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Contactless payments since 1926

On my desk sits one of the first contactless credit cards. It dates back to 1926 when it worked in exactly the same way as its modern NFC successor - you present it to buy goods or services. If they had mobile phones back in 1926, with a piece of Scotch tape that card could have been turned into the equivalent of Barclays PayTag and used for "mobile payments".

The term "mobile payment" is often greatly misunderstood. Investopedia offers the following definition of "mobile payments": Money rendered for a product or service through a portable electronic device such as a cell phone, smartphone or PDA. Mobile payment technology can also be used to send money to friends or family members.

That definition is wrong on two counts. When it comes to mobile payments, there is no money involved. Money is a "medium that can be exchanged for goods and services". Money started to disappear in the early 1920s when some stores and petrol stations in the USA introduced credit/charge cards which required no physical exchange of any "medium". One simply had to demonstrate ownership of money without showing the money itself. That simple concept is the cornerstone of modern payment systems, and anyone involved in mobile payments needs to grasp it.

With non-cash payments, money means data. When you have £1,000 sitting in your bank account, those £1,000 are nothing more than a record in bank's database. Thus, when you pay someone £100 that simply means that your and payee's data records are amended accordingly. Hence, you can only "send money" if you stuff some banknotes into an envelope and mail it to the payee. You cannot "send money" using a mobile phone.

The importance of the above was explained well by Dave Birch of Consult Hyperion: since mobile payments are not based on any physical exchange of money, and since money is data, mobile payments are all about your entitlement to permit for that data to be used/modified. That means mobile payments are about secure ID, i.e. who you are and what you are entitled to.

M-Pesa is known as an "SMS-based payment system". Payment means "transfer of value". The payment part of M-Pesa has nothing to do with SMS: text messaging is only used to communicate payment confirmation - pigeon post could have been used instead for that purpose, if one was not in a hurry. M-PESA is based on Safaricom's ability to authenticate the payer and the payee using a "secure element" (i.e. phone's SIM card). M-PESA is about secure ID, not about SMS.

The same logic applies to all mobile payments: mobile phone is used to (a) authenticate the user and (b) to send payment instructions and confirmations. The first step can only be performed using a "secure element". The latter step can be performed via a number of interfaces: SMS, NFC, Bluetooth, barcodes, Bump, ultrasound, etc.

Money = Data. Mobile Payments = Secure ID. The big winners in mobile payments will be those companies that understand that well (and those who control "secure element" because Secure Element = Secure ID).



Comments: (5)

Paul Love
Paul Love - Konsentus - Nottingham 05 July, 2012, 18:00Be the first to give this comment the thumbs up 0 likes


An excellent post, which clearly separates the notion of money and payments.

The other key criteria in payments, whether using real money, or electronic money is Trust. 

This is where the central bank printing presses, with fine details and watermarked paper, etc were used to deter counterfeits and establish trust in paper currency.

The cards schemes such as Visa and MasterCard built their networks based on standards and trust, recently enshrined in EMV.

Mobile payments require the same level of trust.

The secure ID is one part of it, but the backing of a trusted brand, whether the Bank of England, Visa, or M-PESA is also vital to ensure payments can me made and accepted.

Winning the battle for trust is the key to growing the volumes in mobile payments.


A Finextra member
A Finextra member 05 July, 2012, 18:14Be the first to give this comment the thumbs up 0 likes

Great comment, Paul - "trusted" is indeed a crucial element (that's what the "T" in our company's name stands for, by the way).

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 06 July, 2012, 13:41Be the first to give this comment the thumbs up 0 likes

The problem with "checking account", "mobile payments" and other popular terms is that, well, they're popular! Even if they might appear ill-defined in hindsight, they're so well entrenched in the popular lexicon that individual service providers might find it unviable to correct their definitions. Even the mighty Facebook had to reconcile itself with this harsh reality recently: Explaining its rationale for shutting down "Facebook Credits", Facebook admitted that people have such deeply entrenched notions about the term "money" that it wasn't worth its while to try and educate them about an alternative medium of exchange called "Facebook Credits".

Open-loop mobile payments like Google Wallet and M-PESA use banking or MNO rails, both of which already enjoy reasonable amount of trust of the average consumer. If we take closed-loop mobile payments, only consumers who trust the merchant's basic product (e.g. Coffee) will even visit the store and try out the merchant's mobile payment product (e.g. Starbucks Prepaid Card). Trust is a given under this situation. Against this backdrop, unless "trust" and "security" are used interchangeably, I don't know what more trust mobile payments need to cultivate with consumers. (I accept that trust is a far more important issue in a merchant's acceptance of a certain payment method versus another e.g. If PayPal keeps freezing a merchant's account for no apparent reason, I expect that merchant to lose trust in PayPal and refuse to sign up for accepting its PayPal Here mobile payment product. But, I'm unable to link this context of trust with secure element or secure identity). 

Even leaving aside "soft" issues like perception, consumer behavior and communication strategy, the fundamental point is this: Any given entity can have different representations under different frames of references. This doesn't make one of those representations wrong. A mobile payment does result in increments and decrements of a certain number at the database level but it undeniably involves transfer of what everybody accepts as money / consideration in the real-world level. I see a place for both representations of mobile payments, depending on the frame of reference used in a given context. As a matter of fact, even banknotes are numbers in a central bank's money supply ("M3") databases. If I were to stuff some currency notes in an envelope and send it to someone, there's a decrement in one M3 database and an increment in another M3 database. This doesn't take away the fact that banknotes are a form of money. 

A Finextra member
A Finextra member 06 July, 2012, 19:47Be the first to give this comment the thumbs up 0 likes

"If I were to stuff some currency notes in an envelope and send it to someone, there's a decrement in one M3 database and an increment in another M3 database. This doesn't take away the fact that banknotes are a form of money."

I am afraid I have to disagree: money, by its definition, involves physical exchange at the point of sale. Any other form of payment (even if the physical money is involved at some later stage) is a "reference" to money.

As for the central bank's "M3" database, I doubt it that any record is changed when a given banknote is transferred from one party to the other. You may be referring to taking a banknote out of the circulation, but that's a different matter altogether.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 07 July, 2012, 18:05Be the first to give this comment the thumbs up 0 likes

Cash or Currency involve physical exchange. Money is a legal tender of exchange and is involved even when the exchange happens electronically e.g. Money Transfer Operator, Fund Transfer, etc. 

Far as I know, M3 is updated at country / city level when currency notes move from one country / city to another.

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