Will that be cash, check or cell phone?

Mobile payments are the next frontier, but Americans are slow to adopt

By Vanessa Richardson

Daisy Chen has seen the future of credit cards -- and it's on the cell phone.

While on a trip to South Korea, Chen, a 24-year-old graphic designer from Sacramento, Calif., noticed how people whipped out cell phones when it came time to pay. One of her friends had a mobile phone from SK Telecom, South Korea's biggest mobile operator, that let her fill her commuter train account when it fell below a certain amount, and remotely send the charges to her Visa account. "She just held out her phone as we walked through the turnstile," said Chen. "I got spoiled. Now I want to do the same with my phone."

That's what credit card issuers want to hear from customers, and they're working hard on rolling out mobile payment technology to U.S. customers. However, compared to Europe and especially Asia, payment by cell phone here is still in its infancy. Analysts say it will take a while for card issuers to evaluate how well the technology works and whether consumers -- beyond hip youngsters like Chen -- will accept it.

Pay by phone: SMS or NFC?
There are two types of payment technologies used on cell phones. Short Message Service (SMS), or texting, allows a transaction by typing a dollar amount into your phone and sending it to the payee. With Near Field Communication (NFC), you swipe your phone like a credit card near a terminal. Both types use the phone's Internet browser to reach a remote Web server to approve payment.

NFC is used in "contactless cards," which many card issuers are introducing for use at special terminals in stores. The SK Telecom phone Chen's friend used for train tickets had Visa's payWave technology, used in contactless cards. But for now, NFC on cell phones is only being used in Asia.

SMS is seen as an easier technology in the United States because it works on all phone networks and doesn't require any special software to work. Visa is also focusing on SMS transactions, working with U.S. and Canadian banks such as PNC Bank, SunTrust and Wells Fargo on trials that let cardholders get text messages on their phones when they pay for something with a credit card.

The action is overseas
Visa is rolling out mobile payment pilot programs worldwide with SMS, NFC and more cutting-edge 3G and 4G phone networks. For example, employees of banks in Spain and Taiwan are using Nokia phones with payWave to pay at stores in major cities. There are also major pilots in Australia, Brazil, Guatemala and the United Kingdom.

In May 2008, MasterCard Canada did a four-month trial testing its PayPass contactless technology (which is currently used in the United States) in NFC phones on Bell Mobility's wireless networks.

So why is this technology being tested everywhere but here? There's simply no interest, says Edward Kountz, a Forrester Research analyst studying mobile payments. In a 2008 study, he found that just 6 percent of Internet users -- and only 10 percent of mobile device users --were interested in paying by phone.

Everyone is interested in mobile, but some are more interested than others ... So where you need more speed and convenience is where you may see the technology first.

-- Prakash Hariramani Visa

"The high availability of credit cards and online payment alternatives are commonly understood and accepted," he wrote. "But establishing awareness and trust around mobile payments increases the challenges of phone transactions. Compare that to markets like the Philippines, where many have embraced mobile as the first and only electronic alternative to cash payments."

Jane Cloninger, research director at financial services consultancy Edgar, Dunn & Co., says Asia's lifestyles make people there more apt to embrace mobile payment than Americans. "Those countries, with their dense housing and cities, have put more money into transit and wireless infrastructures, which has made cell phones more advanced and really helped spur adoption. It was seamless to use them first at train stations, then sandwich shops near the platform and so on. In the United States, we don't have the same density in our cities. It will take more than a PayPass-like application to spur adoption here."

There are a few U.S. companies working on mobile payments, both with card companies and on their own. Obopay lets you create a PayPal-type account to deposit money and download software onto your phone to make or receive payments with other Obopay customers. It currently has a mobile pilot program with Citibank.

Paymo lets subscribers in 50 countries use their phones to pay bills and buy in advance from merchants. Users enter their phone number to initiate the transaction and then confirm a purchase via text message. When the transaction is complete, it goes directly to their cell phone bill. MyTango has a pilot program in Northern California that allows phone users to do the same at a few merchants near Stanford University.

