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Pace of innovation in mobile payments accelerating: Forrester

The growth of mobile payments is beginning to accelerate and Forrester Research predicts that 2011 will mark the year that near field communication becomes mainstream.

Forrester’s “Mobile Payments Enter A Disruptive Phase” report talks about the ways in which mobile payments are disturbing current payment models. Wireless carriers, alternative payments and online players such as eBay’s PayPal will all play a role in this disruption.

“Consumer product strategy professionals should anticipate different disruptive scenarios and determine the likelihood of them happening,” said Thomas Husson, Paris-based senior analyst at Forrester, in the report.

“To define the correct strategy, be it defensive or offensive, they need to measure the convenience of their new products and services,” he said. “And, at a tactical level, they shouldn’t underestimate the need to educate consumers about new payment methods.”

Breaking down mobile payments
Forrester breaks the mobile payments space into two different systems: those that use the mobile network and contactless payments systems.

Over-the-network mobile payment systems use the mobile network to initiate and process payments.

For example, buying tickets from the Fandango application to see a movie on Friday night is an example of over-the-network mobile payments.

Other examples include anything bought remotely, such as ringtones, apps from the App Store, games and other digital content.

Contactless mobile payments rely on a chip that is embedded into a mobile device such as NFC or RFID. These payments rely on point-of-sale infrastructure for the initiation and authorization of transactions.

For example, waving an RFID-enabled device in front of a POS sale terminal at a 7-Eleven, where the wave would be sufficient in initiating and processing the transaction, would be considered a contactless payment.

Various mpayment players
There are various players in the mobile payments ecosystem. The most obvious are the payment leaders: financial companies such as MasterCard and Visa, who have recently spread their wings into the mobile realm.

Additionally, POS terminal manufacturers such as Verifone and Ingenico also play a role in the mobile payments space, as they have worked to revamp their technology to accept mobile contactless payments.

Handset makers are also players in the payments space. For example, Nokia and Samsung are already shipping handsets with NFC chips built into them.

Wireless carriers play a role in mobile payments already, letting consumers purchase digital goods and services by selecting “bill to wireless account.”

Right now these types of payments have been mostly for small purchases such as for digital content like ringtones and games and such, but in the future that may change. Wireless carriers may one day take on the role of credit card companies.

Then there are the alternative payment companies, which have already made their staple online. These are the PayPals and Google Checkouts that have already earned consumer trust online and are quickly recognizing the opportunities in the mobile space.

Drivers of mobile payment uptake
“While mobile payments have been slow to penetrate the market, barriers are eroding and disruption is on the horizon,” Mr. Husson said in the report. “However, this disruption will be slow in coming.

“Mobile phones are now everywhere,” he said. “Beyond the scale they offer, these devices are increasingly smarter and open to software extensions, enabling innovation from third-party players.

“After many years of trials, NFC will finally become available across a range of different handset brands, price points, and form factors in 2011.”

Forrester identifies four key factors that will drive mobile payments: ubiquitous mobile phones, mass-market smartphones, open software platforms and millions of NFC-enabled devices.

New player and technology disturbances
As consumers and merchants become more accustomed to mobile payments, disruption in the payments space is inevitable.

“New payment methods, such as contactless schemes, aim to displace cash transactions,” Mr. Husson said in the report. “Mobile payment capabilities can also catalyze changes in related markets, such as transit systems.

“Their readers could be upgraded to accept digital tickets stored on phones,” he said. “Disruption also means that new entrants could gain market share at the expense of incumbents.”

Forrester sees disruption via existing players expanding their roles and new entrants and partnerships emerging.

However, Forester forecasts that this disruption will be slow-coming.

There are a couple of reasons why this is so. First, consumers are slow to adopt mobile payments. Right now most mobile payments are made for mobile content. In-store mobile payments have not gained traction yet.

Forrester found that only 12 percent of American adults with a mobile phone have made a mobile transaction. It is the job of the vendors and providers to create consumer demand.

Additionally, Forrester says that merchants also need to be motivated.

Another issue is the fact that the current players are still not done ironing out the issues in this space.

“Merchants, banks, and payment operators often squabble over how to divide the profits,” Mr. Husson said. “Adding new players, such as handset manufacturers and mobile operators, to an already complex value chain makes it all the more difficult to reach a consensus.”