Mobile Payment Players Swallow Their Egos

Many people find the idea of being able to pay for things with their mobile phones attractive, removing the need to carry cash and credit cards. Until now, mobile operators, device manufacturers and banks have effectively blocked that by all offering independent solutions, making it hard to choose which option to go for.

Vodafone, O2 and Everything Everywhere – the T-Mobile/Orange joint venture – have announced a partnership to create a shared mobile payment system using near-field communications (NFC).

It is about time. Momentum has been building over the last few months around NFC technology, which allows consumers to carry out transactions using their mobile phones. NFC is a set of short-range wireless technologies that can beam and receive information at a distance of up to 4 inches, and is currently used in London Transport’s Oyster cards.

Although NFC has been around for a while, there has recently been a resurgence of interest in the technology from within the mobile industry. A recent report by Juniper Research predicted that global NFC mobile contactless payment transactions would reach nearly $50 billion (£31bn) worldwide by 2014, and that 2011 and 2012 would be “banner years” for NFC service rollouts.

However, the mobile payments industry has been extremely fragmented, with individual partnerships between network operators and banks creating closed-loop systems. This will have to change if NFC is ever going to be adopted into the mainstream – and the UK-based agreement may be a sign that this is starting to happen.

Industry gearing up for NFC

Back in January, Everything Everywhere – the combined entity of UK mobile operators Orange and T-Mobile – teamed up with Barclaycard to offer mobile payments, using NFC technology built into the phone’s SIM card. The operator described it as “the beginning of a revolution in how we pay for things on the high street”.

Then in February, O2 announced that it would be operating its own NFC network, and applied to the Financial Services Authority for a licence to hold money on behalf of its customers in a virtual “wallet”. Global e-payments provider Wave Crest will provide and operate the core banking platform upon which O2’s mobile wallet service will run.

Device manufacturers have also been keen to get in on the action. In March, mobile giant Samsung and credit card company Visa announced they were teaming up to offer mobile payment technology at the London 2012 Olympics. The two companies will produce a special mobile handset equipped with NFC and a Visa-enabled SIM card ahead of the games.

And Google – together with Citigroup and Mastercard – is planning to run NFC trials in New York and San Francisco during the summer, allowing people with NFC-enabled Android phones to pay for goods in the 124,000 retailer stores that offer MasterCard’s PayPass service.

Meanwhile Apple, Research In Motion, Motorola, HP and Nokia are all busy building NFC into their future smartphone handsets. Those companies have not announced partnerships yet, but are so confident that mobile payments will take off that they are preparing the technology anyway.

Lots of walled gardens

While all these announcements have helped to boost consumer interest in NFC technology, there has been a fundamental problem, which is that the majority of them operate independently of one another. People that sign up to use NFC with a particular operator and a particular bank can’t use the service in a shop with terminals provided by a different operator.

“From an issuing perspective we’re still really in a very closed loop configuration,” said Mary Carol Harris, vice president of mobile innovation, new product and channel development at Visa Europe, speaking at a GSMA roundtable on mobile money (speaking yesterday, before the UK announcement).

“The business models we’ve seen have been bilateral deals,” she added. “Really what we need in the industry is something that’s going to break that. A much broader, more widely accepted business model, to enable a multitude of issuers to work with a multitude of mobile handset manufacturers, so that consumers can have choice.”

The UK’s announcement follows a similar deal in Spain, in which Orange, Telefónica and Vodafone pledged to work together on creating a stable ecosystem, to avoid market fragmentation.

The hope is that this model will be replicated in other markets. However, this means persuading companies that participating in a mobile payments ecosystem will be more lucrative in the long run that keeping their customers all to themselves. It really comes down to mobile companies swallowing their egos.

A more fluid business model

“What we see now is that a lot of the companies that are coming out in what we call a ‘closed loop’ or competitive manner, but the cycle time on them opening those up has decreased tremendously,” said Matt Dill, global head of emerging products at Visa.

“People that get in and start to look at the challenge of consumer acceptance very quickly realise that the ecosystem requires parties to work together a little bit more fluidly than a corporation may want to when they first look at the plan.”

Today’s announcement is a sign that the mobile payments ecosystem in the UK is preparing to open up, but we have yet to see how strong the operators’ commitment is. The players need to establish standards and regulations that will allow the technology to be used universally. Only then will consumers be able to see how mobile payments could revolutionise the way they spend.