Tapping into the cellphone wallet

The technology for using a cellphone for everyday payments has been around for several years, and has been in use in Japan since 2006. Now, the development of sophisticated, and secure, applications such as NFC (near-field communication) has prompted Spain's major retailers and gas stations, as well as public transport companies, to begin allowing customers to pay with their phone, backed by the country's main banks, credit card companies and Telefónica.

The NFC wallet requires a special chip and an application (app) on the smartphone. This type of wallet requires the consumer to log in to the app, using perhaps a secure PIN or password. The wallet app can then be used for proximity "contactless" interaction with nearby terminals, transport gates or other NFC devices.

As said, the basic idea is not new; in the United States, Exxon provided customers with a keychain dongle called "Speedpass" that can be waved at the gas pump to pay. The advent of smartphones gave the idea a real boost, since we always seem to have one with us. But how to take it mainstream? Without a lot of demand for NFC, handset makers have shied from incorporating it. Without the chip in wide circulation, retailers aren't particularly interested in buying lots of new equipment to provide technology their customers have likely never even heard of.

Cellphone payment will spread rapidly because consumers like the system"

NFC wallets definitely have the "cool factor," and when contactless infrastructure or terminals are available, this is a compelling way for busy consumers to get around. These wallets in many cases focus on improving the loyalty experience for cardholders - allowing the customer to have many or all of their loyalty cards in one app, and have these "auto redeem" at the point of sale (POS), for example. It is certainly much simpler than cutting out coupons.

They say that using cellphones to make payments is cheaper than cash and credit cards. "When somebody makes a payment of 100 euros, there is an added cost of 3 euros for cash, and 2.40 euros for debit cards, and that cost is born by everybody. In Europe, credit card payments make up 22 percent of transactions, around 2 trillion euros a year, and amounts to a saving of 14.4 billion on the cost of cash payments," says Pilar Aurrecoechea, the director general of Mastercard's Spain operations. She says that moving away from a cash economy toward electronic payments will benefit everybody.

"It will increase Europe's GDP by around 3 percent and will increase employment by 2 percent. This will mean some 200,000 new jobs," she claims.

Contactless payment, in the case of credit cards and transport season tickets, and NFC in the case of cellphones, is, say the banks, the solution. The system allows consumers to pay up to 20 euros by holding a cellphone or card in front of a point-of-sale (POS) terminal. This is a computerized replacement for a cash register which can include the ability to record and track customer orders, process credit and debit cards, connect to other systems in a network and manage inventory. Purchases above 20 euros will still require consumers to tap in a PIN code.

South Korea followed Japan in implementing the system, while Turkey and Poland have led the way in Europe. There is now a global standard, meaning that users can pay for their subway trip in New York or Stockholm with the same phone. The European Union has already begun preparing legislation to facilitate the use of NFC technology. Athletes attending the Olympic Games in London were all issued with NFC-adapted cellphones.

Exxon customers have a keychain dongle that can be waved at gas pumps

Barcelona-based savings bank La Caixa is now in the process of converting its POS system, and has already issued more than 600,000 contactless cards in Catalonia; next year it intends to extend the program to the rest of the country. "By 2015 we will have converted the 200,000 POS that we have in Spain, and it will be possible to pay for drinks in up to 15,000 bars. We will be installing POS in markets, newsagents, florists and other small businesses that have never used them so far," says Miguel Ángel Pozuelo of CaixaBank.

BBVA is doing the same in Madrid and Barcelona, and has switched from charging commission on credit card payments for monthly 10-euro flat rate cards that include the cost of communication on cellphones. "We have 150,000 POS throughout Spain, and we want to make them all contactless within two years. We already have them in taxis, pharmacies, tobacco stores and restaurants, and we will have switched a further 15,000 by the end of the year. There is a massive move toward this in Spain that is creating synergies and that will spread the use of cellphone payment very rapidly because consumers like the system. Fifty thousand of our Turkish clients use their cellphones to pay for goods and services every day," says Antonio Macías, the head of BBVA's sales development.

Assuming that the technological hurdles can be cleared, the business model has also traditionally been a challenge with the cost outweighing the benefit. In fact, Osama Beider, Google Vice President of Payments speaking at Mobile World Congress 2012 stated that the challenges on the supply side are solvable but that the more troubling issue is consumer demand. This requires building compelling consumer experiences and a value proposition that works for the consumer.

There are currently upward of 60 devices with inbuilt NFC in market. Their relatively high price tag, around 500 euros, will not be a problem, say the experts, because operators and banks want to promote their use. "We'll offer no-interest deals, and sales will go through the roof, because they can be used for so many things. Our NFC wallets work with any credit or loyalty card. By 2014, there will be 250 million NFC cellphones moving some 80 billion euros throughout the world, and by the following year, there will be 500 million terminals," says a spokesman for Telefónica.