Feb 06, 2012 05:50 PM

Battle for Bill Payers Pits Telecoms, UnionPay

China Mobile, China Unicom and China Telecom have won government permission to offer services that let customers pay bills and buy goods by tapping or waving a handheld device.

The technology is expected to open doors to new revenue sources for the telecoms and extra conveniences for their customers. But so far, neither the telecoms nor mobile subscribers are cheering the regulatory decision.

The telecoms argue they can't start full-fledged services anytime soon because the so-called third-party payment licenses they received on the last day of 2011– issued by the central bank and Ministry of Industry and Information Technology (MIIT) – did not go far enough.

The licenses gave the telecoms' mobile phone units a green light to provide wireless bank and utility payment channels for hundreds of millions of customers. Yet the telecoms still lack permission to offer prepaid, SIM card-based financial services to mobile users. Nor did the government decision settle debates over technical details such as radio wave frequencies and SIM cards.

A key reason for the ban appears to be that mobile wallet cards mounted inside smartphones and other devices would allow telecoms to directly compete against China's state-owned and exclusive payment settlement service UnionPay.

A handheld outfitted with a mobile wallet can bypass the UnionPay system, letting its user make a store purchase through a telecom's financial service, leaving UnionPay in the cold.

A handheld-to-bank card system, on the other hand, would divide processing fees among a telecom, bank and UnionPay.

Mobile phone "carriers can obviously get more profit from mobile wallets than through services with bank cards," said Zhang Chunle, strategy manager of Co., China's largest third-party payment services provider. But mobile wallet services require a central bank license, he said, and so far none have been issued.

What's the holdup? Analysys International analyst Zhang Meng said telecoms apparently have yet to convince the central bank that they can meet the strict security standards that mobile wallet systems require.

But telecoms are balking at bank card systems, arguing a lack of financial incentive.

Lin Caiyi, chief analyst at Guotai Junan Securities, said the business model for basic mobile payment services is immature, and profit margins are low. Among the only advantages of a bank card-based mobile payment service, he said, are that it can increase subscribers and lay a foundation for future, more profitable customer services.

Conflicting Wavelengths

Disagreements over radio wave frequencies point to another reason why the newly licensed telecoms are delaying large-scale mobile payment services.

The most efficient system, theoretically, would operate on a single frequency. But China Mobile's 2.4 gigahertz frequency standard for payment services, which has also been adopted by the other telecoms, conflicts with UnionPay's 13.56 megahertz standard.

MIIT and the central bank have tried so far unsuccessfully to mediate a settlement. Meanwhile, industry leaders such as China Information Industry Chamber of Commerce President Zhang Qizeng are trying to find common ground.

At a recent trade conference, Zhang implied the industry standard could be based on more than one frequency. "The standard should not be one and only," he said.

Zhang's perspective, according to a source close to government regulators, is apparently shared by government regulators eager to embrace the China Mobile and UnionPay frequencies in an industry standard. Working on the unification project are representatives from MIIT, the central bank and the Standardization Administration of China.

The rift dates to April 2009, when China Mobile finished work on a mobile payment SIM card. To carry signals from inside a handheld device, the card needed a stronger frequency than UnionPay's 13.56 megahertz.

China Mobile technicians chose the 2.4 gigahertz wavelength. Soon, China Unicom and China Telecom joined the camp.

UnionPay responded by entrenching use of its frequency by upgrading financial institution ATMs and point-of-sale (POS) devices around the country. To date, the company says its network includes about 3.3 million POS machines, more than 600,000 of which operate at 13.56 megahertz.

The telecoms could offer payment services based on the UnionPay frequency, but their customer bases would be limited to those who can afford handheld devices that cost at least 2,000 yuan apiece, said Alipay's Zhang. "Such a high (device) replacement cost would make (payment service) marketing very difficult" for the telecoms, he said.

Amid the friction, China Mobile has hinted at compromise. A source told Caixin the company is developing products based on the UnionPay standard, while at the same time testing 2.4 gigahertz products in Guangzhou, Shenzhen, Shanghai, Chengdu and Beijing.

The tests also could determine whether mobile payment customers would be served by so-called "near-field" or "remote" systems. The former involves making a payment by swiping a mobile wallet-outfitted device, while the latter requires payment orders through wireless Internet or text messaging.

As part of trial program, China Mobile now offers limited remote payment services that let customers in more than 80 cities pay water, electricity, gas and other public service bills via handheld devices.

Zhang said the telecom hopes to build a customer base and then migrate mobile payment users to a near-field system with mobile wallets.

Wang Hui, an independent telecom analyst, expects the dust to settle in two to four years. He notes that more than 20 years were needed for Chinese consumers to switch from paper bills to bank cards, while the transition from bank cards to online payment systems took less than a decade.

The market for mobile payment services could mature in China within two years, he said, and usher in "the arrival of the phone-swiping era."

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