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Smartphones: paying the price

Mobile payment services aim to turn smartphones into handy alternatives to cash or credit cards – will they spearhead the move to a cashless society?

Advances in mobile technology are redefining commerce by turning smartphones into mobile wallets. The newest'development in mobile commerce is contactless payment, which enables customers to pay for lower value goods with a simple wave or tap of their smartphone over a contactless reader rather than swiping a credit card.

In 2007, Visa Europe's CEO Peter Ayliffe predicted that the UK could become a 'cashless society by 2012'. Although Ayliffe's forecast has proved over-ambitious, market movements are supporting his contention.

In January 2011, for instance, McDonalds announced it was rolling out contactless payment terminals in all UK outlets, with coffee chain Starbucks following suit in May. Other retailers moving towards mobile commerce include fast-food chains Subway, Pret A Manger, EAT, and pharmacist Boots.

Mobile Wallet

Market indications suggest that consumers will respond positively to these moves. According to research by consultancy group YouGov, the Mobile Wallet study found that 23 per cent of users would prefer to use their smartphones to pay for purchases instead of cash and credit cards. The study also discovered that 87 per cent of users thought contactless payment methods were convenient, 67 per cent that it's easier than carrying cash, and 29 per cent that it's an easier way to track their spending.

'Retailers, mobile operators and handset manufacturers have a real opportunity to educate consumers about the advantages of paying, particularly for smaller items, in this way,' says YouGov consultant Russell Feldman. He believes that consumers are attracted by the idea of paying for items via their mobile phone and once they have seen it in practice they will be quick to adopt it.

'In the UK we're slowly moving towards a cashless society. With the introduction of park-and-text schemes and the rapid take-up of Oyster cards on the tube (since 2003), one can only see us moving towards this,' explains Feldman. 'Stakeholders need to market the advantages of this technology to the consumer, it's not just about speed and convenience but also about the green benefits – these are great marketing messages.'

YouGov's Mobile Wallet Tracker survey revealed consumers are concerned about the security issues as well as confusion on how the technology works. Other concerns relate to viruses or malware issues and stolen or lost smartphones Barclaycard and mobile network operator Orange claimed to be the first to have launched an electronic wallet service, called Quick Tap. The app sits on the home screen of a Samsung Tocco handset and enables consumers to make purchases of up to £15 by tapping their phone on a contactless reader at participating tills. Barclaycard, Barclays Debit or Orange Credit Card users can transfer funds of up to £100 onto Quick Tap. The app contains information such as e-statements, so users can manage their credit on the app itself or online. For added security, they can choose to enter a PIN before making each transaction.

'Consumers can now check their balance on their mobile phone and see how much they are spending, which you cannot immediately do when touching your debit or credit card on contactless readers,' says Orange's director of mobile payments Jason Rees. 'Feedback from trials is positive. Two-thirds of trialists want the service.'

Communications firm Everything Everywhere (jointly owned by T-mobile and Orange) has joined with Telefonica UK and Vodafone UK to create an m-commerce service. Users will be able to transfer assets into a SIM-based wallet regardless of which NFC-enabled mobile device or network they use, service providers claim.

'We are seeing an explosion in the m-commerce market,' reports Telefonica UK CEO Ronan Dunne. 'Mobile advertising spend has more than doubled in two years as consumers embrace marketing on their handsets because it is now relevant to them.' Telefonica UK has joined forces with Everything Everywhere, the company now behind the T-Mobile and Orange brands, and Vodafone, to create another m-commerce service. The aim is to provide a single contact for advertisers, media agencies, retailers, and banks to create easier m-commerce products and services. Companies and organisations that can provide anything from credit, debit, loyalty and membership cards, and transport tickets can create mobile versions of their products. 'The mobile marketing and payments market is fragmented,' adds Dunne. 'Business customers will reach an increased audience, utilising a single platform for sales, delivery and payment.' The venture aims to enable organisations to book advertising space and create campaigns, as well as provide offers, coupons, and loyalty cards which can be stored on the phone and redeemed in shops. Consumers can receive discounts from brands that are relevant to them.

