Cell Phones: A Key Player in Proximity Payment Systems

Some industry observers believe the next generation of venders will successfully integrate the vending machine with a kiosk, thereby creating a device that not only dispenses product but also displays advertisements, captures user input, and creates an interactive purchasing experience. Accompanying this prognostication of technological advancement is the anticipation of a comprehensive contactless payment structure built on near-field communications (NFC) technology.

This is a technology that enables contactless payments by the wave of a cellular phone, not a card, tag or fob. NFC applications allow consumers to store credit card and debit card account information and to select a preferred method of payment, from those stored in the e-wallet of the phone, at the time of the transaction. Experiments by Visa International indicate that 89 percent of the participants who tried phone-based settlement preferred its convenience to alternate payment schemes. MasterCard also supports the cell phone as the next logical progression in proximity payment technology.

Near-field communication creates new possibilities

Forming a secure gateway to the connected world, NFC-enabled mobile devices (cellular phones and PDAs) allow consumers to store and access a variety of information. Bringing two NFC-enabled devices in close proximity of one another will initiate an automatic network communication configuration. NFC-enabled devices are then able to exchange and store data — including personal and financial data, text and voice messages, photo and video images, and MP3 files — without user intervention. By delivering intuitive connectivity, auto-configuration and smart key access, NFC can improve the speed of data transfer while enhancing its level of security.

Cell phones have new capabilities

Technology experts anticipate proximity payments will soon be added to cell phones as they become equipped with near-field communication technology. Instead of carrying credit cards, debit cards, loyalty cards, prepaid cards, hybrid cards or other settlement media, the cell phone will be used to settle transactions.

Transmitting payment information via cell phone to a POS terminal is sufficient cause for concern, but concern is compounded by the possibility of losing the phone. The solution may well be a biometrically controlled cell phone that requires the user's personal attributes to activate settlement.

Cell phone manufacturers are experimenting with several security options, including hardware modification (shell casement and fingerprint authentication) and software add-ons (custom shortcuts and voice authentication). Although in its infancy, cell phone settlement technology is expected to become popular as the next-generation consumers, already cell phone dependent, dominate the marketplace.

A real fear associated with cell phone settlement is the threat of misplacing or losing the handset. Phone absence could also mean a loss of transaction functionality. Security concerns point to a need for better authentication methodologies, including voice authentication and fingerprint authentication built into the phone, so that lost equipment is rendered unusable.

Security solutions: Fingerprint, voice

Fingerprint authentication is a cell phone with a fingerprint scanner built into its base. It requires the user to swipe a finger across its surface before the phone is operable.

NTT DoCoMo Inc. markets a biometric phone in Japan. The phone features an onboard fingerprint scanner to prevent unauthorized handset use. The user can lock or unlock the cell phone simply by placing a pre-enrolled finger on the scanner.

Cell phone voice authentication is keyed to recognizing characteristics of the user's voice and thereby activating the device. Although considered a low-to-medium-level identification technique, little modification is required as the necessary hardware is already in place and improved software is evolving. This approach allows speaker-verification based on stored data burned onto an existing microprocessor within the cell phone.

How phones become payment devices

NFC technology evolved from a combination of contactless identification (RFID) and interconnection technologies. This fact is reflected in the three approaches for implementing NFC payment technology via cell phone: 1) integrating the process with the phone's internal software, 2) embedding an NFC chip inside the phone handset and 3) adding an NFC-enabled shell over the phone.

Modification of a cell phone's software involves generating a menu display of multiple account options and allowing the user to select the preferred method of payment for each individual purchase.

This option, called an "e-wallet," does not require adding a physical component to the phone, yet allows for selection among a set of cashless payment options. In this way, the e-wallet becomes analogous to a physical wallet carried in a pocket. Since cellular payment systems are phone model dependent (i.e., different model phones employ different software), development of software modified applications have experienced a slow rate of adoption.

