For most people, pulling out their wallet to pay for a purchase is an automatic reflex, as natural as breathing.

But, when it comes to forking over the funds, it may not be long before consumers reach for something else - their cell phone.

Mobile payment is becoming a reality. Seeking to capitalize on the growing ubiquity and expansive capabilities of the cell phone, established payment-industry players and new upstarts are developing services that allow cellular subscribers to buy things or even send money to friends instantly by cell phone. The subscriber will be able to send a message or short code from a phone, or use specially loaded near-field communications (NFC) technology to wirelessly transmit payments by waving the phone close to a payment reader.

Text-based mobile payment systems - like those offered by PayPal and TextPayMe Inc., of Redmond - allow consumers to make purchases even when they are not in a retail store. The idea is that on-the-go shoppers would see an ad for an item they want and could purchase it on the fly by entering a simple short code, almost like voting for their favorite "American Idol" contestant. The process is analogous to online shopping, except it's conducted from a cell phone instead of a PC.

Meanwhile, NFC-based payment services, such as those being piloted by MasterCard International and J.P. Morgan Chase & Co., work best when the consumer is making a payment in person. In this scenario, the user must wave her phone next to a wireless reader to activate a payment. The method is similar to the one consumers already use with the increasingly popular contactless credit and debit cards issued by Morgan Chase, KeyCorp and other banks.

The emergence of these new services could not only revolutionize the way people use their cell phones - which have already become more of an appendage to many Northwesterners than a wallet, laptop or personal digital assistant (PDA) - but could also shake up the existing payments and mobile communications businesses.

"The cell phone will become a user's 'wallet,' as it already has for many subscribers in Asia," says Dan Schatt, an analyst for financial research firm Celent LLC, in his recent report on mobile commerce. Schatt believes that U.S. consumers will start to see such "mobile wallets" debuting in their phones this year.

Indeed, a flock of financial services companies, wireless carriers and technology vendors have already been dabbling in mobile payments over the past year. Last November, MasterCard International launched a market trial of its "Tap & Go" mobile payment service with 500 participants in the Dallas area. The bank card association is essentially moving its PayPass technology from the contactless card platform to NFC-enabled Nokia 3220 cell phones, so consumers can make payments at any wireless reader with the wave of their phone. (More than 35,000 merchant locations have contactless readers.)

Earlier last year, in May, New York City-based Morgan Chase finished a six-month pilot conducted with 150 patrons at Philips Arena in Atlanta, Ga., home to the NHL Thrashers and NBA Hawks. Participants in the pilot were given Nokia cell phones that had been outfitted with NFC technology and linked to a Chase account, so they could make purchases at the stadium by simply waving their phone over a reader to debit the cost. Cingular Wireless, a major wireless carrier with a large user base in the Northwest, was also a partner in the Atlanta pilot. More recently, in November 2006, Cingular announced another foray into finance-by-phone, partnering with wireless services vendor Firethorn Holdings LLC to plan the launch of a mobile banking and payment service for its customers, which will get a trial run early this year.

Mobile payment developments are under way in the Northwest as well. One notable mobile payment start-up, TextPayMe Inc., was launched out of Redmond by a pair of former Microsoft employees. Since it was founded in late 2005, TextPayMe has attracted a lot of press attention for its mobile payment system, which allows users to pay for things by cell phone using simple text messaging.

THE NEW WALLET
While most people don't yet consider their phone a replacement for credit cards and cash, the mobile phone is in many ways poised to become the new wallet. For starters, cell phone usage is prevalent. The Cellular Telephony Industry Association (CTIA) estimates there are 200 million cell phone subscribers in the U.S. - that's a cell phone for every two out of three men, women and children in the country. And the United States represents only one-tenth of the world's 2 billion cell phone users. According to Boston, Mass.-based Celent, global mobile phone penetration is already about twice that of Internet usage.

Most phone-based shopping to date - at least in the U.S. - has been limited to ringtones, games, song downloads and the like. But Celent predicts that as the number of mobile users increases and the technological capabilities of the phones expand, opportunities to spend and share money by phone will gain momentum. According to Celent's predictions, worldwide mobile commerce will more than double in the next two years, from $24 billion in 2006 to more than $55 billion in 2008.

