Posted By Tom Sowa
Innovative banks trying to introduce phone payment systems hope the strategy makes their own card the credit card of choice, said Jim Salters, a banking industry analyst with California-based consulting company Glenbrook Partners. "People can use any one of their several cards when making payments. This is one effort [by banks] to make their card the primary one inside each person’s wallet.
When Apple (Nasdaq: AAPL) introduced the iPhone last year, it was the first mass market cell phone to use a touchscreen system of controls.
Now the retail and banking industries are pushing a vastly different kind of touch technology. This year’s model is all about shopping and using a cell phone like a wand — touching the end of the phone to a checkout screen when you pay for that Big Mac.
That trend has been labeled "mobile payments," and it has just landed in Spokane, Wash., where U.S. Bank is launching its first six-month trial of cell phones that work like a credit card.
Data Exchange
The nationwide bank, using more than 100 members who have MasterCard accounts, will use the test to decide if the country is eager to embrace the use of a credit card buried inside a cell phone.
Over the past three years, banks across the world have tested "contactless" credit cards that work the same way — tapping or moving specially equipped cards near a radio-signal-sensitive payment device that records the amount of the transaction.
The technology behind the system carries the acronym of NFC, for near field communications. When two NFC devices come together — within about 4 centimeters — they exchange data via radio signals. That data can be anything from credit card numbers to instructions on how to find the nearest public transportation.
The U.S. Bank effort shows how the NFC idea has jumped from credit cards to cell phones, said Jim Salters, a banking industry analyst with California-based consulting company Glenbrook Partners.
"That’s the question everyone asks: Is this the way all the banks will eventually go, toward contactless phones?" Salters said.
Making Customers’ Lives Easier
If nothing else, the test is part of U.S. Bank’s goal of staying in touch with customers and finding ways to make their lives easier, added Dominic Venturo, a bank vice president helping manage the Spokane test project.
"Anytime you can combine the phone, which most of us have in our pockets, with the bank payment card many of us carry in our wallets, into a single system, you’ve created a simpler and easier way for your customers to manage their lives," Venturo said.
Many earlier versions of contactless cards and tap-and-go phones have been used in Japan. Other countries, including Australia and Korea, also are testing them.
U.S. Bank’s Spokane test is one of a handful of similar efforts across the country by companies looking for the same answers: Will customers like this system? Will merchants sign on and want those readers in their stores?
Too Much Information?
The answers, so far, are not clear, said Salters, who graduated from Gonzaga Preparatory School and got a degree at Princeton University. One issue will be how much information the new phones can hold, he Salters.
To date, the tests involve inserting just one credit card number inside the test phone. Over time, if banks and wireless phone companies allow customers to load the phone with multiple credit cards, or the numbers of merchant reward cards, that option might be very attractive, Salters said. However, it’s uncertain whether the banks and phone companies will give consumers those choices, he said.
About 80,000 contactless readers have been installed across the United States, according to a spokesperson with MasterCard International.
Salters said merchants consider the jury still out over the value of introducing a contactless payment system. For one, merchants know a chief goal of such NFC systems is to move customers from paying in cash to paying with a card, a transaction that costs merchants 1.5 percent to 2 percent in fees to the card company.
Primary Cards
"Merchants generally will only adopt this kind of system if it can show that it moves customers through a line quicker" or helps customers spend more money over time at that store, Salters said.
From the credit card bank perspective, one big value in developing the tap-and-go phone is creating the "top of wallet" position among a consumer’s credit cards. Industry analysts say a typical middle-class consumer has between four and six credit cards.
Salters said innovative banks trying to introduce phone payment systems hope the strategy makes their own card the credit card of choice. "People can use any one of their several cards when making payments. This is one effort (by banks) to make their card the primary one inside each person’s wallet," he said.
The other major attraction behind the marriage of cards and cell phones, Salters said, is the option of developing two-way communication with the phone user. A credit card is nothing but a card, but phones can receive text messages, tones, even short videos from marketers trying to encourage the customer to buy something.
The first versions of interactive marketing will be simple, Salters predicts. Shoppers will go to a vending machine and swipe their phone to buy something. The vending machine company will activate a message to the phone saying the shopper can get one can free can of pop with three more purchases.
Customized Coupons
Over time, the likely scenario could be a version of a plugged-in universe in which customers with cell phones are notified, because of their global positioning system location, that if they visit the nearest coffee shop they can get a double mocha on special.
"That’s not happening yet, but that is something that’s possible," Salters said.
When U.S. Bank set up the Spokane pilot program, it looked first at Spokane’s current list of merchants that use contactless readers and saw that the community had a fair share. The list includes McDonald’s, Jack in the Box, Regal Cinemas, Office Depot and 7-Eleven, Venturo said.
The bank also decided to include Gonzaga University in the test. For the six-month trial, the university agreed to equip 10 campus vending machines with new readers that will allow bank customers to try the technology.
Venturo would not say how many U.S. Bank customers are participating. "Our competitors would very much like to know that number," he said. It’s a group that is well above dozens, he noted.
To encourage them, the bank provided each with a new Nokia (NYSE: NOK) Web-enabled phone and agreed to give each participant a monthly cash credit to be applied toward the data plan cost of their phone service. To take part, the bank member has to use either T-Mobile or AT&T (NYSE: T) wireless for their service.
Security Is Critical
Another incentive: At times the company will send text messages to the phones reading "if you use the card two times over the next several days, the bank will credit your account a certain amount," explained Venturo.
Security is a critical part of the system, Venturo said. First, when a phone taps a reader screen to make a payment, the transfer of data only sends encrypted credit card numbers, not the name or other personal information, he said.
If the phone is lost, the owner is subject only to the US$50 maximum amount any credit card company regards as a customer’s liability; in fact, most banks don’t even ask customers to pay back that amount.
"We’ve also made clear that if the phone is lost, that person should immediately contact U.S. Bank. We’ll have the option of disabling the secure card (inside the phone) right away," Venturo said.
The cards containing the information are also wired into the phone and can’t be easily removed. Even if removed, the information inside is indecipherable, Venturo said.
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