The Economist : The Future Of Money

Friday, February 16, 2007

Smart cards and mobile phones are quickly emerging as ways to pay with electronic cash…..Arthur D. Little, a firm of management consultants, reckons worldwide payments using mobile phones will climb from just $3.2 billion in 2003 to more than $37 billion by 2008…..More banking services are also being offered on mobiles.  On February 12th, 19 telephone operators with networks in over 100 countries said that people would be able to use their handsets to send money abroad.  MasterCard will operate the system in which remittances will be sent as text messages.  For people without bank accounts, the credit can be converted into pre-paid cards which can then be used to buy things.  “It will revolutionise the money-transfer business,” said Sunil Bharti Mittal, boss of Bharti Airtel, one of India’s biggest mobile operators.  The idea is to tap into the more than $250 billion a year that immigrants and migrant workers send to relatives and friends back home…..

Both MasterCard and Visa have recently introduced plastic cards in America that do not have to be swiped for purchases under $25.  Later this year a “dual interface” system will be tested in London.  It will involve a single plastic card which combines an Oyster for travel, a standard Visa card issued by Britain’s Barclays Bank for “chip and PIN” payments and a new “wave and pay” Visa for instant transactions up to £10 ($19).  The various “contactless” payment systems rely on a technology called “near-field communication” (NFC).  The NFC device within the cards reacts when placed close to a reader or touched onto one.  The machine induces an electrical circuit in the NFC device, which allows a short exchange of data to effect a transaction, such as deducting a fare from the stored value.  As NFC devices can cost only a few cents they could be inserted into every mobile phone.  The idea is that instead of carrying another piece of plastic, just the phone will do.  Payments made from those using stored-value are seen as relatively low-risk.  Merchants are guaranteed payment and if the cards or phones are lost or stolen the cost to users is limited.  But mobile phones can be much smarter than smart cards.  They can be de-activated remotely; they have a screen which can show information, like a credit balance and product information; they have a keyboard to enter information and they can communicate.  This means they can also be used to authorise larger payments by entering PIN codes directly on the handset or topped up with stored credit from an online bank account without having to go to an ATM.

…..The Americans prefer to use plastic for their purchases.  Cards account for more than half of all transactions, up from 29% a decade ago, according to Nilson Report, a trade publication.  More than 1.5 billion credit cards are stuffed into Americans’ wallets.  The average household has more than ten.  The infrastructure for mobile-phone payments in America is starting to take shape.  The market for pre-paid cards already exceeds $180 billion and includes telecoms cards, pre-paid cards issued by Visa, MasterCard, American Express and Discover, and gift cards issued by retailers like Gap or Starbucks.  Cards are also issued for health-care and government benefits.  Banks and credit-card firms hope to convert more cash and cheque payments to plastic with new smart cards.  Some versions are already very successful. Many Americans use EasyPass, in which drivers pay for highway tolls wirelessly.  They are later billed on their credit cards.  SpeedPass, a contactless keychain issued by Exxon Mobil, can be used at petrol stations.  Yet compared with the overall market, the new payment systems are still small.  John Suchanec, of Bank of America, says that whereas debit and credit cards are accepted at 6m locations in America today, only 1m sites accept contactless cards.  The same systems for contactless cards can be used for mobile phones.  Lower fees for shops could speed up adoption, along with the installation by merchants of more readers to take payments.  Again the less well-off countries are sometimes the origin of cheaper ways to use the technology.  Instead of making a big investment in having lots of electronic NFC ticket-checking devices at the entrances and exits of stations, Croatia has found that tickets can be bought by and delivered directly to a mobile phone.  When the inspector calls, the ticket can be displayed on the screen.  Mr Suchanec says a big opportunity still to be exploited is the “two-way” conversation that mobile-phone systems allow.  Banks could send text messages to customers using mobiles linked to their accounts.  Coupons or product information could be delivered directly to mobiles as consumers pay for items.  This opens up lots of new marketing opportunities, which could underwrite fees. 

Art Kranzley, of MasterCard, believes mobile-phone payments could cut down on fraud.  His company is testing, with KeyBank, a system that allows a customer to punch his PIN number into a phone before making a purchase, in effect turning the phone into a credit card.  Studies by Visa show that the average American consumer is twice as likely to carry his mobile phone as he is to carry cash.  For those aged 18-34, the average is four times as likely.  Some of the fastest-growing payment systems already operate online.  Banks provide online processing for clients to accept internet payments made by credit or debit card when the customer is not present.  But, as Sony hopes, computers can be equipped to do the same thing without giving away credit-card details.  This could prove very popular.  One attraction of PayPal as an online-payments system is that neither credit-card nor banking details are exchanged when payments are transferred instantly between account holders.  PayPal, which is owned by online auctioneer eBay, now has more than 120m accounts with people in over 100 countries, and claims a fraud rate that is much lower than a typical credit-card firm.  PayPal has also begun to promote its own mobile-phone payment services.  With their grip on the market, banks and credit-card firms want to be in a position to collect most of the fees from the users of mobile and contactless-payment systems.  But the new systems could prove to be a “disruptive technology”.  Banks could be “disintermediated” if, say, the payments for the train ticket, newspaper and coffee made every day by a commuter with his mobile phone appear not on their monthly credit-card statements, but on those of a mobile-phone service provider or an online-payments firm like PayPal…..Tim Attinger, of Visa, thinks phone companies will not be interested in letting customers charge big-ticket items to their phone bills, because it would require them to take on more financial-risk management and start functioning like banks (which have to deal with customer defaults, collect payments and resolve disputes).  And the credit-card firms will want to keep making their new contactless plastic cards (both in and out of phones) easier to use for small payments.

Much may depend on how bills are settled.  Payments associations would lose out if customers pay for goods directly from their bank accounts (whether via mobile phone or online banking services) rather than with credit or debit cards.  Banks could try to charge customers for settling such bills online; however in the past such schemes have failed.  Some of the smaller banks, which do not have payment-card portfolios to protect, might have the most to gain from offering customers a way to use their mobile phones to pay for items directly from their accounts.  Having spent fortunes on branding, credit-card firms and banks do not want to see other payment systems gain ground.  This presents a threat to banks, says Dan Schatt, of Celent, a research company.  Historically, banks have controlled both the hardware (chequebooks and debit/credit cards) and the distribution (branches, websites, etc). Mobile-phone banking and contactless smart cards could escape some of their control.  Banks could lose customers, says Mr Schatt.  Or will they?  Banks and credit-card firms say that if cash is replaced by mobile phones, they intend to be part of the transition.  A decade ago some observers predicted that internet banking would render retail banking from high-street branches obsolete.  But JPMorgan, Bank of America and others are adamant that people are nowadays using bank branches more than ever.  Even if the phone and the smart card replace cash, who gets to collect the fees remains open to contention.

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