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Visa's Mobile Payment Plan 'Most Comprehensive to Date'

Visa's plan to launch a digital wallet system in the U.S. and Canada this fall is by far the largest and most ambitious of any similar initiative announced by credit card processors, banks or wireless carriers.

Visa announced a digital wallet service that will enable people to use their smartphones to make retail purchases.

Still, Visa faces challenges when it comes to merchant acceptance of near field communication (NFC) terminals that work with smartphones and when it comes to merchants' willingness to pay transaction fees to Visa's partner banks, analysts said.

Part of what makes the announced plan so impressive, analysts said, is that Visa is already enormous: There are 1.8 billion Visa cards in use globally. More than half of U.S. credit card transactions each year are handled by Visa. MasterCard, American Express and Discover are the next largest credit card companies.

Visa runs a credit card network for 16,000 banks. On Wednesday, it named 14 banks and financial institutions that will be directly involved with the new digital wallet system, including US Bank and TD Bank Group (in the U.S. and Canada). Visa cards are accepted by more than 30 million stores and other merchants, and Visa said that its size will make it easier to encourage merchants to accept the new technology.

Visa officials said that the company's goal with its digital wallet initiative is to use NFC , a short-range wireless technology, to make it possible to complete transactions using smartphones, tablets and other mobile devices at stores and transit stops. It also wants to converge that newer technology with one-click desktop-PC e-commerce payment systems and to support easy person-to-person transactions within social networks and other online settings.

"We believe [payment] convergence is here, primarily driven by the mobile phone," said Jim McCarthy, head of global products for Visa, in a conference call. "Reliability, security and interoperability are critical to drive the electronification of payments. [This] will fundamentally change the way we interact with merchants."

Visa's announcement is "obviously the most comprehensive solution that's been announced to date," said Gartner analyst Mark Hung. "If anybody can make it happen, it would be Visa and [secondly] MasterCard. The fall 2011 availability date in North America is impressive. This is a significant step forward for the mobile wallet application."

In contrast, Isis, a consortium of three wireless carriers , has only announced a mid-2012 pilot of NFC payments in Salt Lake City, Hung noted. Visa said it will work with Isis, but it explained that Isis is not a part of the Visa plan.

Hung and other analysts said that NFC and other technologies are mature enough to make Visa's plan "definitely feasible."

Visa has been deploying NFC with digital smartcards in its PayWave technology for about five years. It already has 150,000 terminals in place with various merchants, including McDonalds restaurants and New York taxis, said Bill Gajda, head of mobile technology at Visa, in an interview. More recently, Visa has supported its PayWave NFC with microSD cards inserted in some smartphones, but Gajda said that almost all new smartphones will soon be embedded with NFC.

Hung said phone makers will need to support the PayWave application inside each phone's secure element for the Visa service to move ahead. Visa said it plans to license PayWave technology in new phones and other mobile devices, such as tablets.

Bob Egan, an analyst at The Sepharim Group, said he applauds Visa's announcement but added that getting the PayWave application onto smartphones could be an obstacle for Visa. Another obstacle will be gaining merchant support for buying and integrating more NFC terminals and software.

"Their road to success is filled with a number of potholes," Egan said.

Visa CEO Joseph Saunders said in a conference call that Visa expects to expand its debit and credit account usage globally with the digital wallet concept to earn added revenues. In response to a question, he added that revenues "will be manifested in other sources of fee income" although he declined to name what those sources might be, citing competitive reasons.

If merchants have to pay added transaction fees to Visa and its bank partners atop the 1% to 3% fees they already pay for accepting credit-card payments by customers, then Visa's digital wallet concept could fall flat, analysts said.

"It depends if Visa's fees on the new smartphone services are replacement fees [for fees on credit cards] or additional fees," Hung said. "The latter would definitely put off merchants and consumers. The new fees would have to be at least cost-neutral, if not cost reductions, in order to see them adopted."

Visa's McCarthy said the planned digital wallet system was made possible through Visa's acquisitions of CyberSource, Authorize.net and PlaySpan. Technology from those companies will help enable payments for virtual and real products inside social networks such as Facebook ; they will also support person-to-person payments, Visa officials said.

Visa has seen growth in e-commerce payments and hopes to integrate those payments with an easier one-click system that uses usernames and passwords instead of requiring a 16-digit credit card number, a security code and a shipping address, McCarthy said.

"The days of entering a 16-digit code and ... shipping address are over," McCarthy said.

Visa's Gajda said that while a one-click e-commerce payment system will be part of the new digital wallet system, payments will be even simpler with NFC on smartphones: "Just pass your phone over the terminal," he said.

The U.S. is considered years behind Japan and South Korea when it comes to adoption of mobile payment technologies, but Gajda said Visa's new direction "allows markets like the U.S. to catch up."

In addition to working with a variety of devices, Visa's system will honor payments made using other major credit cards, Gajda added. "People want to take their physical wallets into the digital world, and we believe that the wallet needs to be open. We know that people have multiple payment brands, and we want to give them choice."

Gajda also said that merchants "will want this technology," since they stand to see an increase in online sales if mobile devices are integrated into desktop e-commerce sales. "Consumers today aren't sure how secure those payments are, and it seems onerous when they are faced with filling in a form," he said. "A lot don't have the strength of Visa behind them."

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen , or subscribe to Matt's RSS feed . His email address is mhamblen@computerworld.com .

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