U.S. mobile operators are at a crossroads: Mobile phones have become necessary items for most Americans, and non-voice services make up a growing share of operators' average revenue per user (ARPU).

But while the growing multi-functionality of mobile phones could present an opportunity to substitute the ubiquitous wallet with a digital alternative, wireless operators face real challenges in deciding how they will generate new revenue in a mobile payments ecosystem that could be dominated by financial services firms, according to telecom experts at Diamond Management & Technology Consultants, Inc. (Nasdaq: DTPI). Diamond's new white paper, "Mobile Payments: Mobile Operator Market Opportunities and Business Models," addresses key strategic areas of consideration before an operator commits resources to pursue m-payment opportunities.

Mobile payments - or m-payments - refer to any payment made through a mobile phone, whether in-store or remote. For example, a consumer can use a mobile phone to make purchases at retail stores in place of cash, credit or debit cards, and checks. In the case of remote transactions, consumers use mobile phones to purchase mobile content and applications and complete peer-to-peer (P2P) and international fund transfers.

"The total payments market in the U.S. is estimated to be over $7 trillion, so even if m-payments capture a small share of that, the potential opportunity is enormous. U.S. mobile operators will need to play an active role in developing an m-payments ecosystem that ensures they capture a fair share of revenue from this opportunity," said Hamilton Sekino, a Partner in Diamond's Telecom and High Tech practice.

"These operators will have to work collaboratively with financial institutions and other ecosystem players to build a compelling value proposition around m-payments in order to accelerate consumer behavior shift from traditional payment methods to mobile payments. M-payments' associated fees to mobile operators will help them fill the gap in $40 billion non-voice revenues they need to generate by 2010 to sustain overall ARPU."

"We believe the largest potential for adoption of m-payments is in in-store micro-payments and remote macro-transactions (i.e., P2P and international fund transfers) and micro-transactions (i.e., purchase of on-deck and off-deck mobile content). In-store macro-payments will take longer to develop due to lower consumer acceptance and financial institutions' resistance to cannibalize credit/debit card revenues."

Also, in order to assess the feasibility of different mobile payment business models in the U.S. market that mobile operators and financial institutions can pursue, Diamond evaluated seven representative mobile payment initiatives from around the globe. The report examines four current m-payment initiatives for in-store purchases and three initiatives based on P2P remote payments.

"A model through which mobile operators collaborate with financial institutions will have the greatest likelihood of success for implementing an m-payments strategy in the U.S. market," Sekino said. For instance, SK Telecom and leading banks in South Korea teamed up to introduce the Moneta m-payment service, using Near Field Communication (NFC) chips inserted into mobile phones. Once activated, the mobile phone can be used as an e-money account, credit card, transit card, or membership and loyalty card. Moneta subscribers are able to hold multiple accounts from different issuers on a single mobile device (i.e., mobile wallet)
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"We do not believe that mobile operators can take these steps in isolation," said Sekino. "The best approach is for mobile operators to start working very closely with leading financial institutions and retailers to design an m-payments strategy that is aligned with the interests of the required partners to deliver a compelling value proposition and experience to m-payments users."