March 23, 2011

Swiping Is the Easy Part

By TARA SIEGEL BERNARD and CLAIRE CAIN MILLER

The cellphone has been more than a cellphone for years, but soon it could take on an entirely new role — standing in for all of the credit and debit cards crammed into wallets.

Instead of swiping a plastic card at the checkout counter, consumers would merely wave their phones.

There’s just one hitch: While the technology is already being installed in millions of phones — and is used overseas — wide adoption of the so-called mobile wallets is being slowed by a major behind-the-scenes battle among corporate giants.

Mobile phone carriers, banks, credit card issuers, payment networks and technology companies are all vying to control these wallets. But first, they need to sort out what role each will play and how each will get paid.

The stakes are enormous because small, hidden fees that are generated every time consumers swipe their cards add up to tens of billions of dollars annually in the United States alone.

“It all comes down to who gets paid and who makes money,” said Drew Sievers, chief executive of mFoundry, which makes mobile payment software for merchants and banks. “You have banks competing with carriers competing with Apple and Google, and it’s pretty much a goat rodeo until someone sorts it out.”

In one camp are the long-established players. Payment networks like Visa and MasterCard, along with banks that actually issue credit cards to customers, want to stay at the center of any payment system and continue to collect their fees from merchants.

They are facing competition from companies they see as interlopers. These include PayPal and Google, which want to play a part in a new payment system, as well as Apple and the mobile carriers, which want to collect fees through their control of the phones themselves. In the middle — and perhaps playing a deciding role — are the retailers. They have to install terminals that accept mobile payments.

Consumer advocates, meanwhile, said they were concerned that a mobile system would bring higher fees and questioned whether consumers even want a new system.

“Is it possible to make a system that’s too easy to use, where you reduce so much friction from the transaction process that people aren’t necessarily aware of what they’re spending on something?” asked Jan Chipchase, executive creative director at the design firm Frog Design, who studies mobile payments.

Credit card and technology companies have talked about mobile wallets for well over a decade. But now, finally, the pieces are starting to fall into place.

“Now that we have this commitment by the handset manufacturers and telcos, I think things are looking far more promising than ever,” said Gwenn Bézard, research director at the Aite Group, a research and advisory firm focused on the financial services industry. “The question is, Are telcos and card networks and banks going to agree on anything?”

Visa and MasterCard now dominate the major tracks that shuttle credit card and debit payments between banks and retailers. Retailers must pay the banks issuing the cards a percentage of each transaction, and payment networks like Visa take a small cut. So for every $1 spent by a consumer, the retailer keeps about 97 cents, the card-issuing bank takes nearly 2 cents and the remaining penny goes to the merchant’s bank handling the transaction and the payment network.

With mobile payments, it is still unclear how all the players will get paid or if any of the costs will trickle through to consumers, perhaps through new fees. Mobile carriers may demand that the card issuers pay them something akin to rent, or reach some other agreement, to store important payment credentials on a secure piece of the chip inside the phone. There are several technologies that allow phones to communicate wirelessly with other technologies, though the front-runner for payments is one called near-field communication, or N.F.C.

“I think watching the industry evolve will determine where we need to go,” said Peter Ho, product manager for Wells Fargo’s card services and consumer lending, adding that the banking industry’s past conversations with mobile carriers had not been fruitful because they could not agree on financial terms.

The mobile carriers’ frustration with the banks, some analysts said, was the impetus behind a joint venture by Verizon, AT&T, T-Mobile and Discover to create their own mobile wallet. The venture, known as Isis, is expected to introduce its system next year. Barclaycard, already a major player in Britain, will be the first issuer of the group’s in-phone credit card and sees it as an opportunity to expand in the United States. Referring to the carriers’ 200 million customers, Amer Sajed, chief executive for Barclaycard US, said, “It’s phenomenal for us to be able to leverage such a large customer base, right as the customer is getting or updating their mobile device.”

The banks and credit card issuers, meanwhile, have found a way to temporarily avoid working with the cellphone carriers.

Bank of America, Wells Fargo, U.S. Bancorp and JPMorgan Chase, working with Visa, are all in various stages of testing wallets that would provide access to some of their own credit or debit cards. Because their model is powered by a chip that consumers insert into a slot in certain phones, it does not require the cooperation of the mobile operators.

Visa said some of its bank partners might introduce mobile payments in the second half of this year. But that variation may become outmoded as more phones with embedded chips become available. Visa said it was also working with other providers to ensure that its network would work in all wallets.

(As to the issue of security, several banks and payment networks said that mobile wallets would require a pass code and could be disabled remotely if a phone was stolen. Consumers would not be responsible for transactions they did not make.)

Apple and Google already have payment systems — Apple’s iTunes has 200 million accounts tied to credit cards, while Google Checkout has been less popular. Both could be turned into mobile wallets, allowing users to pay for offline purchases with their Apple or Google accounts. But they would need access to the cellphone chips and the merchants’ terminals. Apple could make its own cellphone chips to make this all happen, but Google could not because it makes only Android cellphone software, not the phones themselves.

Getting retailers on board is important to the widespread adoption of the mobile payments because many merchants will have to replace their card terminals.

While one analyst estimated, conservatively, that only 5.9 percent of merchants will accept mobile payments by 2015, Mr. Bézard of Aite Group said that many of the large retailers — including McDonald’s and CVS — already had the terminals and thus could take part whenever the payment network was figured out. And, he said, 80 percent of consumer transactions occur at the top 200 merchants.

Mobile payments have taken off more readily in other countries, using a variety of technologies. In Africa, where many people do not have credit cards, mobile phones have often replaced cash. And in Japan, people have been swiping phones at convenience stores and bus stations for several years.

“Other global markets may have a single dominant mobile carrier, or a small number of banks, or a strong central bank,” said Beth Robertson, director of payments research at Javelin Strategy and Research. “And this has made it easier for them to reconcile a model.”

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