Pay Fast--With No Cash

By Cathy Booth Thomas With Reporting by Paul Cuadros/Chapel Hill, Judy Grigg Hansen/Boise and Maggie Sieger/Chicago

Curtis Mason doesn't like to carry cash, which used to be a problem on the days when he didn't have time to pack himself a lunch before heading off to work at Sears Credit in Boise, Idaho. But now Mason, 23, an account manager, simply waves a wand at a vending machine, and out comes a hoagie or his favorite indulgence--a Big Ed's ice-cream sandwich.

The wand's not magic. It's just a plastic doodad smaller than a lipstick, embedded with a tiny electronic chip that is scanned by a reader in the vending machine. The reader taps Mason's credit account over the Internet and works much like a credit card--something most vending machines won't accept, along with crumpled dollar bills. Mason's wand from FreedomPay, based in Wayne, Pa., lets him eat not just from the machines at work but also at any of Boise's 31 McDonald's restaurants. Says Mason: "Now I don't starve."

This is the new face of mobile commerce, or m-commerce as it's known in the trade. And it's a far cry from the grand vision painted by promoters at the height of the tech-investing bubble. We were all supposed to be surfing the Net on cell phones with video screens and ordering everything from airline tickets to stereo gear for delivery to our homes or offices. Instead m-commerce is growing fastest in a direction that is at once more modest and more useful to a broad range of consumers and retail businesses.

More than 25 million Americans carry simple m-commerce devices like the one Mason uses to buy lunch, according to analyst David Krebs at Venture Development Corp. Most are motorists who whiz through tollbooths daily, paying their way with electronic passes attached behind their windshields. In North America, 6 million now use m-commerce to pay for gas and fast food, and their numbers are growing at 70% to 80% a year. Since 1997, 5 million ExxonMobil customers have paid for gas with just a wave from little Speedpass wands on their key rings. Phillips 66 and Shell announced their own Speedpass clones this year. Fast-food companies such as McDonald's, KFC and Taco Bell, as well as Canteen Vending, began rolling out m-commerce initiatives this year. Blockbuster and 7-Eleven are expected to follow soon.

"It's the next natural evolution in cashless payments, after credit cards and debit cards," says Robert Pons, co-founder of FreedomPay. "Consumers want to make cashless payments at fast-food restaurants, car washes, coffee shops, convenience stores and video stores--places where you typically cannot use a card." Merchants looking to speed up service and cut down on employee theft are salivating--as are credit-card companies, which have had a difficult time grabbing a share of $10-and-under purchases.

After six months of testing in nine stores in the Chicago area, McDonald's in mid-October began allowing holders of ExxonMobil Speedpass wands to use them to buy meals at more than 400 area McDonald's outlets. "Customers like it because it's quick--no slip to sign, no code to punch in. It's swipe and go," says Dave Rosales, McDonald's director of strategy and business development. In Orange County, Calif., and on New York's Long Island, commuters can even use their electronic toll passes to pay for purchases at some McDonald's drive-through windows.

About 400 customers at KFC and Taco Bell restaurants in the Raleigh-Durham, N.C., area are testing an m-commerce system created by 2Scoot, based in Kingston, N.Y. In July 2Scoot signed a deal with Nokia to bring cashless payments to the lunch counter at the Finnish cell-phone giant's U.S. headquarters in Irving, Texas.

Canteen Vending, based in Charlotte, N.C., is busy retrofitting 50,000 machines nationwide to take payment from FreedomPay wands by the end of 2002. FORTUNE 500 companies such as Prudential Insurance and GM already have vending machines that accept payment by wand. And Yale students will get similar machines in their cafeterias next year.

The little RFID (short for radio-frequency identification) wands are proving far more popular and practical than the much promoted use of cell phones to shop on the Net. Only 6% of all mobile-phone owners use theirs to purchase stock, transmit payments, make travel arrangements or buy small items, according to the Personal Communications Industry Association. More Americans may soon be able to use their cell phones in conjunction with the RFID tags. The key, says Nokia m-commerce expert Tom Zalewski, will be enabling retailers to reach out to phone users with short messages when they are within, say, a mile or two of a store. Then users can pull in and pay with their Nokia phones, which will be hiding an RFID tag inside their SmartCover. "The next round of pilots will test alerts from stores like Blockbuster, Starbucks or the Gap telling you about specials," says Zalewski. "Or maybe a theater will message you with a coupon for a free movie on a slow day."

The m-commerce chips, when scanned by a reader, transmit a unique code, your ID, which zips down the Internet to an account sitting in a computer at a transaction-processing company. No credit-card information is transmitted between the reader and the tag, so that information cannot be hijacked. 2Scoot bills your credit card of choice, while FreedomPay uses a debit system that deducts money from an "electronic purse" set up in advance using either cash or a credit card.

If you lose your wand or RFID cell phone, you just report it stolen or missing, and FreedomPay or 2Scoot will deactivate it and issue a new one with a new code. And those who use the electronic-purse system usually keep only two-figure sums of money in them. "It's not like you're gonna buy a 1948 roadster with a $99 account," says Jim Forbes, an analyst for consulting firm IDG, based in San Mateo, Calif.

Fast-food restaurateurs are especially excited by m-commerce, which promises to inject more "fast" into their business while helping reduce employee theft and errors in making change. End-of-shift reconciliation is automatic, so there's no clumsy comparing of credit-card receipts with the register. "People can't sift through the trash and find your credit-card number," points out Joe Ely, technical officer for 2Scoot. "And they can't ring up $7 on the register, put $27 on the credit-card machine and pocket the $20." Installation of an RFID reader costs about $300--about half the cost of a reader for credit cards. And customers get the wands or tags free.

Parents who want their lunch money to go for food--as opposed to video games, cigarettes or alcohol--are also finding RFID wands a useful tool. In Boise, McDonald's manager Dick Darmody says one of his first customers for RFID wands was a woman with three sons--12, 14 and 16. "She was always giving her sons money for lunch, and they were always losing it," he says. "She liked the idea that they could use the wand only at McDonald's." Darmody also sees the wands as a tool to build customer loyalty--say, by offering customers a free dessert or a $5 credit when they spend $20. FreedomPay and 2Scoot do not sell their information, but they do tell retailers whether you have a penchant for Big Macs over cheeseburgers, or chocolate shakes over vanilla.

McDonald's hopes to accept RFID wands nationwide as early as next year. Canteen has decided to convert all its vending machines after watching sales shoot up more than 40% in its North Carolina test. IBM technology guru Michael Karasick notes that while "the hype level for m-commerce has gone way down," the the technology still promises to change retailing "profoundly."

--With reporting by Paul Cuadros/Chapel Hill, Judy Grigg Hansen/Boise and Maggie Sieger/Chicago