This article originally appeared in the March 2011 issue of NGN.
There has been considerable media coverage of the mobile payments market recently from U.S. media outlets. Smartphones are said to be poised to replace your wallet, and all the cards in it, by performing financial transactions of all types even at point of sale using new short-range wireless technologies such as near-field communication. Here is another case of the North American market lagging the rest of the world, with the news coverage positioning mobile payments in general as a new technology.
But the rest of the world has long ago embraced prepaid mobile calling plans where technology is needed to perform financial transactions on the phone related to prepaid mobile services such as mobile top-up. And with the early usage of mobile payments in the rest of the world, mobile payment technology has matured on 2.5G mobile handsets with limited user interfaces. This has created a fertile landscape already for mobile payment usage in many regional markets with large mobile networks outside of North America.
So before the near-field communication hype using smartphones is realized, how have various parts of the world been able to support mobile payments? For browser-equipped phones, WAP, HTML and XML have seen increased usage. For 2.5G feature phones with a limited integrated browser, the USSD (unstructured supplementary services data) protocol is often used for mobile payment applications. USSD is a message-oriented protocol like SMS, but it is also a session-oriented protocol that can connect mobile phones in real time to data sources that support mobile payment applications. It is highly suited for building the interactive part of the application on the phone, such as menus that enable authentication and function selection as well as for the retrieval and update of information in the mobile payments network.
However, SMS is still the most widely used mobile payments technology. SMS mobile payment messages can contain short codes or support other means of validation to enable financial transactions. It can also be used, for example, to alert consumers of low account balances, transactions taking place, or communications with the financial institutions. According to Research and Markets, SMS accounted for 76.4 percent of mobile transactions in 2009 with only a slight decline in usage to 58.7 percent forecasted for 2014.
Even though the smartphone phone push for mobile payments is on, SMS represents a highly scalable and profitable way for mobile operators to implement mobile payments in their networks today. Smartphones will still require the building of specific phone environments for mobile handset applications, slowing down the adoption of smartphones for mobile payment services. Also, since near-field communication is an open industry standard, vendors can still find ways to implement the standards to their advantage to differentiate their products, creating possible market fragmentation that slows down widespread usage of near-field communication-enabled smartphones.
The mobile payment opportunity will also evolve to support a value chain of application developers in various vertical markets that use SMS, USSD and other mobile payments technology. Banking, financial services, retail, gaming, and other vertical markets will begin to rely on mobile payments to enhance their revenues. This will become the basis for mobile cloud services to emerge. The value chain in this environment will include the mobile network operators, businesses, application developers and the consumers all tied together. To get to this point, service providers will emerge to give access to mobile payment resources such as USSD and SMS that can be readily accessed by application developers.
Today this value chain is not here, but as in the case of USSD and SMS protocols, APIs are emerging based on the HTTP/ RESTful web services model that simplify development of mobile payment applications. To currently build USSD and SMS mobile payment applications, developers either have to use a third-party mobile payments platform or be aware of mobile network protocols such as SS7 to develop these applications. By using a RESTful API, application developers do not need to understand complex SS7 protocol interactions, opening up the value chain for development of mobile payment applications by web developers already serving vertical business markets.
So don’t throw away your wallet quite yet. There is no doubt, though, that mobile payments will become a paradigm shift in the way businesses and consumers interact with each other – just as fundamental as how mobile phones have impacted our lives. And, of course, plan on getting a new smartphone this year.
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Edited by Stefania Viscusi