The next step: mobile banking
While mobile payments gain traction, card issuers are using an alternative method to get customers interested in making payments anytime, anywhere -- "mobile banking" programs that can be used on most cell phones.

For example, Bank of America Mobile Banking lets customers check balances on their credit card accounts, pay bills, transfer money between accounts and view transactions. It launched last October on the new Google Android phone system. An app for BlackBerry devices soon followed, launching in January.

American Express and Discover also offer mobile banking apps. You can get text alerts about when payments are due and received, balance updates and limits, membership points balances and irregular account activity. (Visa has the same, but it's currently only for Chase cardholders.)

With the iPhone craze, many banks, including Bank of America, Provident, USAA and Wells Fargo, have created mobile banking apps for Apple users to download for free.

A cell phone changes the way you interact with the world.

-- Farhan Ahmad Discover

For smaller banks with less of a tech budget, AT&T and cell phone maker Qualcomm created an iPhone application called Firethorn that lets their customers get the same access.

Prakash Hariramani, a manager for Visa's global product innovation, says these free apps are a good way for card issuers to gauge customers' interest. "It's a great way to get them snacking on financial services because NFC is not prevalent here yet. Once they get used to this, it will be a much easier adjustment when the NFC rollout arrives."

Until that happens, card issuers are doing more pilot programs in the United States that sidestep NFC. MasterCard has pilots for its Blaze Mobile sticker -- literally, a sticker containing its PayPass contactless technology. It can be put on any phone to make transactions at stores that accept PayPass. (Analysts say it's a good step, but the sticker is not as safe or secure as NFC).

MasterCard may be taking the biggest leap into mobile payments by launching a 21st century version of Western Union. Its MoneySend program, a partnership with Obopay that launched in May, offers person-to person money transfers via any cell phone in the United States. Sign up for a prepaid account online and you can use your credit card, debit card or bank account to transfer funds to anyone. (They also have to register to state where they want your money to be deposited.) Send a text confirmation to the recipient, then you'll get a call from MasterCard to enter a special PIN to verify the amount and the recipient. Currently, you can transfer anywhere between $1 and $500 for a small fee, although MasterCard expects some partner banks to waive that fee to get people interested. As with credit cards, you're not liable for any unauthorized charges.

Discover, which has done four small mobile pilot programs in the past two years, has a similar contactless sticker with its Zip technology, currently being tested by company employees. Farhan Ahmad, director of emerging payments for Discover, says there's no rush to get it to market. "We will slowly roll it out, but only where it's appropriate. We won't open it to those who may not take advantage of it."

What's the holdup?
Why are card issuers so reluctant about rollouts? It basically comes down to a chicken-or-egg problem, says Ahmad, who is candid about the multiple challenges in getting new technology to market. "First, you need a new type of card reader at the retailer. What technology do you use, and who pays for it? Second, how do all the different players come together, and what economic model will they use? Then there's a layer of complexity in user adoption because people use hundreds of different types of phones and applications. It's all very unclear, so we've been testing a lot of technologies to hash out the challenges and figure what works best."

Hariramani at Visa agrees there's no timeline for a NFC rollout, as phones with that technology aren't yet widespread in the United States, but he says Visa is actively talking with wireless carriers and banks about setting common standards. "Everyone is interested in mobile, but some are more interested than others, such as retailers in quick-service areas, like convenience stores. So where you need more speed and convenience is where you may see the technology first."

How long will that be? Tech analysts believe NFC mobile payments won't hit the United States until at least 2012. But with mobile banking fast gaining traction worldwide, it's inevitable that many Americans will eventually be switching from whipping out plastic to waving phones around at the train turnstile and store scanner.

Says Ahmad, "I think pay-by-phone will be adapted quickly because when someone loses his credit card, it may take a day before he realizes it. But if he loses his phone, he'll notice in about 20 minutes. A cell phone changes the way you interact with the world."

And it will soon change the way you spend your money.