NTT DoCoMo, Japan's largest cellphone system operator, best known worldwide for pioneering the wireless Internet in 1999 with its hugely successful i-mode system, looks to have another big winner on its hands. Having recast the cellular handset as an electronic wallet—in effect a prepaid wireless cash card—it's getting ready to make it a full-fledged wireless credit card.

DoCoMo is working with major travel and banking organizations to extend the reach of its e-wallet service. Meanwhile, its two main Japanese rivals, KDDI Corp. and Vodafone K.K., are introducing competing products. (All three companies are based in Tokyo.)

The critical element in DoCoMo's Osaifu-Keitai, or mobile wallet, is a wireless smart card chip, FeliCa (from the English word "felicity"), which was developed by Sony Corp. and Royal Philips Electronics for close proximity, low-data-rate transactions. The wallet phones can be used to make electronic purchases at stores or vending machines equipped with FeliCa readers; can act as boarding passes on certain domestic air flights; and can authorize entry through corporate security doors—all with a wave of the handset [see photo, "Wireless Shopping"].

Already, a year after DoCoMo introduced its first e-wallet, the company has shipped some 6 million of the handsets. "By the end of March 2006 we forecast DoCoMo will have shipped around 10 million mobile wallets," says Shohei Sakaguchi, executive director of DoCoMo's multimedia service department. "And by the end of 2006 we believe the figure will reach 15 million." In addition, he says, competing carriers could ship 5 million more handsets, for a total of some 20 million mobile wallets by the end of next year.

Sony's FeliCa chip originated as the active element in its contactless smart cards, introduced in 1995. They dominate the market for such devices in Japan and are widely used in Asia as commuter passes and for making e-purchases. As of June, Sony had distributed 82 million such chips, including 53 million in Japan, 16 million in Hong Kong, 10 million in Singapore, and 1.5 million in China.

In January 2004, Sony and DoCoMo formed a joint venture to adapt the chip for mobile phones. Besides supplying DoCoMo with the chip, the venture is also shipping mobile FeliCa integrated circuits to KDDI and Vodafone, which launched their own wallet phones in September and October, respectively.

Users with FeliCa phones who have registered for the e-wallet service can load money onto the phone's chip in two ways. They can feed cash directly into special machines found in convenience stores and other locations, or they can do it by phone, keying in a personal identification number and transferring cash from a credit-card account.

From a technical point of view, the FeliCa chip is part of a transponder system: it receives its power from the waves radiating from read/write devices it communicates with, so a battery is not required. The chip, based on radio-frequency identification (RFID) technology, operates at 13.56 megahertz over a distance of 10 centimeters, communicating at 212 kilobits per second. The communications protocol, called Near Field Communication, was developed by Sony and Philips and has been standardized under ISO/IEC procedures.

A pioneering user of FeliCa technology is East Japan Railway Co. (JR East), the country's largest rail company. Its Suica smart card is used both for e-purchases and as a commuter pass. Users simply flash the card as they go through turnstiles, and instantly the reader displays the cost of the journey and the amount of e-cash remaining on the card. JR East plans to extend the commuter service in January to wallet phones from DoCoMo and KDDI, and it is in discussions with Vodafone [see photo, "Showing Off"].

Mobile FeliCa application files and their data are managed separately in the wallet phone, and they each take up from 0.5 to 1 kilobyte. The number of applications is limited only by the amount of memory on the chip, which is currently 5 KB in DoCoMo's phones.

Mutual authentication between the chip and a reader/writer is based on a key encryption system made up of randomly generated numbers. Information such as transaction histories and account balances can be presented on the phone's display. And should the phone be lost or stolen, a subscriber can block transactions by calling the handset with a preregistered number or calling customer support to have the phone locked. The user can opt for a personal identification number to be entered before transactions are made, an important feature given that up to 50 000 yen (US $450) in e-cash can be stored.

Despite DoCoMo's impressive shipment figures, the actual number of people using the wallet part of the phone might not be so high. Some reports estimate that the number is as low as 550 000; DoCoMo's own figures are more optimistic.

"Some 20 to 30 percent of [the] total [number of owners] are registered to use their phones as wallets," says Sakaguchi, whose boss, Takeshi Natsuno, managing director of DoCoMo's multimedia services, played a major role in creating both i-mode and the i-mode FeliCa service.

To give subscribers more reasons to use their wallet phones, DoCoMo has asked a Sumitomo Mitsui banking group to help it develop its own credit-payment services. By the spring, DoCoMo plans to launch a plastic card in partnership with an international credit card company, and then in the first half of fiscal 2006 it anticipates including the service in its wallet phones.

DoCoMo hopes to help popularize the use of credit cards in a country that still relies mostly on hard cash for conducting everyday business. "Credit cards are usually used [in Japan] only to make large purchases," Sakaguchi says. "But with our service, users will be able to make purchases as small as 100 yen."

In July, DoCoMo teamed up with NTT Data and the rail company JR East to set up a joint venture aimed at covering the cost of installing equipment for companies and stores wanting to implement the Suica e-cash service. They expect their investment costs to be recouped by charging a commission on transactions.

As for introducing the technology overseas, DoCoMo is keeping silent on the subject. Since 2002, however, it has been working with a dozen mobile operators in Europe, Taiwan, and Israel to create local versions of i-mode. Vodafone, though it refrains from commenting on plans for its wallet-phone business, has subsidiaries and alliances in 28 countries across five continents, giving it ample opportunity to introduce an e-wallet service when the time is right.