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Banks Could Lose Out in Battle over Mobile Payments

Financial institutions face a powerful new foe for the nascent mobile-payments market: telecoms.

AT&T (T), Sprint Nextel (S), T-Mobile and Verizon (VZ) are in talks to launch mobile-payment projects using Near Field Communications phones and other "contactless" technologies as early as this year, according to industry publication NFC Times. This technology, increasingly common in Europe and Asia and known as "m-payment," lets consumers make purchases using a cellphone or other handheld device right at the checkout counter.

Reports NFC Times:

The telcos might work with payments partners, such as third-party payment service providers or financial institutions and perhaps a major payment brand. But word is the m-payment plans of the operators do not include major U.S. banks.
That bodes ill for big U.S. banks such as Bank of America (BAC) and Citigroup (C), along with credit card giants Mastercard (MA) and Visa (V), all of which are testing contactless m-payment. Telecoms once viewed such companies as potential partners in deploying these services, but they're now considering whether to go their own way. If their pilots succeed, it could allow mobile operators to bypass banks and credit card issuers altogether in providing the vital financial link between shoppers and merchants.

Many people already use mobile networks to buy ringtones and other products. But facilitating mobile payments at the point-of-sale is potentially big business, NFC Times editor Dan Balaban told me. "It could be the mobile operators see an opportunity here to break into the payments business. They have tens of millions of subscribers carrying mobile phones that could one day become payment devices."

Contactless payment involves NFC technology, which is used to transmit data between devices over short distances. In essence, it turns a cell phone into a mobile wallet, enabling payments and storage of personal information. For example, people can use their NFC phone to buy movie tickets, purchase transit passes and check in at the airport simply by tapping their handset on a special reader.

But full-blown contactless m-payment would represent a dramatic advance. For instance, the technology could turn cell phones into credit cards. It could also allow merchants to send mobile coupons or other promotions, which consumers would redeem with a tap.

In the U.S., progress has been fitful. Banks and the credit card companies have been testing contactless cards for years, with limited success. An additional major hurdle for m-payment is getting disparate constituencies to work together. Depending on their uses, a mobile payment system requires the involvement of mobile network operators, hardware makers, card issuers, government agencies, transit authorities and numerous other players.

And at the retail level, the quandary is a classic chicken-and-egg scenario: Enough consumers must use contactless m-payment to persuade merchants to invest in (and install) the required infrastructure. Meanwhile, enough merchants must use the technology to encourage consumers to invest in a souped up phone.

M-payment business models also remain in development. Under one scheme, banks could collect a fee from merchants or tack on charges for mobile wallet transactions involving a credit card. Meanwhile, telecoms could build proprietary payment networks in order to shut banks out of the fee. But nothing is certain on this front.

Still, the potential is huge. In Japan, the world leader in use of the technology, some five to 10 million people use their cell phones to make contactless m-payment purchases, while nearly three-quarters of mobile phones have digital wallet capabilities, according to industry estimates.

A key question for the American market: Would growing competition between telcos and banks speed the emergence of contactless m-payment or bog it down? If they're smart, financial firms and mobile operators will opt against trying to steal a march on the other and instead join forces in the hope of breathing life into a promising new business line. There's money to be made here.

Image courtesy of NFC Times