Turning your cell phone into a wallet

Obopay founder Realini, in her California office, offers a pay-by-cellphone service.

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(FORTUNE Small Business) -- When software entrepreneur Carol Realini first visited Kinshasa, capital of the Democratic Republic of Congo, signs of brutal poverty were everywhere - sprawling slums, diphtheria, flickering power. But she saw one stark contrast: Almost everyone had a cellphone. And the phones were used like virtual money clips.

"I visited the prepaid-phone store, and there was a line of people trading bags of cash for cellphone minutes," recalls Realini, who was doing a volunteer stint in Africa after leaving her job as CEO of a software startup called Chordiant (CHRD).

That moment in Kinshasa gave Realini, 57, the idea for her next act: a mobile payment system that, like a gift card, lets users store cash in their phones and transfer it via the Web to other phones (if, say, you owe a friend money) or use it to shop. Not only would the system make simple transactions quicker and easier, she figured, but it might also create a conduit for humanitarian aid that would bypass local corruption and improve lives in the developing world.

Realini founded Obopay in Redwood City, Calif., in 2005. A year later the 76-employee company launched a service in the U.S. that acts as a digital intermediary between cellular companies and banks - in other words, moving money from checking accounts via cellphones. Realini has locked in deals with Verizon (VZ, Fortune 500) Wireless and other mobile-service providers to run Obopay software on their phones. Citibank (C, Fortune 500) is testing the system. (Currently Obopay partners with a South Dakota bank called First Premiere.)

Obopay is both simple and cheap to use: Transactions start at a mere 10 cents. Say a friend is sending you $20. Instructions will immediately be transmitted to your phone on how to sign up as an Obopay user. Once you complete the registration and download the software to your phone, you can send that $20 to another friend's phone, to your own bank account, or to any store that uses Obopay. You could also apply for an Obopay card that would let you take it out as cash from any ATM.

Obopay thinks there's a massive market for this kind of casual, personal transaction. Why shlep to an ATM or write a check when you can just press a few buttons on your cell-phone?

And the company is not alone. Richard Crone, founder of Crone Consulting, an independent mobile-commerce consultancy in San Carlos, Calif., pegs the number of so-called m-commerce companies at 67. The online payment giant PayPal launched a service similar to Obopay this summer, leveraging PayPal's worldwide base of 150 million accounts. Google (GOOG, Fortune 500) filed patents in September that suggest it is preparing its own online payment system, GPay. The company declined comment.

Despite the competition, Realini has raised $48 million in early-stage capital from a top-tier consortium led by Onset Ventures and the venture arm of telecom manufacturer Qualcomm (QCOM, Fortune 500). Research firm Celent estimates that the global pay-by-phone market will blossom to $55 billion this year, up from $24 billion in 2006. (Realini won't say how much revenue her company has earned to date.)

Individual consumers are not her only customers. Collective-Good, a ten-employee cellphone-recycling business based in Tucker, Ga., with revenue in the low six figures, found Obopay a convenient way to process its transactions. The firm pays its customers for their old cellphones, which it cleans up and resells to used-phone brokers or for scrap. By using Obopay, CollectiveGood pays just 35 cents per transaction with a customer. On large orders, using Obopay can be cheaper than most other payment systems.

Some business customers even use Obopay to compensate low-paid, part-time employees. Chegg, a Santa Clara, Calif., company that runs a used-textbook business called textbookflix.com, uses Obopay to pay some 50 marketing interns on college campuses around the country.

"It's a very cheap way to move and track money," says Osman Rashid, Chegg's co-founder and CEO.

Before it can begin to replace cash transactions at businesses throughout the world, Obopay must ease security doubts about using its system in places like Kinshasa. As more phones become commercial instruments, they grow more valuable to petty thieves, drug dealers, money launderers, and terrorists. The Obopay system may be open to fraud in countries with poor law and order records.

"In the developed world, cellphone commerce is quite secure," says Alan Goode, a bank security expert who tracks mobile commerce for Juniper Research, a London-based telecom analytics firm. "We don't know how money will be protected on mobile phones in the developing world."

Realini says her company is dedicated to the best possible security. Obopay's system features PINs, passwords, and other features designed to turn your cellphone into a mobile cash holder. Judy O'Brien, the company's executive vice president of international strategy, says Obopay will test the service in India this year. The rollout may take time.

"Considering the complexity involved in moving money across borders, I can't see that business scaling very quickly," says Crone.

Realini, though, is confident that the idea she hatched in the Congo will someday change how money changes hands everywhere.

"You have to build a company in steps," she says. "I see this business competing with cash worldwide."