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Cell Phones Double As Credit Cards In Japan

November 11, 2008

Many of the world’s biggest cell phone and credit card companies are testing new ways for consumers to use their cell phones to pay for everyday goods and services.

Meanwhile, consumers and firms in Japan are paving the way for the technology to become a way of life for the rest of the world.

More than 50 million ““ about half ““ of all cell phone users in Japan currently use phones with payment capabilities. Japan has pioneered not just the technology but also the business models that will pave the way for wallet phones to become a standard payment method in the future.

The so-called “wallet phone” service was started in 2004 by NTT DoCoMo. It was quickly followed by other services from rivals KDDI Corp and Softbank Corp.

Trials in Japan showed that cell phones could effectively replace credit cards and even house keys and other commonly pocketed items.

“You can’t deny that having such applications on a phone is convenient, and that will likely be the way that mobile phones are going worldwide,” said JPMorgan Securities analyst Hironobu Sawake in Tokyo.

“People always carry cell phones on them, and they would find it useful to have a financial function there.”

And since the phones are linked to actual credit cards, users can even rack up points with a wave of their mobile.

However, other factors stand in the way of cell phones becoming a widely-used method of payment. Not only does the system require a completely revamped business model, there is also the stiff psychological barrier of consumers being skeptical about using their cell phones as credit cards. But Japanese firms are working to solve these issues.

KDDI, for example, is a Japanese telecom operator that has recently set up a bank along with Mitsubishi UFJ Financial Group. NTT DoCoMo, Japan’s biggest wireless carrier, offers credit cards and lending services as part of a tie up with Sumitomo Mitsui Financial Group, Japan’s third-largest bank.

“Traditional financial industry met telcos by going mobile. Now telecom operators want to play a part in that chain. These talks are well under way,” said Gerhard Romen, Director for Strategic Alliances & Partnering at Nokia.

Mastercard last month announced that it was discussing its options of using the phone wallet system with several banks.

“Now banks say: I have no doubt in the technology. We need to solve the business model between mobile and payments industries. It’s not a trivial task,” said James Anderson, a Vice President at Mastercard’s mobile business.

However, the fact still remains that only one third of wallet phone holders actually use them for purchases. The largest user group is consumers in their 20s and 30s.

“For young people the phone is more important than the card when they leave home,” said Nokia’s Romen.

McDonald’s Japan and 7-Eleven convenience stores have been testing mobile discount coupons, and FeliCa Networks, a joint venture of Sony and DoCoMo, have launched a mobile platform for retailers to offer such services.

“With many cell phones around and most of them being wallet phones, we cannot ignore them as marketing tools,” McDonald’s Japan spokesman Kazuyuki Hagiwara said. McDonald’s plans to widen its mobile discount coupon offering nationwide next year.

The world’s top cell phone maker Nokia has started selling wallet phones, though growth is hampered by costs stemming from an extra chip needed in phones for data security. As a result, Nokia’s near field communications (NFC) version of devices costs far more than regular phones.

Near field communications (NFC) enables contactless data transmission at high speed and enables many functions at once such as various electronic money services, keys and coupons.

Japanese cell phone makers install Sony Corp’s FeliCa chips into new phones by default.

Globally, research firm Juniper Research says there will be 700 million NFC-capable phones by 2013, from some 50 million in Japan now, offering major growth for the phone payment industry and the companies that provide the hardware and software.

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