Vendors Send a Message As Mobile Payments Grow

  Text-based mobile payments got a boost in September when Google Inc. published a patent application for a system called Gpay. The application, filed in February 2006, says Google’s “text message payment system” would use a mobile phone or other device to transfer funds to other Gpay users. Gpay would draw funds from demand deposit, prepaid or credit card accounts.
  It remains uncertain whether Google legally can patent a text-based mobile-payment system, which other mobile vendors have attempted but failed to achieve, or whether it ever will offer the service, which a spokesperson says is not certain. But Google still lent credibility and a temporary media buzz to the concept of payments via mobile text message.
  Indeed, Google’s move underscores the growing interest in banking and payment services supported by mobile devices that rely on text messages, software applications downloaded to phones, or Web browsers. Vendors say the three methods fill payment niches that will exist even after the much-anticipated arrival of payments based on contactless Near Field Communication chips embedded in mobile phones. (see cover story, page 26.)
  Mobile payments based on sending or receiving short message service, or SMS, text messages already work on any mobile phone. And most phones can support payments using the international wireless application protocol (WAP) standard for mobile Web browsers or downloadable software applications, which offer more functionality and richer data transfers than do text messages.
  The standoff between mobile-network operators, handset manufacturers and financial institutions has been well-documented as it relates to divvying up the revenue from NFC-enabled mobile phone transactions. But mobile-network operators also hope to get a cut of revenue from mobile commerce and banking transactions that employ WAP, downloadable applications and other non-NFC methods, according to a recent survey.
  In October, analysts from Boston-based Aite Group LLC surveyed 12 mobile-network operators based in Europe, Asia and North America about their expectations for revenue sharing from mobile banking, point-of-sale and nonproximity transactions.
  Aite analyst Nick Holland, who wrote the report, would not identify the networks but said they are among the largest networks in the countries in which they operate.
  Not surprisingly, 83% of network operators said they would expect fees for each NFC-enabled transaction on their networks. But 82% also said they considered fees per end-user transaction to be a “likely” or “extremely likely” means of generating revenue from nonproximity mobile commerce. And 60% of the network operators named subscription fees charged to end users for mobile-data access as “extremely likely” or “likely” revenue models for networks enabling mobile commerce.
  Mobile networks “expect to make revenues on the end users’ transactions,” Holland says. “Whether that is to be paid for by the merchant, consumer, bank or network operator is up in the air at this time.”
  Mobile networks have laid the groundwork for per-transaction fees from some types of mobile commerce, such as downloading songs and ringtones, Holland says. But most merchants will not agree to pay fees for mobile transactions in which they also pay other fees, such as payment card interchange, he adds.
  Big-Name Interest
  Meanwhile, mobile commerce continues to draw interest from some big names. In September, Google dipped deeper into mobile payments by extending its Google Checkout service to mobile devices whose WAP browsers can access mobile Internet sites designed for small screens of mobile devices.
  Google Checkout users register for the payment service using cell phones or other mobile devices. Any merchant in the United States or United Kingdom that offers Google Checkout for Internet purchases–and supports a WAP-accessible Web site–can accept payments from mobile devices and deliver such content as ringtones and music directly to them.
  Google charges merchants the same fees whether consumers initiate transactions using personal computers or mobile devices. Checkout is free to merchants for transactions up to 10 times the amount the merchant spends advertising on Google. Beyond that, merchants pay 2% of the sale plus 20 cents.
  Javelin Strategy & Research Inc. analyst Bruce Cundiff says it is unclear whether Google’s entry into the mobile-payments market will overwhelm competitors or boost their businesses by drawing attention to mobile payments. “It is possible for both of those scenarios to play out,” Cundiff says.
  PayPal began enabling mobile payments in April 2006. Customers may use mobile browsers to check PayPal balances and to find places to shop. Accountholders also may check balances and send funds using text messages by registering their phone numbers with PayPal, which then sends automated calls to phones to verify registration.
  Such companies as Google and PayPal can afford to offer mobile options whether the services lose or earn money in the short term. But companies only enabling mobile transactions may struggle to survive until they gain enough users, Holland says.
  One company whose business is based solely on mobile payments is Palo Alto, Calif.-based Obopay Inc. Obopay enables person-to-person payments from prepaid accounts using text messages, downloadable software or mobile Web browsers.
  Obopay users may send funds to each other’s Obopay accounts for purchases or loans. They pay Obopay 10 cents to send funds but nothing to receive them, and 1.5% of the transaction amount to add funds to Obopay accounts using a credit or debit card. But they pay nothing to add funds from checking accounts using the automated clearinghouse network.
  Obopay sends accountholders prepaid, reloadable MasterCards to tap Obopay funds for free at any merchant or U.S. ATM that accepts MasterCard or its Cirrus ATM brand. Withdrawals from ATMs outside the U.S. cost $2.75 per transaction.
  Obopay began on the premise that college students would use the service to pay each other for debts, such as splitting the cost of lunch. “We’re still addressing that market,” says Ramy Mora, Obopay vice president of marketing. “We found Obopay has a much wider appeal than we ever believed. We’re seeing parents use Obopay to send money to students and young professionals using BlackBerries (wireless phone, e-mail and calendar managers) to pay each other back.”
  Plastic Important
  Red Gillen, senior analyst at Boston-based consultancy Celent LLC, says Obopay is useful for parents to send funds to college students. But he doubts that many consumers will find mobile funds transfers an easier option than
  using cash to split lunch tabs.