In other words, since each cell phone model may require a different software modification, the process becomes proprietary and cumbersome. Fortunately, there are some cell phone providers working on software uniformity and compatibility in hopes of rectifying the current model-specific dilemma.

Overcoming model dependent software

Placing an NFC chip inside a cell phone is an alternate approach to cell phone compliance that avoids the conflicts arising from model dependent software. Enabling users to wave or tap the cell phone against a contactless reader (similar to an RFID-enabled card) provides rapid authorization processing but eliminates the multiple account selection available through e-wallet software.

Similarly, handset transaction processing can be accomplished through placement of an outer casement with an embedded NFC chip over the phone. The outer shell, with embedded NFC technology, allows for contactless payment by pointing the phone at a contactless reader. This attachment is a stand-alone component that is independent of the phone model or software version.

An example of an enabled phone is the Nokia NFC shell for the Nokia 3220 phone. The shell allows the user to conduct transactions simply by touching a qualified POS device. The user's payment credentials, such as debit and credit card account data, are securely stored in the NFC chip of the shell and exchanged during the transaction. The shell is compliant and interoperable with standard contactless applications.

NFC applications

Originally designed to link electronic devices, NFC technology is capable of altering the functionality of cell phones and PDAs. NFC-enabled devices can be linked with contactless payment systems, online ticketing services and website download content providers. NFC-enabled applications being developed and tested by Nokia, Motorola, Philips and Sony can be divided into four broad categories.

  1. Touch and Go. These applications merely require that a device equipped with access information be brought into proximity of a reader. Examples include transportation and event ticketing, security access coding and smart label reading.
  2. Touch and Confirm. These are applications such as mobile payment where the user has to confirm acceptance of a transaction and/or enter a password to verify and authorize payment.
  3. Touch and Connect. This is the linking of two NFC-enabled devices for peer-to-peer data transfer. They include music downloads, image exchanges and address book contents.
  4. Touch and Explore. These are NFC devices that can offer multiple functionality. The user is able to explore device capabilities to select the most appropriate function or service.

Interestingly, the latest cashless payments systems being installed in vending machines are likely to be NFC-enabled in anticipation of this forthcoming technology. Japan's NTT DoCoMo expects the number of subscribers to its e-wallet service to increase to more than 7 million subscribers.

Discover Card experiments

While MasterCard, Visa and American Express have actively pursued contactless payments via stand-alone RFID technology, Discover Financial Services (Discover Card) has taken a different approach. The company is experimenting with contactless payments via cell phone and anticipates having the product in the marketplace by mid-2006.

The cell phone, equipped with a NFC chip and antenna, enables consumers to settle purchases with the wave of the handset. In addition, the phone can also be used to review account balances and transfer funds between cardholder accounts using a secure PIN code.

Discover relies on NFC technology to send and receive data. With the ability to share data, a consumer could purchase two movie tickets via an NFC-enabled phone, then transfer one of the tickets to a friend's NFC phone, thereby allowing each to simply wave the phone near a reader to gain entry to the show. Moving "tap and go" from cards, tags and fobs to cell phones is the next logical progression in the proximity payment technology evolution.

The Cell phone as e-wallet

Both Visa and MasterCard have indicated support for NFC replacement applications over current RFID uses. Experts predict the cell phone will rapidly become the consumer's primary e-wallet for conducting banking and purchase transactions. It is important to note the success of a pilot program in Chicago where Motorola tested NFC payments via cell phone within the MasterCard PayPass system.

NFC devices provide short-range wireless connectivity — 2- to 4-inch range — without the use of RF transmission, and hence can be used without regard to interference. NFC devices require power, and hence cell phones and PDAs are likely candidates to house the technology. Uses include identification management, access control and payment systems. Soon users will be able to open electronic files and door locks as well as replace remote control devices with an NFC-enabled cell phone.

Michael Kasavana, Ph.D., is the NAMA endowed professor in hospitality management at Michigan State University. He has been researching vending technology for several years.

Loading