Finovate Blog

Obopay and PayPal both offer phone-and-text based payments along with a linked debit card for spending the money sitting in your payments account. But it's not as powerful as a true mobile wallet with a cellphone preprogrammed to connect to online banking and various payment options.

Here are the specs of the perfect mobile wallet:

• One-key access to common banking functions: check account balances, confirm transactions, and so on
• Money movement between the user's own accounts
• Send money to others using the bank's bill pay system or inter-institution funds transfer (A2A)
• Pay for purchases at the point of sale (debit card or credit card) using an embedded RFID chip
• Authenticate users at ATMs, branches, and remote terminals
• Person-to-person payments (potentially by linking to the PayPal network)
• Text message data entry: Update bank account records by sending a text message to the bank (for example, if you paid $22 cash for a business lunch, text to the bank, "22.00 biz lunch" which would be posted to your transaction records)
• Priority customer service: Voice, text, or IM customer service with minimum wait times with transcripts emailed for future reference
• Text-message-based alerts
• Real-time virtual "panic button" to disable phone: If the phone is misplaced, users should be able to temporarily disable payment and banking functions with a simple email or phone call to an automated system

Where will users purchase their mobile wallets?
While first-generation mobile wallets will come from tech startups, wireless phone companies, and Internet giants such as Google, a bank-based model has a number of potential benefits:

1. Trust
2. Integrated online banking features (balance lookup, transaction history)
3. Integrated bill payment (use pre-existing bill-pay merchants)
4. Mobile payment transaction history integrated with online banking history

As cool it sounds, mobile wallets will not replace cash or plastic until RFID-equipped POS terminals are widespread. Until then, you'll still need to carry plastic. That brings to mind a practical interim solution, a plastic clip that attaches an RFID-enabled mini-credit card to the back of a cell phone. Users would have the convenience of waving their cell phone to pay, but could also easily swipe the mag stripe through a conventional terminal.

— JB

One of the better overviews of mobile payments appeared in the Wall Street Journal several months ago (April 26). It looked briefly at TextPayMe, Obopay (see screenshot below) and PayPal Mobile (NB June 5). The article does a good job of contrasting these systems to the more common "mobile wallet" where a cellphone is used in place of a credit/debit card.

Analysis
While we see much promise for the mobile wallets, the mobile payment feature appears far less useful, at least in the United States.

Mobile Wallets: It's inevitable that today's plastic-based payments systems morph into cellphone-based services using radio frequency (RFID) technology as the enabler. For many people, especially younger cellphone-toting, debit-card users, it will be easier to point their phone at the POS terminal and press # than to swipe a card and enter a PIN or sign a receipt. Arthur D. Little projects $37 billion in mobile wallet transactions in 2008, a twelve-fold increase from the $3 billion in 2003.

And for those who don't carry a cellphone, or who prefer a different access device, companies are working on RFID-enabled watches, jewelry, key chains, and something Citibank is said to be preparing for market later this year, an RFID money-clip, which I'd love to use, although I've yet to see a contactless point-of-sale location in Seattle (see, "Creating the Perfect Mobile Wallet," NB June 7). 

Mobile Payments: On the other hand, text-message-based services, designed to send money to individuals, are a solution seeking a problem. As cool as they look on a well-crafted homepage (see Obopay's homepage right), there just isn't enough payoff for changing deep-seated consumer payment habits.

Even the WSJ couldn't dig out a rational anecdotal example, though the writer tried. The usual "splitting the dinner bill" straw man was trotted out, but upon closer look, too many variables could make it unworkable. Imagine you had a group splitting a $100-tab four ways. The vendors want us to believe that one person will pay the entire bill, then his or her three friends will each text-message their $25 share. Outside of Silicon Valley and a few Manhattan neighborhoods, it just won't fly.

It is not only a hassle (what if the phone call is disconnected, or the wrong button is pushed in a dark eatery), but also each of the three parties will likely incur one or more transaction fees (from the payments gateway, the cell phone provider, and possibly one or more financial institutions along the way). Finally, the person receiving those payments then has to initiate some type of transaction to tap the $75 sitting in their account. 

This makes about as much sense as ordering dog food online. Current methods of sharing costs, either with cash, having the restaurant apply it to two or more debit/credit cards, or by agreeing to "get the next one" works just fine.

–JB

Most people interested in electronic payments have probably read reviews of PayPal's mobile payment system launched in March. However, if you haven't had a chance to use it, by all means head over to PayPal Mobile and activate your phone.

The service covers two mobile payment services:

1. Person-to-person payments: PayPal's email-payments service is extended to phones, mobile or land-line, allowing users to send money to anyone with a phone number using text messaging or by following the prompts on PayPal's toll-free number (800-4PayPal).
2. Text to buy: To buy things at participating merchants, users send the text message a code to the merchant's text-message number; for example, listed on the PayPal site today is a special offer to purchase a DVD Of X-Men 2 from by texting "X2FF" (full-frame) or "X2WS" (widescreen) to 63336 to FoxStore.com.

Sign-up Process
The sign-up process is absolutely painless (click on screenshots below for a closer look). Assuming you already have a PayPal account, just enter your phone number and then a few seconds later answer the verification call on that number. After that, you can send money to any other phone by sending a text message from your phone or calling PayPal's toll-free access number and following the simple prompts to make a payment.

The company ran a sweepstakes during the first month to encourage activation with instant prizes valued up to $1,000 (see screenshot left). The sweepstakes has ended, but not before we bagged a fresh $5 credit to our account. All entrants are also in the running for a new BMW.

Security
Although it will take some convincing before PayPal Mobile hits the mainstream, it's really far more secure than using a credit card. When you text money to someone or to pay for goods and services, PayPal first confirms the purchase by calling your designated phone number for confirmation with a self-selected PIN number. At that time, you are also able to make changes, such as altering the default funding source, which is always bank transfer (see inset for PayPal's how-to-use instructions).

Analysis
In the United States, payment by phone is likely to be a small subset of the "online payments" market. It provides a good solution for situations where a computer is not available (purchasing a new DVD from a magazine ad or paying your friend for the concert ticket she just gave you).

However, in other parts of the world where mobile phone usage is far higher than computer usage, it could become an important payments vehicle.

—JB