and MasterCard want to prove that reducing the fumble factor can save merchants money.
Phones equipped with PayPass, MasterCard’s contactless payment service, are expected to go through rigorous testing in U.S. cities by the end of the year, the companies said.
“In essence your phone will become your wallet, key
chain and your ID,” Ron Hamma, vice president and director of enterprise business development for Schaumburg, Ill.-based Motorola, said in a statement.
PayPass, a contactless payment platform developed by MasterCard with VivoTech, lets users tap or wave a device in front of a special reader in order to process a transaction. With PayPass, MasterCard is targeting retail establishments that have low-value transactions that are mainly cash-based, such as quick-serve restaurants, movie rental shops, theaters and casual dining restaurants.
“MasterCard’s overriding goal is always to increase transaction volume,” said Jupiter Research analyst Bruce Cundiff. (Jupiter Research and internetnews.com are owned by the same company.) “They’re also going after merchants that benefit from quicker transactions. McDonalds is a perfect example.”
In August, McDonalds announced that some restaurants in Dallas and New York City would accept PayPass by the end of the year, with more locations participating in 2005.
Purchase, N.Y.-based MasterCard, the second largest credit card company, needs to try harder, Cundiff said, and m-commerce is one way of differentiating itself.
MasterCard has completed trials of credit cards with embedded chips in Orlando, Florida. It also worked with Nokia
on tests of PayPass-enabled phones in Dallas, Texas. For this test, chips embedded in special cover plates on phones were pre-programmed with users’ MasterCard account information.
Around 16,000 Orlando credit card holders and 500 to 700 Nokia users in Dallas could use contactless payment at a variety of participating drugstores, gas stations, movie theaters and restaurants.
MasterCard said it has rolled out these tests slowly and carefully. The PayPass offering was announced in December 2002, and the nine-month Dallas pilot began in May 2003.
In those tests, the company found that retailers had the potential to increase revenues by decreasing checkout time. In drive-through establishments, PayPass shaved between 12 and 18 seconds off a purchase when compared to cash. In Dallas, the average PayPass payment made using a mobile phone was six seconds faster than using a card, because shoppers spent less time fumbling through their wallets.
Proving PayPass saves merchants money could be the key to adoption of the technology, Cundiff said.
“It hasn’t made sense for the low-to-average-ticket merchant to accept credit card payments, because they lose a certain percentage of the transaction [due to fees],” he said. While the major credit card companies have tried to show that there are hidden costs to accepting cash, such as theft and physical management of the money, the decision remains with the merchant. “MasterCard sees [PayPass] as its way into those merchant types,” Cundiff said.
Getting mobile phone manufacturers involved can help MasterCard with some of the development costs. “MasterCard, up to this point, has been bearing most of the burden of the investment,” he said. “Involving Motorola and making the case that it’s beneficial to them may be a way of spreading the investment burden across a larger number of players.”
The successful implementations of contactless payment systems in Japan and Korea have been driven by telcos, Cundiff said. But phone-based mobile commerce has been slow to take off in the States, where mobile networks are slower and use inconsistent protocols.
Svante Rodegard, an independent consultant to the mobile payments industry, said, “PayPass is the right way to do it. The problem has never really been the technology itself.” He pointed out that SIM
“This is more of a direct transaction,” Rodegard said, “because PayPass ties into merchants’ existing POS system. It’s not really changing the payment system; it simply transfers the information from the magnetic strip on the credit card to the phone.”
Involving handset manufacturers is something of a coup, according to Cundiff, because concerns over who owns the customer could stall m-commerce. Because in the U.S. most mobile phones are sold by network operators, the Motorola/PayPass system also brings telcos to the party. Those operators will need to agree to the form factor of the phone, while the banks issuing the credit cards will need to feel confident about the security and storage of their customers’ financial information.
“It’s a multilateral relationship. Card issuers will have to build a consortium and give others a piece of control over the relationship with the consumer,” Cundiff said.
But struggles to control customers and their information in the m-commerce world are only beginning, according to Maria Christensen, a micro-payments consultant based in Sweden.
“The question of who is the owner of the card, of the applications stored on the card and of the connection to the communication link must be sorted out,” she said. “The operators don’t have a business models for adding an extra application to the card, and the banks wants control over the business process.”
There’s another thorny problem, according to Christensen: Each m-commerce-enabled phone will contain an “empty card” before it’s sold and activated, in the form of a master key stored in the card. Who controls that key?
Security of the stored information and the phone itself is another issue, one on which the announcement was vague. “One of the biggest problems using credit cards is fraud,” Rodegard said. “Is this fraud prevention any better than credit cards?” Motorola and MasterCard executives were not available for comment.
The Motorola phones will be able to run other applications besides payment and act as readers. They could be used for ticketing for mass transit or to receive promotions such as coupons. The companies expect trials of the m-commerce phones to take begin in several U.S. locations by the end of 2004.