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Mobile Payments: Japan Leads the Pack

The potential of cellphone-based mobile payments to eventually squeeze banks out of their central role in payments can already be seen in East Asia, says Andrei Hagiu, a principal at Market Platform Dynamics, and by ignoring it, American banks have nothing to lose but their business.

Octopus_cardHong Kong’s Octopus prepaid debit card (see inset) is one example: Issued by Hong Kong’s subway system and several other transportation companies—with no bank involved—Octopus cards drive about $2.2 billion in annual payments volume.

And in Japan, several contactless payment vehicles built around Sony Corp.’s Felicity Card, or FeliCa, are competing for market share: NTT DoCoMo’s Edy (Euro Dollar Yen) contactless payment vehicle, and East Japan Railway’s Suica (Super Urban Intelligent Card) vehicle are the leaders. But NTT DoCoMo, a unit of Nippon Telephone and Telegraph, also bought 34 percent of Sumitomo Mitsui Card, the card-issuing arm of $883 billion Sumitomo Mitsui Bank, so it could issue its iD brand cellphone-based credit card, and license it to other cellphone carriers.

“What people in Asia increasingly do for convenience is use an automatic refill service, tied to their bank account, that automatically refills the card when the balance runs low,” he says. “Banks play a role, but it’s a minor role.”

The result increases the distance between banks and their customers and turns them into utilities, a banker’s worst nightmare. The m-payments phenomenon in many developed countries, combined with a preference among people under 30 for debit over credit cards, “is a danger to both banks and to credit card companies,” says Hagiu. The only good news for U.S. institutions, he says, is that “the U.S. is way behind in this area,” giving them time to avoid being marginalized.

Technology is driving this, and especially the accelerating phenomenon of ever-cheaper, ever-smaller, ever-more-powerful computer chips. For instance, within 10 years, computers more powerful than anything available today will be so small that people will be wearing them, just like Dick Tracy and his iconic wristwatch phone, says author Ray Kurzweil in his new book, THE SINGULARITY IS NEAR. At that point, payment cards as we know them today, as well as today’s cellphone-based payment vehicles, will be quaint relics.

And the claim of some skeptics that the popularity of cellphone-based payments in Japan is rooted in the fact that computers are cheap in the U.S., but expensive in Japan—leading young Japanese adults, many of whom live with their parents in small apartments, to use their cellphones as computers—does not mean that the popularity of m-payments in that country aren’t transferable to the U.S. “There’s no denying that if the same service appeared in the U.S. tomorrow, it would be a tough competitor for credit cards; that would be the real danger,” says Hagiu.

In this country, cellphone carriers are already creating the habit of making purchases among their customers by constantly lengthening the list of things their customers can buy with their cellphones—things like ringtones that can be charged to the customer’s phone bill, or by allowing Internet access, with the accompanying inevitable online purchases. But these are baby steps, says Hagiu: “What we have here is zero, compared with what they have in Japan.”

Still, he adds, “At some point, we’ll get there, and have a lot of e-commerce on celllphones. And as people get more comfortable doing this, the step to using a cellphone as a credit card or debit card is really small.”

Luckily for banks in both countries, emphasizes Hagiu, these payment methods are still in their infancy, even though the technology to do it exists today, so that it’s only a matter of time before what seems like a daydream becomes commonplace.

Another stroke of good fortune for banks: The fragmented payment card landscape. American Express, Discover, MasterCard and Visa, all currently have cellphone-based payment pilot programs underway, and this will delay the widespread adoption of cellphone-based payments in this country, since those companies all want to own the customer. The result is that so far, no carrier can handle payments for all the card companies. This also gives banks more time.

How can they do it? Buying a cellphone carrier might be one way, he says, but “it’s more likely to be the reverse” in both Japan and in the U.S.

Banks have a real problem here, though, because it’s their general habit to wait to invest in a new sector until they can identify a winner—an apparently prudent step that has often turned against them. “It’s very difficult for them to take the lead in offering these sorts of services, because they’re unlikely to issue mobile phones,” says Hagiu. “But they should take it as a given that these sort of services will move from Asia to here very soon. I would advise them to invest in those services, and make their existing payments systems more able to compete with this emerging technology, or at least approach the mobile carriers and try to create a service like this.”

The alternative, he points out, could be that the mobile carrier approaches the bank, at which point the bank would become an invisible processing utility. “It would be really insidious,” he says. “People would see T-Mobile payment phones everywhere, and not the bank behind it.” (Contact: Market Platform Dynamics, Andrei Hagiu, 617-374-1337)