Mobile phones replacing your credit card ?

The mobile consumers around the world see their mobile phone as a payment gateway and the Telco’s interests in it. 

There is increasing interest from Telcos and consumers alike at the possibility of using mobile phones as payment gateways.

Surprisingly, I first saw this concept in Sri Lanka while I was there on business last January. Essentially, the service allows mobile phone service subscribers to use their phone in the same way as they would use a credit card.

Interested users start by registering with their bank and their mobile service provider. The registration process authorises the telco to make debits from your credit card. At POS, you would give the salesperson your mobile phone number (in lieu of your credit card). The number is entered into the terminal along with the amount to be charged. You receive a text message on your handset and must reply with the PIN code you nominated at the time of registration to authorise the transaction.

As I understand there are four steps to the transaction

1.     Customer verification by the Telco

The mobile service provider sends a text message to the customer requesting the secret PIN code. This step guards consumers against unauthorised use (by third parties who have access to your mobile phone number and/or handset)

 Credit card verification

The Telco then communicates with the customer’s bank to determine whether the nominated credit card was successfully debited

Telco communicates with POS terminal

If both verification steps above are successful, the sales terminal will receive electronic confirmation of the transaction. If one of two verification steps fails, the original request will be declined.

POS terminal confirms successful transaction

The Telco is informed that a reply has been received for the original request (either approved or declined). If no reply is received the transaction will be annulled.

I figure there are two main advantages of the “mobile phone credit card” over the traditional credit card. Firstly, the consumer does not need to carry the credit card around. Secondly, the carholder does not need to be present for the transaction to be successful (as long as the PIN is known, the transaction can be processed)

The most obvious shortcoming of the system is that a customer needs to have a credit card available to register for the service. There is a time lag associated with the system (swiping a credit card through the terminal is much faster than the to-and-fro text messaging that needs to happen for the transaction via mobile phone!)

An interesting direction for service providers to consider is to eliminate the credit card altogether. Consumers would be able to credit transactions to their mobile phone account. They would either receive a bill with these included charges at the end of the billing cycle (post paid) or the available credit would simply decline (pre paid). The system would be independent of the customer’s bank giving the Telco more control and more flexibility to further develop the service.

Telstra Australia has demonstrated the viability of this concept with their Big Pond Music products. Consumers are able to purchase tracks/albums against their account by entering their mobile phone number and PIN code.

I would love to see this concept associated with a technology such as NFC to streamline communication between the terminal and the consumer.

Notes on NFC

Near Field Communication or NFC, is a short-range high frequency wireless communication technology which enables data exchange across short distances (max. 10cm). The technology is a relatively simple extension of the ISO/IEC 14443 proximity-card standard that places both the interface and reader of a smartcard into a single device. An NFC device can communicate with both existing ISO/IEC 14443 smartcards and readers, as well as with other NFC devices, and is thereby compatible with existing contactless infrastructure already in use for public transportation and payment. (Courtesy http://en.wikipedia.org/wiki/Near_Field_Communication)

The Telco that manages to fine tune the concept of payment via mobile phone, ideally with a technology such as NFC has the potential to corner an emerging market (read, big bucks!) and really stand apart from the competition in what has become a pretty homogeneous market.