Electronic Wallet: The New Way to Pay

The thirsty teenager steps up to a bright red vending machine and takes out her mobile phone. She places the phone near a reader attached to the machine and a cold can of cola is immediately dispensed. This scene is repeated thousands of times each day for thirsty consumers—in Japan.

For almost six years, Japanese consumers have been able to make credit and debit purchases and manage their financial accounts using their mobile phones. Celent, a research and consulting firm focused on information technology financial services, estimates that there are now 28 million registered mobile payment accounts in Japan.

In North America, contactless payment systems have been slow to catch on due to infrastructure issues and the variety of agents, such as banks and credit cards companies, that must agree on standards and business models for the service. However, the concept is not completely alien to U.S. and Canadian consumers. Mobil offered the “Speedpass” contactless payment system at the company’s participating gas stations as early as 1997. The company eventually merged with Exxon, and the service is still available at most ExxonMobil locations.

But widespread contactless payment using phones may not be far off. In August, AT&T and Verizon Wireless, the biggest U.S. mobile carriers, announced plans to test a mobile phone payment system at stores in four U.S. cities.

Looking Ahead
The number of mobile phone subscriptions worldwide has reached 4.6 billion, according to the International Telecommunication Union, and that figure is expected to hit to five billion this year.

Providing consumers with voice, text and e-mail communications, plus a camera and the opportunity to download thousands of applications, the phone is anything you want it to be, said Kevin Grieve, CEO of Mocapay, a Boulder, Colo., company that creates mobile payment and marketing programs.

“Your phone can open your car, turn on your security system at your house and run your stereo equipment,” Grieve said. “It is a single device with multiple functions, and now it can replace your loyalty club card, your gift card and paper coupons. Anything can be put on a mobile phone.”

When a customer makes a purchase, they take out their wallet and then decide if they’ll use cash, a credit or debit card or a gift card. An electronic wallet functions in the same way, Grieve explained, except that all of those choices are on one mobile phone. He compared the system to the first ATMs.

“Remember when you first signed up, and your ATM served a network of banks?” Grieve said. “When you went to the ATM, you had to look at the stickers to see if that machine served your bank. Then someone hooks up all the networks and you can use any ATM.”

Starbucks’ Contactless Bucks
Last fall, Starbucks launched a 16-store iPhone mobile-phone payment trial. In April, the company began expanding that service to 1,000-plus U.S. stores, all of them located within Target outlets. This program lets customers purchase Starbucks products by flashing a 2-D bar code on their phone screens, which are linked to their individual Starbucks prepaid card accounts. In order to read the bar code, each store is equipped with a special scanner.

Anyone who owns an Apple 3G iPhone or iPod Touch can download the chain’s mobile application for free. Customers can review their card-account balances and easily load additional value into the accounts through the mobile network. While the mobile payment system speeds up transaction at the point of sale, allowing customers to manage their own accounts also saves time and decreases the demands on store employees. Industry observers expect Starbucks to expand the program, making the applications available to other phone models.

Mobile at McDonald’s
Some of the greatest retail opportunities for using contactless payment have nothing to do with actual payments, according to Red Gillen, senior analyst for Celent. On a recent visit to Japan, Gillen met with McDonald’s executives to learn more about how the company uses contactless payment technology.

“The focus of our discussion was McDonald’s use of mobile technology for sales lift purposes—as a channel to distribute coupons and special offers, to entice customers into McDonald’s restaurants,” Gillen said.

In Japan, McDonald’s customers can register as members of the chain’s “Toku” promotional program. Each week prior to the weekend, McDonald’s sends program members a mobile message, along with current coupons and promotions.

“Customers then have two choices,” said Gillen. “One is to use their mobile browser to open mobile coupons, which are shown to McDonald’s cashiers. The other, if customers have already downloaded the McDonald’s app, is to download the coupons to their contactless mobile wallet. Either way, the customer gains the benefit of the coupon.”

Customers who use the contactless version of the coupon must input their Toku membership number, which allows McDonald’s to learn more about the individual’s shopping and eating preferences. With that information in hand, the chain can send the customer’s mobile phone highly personalized promotional offers featuring specific menu items or store locations or set for a particular time of day.

“This increasingly tightening marketing loop cannot be achieved with plastic membership cards, or with mobile browser-based coupons,” said Gillen. “And there’s one more thing that contactless technology does for McDonald’s. Once customers tap their contactless coupons, the data is leveraged to immediately send orders back to the kitchen. This just goes to show that contactless is not just about payments. In fact, it often isn’t about payments at all.”

Eight millions consumers in Japan agree. That’s the current number of people who have signed up to be part of Toku.

Rutter’s Phone App
Convenience retailers are recognizing the value of allowing customers to make purchases—and receive special offers—using mobile phones. In August, Rutter’s Farm Stores, headquartered in York, Pa., added an Android app to complement its previously introduced iPhone and Blackberry apps. All downloads are free and available on www.rutters.com and from each phone’s respective app stores.

With the downloads in their phones, customers can find directions to their nearest Rutter’s, check current gasoline prices and redeem paperless mobile coupons sent directly to their phones. They also can register their Rutter’s Rewards loyalty cards, which are used to earn cent-off-per-gallon savings on fuel.

“We started sending mobile coupons out about two-and-a-half months ago,” said Jeff Leedy, senior vice president and chief customer officer for Rutter’s. “Anyone who has a mobile application and who authorizes ‘push’ can get coupons. The secret is finding the balance between how often you text or coupon a customer. As we go forward, we’ll have to learn.”

It is too early to report customer response to the download offering, Leedy said, but he’s confident this is the beginning of how retailers will use mobile technology to simplify customers’ lives. “The emerging customer—the early adopters—wants the ability to do things mobile,” he added. “If you can offer these applications instead of someone else, you can get their business. It is a point of differentiation between you and your competition.”

Currently, Rutter’s is looking at the next st
ep in mobile payment technology. “We’ve had the vision of an electronic wallet for over a year,” Leedy said. “The concept of the electric wallet—it’s very powerful.”

All of this is possible with the new wave of mobile phones. “Talk about convenience,” said Grieve. “It sounds a little like an episode of the Jetsons, but it’s happening as we speak.”

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