Mobile commerce (m-commerce) will take electronic commerce (e-commerce) from the home and office and place it firmly in the pockets of those on the move, enabling "anytime, anywhere" internet transactions. The increasing ubiquity of mobile devices further maximises the potential for payments conducted via mobile phones.

A new study by Frost & Sullivan, the international marketing consulting company, believes the foundations of m-commerce are currently being laid and that the market will take-off within the next few years. The report expects that trade worth $25 billion will be generated through mobile payments in 2006, which equates to around 15% of estimated online e-commerce consumer spending.

This forecast is based on a detailed model that considered mobile payment expenditure comprising key user payment scenarios, namely: automated point-of- sale payments (vending machines, parking meters and ticket machines); attended point-of-sale payments (shop counters, taxis); mobile-accessed internet payments (merchant WAPsites); mobile-assisted internet payments (fixed internet sites using phone instead of credit card), and peer-to-peer payments between individuals.

Mobile-accessed internet and peer-to-peer payments make up the bulk of payments, accounting for 39% and 34% of spending respectively in 2006.

Mobile payments are not just another service touted as the "next best thing" of the mobile internet. Mobile payments offer a genuine and compelling set of benefits to both consumers and merchants, as well as significant market opportunities for the network operators, banks, credit card associations, manufacturers and the host of startups that are looking to claim a stake in the payment market.

Ben Donnelly, Research Analyst at Frost & Sullivan, notes that it is more a question of how and when, rather than if, mobile payments will gain mass market acceptance.

"Analogies can be drawn with the introduction of credit cards 50 years ago, currently the principle alternative to cash. They were perceived as a niche product and unnecessary luxury for many years until global technology standards made them viable for the mass market," he says.

Mobile payments enable impulse or last-minute purchases, as well as traditional shopping, but also booking and paying for tickets, and managing stock-trading or financial transactions.

"Mobile payment also increases the lifestyle efficiency of consumers, making use of "dead time" that could otherwise be wasted doing nothing. For example, users are able to make purchases walking down the street, pay bills while they wait for a train, or pay back a debt to a friend immediately after a meal," Mr Donnelly adds.

Merchants can profit from mobile payments by reducing costs and fraud. Vending machine and parking meter operators, for example, could minimise expenses associated with handling cash and vandalism. Furthermore, certain mobile payment providers will deliberately offer lower commission charges than the credit cards, which could save large merchants significant amounts. It can also be cheaper and easier for merchants to register for mobile payments than it is to register for a credit card terminal.

Hence, consumers will find they can use their mobile phone to pay in places that previously only accepted cash. Additionally, these merchants will boost sales by providing an additional payment option to their customers. Surveys have shown that mobile payments have directly resulted in a sales increase of 20%.

Clearly, security between users' mobile devices and the servers which control transactions is a key issue for m-commerce. Mobile payments actually offer a higher degree of security than credit cards, since both the phone and a PIN are required as authentication. "The fraud risk is miniscule compared with credit cards," Mr Donnelly explains, "a stolen mobile phone is far harder to crack than forging a signature on a credit card."

Mobile payment security is further augmented by mobile-assisted internet payment for online commerce. Consumers are not required to divulge their credit card details over the internet if the merchant supports mobile payments in addition to credit card payments. Instead their mobile phone number or an alias would suffice, overcoming a major consumer concern with internet retail.

Network operators are facing long-term decline in revenue from voice traffic as well as tightening competition triggered by operators with 3G licences and virtual network operators. Mobile payments offer them the opportunity to get a piece of the multi-million dollar payments pie that is currently dominated by banks and credit card associations.

"These financial institutions are conscious of the threat to their business posed by network operators and mobile payment start-ups. They need to ready themselves for mobile payment enablement and galvanise into action when adoption gathers pace. Banks want control over mobile payments, but at the same time, they are keen to collaborate with operators in the development of other wireless banking services," Mr Donnelly says.

Some degree of cooperation between the operator and the financial service provider is necessary, since they each possess complementary skills and capabilities.

Mr Donnelly continues: "Payment startup companies are already beginning to define commercial models, based on the experience of market assessments and pilot trials that have been conducted, in some cases, for up to five years.

However, their specialist knowledge and flexibility is usually countered by a lack of brand awareness and very small customer base." Device manufacturers also have a stake in the market, with the opportunity to develop payment- enabled handsets that store credit card information and advanced payment applications in the device itself.

With transaction fees in the range of 1.5% to 4%, there is little doubt that the opportunity is extremely attractive for the various stakeholders involved.

What is not yet certain is how standards may develop and which companies will ultimately succeed.

Price: euro5,000 Code: 3851 Publication Date: April 2002