Mobile commerce uses near-field communication (NFC) technology. Though NFC has existed for almost a decade, banks and mobile operators have only recently started to deploy it. NFC enables users to make transactions, exchange digital content, and connect electronic devices at a touch. The short-range wireless communication technology is placed in two electronic devices, so small amounts of data can be exchanged over short distances. NFC-equipped phones are made with a chip and a built-in coil of wire and the contactless payment reader, which also has a built-in coil of wire, generates a magnetic field. When the smartphone is waved or tapped close to the reader, electric currents jump between the coils of wire which signals data-carrying radio waves between the devices. Contactless payment readers can then send information like discount vouchers, and carry on the conversation using the chip in the phone.

Embracing e-payments

Mobile phone manufacturers are seeing the potential of having NFC chips in their handsets. Mobile operator 02 will be working with e-payments company Wave Crest, financial services FIS and Intelligent Environments, and Visa Europe to launch 02 Money before the end of 2011. Also smartphones Samsung Tocco, Google's Sprint Nexus S and the Nokia Astound have already installed NFC chips, and Apple's iPhone 5 is to be poised to follow the trend.

Digital banking firm Intelligent Environment (IE) reckons that mobile phone users will take-up NFC technology: a survey it conducted indicated that 56 per cent of iPhone users would use their smartphone as a payment option. With the iPhone being the second most popular smartphone, Apple could take a large share of the mobile payments market if it chose to install NFC chips in next-generation iPhone.

Also in favour of mobile commerce are 42 per cent of BlackBerry users and 40 per cent of Android users. IE found 33 per cent of people in the UK own a smartphone; these statistics show mobile tap payments could be the next technology movement. Credit card giant Visa and search engine Google have faced the market by convincing consumers to digitise their wallets. Google launched Google Wallet in September 2011 and Visa will be launching its own version.

Google hoped to be the first to launch a NFC-based mobile payment service, but despite being pipped by the Barclaycard and Orange deal, Google Wallet is already linked with a number of retail and financial players including Subway, Macy's, Toys R Us, Citibank, and MasterCard – plus mobile carrier Sprint. The Sprint Nexus S 3G will be the only compatible smartphone but more have been promised over time. Google has suggested users with non-NFC phones could use an NFC Sticker. Speaking at an advertising festival in August 2011, Google chairman Eric Schmidt claimed that 'the tap and pay revolution will be in full swing within 12 months'.

Visa, meanwhile, is also promising the user mobile wallet a retail experience. 'Widespread adoption of Internet and mobile technology is changing the way people connect and transact across the globe, so we're focused on delivering locally-tailored payment products and services,' says Visa CEO Joseph Saunders.

Visa set clear standards and practices for when mobile devices are used to make payments. All data is encrypted at the card reader level is especially important given the use of wireless and public networks. 'Mobile commerce devices are not designed to the same security requirements as traditional payment terminals, and merchants do not control the security of the network environments to which their devices connect wirelessly,' admits Eduardo Perez, Visa's head of payment systems.

Security risks redux

Mobile payments have other attractions than just convenience, such as eliminating paper receipts. Participating retailers have the option to send receipts back to the device, rather than output printed confirmation of transaction. This goes some way to making mobile commerce environmentally friendly.

The data sent between the electronic devices is useful for marketers to gather information on consumer spending habits. The drawback to this widely available data is consumers will question who has access to their information and what will they be doing with it. Other pitfalls include extra charges from carriers who will see the potential gain from mobile payments.

Earlier this year Lieberman Software CEO Phil Lieberman, said mobile wallet technology is a potentially serious security risk just waiting to happen. Six months on, Lieberman's views are unchanged: 'I still believe that it's a scam by the credit card users, and manufacturers are not taking security into consideration. Instead this is a matter of greed by the card issuers trying to transfer costs to consumers under the guise of this being 'cool' or 'magical'.' Lieberman adds: 'A cashless society is fine, but criminal behaviour in a cashless society will become easier than at any time in the past.'

When these devices become compromised, it will 'be a miserable experience for customers. The choice of NFC is stupid and obstructive given that the worldwide standard is chip and PIN', Lieberman says. 'NFC as a secondary low-value/low-security transaction system is fine as long as it is a secondary solution.'

Lieberman explains: 'Some of the m-wallet transactions are limited to £15 and under, but if a smartphone is loaded with £100 worth of bank credit – or is linked to a user's bank account – it's more valuable, and there is then a risk that hackers can replicate the m-wallet credentials and make multiple transactions using a cloned mobile wallet.' *

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