Your cell phone as a wallet

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NEW  YORK (Fortune) -- In many countries, the cell phone has become the new wallet. Forget cash, checks or plastic: In places like Japan and Finland, consumer can pay for train rides or even merchandise with a wave of their phones or via text message.

Then there's the U.S. The mobile phone has yet to become a tool for payments here, largely because the different players in the mobile payment ecosystem ­--wireless operators, banks, credit card companies and software providers ­-- have tended to squabble over how to divide the fees from such transactions.

Now one promising upstart thinks it has cracked the code. Paymo, a two-year-old mobile payment network, says it has forged deals with four U.S. carriers ­ AT&T (T, Fortune 500), T-Mobile, Cellular One and Virgin Mobile (VM) ­that will allow users to buy digital goods online and pay with their mobile phone.

The service Paymo provides is simple enough. If an online merchant is set up to accept mobile payments via Paymo, the customer can simply click on a Paymo icon at checkout, and enter his or her cellphone number. A text message asking for verification of the payment is sent to the number, and after the customer replies to the message, the purchase is complete. The amount will be either deducted from the customer's prepaid account or charged on his or her next phone bill.

This system has many advantages. Customers don't need to have a credit card or bank account and don't have to register to any service. Hence, users can be young or from anywhere in the world, which typically is the case for Paymo's main clients, online gaming and social networking sites.

The service is already working in 45 countries, and Paymo recently announced partnerships with the online gaming company Playfish and the online social network Hi5. At both sites, users will be able to pay for virtual coins via Paymo, then use them to buy, say, virtual gifts or food for virtual pets at the sites.

But will Paymo really be able take off in the U.S.?

Carriers, banks, credit card companies and handset manufactures have all tried for years ­-- and failed -- to create new mobile payment methods for the U.S. market. Two basic models emerged: the point-of-sale model, in which the customer pays for an item by tapping or waving a handset at an electronic reader; and a remote payment model, in which a purchase is paid for via text message. So far both systems have been a bust.

So why does Paymo, a San Francisco based company with 35 employees, think it will win where others have lost? CEO and co-founder Paul McGuire tells Fortune.com that Paymo will succeed by serving cellphone and website users who don't have credit cards. They want to buy stuff online but need an easy way to pay. And what better way than via a mobile-phone account?

Ultimately, though, the key to Paymo's possible success lies in its relationships with several of the major mobile phone operators. Carriers historically have focused on simple digital fare: ringtones, wallpaper, and games. Now the carriers are looking for new sources of revenue, and Paymo has convinced several of them that they can bolster their top lines by enabling millions of micropayments via mobile accounts.

In Paymo's business model the carrier gets typically 20 percent to ­50 percent of the revenue. The rest is divided between the merchant, the reseller, the aggregator and Paymo, McGuire said, likening their system to the Visa model.

Paymo's cut of each transaction is going to be about 3% to 5%. The transaction amounts are typically small, under $30, and the carriers set the limits for individual users -- for example, at $100 per month.

Even with the cooperation of carriers and online merchants, analysts think Paymo is going to face some serious challenges.

Edward Kountz, senior analyst at Forrester, says Americans tend to have a computer either at work or at home, so they don't need to use their mobile phones as much as Europeans and Asians for accessing the web and e-tailers.

Also, Americans like to drive, which makes it less likely for them to be using their phones' data services when moving from one place to another. The cellular coverage in the U.S. is often spotty, for example in hilly areas or on subways, making mobile services unreliable. On the business side, the carriers' competition with each other has made the adoption of industry standards difficult.

But younger users, the target of Paymo's system, are another story. Many already use their phones to buy applications for their smart phones, for example.

Paymo isn't the only company trying to crack the U.S. market. Online payment network PayPal, which did not have much success with its earlier text-based PayPal Mobile service, has launched new applications for smartphones. Other companies offering similar service as Paymo's (but in more limited markets) include upstarts Zong and Mobillcash.

Juniper Research predicts that the overall remote mobile payment market in North America will grow ten-fold from $5.3 billion in 2008 to $54.9 billion in 2013. The remote mobile payments for digital goods in North America are expected to be over $31.2 billion in 2013. The worldwide remote mobile payment market is expected to exceed $300 billion by 2013.

The market is there, as is the technology. All Paymo needs to do now is to get users' attention. That, of course, is often the hardest part.