There’s money to be made in micropayments: Technologies are in place, but business models still need work

Hardware, software, high-speed networks, uptake . it seems all the pieces are in place for mobile commerce to take off. Well, all the pieces except maybe a viable business model or two.
That was the takeaway from last week’s Mobile Financial Services Summit in Denver, where executives from the wireless and banking worlds converged to discuss opportunities in m-commerce. High-speed networks have come online, sophisticated handsets are the norm, and a host of cross-industry partnerships have laid the foundation upon which to build products and services consumers actually seem to want to use.
“I think right now we’re at a stage where the technology is stable, it can work, and there are models where the three industries (mobile, banking and retail) can work together,” said Mehul Desal, COO of C-SAM Inc., an Illinois-based firm that enables mobile transactions. “The ecosystem is the part I think that needs to come together. It’s more about business models than technologies.”
There seems to be plenty of potential in m-commerce, a broad term that encompasses – among other things – contactless mobile payments, wireless banking and peer-to-peer transactions. The number of global mobile banking transactions will explode from 2.7 billion last year to 37 billion in 2011, according to Juniper Research, and IMS Research predicts the number of mobile banking and payment services users will grow more than six-fold during the next four years.
Indeed, consumers seem eager to use their phones to check account balances and transfer funds. Bank of America claims more than 1 million customers use its wireless banking service, which launched in May 2007, with more than 100,000 users accessing the service on busy days. “Clearly, it’s meeting a general user need,” said Vance Hodnett, VP of research for financial services for Pelorus Group, which hosted the conference. “Otherwise it wouldn’t have taken off like it has.”
But banks and credit-card companies generally see mobile as an extension of their their existing services – not a moneymaker in and of itself. Financial institutions are increasingly marketing their wireless services as a way to lure new customers and increase stickiness with existing patrons. It’s unlikely, though, that consumers are willing to pay regularly for the privilege of checking their accounts or moving money around over the phone.
So where’s the money going to come from?
Wireless is hoping to create a place for itself in the value chain with contactless payments, allowing consumers to use their phones to make micropayments of $5 or less at convenience stores and snack counters. Those transactions account for an astounding $1.8 trillion every year, according to Hodnett, and “99% of them are cash.”
But there’s much work yet to be done before wireless subscribers reach for their phones instead of their wallets. Contactless payments – which are often based on NFC, or Near Field Communication, technology – requires costly equipment at the retail counter, and chips must be installed in phones at the factory (although at least one player, Tyfone, is looking to place the hardware on memory cards that can be inserted in the phone by users). A lack of standards continues to plague the contactless-payment space, and it’s still unclear whether consumers really want to “carry” cash on their phones.
So the next logical move for m-commerce may be a two-step: banks could use mobile to decrease costs by reducing fraud, alerting customers to fraud and slashing churn, then try to generate revenues by attracting new customers and cross-selling existing users, according to Reetika Grewal of ClairMail, a Bay Area-firm that powers mobile services for Fidelity National Information Services and WAUSAU.
“Today, people are using (mobile) very much as a pull channel” to perform basic functions, Grewal told the audience.
“But across the board, things are getting used. People are starting to be more adventurous with how they use their phones.”