Imagine waving your New York subway pass in front of the cash register at 7-Eleven to buy a sandwich. Or sending a text message to pay for items you found surfing the Web on your cell phone.
Such payment methods are considered futuristic in the U.S. but are now a reality in Asia and Europe. Hong Kong residents can use their local subway pass, called the Octopus card, to buy food at McDonald's and Starbucks, make purchases at convenience stores and use vending machines.
Japanese phone operator NTT DoCoMo Inc. offers mobile phones with embedded chips that can serve as either rechargeable repositories of stored money or as credit cards.
Such efforts have been only sporadic experiments in the U.S., which continues to lag in the adoption of next-generation payment schemes. A key reason for the slow U.S. adoption, say experts, is the tentativeness of banks.
"Banks have given up ownership of some of this space and allowed third parties to proliferate," said Ray Mulhern, president of M-Consulting Group in Charlotte, N.C.
Indeed, technology players are beginning to roll out such services, though they remain sporadic and not widely used.
In March, PayPal, a division of San Jose-based eBay Inc., started a program that allows mobile phone users to pay for Web purchases via text messages. In June, Google Inc. launched its Google Checkouts consumer payment service.
Some say banks are wisely biding their time, waiting for still-speculative markets to mature.
"You have to understand the comfort level of the average American," said Judd Holroyde, a senior vice president for global product management at Wells Fargo & Co. "He or she is still writing a tremendous amount of checks. I can't imagine a baby boomer being comfortable paying by phone."
Though considered one of the most technologically advanced banks around, Wells Fargo has not made direct inroads into the e-payment or mobile payment arena. But others say that in the more established area of consumer payments over the Internet, banks have let more-nimble players like PayPal grab the lead -- though that's in part because of the stricter regulations banks face. "Banks are looked at as keepers of safety and soundness in the payments world," said Mulhern, a former senior executive for payments at Charlotte, N.C.-based Wachovia Bank. "They are much more constrained. As a result, they are not going to move fast."
But others blame the banks' back-end IT architecture, which, because of a wave of recent mergers and banks' natural caution, generally remains siloed and inflexible.
"Most banks still have dedicated, hard-wired payment systems that they bought 10 to 15 years ago," said Matt Ellis, U.S. president for Clear2Pay NV SA, a Belgian provider of back-end payments software to banks. "It's like a classic spaghetti diagram -- complex and expensive to maintain. If you change anything, you have to retest all of the interfaces."
And that is a cause for concern, argued Christophe Uzureau, an analyst at Gartner Inc. "PayPal is more agile than banks," he said. "Banks have to rethink their processes and act now."
The potential benefits are many, according to mobile commerce proponents.
"Every study has shown that the more products you sell to a particular customer, the less likely they are ever to leave you," Ellis said. He argued that banks need to move to a service-oriented architecture (SOA) or middleware approach, such as Clear2Pay's payment hub. That allows them to add new services faster and also manage each customer's growing menu of disparate accounts such that the bank could provide near-real-time views. "You don't have to throw out what you already have. And we can get you to market in nine months -- six if you're aggressive," he said.
Solutions such as Clear2Pay, which is used by banks including ING Barings, ABN Amro, Krung Thai Bank in Thailand and others can be up and running for between US$500,000 and $10 million, Ellis said. And that, he said, would lead to the "Holy Grail for banks: I know everything about you, the customer. I even know you're going to make a payment tomorrow."
Mulhern maintained that it's not that simple. "Ten million dollars doesn't go that far," he said. "My intuition is that it would usually cost something north of that."
In addition to cost concerns, most banks lack the requisite organizational structure to even act crisply on payments issues, Mulhern said.
"Only the top 15 banks are likely today to have a 'payments czar' or other senior executive responsible for payments," he said, noting, however, that the trend is "starting to expand into the top 50 banks."
Mulhern also thinks banks should eschew mobile commerce for now because too many factors need to align for it to take off. Stores need to roll out radio frequency identification readers on a wide scale. Subways and buses need to switch to smart cards. And a market with too many small start-ups needs to shake out.
"It will take some time. Mobile is at least five years out," he said.
But others, including Uzureau, believe banks are on the cusp of action. "The market pressure is very, very strong," he said. "We're really nearing a tipping point."
Wells Fargo's Holroyde agreed. "Within the top five banks," he said, "I can't think of anyone that is not considering these services at this point."
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