Mobile Phone as a Second Wallet

01. 10. 2009.

In Hungary 23% of the population over the age of 18 years use their payment cards to make payments on a regular basis, while 81-82% have mobile phones with an electronic payment function. 60% of the Hungarian population aged 18 and over have heard about the Mobile Shopping service, while in the global arena, Japan is the leader in mobile payment applications – a study published by GKIeNET – T-Home – T-Mobile reveals in October 2009. At the same time, the European Commission promotes the  emergence of financial service providers in the market, which provides a boost to the expansion of mobile payment solutions.

Following the advent of payment cards in Hungary, many financial experts had high hopes that the new payment option would quickly step up to replace cash payments, given its security, its ease of use, as well as the fact that transactions take place immediately, giving retailers peace of mind (unlike in many other countries where there is a delay in card payments). Nevertheless, the Hungarian population was hesitant to take advantage of the new payment option,  and despite the fact that the number of payment cards in Hungary totaled nine million in September 2009, only a small percentage of the population uses them for payments on a regular basis. 63% of the population 18 years and over own payment cards, however, 17% never use them, and 23% use them occasionally (once a month or less). This means that only 23% of the Hungarian population over the age of 18 use their cards regularly to make payments (September 2009, N=1,000).  No wonder that a mobile handset technically suited for making payments and owned by 81-82% of the population could alter the scene in the area of traditionally cash-based smaller purchases (in the below-fifty-thousand-forint range).

Shopping with Mobile Devices

60% of the Hungarian population over 18 years of age heard of the Mobile Shopping service.  However, familiarity with mobile shopping is not necessarily an indicator of the frequency of internet use, but online shoppers tend to be familiar with mobile shopping at an above-average rate. Toll payment for motorway use is the most well-known mobile payment application (60% mention it without being prompted, and 90% confirm having heard of it if the interviewer brings it up), while parking fee payment via mobile phone is number two (48% mention it without being prompted, and 83% confirm having heard of it if the interviewer brings it up)  .

Highway tolls and parking fees are the most popular mobile payments via SMS (23% and 22%, respectively), despite the fact that both of these services only became available three years ago. In addition,  people are increasingly open to various ticket purchases via mobile phone.

When customers consider electronic payment options, key factors include promptness, simplicity, financial advantages, as well as the opportunity to choose a convenient time for the transaction.

The Mobile Shopping service gives customers  the opportunity to purchase goods and services from licensed merchants via mobile phones without any prior registration or contracts (e.g. highway tolls, lottery tickets, parking fees). Purchases can be initiated via SMS, online, over the phone or via WAP (on various  channels depending on the product).

The Mobile Payment service allows customers (account holders as well as their authorized representatives) to initiate payment transactions via their mobile phones within the limits of their checking account  or available credit based on a prior agreement with their bank (services include payments at MobilePayment locations in person or via the internet, sending or expecting wire transfers, postal money order payments, account top-up).

Boost from the European Commission

In order to regulate payment services,  the European Commission put forth a Payment Services Directive on November 13, 2007, and member states have until November 1, 2009 to put it into effect. The directive aims to eliminate obstacles faced by financial services providers (telecommunication service providers, money-transfer businesses, etc.) when entering the market, and to increase competition in domestic markets and cross-border relations alike (these areas are particularly lacking clear-cut legal regulations). The EU Commission expects that the more intense competition resulting from the new legal framework will encourage consumers to be more receptive to electronic payment solutions.

The objective of the European Union can easily be captured by the example of Japan, the world leader in cashless electronic payment systems.

The Japanese Osaifu-Keitai, or the Mobile Wallet

Developers of mobile phones have always been striving to integrate in one device many functions that had traditionally required their own gadget (watch, calendar, camera, navigation, music player, TV, etc.), and the Japanese population has always been open to these integrated solutions. In the country of 127 million people, the number of mobile phone service subscribers at the four available providers (NTT DoCoMo, KDDI, SoftBank, Willcom) totaled 110 million at the end of the first half of 2009 – this equals 87%, which is not much higher than the rate in Hungary –, and  the first mobile payment solutions emerged ten years ago, in 1999. In order to expand use, the initial simple applications have been replaced by a system integrating many payment functions, thus eliminating all payment solutions that had to be stored in a wallet.

The new system required an RFID chip developed by Sony and optimized for mobile phones. Starting in 2004, these chips were built into mobile devices sold in Japan. The first generation of this type of phone was called Osaifu-Keitai, or mobile wallet, which was the trademark of NTT DoCoMo, the company that created it (the license was later bought and applied by the other mobile service providers as well). The chip interacts with writing/reading devices and is able to read information from a few centimeters away. As a result, instead of taking the handset containing the tag out of wallets or bags, users can simply hold it briefly toward the reading device without direct contact.

Eventually, another prepaid electronic payment solution named EDY (derived from the initials of Euro, Dollar and Yen) was programmed into the chip, which was particularly popular as it allowed users to keep track of their account and purchase history via mobile phone and to top up their accounts. Due to its practical features, EDY has become the most widespread mobile wallet solution in Japan. A number of other payment applications are used in Japan, which are run on the Osaifu-Keitai platform. In addition to the payment function, the system can serve as credit card, membership card, season pass, student ID (or any type of identification or entrance card), loyalty card, electronic ticket for events, or even a house key.

On the Brink of a Breakthrough

A number of European cities have seen pilot versions of complex mobile phone payment systems, of which the most promising development takes place in a town in Finland, which was among the first  cities to experiment with high-tech solutions. Oulu, home to some 800 innovative firms, launched Europe’s largest mobile payment project in 2008. The program’s name is SmartTouch, and, based on a partnership between local businesses and the local government, it promotes the use of a single device – the mobile phone – for payment in schools, retirement homes, the pubic transportation system, sport clubs and a growing number of retail stores. To help the older generation, many stores in this town allow customers to create a shopping list by simply holding their handsets against the products they wish to purchase, which will then be delivered to their home the following morning.

Hungary does not have a complex system like the one in Finland yet, but this could become a reality within the next few years. As the examples of the Asian countries and Finland indicate, these innovative payment applications gain momentum if companies are willing to cooperate and if consumers are open to new solutions.