The cellular electronic payment described in this scenario may seem futuristic, but consider that:

• TheTrainLine, a British train ticket retailer, is piloting a smart-ticketing system that allows riders to link train tickets to NFC-enabled cell phones such as the Nokia 6131. The rider buys tickets online using a mobile phone or PC. At the station, the rider touches the phone to a mobile reader to pay the fare [source: Silicon.com].
• McDonald’s Holdings Japan has begun offering a discount coupon program for NFC-enabled cell phone owners, who already use cellular payment for train fares, store purchases and McDonald’s meals. With the coupon program, users can receive, select and download coupons, making their purchases 10 times faster. More than 40 million Japanese have NFC-enabled cell phones, which first went on the market there in 2004 [source: RFID Journal].

All of this may have you wondering: How does electronic payment with a cell phone work? How available is this type of payment? And what are the security risks? Keep reading to learn more, starting with the technology behind cellular electronic payments.

Cellular Payments and Contactless Technology

Near field communication is at the heart of cellular electronic payment, so any explanation of cellular payment needs to start there. What exactly is NFC? It’s a short-range wireless communications technology standard that allows electronic devices to communicate with each other, for example, to make a cellular payment. Using a short-range radio frequency, an NFC reader can read data from a tag or another device placed very close to it [sources: Nokia Europe and NFC Forum].
It’s similar to the radio frequency identification (RFID) technology used in wireless inventory tags, contactless credit cards and transit cards that you can touch to a reader. NFC and RFID both transfer data via inductive coupling. Induction occurs when a wire or other conductor of electricity passes through a magnetic field, generating an electric current in the wire.
An NFC-equipped cell phone is outfitted with a chip with a built-in coil of wire. The payment station, or reader, generates a magnetic field and also has a coil of wire inside. When the phone is placed within a few inches of the payment station, an electric current jumps between the coils of wire, signaling data-carrying radio waves to pass between the devices.
But NFC connectivity can do more than RFID solutions, which is particularly useful for electronic payment. NFC offers two-way communications, so the payment station can send information like discount coupons or carry on a conversation with the chip in the phone. That also offers added security. The pay station, for example, can request account information from the chip, which can ask for time for the user to enter a password on the keypad. The devices can keep the connection open until account and security information is provided and the transaction approved.
Are you ready to give it a try? Analysts anticipate a booming market for NFC technology, predicting that the number of annual cellular electronic payments will increase fivefold by 2013, with mobile phone users spending more than $300 billion worldwide each year on digital goods (such as music, tickets and games) and physical goods (such as gifts and books).
However, a few obstacles stand in your way. The first is that you need a cell phone equipped with an NFC chip. No problem with that, if you live in Japan. The phones also are becoming more common in Europe. In fact, the Far East and Western Europe are expected to represent 60 percent of cellular electronic transactions worldwide in 2013 [sources: Juniper Research].
But the NFC-enabled phones aren’t expected to be available for purchase in the United States until 2009 at the earliest. They have been tested in pilot studies, including for ticketing on the Bay Area Rapid Transit System in San Francisco, with the MasterCard PayPass processing system in Chicago and with 600 merchants accepting PayPass in New York and on a line on the city’s subway [sources: MSNBC].
While the response from consumers has been positive, stores, restaurants, ballparks, gas stations and other retail establishments need to see enough value in cellular electronic payments to install NFC technology and adapt applications on their end to work with enabled cell phones.
Beyond any reluctance to accept cellular electronic payments, many merchants are not ready to do so. M.V. Rajamannar, executive vice president for CitiGroup’s Citi Brands, estimated after the New York City study that only about 40,000 of the nation’s more than 6 million merchants were equipped with contactless readers [source: Card Technology].
For more Detail: How Cellular Electronic Payments Work