Reuters Summit : Weak tone seen for Japan's wallet phones in Asia

TOKYO (Reuters) - Japanese and South Korean mobile operators are betting future revenue growth on wallet phones -- handsets with embedded chips that allow electronic payments -- but the technology may be slow to take off in the rest of Asia.

"It would be safe to say mobile wallets would be available, if not common, in markets such as Singapore, Hong Kong, Taiwan and Australia before the next decade," said Ridhwan Bakar, an analyst with consultancy Frost & Sullivan Asia Pacific.

But whether the service enjoys the same demand as in Japan and South Korea will depend on the level of security and degree of participation by retailers, banks, content providers and the public transport system, he added.

"Operators need to ensure that an initial acceptable (level of participation) is in place to avoid frustration by early adopters -- the conducive environment developed by NTT DoCoMo and other participants in the mobile wallet ecosystem is the key ingredient of its success in Japan," Bakar said.

DoCoMo, Japan's largest mobile operator, was the first to launch a wallet phone in June last year.

The handset contains Sony's FeliCa radio frequency identification (RFID) chip that enables electronic money transactions, identification and ticketing.

DoCoMo, whose name is a play on the Japanese word for "everywhere", has sold over five million wallet phones, and over a quarter of users have used the service at least once.

About 20,000 stores have installed the equipment to allow customers to make payments using their phones, and DoCoMo hopes to increase this figure to 1-2 million eventually.

DoCoMo's executive vice president for Products & Services, Kiyoyuki Tsujimura, said it was still unclear how popular wallet phones would become in Japan.

"It's something new to the society. We do not know at what pace we can grow this -- we need to watch the market," he said at the Reuters Asia Technology and Telecoms Summit in Tokyo.

Possible stumbling blocks include low usage of credit cards by Japanese consumers as well as security concerns, he added.

Smart chips

Smaller rivals KDDI Corp and Vodafone KK are also expected to offer wallet phones later this year.

East Japan Railway Co plans to launch a service on 1 January that would allow users to enter fare gates by passing their handsets embedded with smart chips over a scanner.

SK Telecom Co, South Korea's top mobile operator, offers a range of so-called MONETA services, where chip-mounted mobile phones are used for credit card transactions, transport fee payments, cash withdrawals and stock trading.

As of August, SK Telecom had sold 4.9 million MONETA-enabled handsets and its subscriber base stood at more than 19 million.

Mobile commerce forms part of SK's wireless internet services, which now account for 20 percent of total revenues.

South Korea's second-largest mobile operator, KTF Co Ltd, which offers similar financial transactions for its subscribers, expects monthly revenues of US$2 million from its mobile commerce services in three years.

"In the era of WCDMA, chip-based m-commerce services will be most important to telecom operators," said KTF spokesman Kim Seong-rak, referring to Wideband Code Division Multiple Access, or third-generation mobile technology.

The concept of wallet phones is just getting off the ground, but contactless chip technology is not new in Asia. Hong Kong residents were the first in the world to use "Octopus" smart cards for payment and access to trains, buses and ferries.

Thailand, China and India also use Sony's chips for similar services.

Singapore Telecommunications Ltd, Asia's fifth-largest phone company, said it was studying the use of mobile technology to enable wider use of electronic payments.

Its subscribers can dial a number on their phones to buy a Coke from a vending machine, book taxis or reserve cinema tickets.

Chicken and egg dilemma

"Certainly, this technology has the ability to spread, but technology doesn't operate in a vacuum and there are a number of stakeholders who need convincing that this is worthwhile," said Pyramid Research analyst Nick Holland.

"The most important of these is the merchant who will need to upgrade his point-of-sale terminal with an RFID reader and will need to see demand from the consumer to pay using his mobile phone -- it's a classic chicken and egg dilemma."

DoCoMo's wallet phone technology may not necessarily be exportable, largely because the weight of industry and government momentum behind FeliCa is considerable, and DoCoMo is one of the largest players in the market, said Neale Anderson, analyst at research consultancy Ovum.

Deutsche Securities analyst Tetsuro Tsusaka said the potential for wallet phones in Japan was strong, largely due to the backing of Sumitomo Mitsui Card, the country's second-largest credit card firm and a leading Visa issuer.

DoCoMo said in April it would invest 98 billion yen (US$880 million) in Sumitomo Mitsui Financial Group Inc's credit card unit to jointly develop credit card functions in mobile phones.

"It's going to depend on whether the financial industry decides to support it -- if there is no infrastructure in terms of compatible readers, then it won't take off," Tsusaka said.

Tsujimura was cautious on whether DoCoMo's service was exportable to other Asian markets.

"As FeliCa is not well-established in Japan yet, we do not want to be too ambitious. We want to make sure the technology is viable in Japan before sending it outside," he said.