The scheme handles the transactions via direct debits between consumers' and merchants' bank accounts.
The telcos use a financial-services organization to help with the funds transfers.
"It's quite fast–you only need a few steps to conduct a payment, (and) it's absolutely secure," Martin Schurig, product manager for corporate wholesale partner management at O2 Germany, said at a recent conference. "You don't have to get up and get your wallet (to) get your credit card. The phone is next to you."
Between them, O2 and Vodafone have 14 million postpaid subscribers in Germany they have preregistered for mpass and are offering the service to subscribers of other mobile operators, including T-Mobile, the country's largest.
That, plus subscribers of all other operators and all prepaid mobile customers in the country, would extend the payment scheme to a potential user base of 70 million.
"Our goal is to build up a big active customer base in order take a second step to widen mpass to vending machines and also payment at point of sale and NFC payment," Schurig says. Building up such a customer base is "only possible through e-commerce."
Point-Of-Sale Options
And according to Schurig, if the telcos try to introduce mpass at the retail point of sale, they could continue to avoid banks.
"From my point of view, we would have complete control of the project," he tells Cards&Payments. "We wouldn't have to share revenue."
But backers of mpass would have an uphill climb to take on banks and Germany's much-used debit card scheme, electronic cash, at the point of sale. They would have to sign up a broad network of merchants, which will be difficult enough for
e-commerce.
The other option would be to enable consumers to do mpass transactions at the point of sale over the mobile network. But this likely would be too slow at many types of merchants, especially quick-serve establishments, even if the telcos use NFC to open the mpass application automatically on the phone and fill in some of the data needed for the purchase.
Instead, the mobile operators may have to enable subscribers to tap their NFC phones on readers at the point of sale supporting open-loop bankcard applications.
In any case, mpass is just getting started and remains small. As of last month, only about a dozen Web merchants accepted the payment scheme. They pay about 2% to 2.5% of the purchase amount in fees, although mpass fees vary by merchant, says Schurig.
The telcos believe Web merchants will adopt mpass because of its large base of potential users. "We can talk to and manage the customer base directly," says Schurig. German consumers will like that the transactions are more secure than card-based Internet purchases, he says.
Schurig declined to release figures on early mpass transactions.
In Austria, mobile operator Mobilkom started its own financial institution, A1 Bank, in 2002, claiming to be the first telco to have done so. The bank acquires mobile and Internet merchants and authorizes and processes transactions.
Telco Bank
A1 has a full banking license, which helps the telco to enable subscribers to pay parking fares and transit tickets and to make Internet purchases on personal computers using their mobile phones and text messaging. The charges mainly show up on subscribers' phone bills.
Mobilkom began enabling subscribers to buy transit tickets with the mobile phones via text messaging in 1999, before it started the bank.
"One reason we founded the bank, in Austria, is customers still trust banks," Thomas Capka, A1chief operating officer said at a recent conference. "We want to provide these services via a bank. We want to be part of the existing banking regulations."
The telco also launched an Austrian branch of mobile-payment platform Paybox in 2001. That later helped other Austrian mobile operators to offer interoperable mobile-payment with Mobilkom, including Austrian operator One, now part of the France Telecom Group. Paybox processes the m-payments transactions.
Mobilkom says its mobile-payment volumes are increasing substantially. Capka estimates 30% of parking fares in Vienna are paid via mobile phones, either through Mobilkom or other operators.
Transit-ticketing transactions more than tripled between July 2006 and January 2008, he says. Specific transaction figures were not available, however.
Capka notes fraud is virtually nonexistent on Web-shopping transactions via mobile and is far less than the high card-not-present fraud rates on the Internet.
In September 2007, Mobilkom introduced phones that support NFC technology, which reduces one or more steps for subscribers to buy tickets on Austria's national railway or Vienna's metro.
Subscribers with the phones tap contactless chip tags embedded in fixtures at stations, which automatically open the mobile-ticketing application and fill in the SMS codes and other information. Users confirm the purchase via SMS, then receive single-use and day tickets over the air. Subscribers also can make purchases at certain vending machines in stations by tapping their phones on chip tags.
Users of the NFC phones buy tickets at a 10% higher rate than those not using the phones, Capka says. But the NFC-based ticketing remains a large trial, which the telco plans to expand.
NFC also could help the Mobilkom move into mobile-payment right in the store.
"We are in classical remote payment, ticketing and Internet payment," Capka says.
"When we are talking about NFC, we are talking about entering the traditional point-of-sale merchants."
Although Mobilkom could issue its own payment application for the NFC phones though its A1 Bank, it probably would have to comply with such standard open-loop applications as Visa payWave or MasterCard PayPass, not a proprietary application from Mobilkom.
"This means working together with existing (bank) acquirers," Capka says. The only other option would be to sign up its own merchants, which would be difficult. In any case, few, if any, merchants in Austria yet accept open-loop contactless payment at the point of sale.
Still, like German telcos O2 and Vodafone, Mobilkom is venturing deeper into banks' payments territory. How far they will be able to proceed remains to be seen, but banks will be watching their moves closely. CP
