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Aaron McPherson, IDC Financial Insights
Aaron McPherson, IDC Financial Insights
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AT&T and Verizon to Support Contactless Payments

AT&T and Verizon Wireless have signed on to support integrated contactless payments on their phones, giving the technology a much-needed boost, according to IDC Financial Insights' Aaron McPherson.

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Just when contactless cards had been largely written off in the U.S., along came an Aug. 1, 2010, report that AT&T and Verizon Wireless are planning a joint venture to "test a system ... that would let a consumer pay with the contactless wave of a smartphone." While neither carrier (or their junior partners, T-Mobile, Barclaycard and Discover) has so far been willing to comment, their failure to deny the report has lent it credence, and we now have no fewer than four other parties reportedly working on contactless mobile payment systems:

* Apple, which filed for patents that envision a contactless chip in an iPhone, linked to iTunes;

* Visa and DeviceFidelity, which are piloting a scheme with Bank of America, Wells Fargo and U.S. Bank that uses a microSD card that can fit into a special iPhone case;

* First Data Corp. and Tyfone, which have signed a partnership agreement to develop a similar microSD system; and

* Monitise and DeviceFidelity, again using a custom iPhone case to accomodate a microSD card.

Apple's success at tying iTunes to the iPhone, and using it as an alternative payment system, seems to be the catalyst for the current contactless resurgence. AT&T and Verizon Wireless are both going to support the iPhone next year, and clearly they want to avoid becoming completely dependent on Apple's iTunes for app sales and point-of-sale purchases by creating their own competing scheme. Contactless is simply the easiest way to access the physical point of sale.

The biggest strike against contactless since it was introduced to the U.S. market by MasterCard under the PayPass brand in 2003 (with live rollouts in 2005) has been the requirement for merchants to upgrade their point-of-sale terminals. While some very large chains -- such as Best Buy, CVS and McDonalds -- have installed contactless terminals, the vast majority of retailers remain unequipped.

It seems that there is some key ingredient missing. Could smartphones supply that ingredient?

Yes -- in the form of rewards. Smartphones could serve as a delivery channel for targeted offers and coupons, which could be redeemed as part of the actual purchase, rather than as a statement credit or a paper coupon that must be entered separately. Many retailers already have mobile phone apps that link to their e-commerce storefronts; these could be adapted to work with the contactless chip, allowing consumers to receive alerts that drive them to a local store. By tying the offers to the use of the contactless chip, merchants, banks and mobile operators would create a positive incentive to adopt the technology, leading to greater consumer awareness and acceptance.

As good as all this sounds, it will be a huge undertaking. At a minimum, AT&T and Verizon actually have to launch the joint venture, get contactless-enabled handsets into the market, set up the infrastructure to drive the rewards, create promotional campaigns with merchants, and sign up consumers and banks (Discover and Barclaycard by themselves do not have enough market presence).

For their part, merchants have to upgrade their terminals and point-of-sale software. This is a three- to five-year process, so there is plenty of time to work out the details. The good news is that, for the first time, the major wireless operators have signed on to support integrated contactless payments in their phones, and that alone gives the technology a much-needed boost. n

Aaron McPherson is a practice director with IDC Financial Insights.

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