Mobile Muddle: When Will ISIS Start Making Sense?

The muddled mobile-payments scheme from Verizon, AT&T and T-Mobile, dubbed ISIS, just keeps getting more puzzling. On Tuesday (April 4), the group announced a pilot project to let mobile phones be used to pay for rides on Salt Lake City's buses and local trains, in addition to purchases at local retailers. But the big announcement is for a project that won't go live for more than a year—and for a public transit system that already allows customers to use contactless credit and debit cards to pay for rides. This will take a year?

Meanwhile, Sprint—which was left out of ISIS' announcement of its formation in November—now says it was originally part of the group, but left. Although ISIS member Discover was originally presented as the only payments network ISIS needed, it now appears that Discover may not have an exclusive deal with ISIS after all. All this confusion comes in the face of one clear fact: Mobile operators should have the easiest time doing true mobile payments. When will they get their collective act together?

In the case of ISIS, it won't be until at least mid-2012. That's when Salt Lake City's transit system, the Utah Transit Authority (UTA), will be entirely "ISIS-enabled," making UTA "the first commercially available mobile transportation fare payment program in the U.S."

Well, maybe. That's only if Apple, Google, Visa, MasterCard, Chase, Citi, Bank of America, Sprint or anyone else in the long line of mobile-payment wannabes don't cut a deal with some other transit agency. (MasterCard may have the inside track on that, because it has already done a contactless trial with New York City's transit system.)

Salt Lake City retailers are also part of ISIS' plan—or at least ISIS thinks so. The group didn't name any specific retailers that have agreed to use ISIS for payments, just that it's talking to the local Chamber of Commerce. Considering that long list of would-be mobile-payment companies—some of which, like Google, have been sweet-talking retailers into participating in pilot programs—it's baffling that ISIS isn't being more concrete.

In fact, ISIS turns out to be a lot more vague in many areas than you might have thought.In fact, ISIS turns out to be a lot more vague in many areas than you might have thought. For example, when word of the ISIS alliance first leaked out last August, Sprint was conspicuously (and without explanation) absent. This week, however, a Sprint VP told Bloomberg News that Sprint was part of ISIS early on but withdrew to pursue its own plans.

(When was that? Probably sometime after the holding company for ISIS—it's officially controlled by "JVL Ventures LLC," which has addresses that happen to match those of Verizon corporate offices—started registering the ISIS trademarks in February 2010. Watch for services called "Vendi," "Pivot" and "Proxi" to come from ISIS eventually, since the group trademarked those names at the same time.)

Then there's Discover, which is currently slated to develop the payments network for ISIS' Salt Lake City project. Last November, ISIS members worked hard to make clear that Discover was the only payment-card provider for ISIS. That, it turns out, is true—for the moment. But one industry source pointed out that, whatever impression has been left, no one on any side has actually said that ISIS and Discover have an exclusive deal. But they certainly went out of their way to let analysts and reporters jump to that conclusion—and didn't correct them when they did.

There's one thing ISIS is clear on, though: The mobile operators won't be putting customers' purchases on their monthly phone bills. That may be the most baffling thing in the whole ISIS puzzle.

Mobile operators have two advantages over other players trying to make it in mobile payments. First, a mobile operator can authenticate a customer, and already does that every time the customer makes a phone call. That should be a big advantage, because fraud is one of the biggest challenges in any scheme to replace payment cards.

Second, a mobile operator already has a billing system that all its customers are using. That's the other big challenge for anyone who wants to cut Visa, MasterCard and other payment-card companies out of the loop—and that, in turn, is the only way to cut interchange fees, which is the most attractive reason for retailers to get on board with any true mobile-payments system.

Trouble is, a true mobile-payments system is hard to do. It would require rebuilding the entire loop, from the phone to the POS to the retailer's back-end software to the payments processor and, finally, to the billing system. That's why most of the players in mobile payments aren't trying to do that. Instead, they're just trying to get phones equipped with near field communication (NFC) chips to emulate contactless payment cards, so most of the existing payment-card loop remains intact.That's why, in almost every one of the recent NFC payments announced over the past few months, there's always a bank (Citi, Chase, B of A), a card company (Visa, MasterCard) and a technology vendor (Google, DeviceFidelity or a mobile operator). Contactless card emulation is a heck of a lot easier for these players than true mobile payments.

It's also a lot easier for retailers. Nobody really wants to mess with POS software—that's just too dangerous. And no retailer is much inclined to add another POS device at a checkout counter. That's valuable selling space for impulse purchases. And retailers already have a payments system that works, even though they hate the hefty bite that Visa, MasterCard and other card companies take from each transaction.

That's one of the problems ISIS—and all mobile-payments players—will have to face to move beyond contactless emulation. The only place that retailers think the payments loop is broken is interchange. But ISIS isn't proposing to change that—not with Discover in the loop, along with (potentially) other conventional card networks.

An even more problematic disconnect exists for the mobile-payments players: Most of the current plans for replacing a wallet full of credit cards with an NFC mobile phone are built on the assumption that customers want to get rid of all those credit-card accounts and replace them with a single account on the customer's phone.

That's a very attractive idea to a bank or card company—at least as long as all the other banks and card companies are being cut out of the deal. But it's irrelevant to retailers, which aren't going to benefit from taking fewer types of payments. And it's an awful thought for any consumer who has ever had a payment card declined. What's a customer to do when his phone is declined—pull out another phone from a different mobile operator?

To all appearances, ISIS hasn't thought through those really tough questions. Then again, neither has anyone else. But with luck, by the time ISIS starts handling payments in Salt Lake City in 2012, we'll already have seen a dozen trials that will have tested just how far mobile payments can go—and maybe they'll provide the clarity that has proven so elusive for ISIS.