Internet businesses have searched in vain for years for that vital but missing link - micropayments. We were intrigued by articles about beans, e-wallets, cybercoins and e-cash, but consumers were not convinced and the solution remained elusive. And the likes of Visa and MasterCard have failed to step down into the world of small, frequent payments.

Yet the past year has witnessed a quiet revolution, with more than £1bn of micropayments made via our mobile phones. The mobile phone is becoming a kind of voice and services wallet. It fits in your pocket, it is trusted and the user expects it to become ever more innovative and versatile.

This surge in mobile micropayments has been driven by the fact that SMS has moved beyond simple texting into higher-value-added information, entertainment and voting services, with premium rate calls enabling service providers to levy different charges for these services.

Young people are the "pioneer users" of these new entertainment and interactive services. Yet the success of ITV's Pop Idol, which earned £22m in fixed and mobile premium rates from 80m calls, demonstrates that these services are popular with adults as well. Another example of an older demographic using text micropayments is the BBC's Question Time, which offers an SMS service where the texts are displayed on one of the Ceefax pages.

In Spain, the television has become a key driver of "m-traffic" with dozens of programmes specially designed to tap into mobile services, between them generating more than £200m in mobile entertainment micropayments.

As consumers become increasingly comfortable with the idea of spending 5p or £5 via their mobile phones, so the world of virtual entertainment services draws closer. Premium rate calls have been around for decades on the fixed networks, but it is mobile users who are demonstrating a real thirst to spend micro-money on all kinds of different services.

Vodafone has been quick to respond and has signed up more than 50 companies including Arsenal FC and FT.com to its microbilling system, m-pay, which allows content providers to bill for web or WAP content. In Germany, Paybox, a mobile operator, has half a million customers that can buy products from 6,500 retailers across Europe - offering both virtual services and physical goods. The cost is charged to their mobile phone, with the SMS message acting as a receipt.

A Forrester Research survey of retailers in Western Europe showed that they are planning for 10 per cent of their sales to use mobile payment solutions in 2004. In the UK, micropayments of this type could fuel the next phase in the development of the creative industries sector.

Young people are now buying Top of the Pops (£9.99) and Formula One (£29.99) content services in the high street, neatly packaged in DVD-type boxes. These mobile services give the buyer a phone number to call to access content downloads. While they could alternatively search and scour the internet for the same information for free, these mobile users seem to be willing to pay a premium for the fun of buying the downloads off the shelf, then dialling the mobile number for the service.

A new retail dimension has emerged in the mobile services market.

In Japan, the wireless web has superseded the fixed internet in terms of usage and revenue generation. Today, 44m people are using mobile micropayments on three networks - i-mode, EZ Web and J-Phone, to make purchases from 50,000 service providers. The favourites for 18- to 29-year-old males on i-mode are: melody downloads; sports news; directories; music and film information; fortune telling; games; concert tickets and train schedules.

The creation of a transparent and easy-to-use billing system is the key to i-mode's success. For 1,600 official service providers, i-mode charges a standard 9 per cent of the price for billing, passing the rest of the money back to the content owner.

In contrast, Europe has a wide array of concealed charging practices and hundreds of different revenue and net profit formulae. Some argue that until these microbilling standards and practices are ironed out to benefit both the content provider and the operator, the European mobile market will never grow as fast as in Japan.

Mobile micropayment has a healthy future because it offers a lot of advantages over existing payments methods:

It is uneconomic to use credit or debit cards for £10 or less

It is with you 24 hours a day

The handsets have been around for a long time and we expect and anticipate innovation from the mobile phone

Unlike credit cards there are no age restrictions for mobile micropayments, and the SMS revenues have shown that the youth market has an appetite for spending via their mobile phones

They make impulse purchases easier.

The operators need to be aware that these services can be developed with or without their involvement. They need to act quickly, possibly together, to find a payment or revenue-sharing formula that rewards both parties fairly for the content and the carriage. Without this, smart applications developers will create "workarounds" that allow subscribers to buy services that effectively bypass the operators - leaving them with the revenues from the basic call, but no cut of the additional premium charge. In this scenario, the operator misses out on some of the branding and "stickiness" benefits of multimedia services.

As the launch of MMS (multimedia messaging services) heralds the arrival of colour screens, picture postcards, photo messaging and richer text on our mobiles, it will be interesting to see who picks up the microbilling baton for the next generation of services. Imagine the internet with a micropayment system that allowed people to buy information and services in 2p chunks. Would this have saved some of the visionary but now extinct dotcom services?

janice.hughes@spectrumstrategy.com

Janice Hughes is managing director of Spectrum Strategy Consultants

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