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Should Carriers Cut Out Credit Cards?

Interest in mobile commerce in the US has exploded, especially in the past few weeks, but the space could be growing too large for its own good, according to one alternative payments provider. (See Google, Apple Fight Carriers for Mobile Money.)

Chicago-based startup mPayy is on a mission to rid the world of credit cards, and it believes that the wireless operators should do the same.

AT&T Inc. (NYSE: T), Verizon Wireless , and T-Mobile US Inc. are trialing contactless payments by leaning on Discover Financial Services and Barclays Bank, two partners that ensure the carriers will always be the weakest link, says mPayy CEO and former banker Conrad Sheehan. (See Mo'bile Money, Mo' Problems and Operators Cash In on Mobile Payments .)

That is primarily because of business model meandering. It is simple enough to build a mobile network on top of a credit card network, but once each party involved -- including the issuing bank, credit card company, and merchant acquirers -- gets a cut, the carrier is left with an empty wallet. Credit card companies, for instance, typically take a set fee per transaction as well as a percent of the purchase, even for small-ticket purchases.

mPayy can displace all three middlemen, Sheehan says. The startup has built its own network, which he admits is markedly harder to do but also ensures fewer companies cut into the profits.

"There have to be new names for mobile payments to work," he says.

mPayy doesn't work with wireless operators today, but Sheehan says his company is making a lot of profit per transaction, and it'd be happy to share this with the operators.

"We can work with a carrier and cut our margins in half and still be enormously profitable," he says. That's because a company like Discover incurs expenses from the physical, signature-based system, something retailers don't want to pay for. Sheehan says mPayy charges about half what MasterCard or Visa charges.

The monetary hurdles of m-commerce are an important issue, but it still won't be an easy sell for a startup. Founded in 2007, mPayy has only a small user base of around 7,000 and lacks the brand cachet of well established financial institutions.

mPayy requires users to open free accounts online, and until contactless technology is embedded in more SIM cards, mPayy will also require a sticker affixed to the phone for payment services other than peer-to-peer transfers and online purchases. That's another potential stumbling point for this or any payment technology.

Sheehan says security, another non-trivial m-commerce challenge, is not an issue, because all data is encrypted on the phone and none of it is stored after the transaction. Most mPayy transactions are less than $5, and if it costs more, the merchant can opt to require a PIN.

Even so, consumer perception may be what matters here. It took the financial institutions a long time to convince consumers that online banking is secure, and any non-bank vendor is up against the same battle on mobile phones.

M-commerce momentum keeps building
Despite the disadvantages that Sheehan points out, the established banks are a force to be reckoned with. One of the biggest, Bank of America, recently teamed up with fellow giant Visa to test a digital wallet program, Reuters reports. The service, to be trialed in New York from September until the end of the year, handles in-store payments by using scannable chips inserted into smartphones.

In Japan and South Korea, where m-commerce is more advanced, KDDI Corp. and SoftBank Mobile Corp. are working on an interoperable payments system based on near-field communications, a technology that China Mobile is also investing heavily in.

[Programming note: Check back later this week for a video interview where Sheehan discusses how Chicago could revamp its public transport system with mobile phones.]

— Sarah Reedy, Senior Reporter, Light Reading Mobile

sarahthomas1011 12/5/2012 | 4:25:55 PM
re: Should Carriers Cut Out Credit Cards?

Apple is the wild card here. It has a credit-card relationship with consumers via iTunes, but maybe not the transaction fees of credit card companies. It's Apple though, so who knows how much it will charge.

ConradSheehan 12/5/2012 | 4:25:17 PM
re: Should Carriers Cut Out Credit Cards?

Apple is very powerful but iTunes is layer on top of the already expensive credit card system.  Anthing they do with iTunes, such as linking an iTunes account to an RFID/NFC chip in an iPhone, will simply add cost to merchants.  Plus credit cards still need a signature some how to protect merchants against fraud and chargebacks.  That is a non-trivial challenge.

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