With mobile wallet announcements pouring out of last week's Mobile World Congress, the market for m-commerce is undoubtedly gaining momentum. News from the show included a new mobile payments partnership between Visa and Vodafone, a multi-year agreement between Visa and Intel and the launch of various devices embedded with near-field communications (NFC) technology from the likes of Samsung, LG and Research In Motion.

While NFC technology is now widely available, there are still a number of hurdles for the industry to overcome before it can enter the mainstream. The latest report by Radius Global Market Research reveals that most American consumers are still sceptical of smartphone-generated payment solutions, with 86 percent citing concerns about security or fraud – and uptake in the US is much higher than in Europe.

In emerging markets, however, mobile wallet technology is thriving, according to Ovum analyst Angel Dobardziev. This is because large numbers of people in Africa and Asia have no bank accounts, so mobile wallets are the only way to exchange money electronically. But in developed markets, where mobile payment technology is regarded as a novelty rather than a necessity, will m-commerce ever enter the mainstream?

Achieving critical mass

Near-field communications – also known as contactless payments or 'wave and pay' – is best known in the UK for its use in Transport for London's (TfL) Oyster cards. It allows consumers to carry out transactions by simply touching their phones to a point-of-sale (POS) terminal in a shop. Around 35 million NFC-enabled phones were shipped in 2011, according to IMS Research. However, a report by WorldPay in July revealed that, on average, each contactless point-of-sale terminal in the UK is only used four to five times per month.

Dobardziev explains that, in order for mobile wallets to reach critical mass, the consumer needs to know that this form of payment will be accepted anywhere they go. With the economy the way it is at the moment, many retailers lack the incentive to invest in NFC terminals, because existing payment solutions work well and – as Ovum's recent Making Money from Mobile Money report revealed – margins on mobile payments are very small.

“A lot of the pieces in the ecosystem are not fully in place. For example, the revenue sharing mechanisms between the retailers, the banks and the telcos have not yet been worked out. Where will the money come from? Will it be the same as in the card payment world, where the commissions are standardised and well understood, or will it be different?” asks Dobardziev. “We have seen that a number of telcos have unrealistic expectations in terms of revenues that can be generated from this.”

Moreover, there are a number of different ways that mobile wallets can be provided. One way is to embed NFC technology onto the SIM card, which allows the telco to control the wallet; another is to embed it onto the device chip itself, so manufacturers like Apple and Nokia can charge rental fees. A further option is to provide NFC through the device's Micro SD slot, whereby external players control and process the transactions.

A new model for providing mobile wallets could also be emerging, with the news that a group of US retailers are planning to develop their own mobile payments system. Juniper Research analyst David Snow describes this as “the missing piece in the mobile wallet ecosystem”.

“Retailers are being expected to play their part in the market and start accepting mobile NFC payments through their POS terminals. However, the news that large retailers such as Walmart and Target are planning their own wallets shows that retailers are not just going to do what is expected of them as the last sector to be consulted; but that they want to drive the market their own way, not on the dictated terms of the other two players,” says Snow.

Dobardziev expects the SIM-based model to prevail, because telcos have the most intimate knowledge of their customers, and also because this model allows consumers to take their wallets with them if they decide to switch devices. However, Google Wallet, which is arguably the most successful mobile wallet offering on the market today, uses device-based NFC. This could result in users having multiple wallets on their phones from various different providers – just as we have multiple credit cards from different banks today.

Walled gardens are not the answer

Another feature of the mobile payments industry is that, traditionally, it has been extremely fragmented. Individual partnerships between network operators and banks have created closed-loop systems, so that a consumer that signs up to use NFC with a particular operator and a particular bank cannot use the service in a shop with terminals provided by a different operator.

“The big issue so far with many telcos has been their desire to keep a level of exclusivity with their wallet,” says Dobardziev. “We see that as a false argument, because the value of the network grows in proportion to the number of connections you have. It was only when the mobile operators enabled interoperability in 1996-97 that you were able to send text messages to someone on a different network, and there was a huge pickup of services.”

