Mobile phone operator Vodafone unveiled the first mobile payments service last week, allowing consumers to pay for low-cost items online and have them charged to their mobile phone bills.
The move, predicted by Computer Weekly last November, is the first major step in the fledgling UK mobile payments market, which analyst firm Forrester Research predicts will be worth £2.8bn by 2005.
Vodafone's M-Pay Bill will start as a small-scale service, allowing consumers to pay for low-cost digital content, such as financial information and news alerts.
However, it could have greater long-term ramifications, particularly with regard to location-based services, according to Adam Daum, chief analyst at research group GartnerG2.
"Our research has shown that consumers are willing to pay for relevant location-based services, especially when they are accessing the information via their mobiles," he said. "However, they have to be customised and specialised - information on child-friendly restaurants in an area, for example."
To take advantage of the expected demand for location-based services, firms need to form partnerships with mobile operators, such as Vodafone, and make sure they get customers to "opt in", Daum said.
"Mobile users have not shown much willingness to accept spam [unsolicited messaging]," he explained. "Companies need to provide consumers with an incentive to sign up - some sort of reward for loyalty."
Another area where mobile payment technology has the potential to succeed is within stores and shopping centres, said Daum.
In January, Vodafone began trialling a more wide-ranging "wallet"-based mobile payments service, allowing consumers to pay for digital and physical goods online.
Consumers are identified by their mobile devices in every purchase and are able to confirm and authorise each purchase with a Pin code. The consumer's payment and address details are kept in a secure wallet, requiring no direct entry of data over the Internet.
Vodafone plans to extend the functionality of the platform to purchase points such as vending machines as well as to fixed retail shops.
"Where mobiles have a unique strength is for payments within outlets," Daum said. "We have seen this demonstrated on a small scale with vending machines but if the technology can be linked to electronic point-of-sale systems it could prove massively successful."
The ITchallenge for retailers and mobile communication companies will be to make the systems quick and reliable before they are introduced, otherwise consumers could be put off mobile payments altogether, said Daum.
Jim Wadsworth, head of m-commerce at Vodafone, said the M-Pay Bill service should go some way towards this. "As people get more comfortable using their mobiles to pay for content it will help to build acceptance of the mobile phone as a payment tool," he said.
The new service would provide much-needed revenue for content providers, such as companies supplying travel information and ticket booking facilities, Wadsworth added.
"One of the biggest problems faced by content providers has been to extract revenue stream from their products - they have generally been free or subscription based," he said. "This service will allow them to increase revenue and it should lead to much more content being made available."
However, Daum was sceptical that consumers would be prepared to pay for content, particularly information that had been freely available in the past.
"There is no evidence that people are prepared to pay for Internet content just yet, particularly if they are accessing it via their PCs, and just using the phone to pay," he said.
Nevertheless, mobile payment technology could open up a new stream of revenue for a wider range of companies. Although Vodafone is primarily aiming this service at digital content providers, it could be used by conventional retailers, Wadsworth said. "They could use it to enhance their online presence by offering books and music downloads and so forth," he suggested.
"But I do not see much call for this in the short term and we do not see the service as an alternative to credit and debit cards for most transactions," he added.
Mobile phones are never going to replace credit and debit cards, but as the mobile payment infrastructure is built and consumer confidence in handsets as payment tools increases, it is clear that companies need to take steps to make sure they are not left behind.
The rise and rise of m-commerce
March 1996: Text messaging is introduced - the first form of payment via mobile phones
November 1999: The Nokia 7110e, the first wireless application protocol-enabled mobile phone, is launched in conjunction with Orange
June 2000: Ericsson unveils the T36 - the first Bluetooth-enabled mobile phone
November 2000: Nokia launches the 9110 Communicator - the first integrated phone/personal digital assistant
June 2001: The T260 - the first commercially available general packet radio service-enabled mobile phone, is released by Ericsson
February 2002: Vodafone launches the M-Pay Bill service
Third quarter 2002: Hutchison 3G due to launch the first third-generation mobile phone service
2005: The UK mobile payments market will be worth £2.8bn (Forrester Research).