The Four-Way Battle to Control Your Digital Wallet

There's little doubt we'll all be waving our phones over payment processing terminals to pay for goods in the near future, but what isn't yet clear are the particulars of how such transactions will work. Near field communications (NFC) chips are the common thread to make this future a reality. These small bits of silicon are effective at transmitting data over very short distances, like when I pass my American Express (AXP) card over a contactless payment terminal instead of swiping the magnetic stripe. So technology exists to transfer the account data, but what doesn't yet exist are standards. And every player involved wants to control such transactions and earn a cut of the deal, expected to be worth $633 billion in mobile transactions by 2014.

Lately there's been talk of two such players, but I'd argue there are four, and all four have different takes on what they offer for wireless payments:

1. The handset makers, which could sell more hardware as consumers upgrade to NFC-enabled phones.

2. The software companies that power mobile devices, because if they can control the software, they have a foot in the door of the entire payment system while also gaining valuable spending data.

3. The traditional payment processing companies such as Visa (V) and MasterCard (MC), which have owned this space for decades, earning a small cut of every credit-card transaction along the way.

4. The network operators themselves, which provide the pipe for smartphone data use.

What does this mean? The longer that arguments between these four parties go on, the longer it will take before we have a readily accessible system for wireless payments. That's part of the reason Colin Gibbs suggested NFC payments wouldn't take hold in 2011 (subscription required).

The most recent arm-wrestling is between Research In Motion and the carriers, reports The Wall Street Journal. RIM (RIMM) is planning to put NFC chips directly inside future BlackBerry handset models, which on first glance, sounds like a positive step forward. And it is, because it would enable handsets for wireless payments. But RIM wants payment credentials—the account data that are currently in magnetic strips of credit cards, for example—to be stored directly and securely on the phone. While RIM's plan would advance wireless payments, it would also add more incentives for people to purchase BlackBerry handsets and give RIM valuable data on consumer spending preferences. It could even boost BlackBerry sales if such data are easier to transfer to a new BlackBerry, instead of another phone brand, during a handset upgrade.

Carriers would instead like to see such account data stored on the SIM card of a phone, which would make it easier to switch to any handset that's enabled for NFC transactions. But that's not the only reason. Because carriers, not the handset makers, control the distribution of SIM cards, carriers would then control that consumer account data. And the carriers have their own plans in this battle as well: AT&T (T), T-Mobile, and Verizon Wireless (VZ) are collaborating on a mobile commerce network called Isis. The three largest U.S. operators have partnered with a payment processor in Discover (DFS), as well as a card issuer in Barclaycard (BCS), so even "new" payment networks are reliant upon companies with years of experience in this space.

Disruption Potential

On Mar. 18, I spoke with one of the companies well-versed in mobile payments to make sense of the many moving parts here. MasterCard Senior Vice-President & Group Head, U.S. Emerging Payments Lead Mario Shiliashki explained that through the company's PayPass technology it has been offering wireless payments for nearly eight years, and no matter which newcomers enter this game they'll likely need to work with the established players that built payment networks.

"We're device and technology agnostic, but we license PayPass, which can be in a handset, a credit card, or other form factor. What companies need to realize is that MasterCard and others have spent years creating a payment infrastructure. NFC is simply the wireless mechanism to start a transaction. The infrastructure after that takes care of how money moves, ensures that transactions work every time and preserve legal rights for consumers, merchants, and banks."

That makes sense to me, although it's difficult to overlook the potential influence of disruptive newcomers such as Google (GOOG) and Apple (AAPL). Google's Nexus S handset has an embedded NFC chip, and the company recently updated its Android operating system to them in other devices, too. Effectively, handset makers and third-party developers could create payment solutions that could, for example, transfer money between two individuals when tapping NFC-enabled phones together.

And "Apple is a considerable player" as well, Shiliashki noted in our conversation. The company has built up a portfolio of 200 million credit-card accounts through its iTunes Store.Apple has continued to disrupt with the store: What started as a simple way to purchase music has become a way to buy software applications and rent and purchase movies and television shows.The next step could be to bring NFC payments to the mainstream consumer, if rumors of including an NFC chip in the next iPhone are true. Given that RIM, Google, Nokia (NOK), and other handset makers already do this, or plan to in the near future, it's a safe bet.

Until some of these battles are fought and won, the promise of paying for everything with the wave of a phone in the U.S. is still a ways off. We're getting closer, but I agree with Shiliashki, who says this will be a multiyear story. Everyone involved wants to own the customer relationship and profit from it, so for the time being you can still leave home with your phone, but you'd better bring your wallet, too.

Also from GigaOM:

Near Field Communication: More Than Just a Mobile Wallet (subscription required)

IPhone 5: To NFC or Not to NFC?

Reddit Goes Down, Blames Amazon, but Who's Responsible in the End?

Difficult or Not, Follow Your Convictions

Photos: Inside Tesla's Model S Alpha Workshop

Before it's here, it's on the Bloomberg Terminal.