The Japanese call it osaifu keitai (cell-phone wallet). Flash your phone virtually anywhere you go for almost any purchase and it's automatically logged into a digital expense report. Eat frequently at McDonald's? Tap your phone to pay and your all-in-one debit card/receipt tracker/loyalty program may instantly offer you 10% off.
Today, if you want to enjoy these benefits, you have to go to Japan. But after years of talk, wireless carriers, banks, startups, and handset makers are now actively working to transform Americans' cell phones into mobile wallets. The goal: to snag a share of the processing fees associated with the $3.2 trillion in annual retail credit-card charges, and to turn the $1.2 trillion in cash and check spending into digital transactions.
For the past five-plus years, Visa and MasterCard have used near-field communications (NFC) chips in tap-to-pay credit cards and key fobs. Now they're embracing mobile phones as well. Later this month, Visa will release an iPhone case (developed with Dallas-based Device Fidelity) that makes the handset compatible with tap-to-pay consoles. This follows MasterCard's similar entry this summer, when it started marketing tags (developed with Atlanta-based First Data) that stick to phones. "Consumers already use phones for online payments," says Josh Peirez, MasterCard Worldwide's chief innovation officer, referring to downloaded songs and software. "The goal is to get them comfortable doing the same thing in the physical world."
The interim offerings will have a decidedly short shelf life. Nokia has announced that it will include NFC chips in all its 2011 smartphones, effectively forcing Apple, Research in Motion, and other rivals to follow suit. "Stickers and stuff are welcome bridges," says Gerhard Romen, Nokia's director of mobile financial services, "but demand is growing, and full implementation is what makes a technology go forward."
Analysts estimate NFC will become ubiquitous within the next three to five years, which will give wireless carriers newfound leverage in determining the future of the mobile wallet. Indeed, AT&T, Sprint, T-Mobile, and Verizon are reportedly working on a joint-payments initiative. (All either declined to comment or couldn't be reached.) "Not only do they distribute the physical devices and 'own' millions of customers," says Philip J. Philliou, of payments-consulting firm Philliou Selwanes Partners, "but they also understand how to do payments — billings, collections, maintaining accounts — on a massive scale."
That said, carriers are unlikely to go it alone. In Japan, a primarily cash-based society, NTT DoCoMo took control of the mobile-wallet market by buying a bank. A likelier scenario in the United States — where consumers already love to buy now, pay later — would be for one or more carriers to partner with or even acquire a credit-card network, so as to take advantage of its brand equity, processing savvy, and retail relationships. "Together, they can offer unparalleled fraud protection," Philliou adds. "And when risk decreases, so does cost."
The excitement surrounding the mobile wallet's potential is so fevered that in addition to carriers and credit-card networks, now banks, tech giants, and startups are all eager to lay claim to some part of this potentially huge new ecosystem. PayPal already lets users send money via text message, and Osama Bedier, its VP of mobile platforms and new ventures, envisions a service that stores gift cards and alerts customers when they're near a merchant. This past summer, mobile startup Loopt launched its Loopt Star program, an über digital-rewards card for such brands as Starbucks and Gap. U.S. Bank is working with Infosys to move beyond a basic banking app: It's developing a location-based "concierge" so smart (and potentially creepy) that it can offer a shampoo discount to shoppers browsing the hair-care aisle. As NFC tech proliferates, says Dominic Venturo, U.S. Bank's chief innovation officer, "we'll be able to make a business case for services that are even better."
This year, eBay expects U.S. consumers to buy roughly $1.5 billion worth of goods using its smartphone apps. It's a short leap, then, to using that same handset to pay at the Target in your neighborhood shopping center. "From the customer's point of view," says Robert Hedges, a partner at the financial-services consultancy Mercatus, "the question is, When is the banking industry going to catch up with us?"
A version of this article appeared in the September 2010 issue of Fast Company magazine.