The market tests that are planned for Texas and Utah, and the test that is already underway in Sitges, Spain are on the front lines of the battle to define how mobile payments will work in the future.
Today, your Smartphone can be used to buy things at some stores and restaurants. In the near future, most (if not all) merchants will allow you to use your Smartphone to buy things without an intervening piece of plastic.
And that makes sense, because already more people have mobile phones worldwide than people with credit cards. Nokia did a study, and asked what people what they never leave home without. The answer as you would expect is their keys and wallet, but then came their mobile phone. When you repeat that question in 10 years, the answer will just be mobile phones, according to Dr Hugh Bradlow, CTO of Australia’s Telstra.
But, there are only two possible ways that can work: with or without the systems built by VISA, MasterCard, AMEX, and Discover, which are know collectively as the “Payments” industry. (For more detail on how Payments work, see an earlier article or Wikipedia.)
WHAT VISA WANTS
Visa, and their Payment competitors want the status quo, and they are not alone. The Payments system is mature, widely regulated, wholly adopted, and popular. Consumers know where to get to get a credit or debit card, and merchants know where to go have those cards accepted. Banks and credit unions know to interact with Visa, and so do the merchants. So, as Smartphones appear to be another way to bank, and another way to pay, Visa is highly interested in keeping the systems used for credit cards in control of the new Smartphone payment systems also. So, Visa found some partners and launched a test in Sitges, Spain to try to figure out this new market.
THE SITGES TEST
La Caixa Bank, Telefonica and Visa teamed up to launch a mobile payment system market test in Sitges today earlier this year. The test involves 1,500 people and roughly 500 retailers and restaurants. The system being tested incorporates near field communication (NFC) technology in Samsung phones. Payment is made by simply moving the phone near to the device where you once swiped your credit card at a cash register. However, in this test, you don’t need to use any kind of card.
The project’s objective is to study the future widespread implementation of shopping using mobile phones. Due to the relatively large number of participants, the project is the most important experiment of its kind to take place with Visa and its merchants to date.
In Visa’s market test in Sitges, the payments are restricted to transactions at retailers, but the future system will also allow customers to use their Smartphones for other purposes such as buying a ticket on public transport, or sending money to a friend using only your Smartphone.
Visa’s system is based on SIM cards containing an additional code, which triggers a transaction similar to a standard debit or credit card. In fact, the customer can even select with which credit or debit provider they would like use for the transaction.
Regarding security, Kim Faura, director general of Telefonica in Catalunya, says that the Visa system being tested in Sitges has “the same security as a card,” which is the main selling point of the program according to William Gajda. It will be particularly useful when making minor purchases where commonly merchants do not accept credit card payments.
To participate in the test, 1,500 people in Spain have been provided exclusive Samsung mobile phones that include the NFC technology. The people have also been given some minimal training since this product is not yet in the collective unconscious of us all. All participants met the requirements of being customers of La Caixa, having a Movistar mobile phone account and a valid Visa card. Then, they are set loose to see what they buy, how often, and (of course) how much money they spend.
WHAT VERIZON and AT&T WANT
Verizon, AT&T, and other mobile network operators, want something new. They think it could be an interesting idea to cut out Visa and their Payment Peers from making any money on the transaction by simply charging your purchase to your cell phone account. In other words, Verizon looked at Visa and said, “I can do that.”
THE MERCURY PAYMENT PILOT
Verizon teamed up with two of the three other major mobile network operators in the US: AT&T, and T-Mobile USA. The test, dubbed the Mercury payments pilot, is set to be launched in 2011 is similar to the Sitges test as it, too, uses NFC to begin the transaction. The trial is scheduled to begin in cities in Texas, Minnesota and Utah and is planned to expand to other US cities, according to Bloomberg.
According to NFC World Magazine:
Both Discover Financial Services and the US arm of the UK’s Barclays Bank are expected to take part in the trials. Discover, the US’s fourth largest payments network, ran an extensive mobile payments test using contactless stickers last year and would be responsible for handling the joint venture’s payments processing requirements. Barclays, which has partnered with Orange in the UK for an expected commercial launch of NFC payments later this year would be responsible for providing the joint venture’s financial services requirements.
The main difference is that Verizon handles the entire transaction, not the Visa. Verizon pays the merchant, not Visa. And, most importantly, Verizon keeps the interchange (or transaction) fee – Visa gets nothing.
The market tests now occurring in Sitges, Spain and Atlanta Georgia are the first steps in determining which format will win, and the stakes are very high.
There is room for more than one format to be widely used, but merchants are eagerly waiting to see if the dawn of mobile payments will bring lower interchange rates, and higher profits.
Note: Verizon and AT&T are clients of the parent company of The Luciano Group, but this fact did not influence this article in any way.
© 2010 David Schropfer
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