Mobile
micropayments
are back in the news after several years of analyst ambivalence over the practicality of the idea.
Simply put, micropayments are very small payments ranging from a few cents to
about 10 dollars, such as the small fees paid for downloading music. Japan’s
leading mobile operator, NTT DoCoMo, has
announced that it is gearing up to put mobile “wallets” in cell
phones by adding new transactional capabilities to its handsets. Now that it’s
possible to buy a loaf of bread with only your cell phone, will the idea catch
on with mobile users? What will it mean to the banking industry?

Octopus, FeliCa, and Edy

Anyone
who has been to Hong Kong in recent years will have seen an Octopus card. The
credit card-like device is charged up with credit—online, over the counter, or
via machines—and can then be used to pay for anything from a bus fare to a
parking meter to a bottle of milk. The particularly striking thing about the
Hong Kong experience is the range of low-cost products and services that can be
bought with an Octopus card. That range is extending all the time; though not
as universal as cash, it will surely become as extensive as credit cards in
time.

NTT
DoCoMo’s mobile transactions are enabled by Sony’s FeliCa chip, a
small device that can be read by a wireless scanner when it comes into close
proximity with it. Sony has deployed FeliCa for a number of Japanese customers,
including travel companies and convenience stores. Millions of individuals
already use it; and next year, it will be possible to use a FeliCa-enabled
handset instead of the stand-alone card. In essence, a user’s mobile phone can
be swiped by a scanner to make purchases.

Sony
has growing confidence in its card. It believes they are difficult to defraud,
both because they are hard to make and are highly secure (they should become
more secure when incorporated into phones since, if stolen, they can be
deactivated). They are also fast: under one tenth of one second exchange rates
are typical. And, they are easy to use, requiring little more than a swipe over
a reader.

Apart
from being wireless, the key issue which FeliCa seems to have cracked is that
of micropayments. Micropayments represent a significant percentage of the
economy, particularly in the lucrative consumer sector. However, when conducted
electronically, using say credit or debit cards, they are often barely
financially justifiable since the cost of the transaction is close to or higher
than the transaction value itself. FeliCa sidesteps this issue by, in effect,
pooling the expensive micropayments into single, larger payments that the user
makes when charging up the card (in Japan the scheme is called Edy).

Will mobile-phone micropayments gain widespread adoption?

Even
though the technology is ready, there are two important questions to be answered:
Will the micropayment trend catch on in America and Europe, as it has in some
Asian markets, and will the banking industry welcome or resist it?

Mobile
phone users in Japan have already shown themselves to be more than capable of
setting trends: They were the first and are still the largest users of cellular
Internet services. But whether consumers in the West will do likewise is a moot
point. Credit cards have a much greater penetration in the United States, and
even more so in Europe, so it will be hard to get customers to make the switch.

Further—and
this is where the banking industry comes in—there are vested interests to
hinder adoption. Banks, for example, may fear being sidestepped in the lucrative
consumer credit industry, losing their brand presence and becoming mere
commodity brokers in any mobile phone-centered process. New payment services
require widespread industry support to gain traction; one foray into
mobile payment services has already gone down to defeat. A collaborative
venture between Orange, Vodafone, T-Mobile, and Telefónica Móviles, called Simpay,
would have enabled micropayments via mobile phone bills, but the deal recently
collapsed, apparently due to one of the founders dropping out.

Some
may say that this is a loss. The technology, after all, is fast, easy-to-use,
and highly flexible. It looks like the future. However, while proximity cards
like FeliCa will spread in Western pockets for limited use, like making mass
transit payments, I think that they will not be a major concern in the
financial services industry for some time yet.