This situation has finally started to change, with last year's announcement of a joint venture between Vodafone, O2 and Everything Everywhere. The mobile network operators are reportedly preparing to submit their plans for an integrated mobile payment system, code-named Project Oscar, to Brussels for EU approval this week. The operators say that the platform will be run independently and open to all.

In the US, there is a similar consortium of mobile operators known as Isis, which last week announced partnerships with three credit providers, representing about 100 million card holders. There have also been talks to form a pan-European platform for payments, according to the Financial Times. Telefónica, for example, plans to provide interoperable mobile wallets for customers in different countries that it operates in.

This does not only provide a better value proposition for end users, but also makes for a better business model for stakeholders, as it allows them to achieve big enough scale that the systems become profitable. As well as simple transactional services, they can then start offering additional products via mobile, such as savings and insurance.

Security: the big issue?

Building the infrastructure is only half the battle, however. The rest is winning over consumers, and that is no mean feat. As the Radius report reveals, the main barrier to adoption is security, and Google's recent acknowledgement of a major hole in its Google Wallet mobile payment platform has done nothing to alleviate those fears.

Last month, the company was forced to temporarily disable its Google Prepaid Cards, which allow users to upload money from any of their existing credit cards onto Google Wallet, to “address an issue that could have allowed unauthorised use of an existing prepaid card balance if someone recovered a lost phone without a screen lock”.

The incident attracted a lot of media attention but, according to Dobardziev, there are very few technical details left to address. The Google Wallet issue was fairly minor, he says, and could easily be resolved. The real security risk is the consumers themselves.

“You can make things as secure as you want from a technical perspective but you always have the human element, with people mislaying their phones,” he says. “So from a technical perspective they will be as secure as anything else, but perception will take a lot longer to shift.”

Diarmuid Mallon, head of product marketing global messaging and m-commerce at Sybase 365, points out that, in some cases, mobile wallets can even be more secure than cash.

“There’s no digital rights management on the coins and notes in your wallet or purse. If you lose your wallet and you’ve got £100 in there, then someone’s got £100, there’s no way you could claw that back,” says Mallon. “With a mobile wallet, there is nothing on the phone, so you report your phone stolen and immediately that phone is locked out from your mobile wallet.”

Making mobile wallets compelling

Furthermore, consumers need an incentive to adopt mobile payment technology. It is not enough that their mobile phone does the same thing as a credit or debit card - it needs to do something extra. This is where retailers have an opportunity to build brand loyalty, by offering customers promotions, coupons or vouchers in connection with their mobile wallets.

“We think of mobile commerce as mobile financial services plus mobile CRM,” says Mallon. “It's not just about the transaction itself but about baking in smart mechanisms for marketing, and mechanisms for understanding what happens post-purchase.”

Sybase 365, which is a subsidiary of mobile messaging and commerce firm Sybase, is working with Telefónica on its mWallet service. Mallon said that the mobile channel opens up new opportunities for interacting with consumers on a one-to-one basis, which can be very hard or very expensive to do via other channels.

“Let’s say I give you a voucher for money off mineral water and you don’t redeem it, next time I'll give you a voucher for a cola or squash. In that way I can collect more information about you, and you’ve got a better deal,” says Mallon. “You have to be careful about this. You can’t just blast stuff out - it has to be relevant. But the real power is to do it with timely interaction that adds value for everyone.”

These use cases just scratch the surface of what is possible with mobile wallet technology. As the technology becomes more widespread, it could remove the cash element from business transactions all together, or be combined with other technologies used in mobile commerce – such as location-based services, QR codes, apps, SMS, Bluetooth and social networks – to create a truly compelling shopping experience.

For example, an SMS-based coupon could be used at the point of sale when the consumer pays for their purchase through NFC, or reading a QR code (a type of barcode that can be scanned using a smartphone's camera) would automatically insert a coupon into the consumer's mobile wallet.

“We are at a market-creating stage. There is a lot of experimentation, and there will be some market shake-up over the next couple of years,” says Dobardziev. “Typically it will be those that make the easiest, most convenient and most attractive platform to the end users, as well as all the partners in the ecosystem, that succeed in this market.”