Mobile payments are defined as the use of a mobile device to conduct a payment transaction in which money or funds are transferred from a payer to a receiver via an intermediary, or directly without an intermediary. While this definition includes mobile payment transactions conducted via mobile banking systems, a distinction between mobile payments and mobile banking services should be noted. Mobile banking services are based on banks’ own legacy systems and offered for the banks’ own customers.

A mobile payment as any other payment is carried out by using a specific payment instrument such as cash, credit card, or mobile phone wallet. In addition to pure mobile payment instruments, most electronic and many physical payment instruments have been "mobilized". Payments fall broadly into two categories; payments for purchases and payments of bills/invoices. In payments for purchases mobile payments compete with or complement cash, checks, credit cards, and debit cards. In payments of bills/invoices mobile payments typically provide access to account based payments such as money transfers, Internet banking payments, or direct debit assignments.

Potential of mobile phones to make the transformation
Bank Negara Malaysia sees tremendous promise in mobile telecommunication networks as an electronic payment channel since mobile phones are already in the hands of most Malaysians, with 88% of the Malaysian population subscribing to mobile phone services.

The high penetration rate affirms mobile phone networks as an increasingly popular channel for Malaysians to perform a plethora of activities beyond voice communication, encompassing all forms of digital communication, commerce, banking and payments. Indeed, payments via text messaging has the potential to grow in importance.

With 25 million mobile phone subscribers in Malaysia, there are immense opportunities to leverage on mobile phones to accelerate the migration to electronic payments, to widen the reach and appeal of electronic payment services, to deliver innovative mobile payment products that offer speed, simplicity and convenience at minimal cost for the public, as well as to provide an efficient and cost-effective method of delivering financial services even in the remote areas. The high percentage of mobile phone subscriber and the high rate of participation of the population in the banking system are important pre-conditions for the significant use of the mobile phone as an ideal platform for personal payments. Indeed, the large mobile subscriber base and the positive transformational effects of mobile banking and payments offer a unique opportunity to open up the financial system to more customers and communities, in order to achieve financial inclusion for all segments of our society.

With the favourable market conditions, various mobile banking and payment initiatives have been launched in recent years. This however, has yet to achieve widespread acceptance. To date, there are only 460,000 subscribers for mobile banking and payment services. This represents only 1.8% of the 25 million mobile phone subscribers in the country. There is, therefore, a significant untapped, and potentially lucrative market for mobile payment and banking services.


Adoption of mobile and electronic payment systems

1.Relative advantages of mobile payment systems:
Mobile payments provide consumers with ubiquitous purchase possibilities, timely access to financial assets and an alternative to cash payments. The users can, for example, pay for transportation tickets or car parking remotely without the need to visit an ATM, a ticketing machine or a parking meter . Advantages of mobile payments compared with traditional payment instruments are thus likely to pertain to time and location independent purchase possibilities.

2.Compatibility:
Compatibility captures the consistency between an innovation and the values, experiences, and needs of potential adopters. For payment systems, consumer ability to integrate them into their daily life is an important aspect of compatibility. The compatibility of mobile payments with consumers’ purchase transactions, habits, and preferences correspondingly influences the diffusion progress.

3.Complexity:
Complexity and problems with usability have contributed to the low adoption of a variety of payment systems, including smart cards and mobile banking. Similarly, ease of use and convenience have been found to affect consumer adoption of Internet payments and WAP financial services. Mobile payments are commonly expected to increase consumer convenience by reducing the need for coins and cash in small transactions and increasing the availability of purchase possibilities. Limitations in mobile device features, however, diminish the usability and user-friendliness of mobile technologies. Typical limitations include small displays and keypads, limited transmission speed and memory, and short battery life.

4.Network externalities and creation of critical mass:
Payment systems exhibit network externalities as the value of a payment system to a single user increases when more users begin to use it. Consumer decision to adopt a payment system is therefore significantly affected by the amount of other consumers and merchants using it. Failure in creating critical mass has contributed to discontinuance of several previous payment systems, including several smart card systems. As mobile payments represent a new system introduced to the market, reaching a wide enough initial adopter base of consumers and merchants is a critical success factor for m-payments as well.

5.Costs:
The cost of a payment transaction has a direct effect on consumer adoption if the cost is passed on to customers. As shoppers in electronic channels are attentive to price the transaction costs of mobile payments should be low enough to make the total cost of the purchase competitive with physical world prices.

6.Payment system security and trust in payment systems providers:
In a mobile environment, lack of consumer perceived security and trust in vendors and payment systems is one of the main barriers to electronic and mobile commerce transactions. The key requirements for secure financial transactions in electronic environment include confidentiality, data integrity, authentication, and non-repudiation. Other security factors important for consumer adoption are anonymity and privacy, which relate to use policies of customers’ personal information and purchase records.