Cash may still be king, but on the streets of Japan there’s a new rival for the throne. Millions of people there use their mobile phones to buy anything from vending-machine drinks to train tickets. To pay, a user passes a chip-enabled handset over a compatible reader. Credit is then deducted from a stored-value account provided by NTT DoCoMo, Japan’s dominant mobile phone carrier. Transactions take a fraction of a second to complete, to the delight of customers and merchants alike. In addition, consumers can use their phones to buy products on the mobile internet, or download digital music. And losing your phone is not as painful as losing your wallet, because the handset can be remotely disabled.

Japan is clearly in the technological vanguard, but mobile payments are catching on throughout Asia and Europe. Juniper Research predicts that remote and in-store mobile phone payments will total $375 billion (€257 billion) globally by 2013, up from $57 billion currently. But use varies from region to region. Europeans, for example, are using SMS mainly to purchase digital goods and services, while Asian — mostly Japanese — consumers are buying physical goods with their phones. It’s a different story in the US, where consumers have come late to the mobile-payments party.

A critical component of mobile-payment adoption in all regions, however, will be mobile banking. “Mobile payments will become an extension of mobile banking once different constituents coalesce to form a business case that makes sense,” says Virginia Garcia, senior research director of TowerGroup, an independent research arm of MasterCard.

Advocates of mobile-payment systems that rely on mobile phones say there are advantages over credit and debit cards. First, handsets can carry multiple payment instruments, making them the electronic equivalent of a credit card-stuffed wallet. Loyalty cards and coupons can also be loaded on them. Second, phones are integral to people’s lives, especially young adults. “The mobile phone keeps coming back as the thing they spend time with,” says James Anderson, a MasterCard spokesman.

Retailers may be a tougher sell. Although throughput and customer spending both increase with contactless payments, margin-strapped merchants are waiting for critical mass before they invest in new point-of-sale terminals. “It’s going to take consumers walking into a store and having only their mobile phones as a payment method” before retailers will be convinced, says Bruce Cundiff, director of payments research at Javelin Strategy & Research.

At the end of 2007, 1m people in Europe were using mobile banking. The number of users, now more than 5m, is expected to reach 42m by 2012, according to TowerGroup. As mobile-phone finance becomes more popular, banks would like to embrace mobile payments. But some say that there are technical challenges in getting a payment application downloaded and working securely on the vast array of mobile devices offered by US mobile-phone carriers. In Japan, where DoCoMo dominates, it was much simpler.

Banking on Banking

In the meantime, MasterCard is among the many players investing in peer-to-peer mobile payments. Companies such as Obopay and PayPal have developed systems that allow users to transfer payments to one another for, say, settling dinner bills, paying the gardener or splitting the rent. According to MasterCard, those solutions will be rolled out next year in the US, with Europe following later.

There are various mobile-payment tools available in Europe already but they are “proprietary and mainly closed loop,” as MasterCard points out. The company is currently running mobile-payment trials with banks including Royal Bank of Scotland in the UK, Telenor in Norway and CIC in France.

However, a clear business model for mobile payments has yet to emerge. While credit-card companies have been the driving force, mobile-phone carriers are also in on the act and already use mobile systems to accept payment for digital downloads such as ringtones. Will they cut the banks in for a piece of the action, or will they be kept from getting more involved by banking and credit laws? “This is such a heavily regulated market, it’s hard to believe any telecom would want any part of that,” says TowerGroup’s Garcia. “Banks are going to stay in command.”

Some carrier/credit partnerships have emerged, but it’s early days. One thing seems clear, however. As the mobile phone becomes the must-have device for connectivity, information and entertainment, can commerce remain out of the mix for much longer?

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