  Gillen considers Obopay’s prepaid MasterCard its most-viable payment or cash-withdrawal option. “It is the only model today that bridges the mobile world over to the physical world,” he says. “Having that piece of plastic is very important.”
  Before mobile payments can take off, consumers will need to grow accustomed to mobile banking, Gillen asserts.
  Today, only 3% of households that bank online also bank using mobile phones, Gillen estimates in a recent Celent report. That report suggests that by 2010, some 30% of U.S. households that use online banking also will conduct some banking functions using their mobile phones, accounting for roughly 17 million households.
  â€œChecking your balance, looking up your transaction history–it’s really getting people used to receiving financial services via a mobile device,” Gillen says. “The next phase will be bill pay, just as it was on the Internet. After people got comfortable checking their balances on the Internet, they got used to bill pay.”
  Novato, Calif.-based Clairmail Inc. is betting on that evolution by enabling financial institutions to send interactive alerts to mobile phones and other devices and via text messages, downloadable applications or mobile Web technology.
  Depositors opt for alerts sent to their mobile phones for such events as when deposits arrive, when bills are due and when accounts drop below minimum amounts. Because the alerts are interactive, depositors may respond to the messages by commanding actions, such as transferring funds or initiating bill payments.
  The service conducts multiple banking functions at once, says David Thompson, Clairmail vice president of marketing. “Customers are not prone to pay bills unless they have the funds and know what their account status is.”
  Relationship Builder
  Third-party mobile-payment services are drawing more interest from financial institutions eager to remain direct participants in payments as competitors, such as PayPal and prepaid card accounts, encroach on bank card turf.
  In August, Citibank began a pilot offering Obopay to existing Citi customers in Chicago and Boston. Pilot participants start by enrolling in Obopay and opening an Obopay prepaid account. They add value to the account using Citi credit cards or electronic funds transfers from their Citi accounts. Citi customers then may view Obopay balances and initiate or receive payments from any other Obopay user, regardless of whether that person also has a Citi account.
  â€œFor some customers, it could be their first or primary relationship with Citibank,” says Steve Kietz, a Citi senior executive in charge of global consumer growth ventures and innovation. “It’s probably going to get us into some teen markets that we weren’t in before. And it meets the needs of people who don’t have credit cards.”
  As more large banks pursue mobile banking and payments, big processors and networks that provide financial institutions with traditional payment services will get into the mobile-payments game by developing their own services, by partnering or by buying smaller firms, Gillen predicts.
  Since its founding in 2004, United Kingdom-based Monitise plc has worked to grow its mobile banking and payments business through partnerships with various banks, mobile-network operators and payments vendors.
  Monitise and VocaLink, an ATM-network operator in the UK, operate a joint venture called Monolink. The service began in 2006 to enable mobile banking and payments for customers of a growing number of UK financial institutions, including HSBC, Royal Bank of Scotland, NatWest and Ulster Bank.
  The company is just getting started, says Richard Johnson, Monitise chief strategy officer. “Mobile payment is not mass-market yet,” he says. “We see a three- to five-year picture for mobile commerce to develop.”
  Johnson says he agrees with the widely held assumption that mobile banking will lead to mobile payments. With that goal in mind, Monitise is expanding its partnerships beyond Europe.
  Milwaukee-based processor Metavante Corp. joined the mobile party in March when it announced its 51% ownership of Monitise Americas, a joint venture with Monitise plc.
  In September, Metavante announced that Monitise Americas would offer a mobile-banking and payment service that operates over its NYCE PIN-debit network. By December, Metavante had named three small financial institutions using the service: Harvard University Employees Credit Union of Cambridge, Mass.; North Jersey Community Bank of Englewood Cliffs, N.J.; and Sutton Bancshares Inc. of Attica, Ohio.
  Depositors whose banks offer the service through Monitise download software to their mobile phones. The service registers and assigns a unique pass code to each phone that downloads the software.
  Transactions move from mobile networks onto the NYCE network for settlement, so participating banks need not make any changes to their systems, says Steve Rathgaber, NYCE president and chief operating officer.
  The service initially is limited to balance inquiries and funds transfers, Rathgaber says. Monitise plans to enable miniature bank statements and banking alerts in the first quarter of 2008, and the company plans eventually to enable bill payments from mobile phones, he says.
  Rathgaber says several more financial institutions, which he would not name, plan to launch the service soon. He says NYCE does not expect mobile banking and payments to gain mass appeal immediately, but he does expect enough early adopters to justify offering the services now.
  â€œThere is a generation that is quite ready–the people who are doing text messages and downloads of ringtones,” Rathgaber says. “Even old-timers like me are using [personal digital assistants] on a regular basis.”
  Most industry observers believe that NFC-based mobile payments eventually will be the mainstay of small-ticket, in-person purchases, such as fast-food and subway fares.
  Some vendors are preparing to add NFC-payment options, too. “We have a beta version of an NFC application that’s ready to launch any time NFC is ready,” Obopay’s Mora says.
  But payment vendors also are betting on a growing short-term market for mobile payments based on text, downloadable applications and mobile Web communications. And they say some non-NFC methods will exist for some time to fill mobile-banking and payment niches.
  Mobile and Internet Banking Household Penetration
   2006 2007 2008 2009 2010
  Internet banking households* 43 46 50 54 56
  Percentage of all households 37% 40% 42% 45% 46%
  Mobile banking households** 215 1,380 5,000 10,800 19,600
  Percentage of all households 1% 3% 10% 20% 35%
  Source: Celent LLC, September 2007. *In millions. **In thousands.
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