Will Oyster follow Octopus?

Mobile micropayments are back in the news after several years of analyst ambivalence over the practicality of the idea. Simply put, micropayments are very small payments ranging from a few pence to about £10, such as the small fees paid for downloading music. Japan's leading mobile operator, NTT DoCoMo, has announced that it is gearing up to put mobile "wallets" in mobile phones by adding new transactional capabilities to its handsets. Now that it's possible to buy a loaf of bread with only your mobile phone, will the idea catch on with mobile users? What will it mean to the banking industry?

Octopus, FeliCa, and Edy
Anyone who has been to Hong Kong in recent years will have seen an Octopus card. The credit card-like device is charged up with credit — online, over the counter, or via machines — and can then be used to pay for anything from a bus fare to a parking meter to a bottle of milk. The particularly striking thing about the Hong Kong experience is the range of low-cost products and services that can be bought with an Octopus card. That range is extending all the time; though not as universal as cash, it will surely become as extensive as credit cards in time.

NTT DoCoMo's mobile transactions are enabled by Sony's FeliCa chip, a small device that can be read by a wireless scanner when it comes into close proximity with it. Sony has deployed FeliCa for a number of Japanese customers, including travel companies and convenience stores. Millions of individuals already use it; and next year, it will be possible to use a FeliCa-enabled handset instead of the stand-alone card. In essence, a user's mobile phone can be swiped by a scanner to make purchases.

Sony has growing confidence in its card. It believes they are difficult to defraud, both because they are hard to make and are highly secure (they should become more secure when incorporated into phones since, if stolen, they can be deactivated). They are also fast: under 0.1s exchange rates are typical. And, they are easy to use, requiring little more than a swipe over a reader.

Apart from being wireless, the key issue which FeliCa seems to have cracked is that of micropayments. Micropayments represent a significant percentage of the economy, particularly in the lucrative consumer sector. However, when conducted electronically, using say credit or debit cards, they are often barely financially justifiable since the cost of the transaction is close to or higher than the transaction value itself. FeliCa sidesteps this issue by, in effect, pooling the expensive micropayments into single, larger payments that the user makes when charging up the card (in Japan the scheme is called Edy).

Will mobile-phone micropayments gain widespread adoption?
Even though the technology is ready, there are two important questions to be answered: Will the micropayment trend catch on in America and Europe, as it has in some Asian markets, and will the banking industry welcome or resist it?

Mobile phone users in Japan have already shown themselves to be more than capable of setting trends: They were the first and are still the largest users of cellular Internet services. But whether consumers in the West will do likewise is a moot point. Credit cards have a much greater penetration in the United States, and even more so in Europe, so it will be hard to get customers to make the switch.

Further — and this is where the banking industry comes in — there are vested interests to hinder adoption. Banks, for example, may fear being sidestepped in the lucrative consumer credit industry, losing their brand presence and becoming mere commodity brokers in any mobile phone-centred process. New payment services require widespread industry support to gain traction; one foray into mobile payment services has already gone down to defeat. A collaborative venture between Orange, Vodafone, T-Mobile, and Telefónica Móviles, called Simpay, would have enabled micropayments via mobile phone bills, but the deal recently collapsed, apparently due to one of the founders dropping out.

Some may say that this is a loss. The technology, after all, is fast, easy-to-use, and highly flexible. It looks like the future. However, while proximity cards like FeliCa will spread in Western pockets for limited use, like making mass transit payments, I think that they will not be a major concern in the financial services industry for some time yet.