Chase Franklin, chief strategist for Seattle-based Qpass, a vendor of mobile commerce software and services, says that while mobile payment is already happening to a much greater extent in Japan and South Korea, the U.S. market presents "the largest and richest footprint" for mobile payment to take hold.

Building on the growth of so-called digital peer-to-peer transactions, which have flourished on the Internet -think of the phenomenal growth of eBay Inc.'s PayPal - many industry onlookers think the new mobile phone-based payment infrastructure will give rise to the next wave of easy noncash payments.

The birth of these new wireless transaction systems could also reframe who controls the transactions. Until now, the wireless carriers have largely controlled most aspects of mobile payment, often licensing software from vendors like Seattle-based Qpass, which tracks and manages billing for premium wireless services, even handling billing for third-party content. (Qpass is owned by Amdocs of St. Louis, Mo., but still operates from Seattle.) Looking ahead, carriers will still likely play a big role, but other would-be mobile payment facilitators are looking to nudge their way into the mix. They hope to gain a slice of the transaction revenues and fees that will be produced by this nascent part of the payment business.

Code Monks of Seattle hopes to be among the companies that fill this need for mobile users. It also wants to help shape the budding business of handling finances via phone. The company was launched in January 2006 by two former Amazon.com engineers, Chuck Groom and Gaurav Oberoi. Its BillMonk service doesn't actually handle the transactions - at least, not initially - but instead gives mobile users an easy way to track and settle payments with friends, roommates or colleagues.

The idea is that splitting bills - whether it be for dinner with friends or for rent and utilities - can be troublesome, especially since so many people don't carry much cash anymore, Groom explains. Indeed, the first seeds of BillMonk were sown when Groom's business partner Oberoi took a trip to Europe with pals in the summer of 2005. Oberoi didn't want to have to carry money, but did want to share expenses and settle up at the end of the trip. Users of BillMonk's free service, Groom says, can enter shared bill or loan information online or through their phone, and BillMonk routes a text message to the involved parties letting them know what they owe and giving them a bill code (usually two short words), to which the other users can respond by reporting a payment or amending the amount they owe. BillMonk keeps sending reminders to anyone who owes on a bill until that person takes action.

While BillMonk is expected to soon add transactional capabilities, Groom says that "payments are only about a quarter of the story." BillMonk essentially facilitates a "formalized barter system" using the ubiquitous mobile phone as its platform. The use of such wireless payment instruments, Groom believes, will lead to a new kind of social transactional network -like MySpace, only mobile and with money.

That idea is catching on. By the end of the third quarter, BillMonk had more than 13,000 users signed up worldwide, 74 percent of them in the U.S., according to Groom. The median age of users is 25.

A CROWDED FIELD
Other players in this market have introduced services that facilitate payment by phone, and they're also gaining traction.

Redwood City, Calif.-based Obopay launched a software application, which cell phone subscribers can download to their phones, to transfer funds between their accounts and those of other Obopay users. Not surprisingly, the company is heavily marketing to young adults and teens - witness Obopay's recent partnership with similarly focused wireless provider Amp'd Mobile - betting that these consumers are more likely to have mobile phones and are more likely to use them for sending SMS messages or using data services. Users have to pay 10 cents to send money to a friend or make a payment, but are charged nothing to receive funds. They also get a companion debit card linked to their account, if they need to buy something or withdraw cash the old-fashioned way. In September 2006, wireless technology provider Qualcomm Inc. invested $7 million in Obopay.

Black Lab Mobile, of San Diego, Calif., is offering mobile users an easy way to make payments from their phone by dialing a number and entering the wireless number of the person or business they want to pay. The cost typically ranges from 50 cents to $2 per transaction, according to company founder and CEO James Linlor. Users must link Black Lab's "BillMyCell" service to a credit card or checking account, Linlor says.

If there's a Goliath to the Davids of mobile payment, it is PayPal Mobile. Launched in April 2006, PayPal Mobile is actually three services. First, there's a phone-based peerto- peer payment service, by which users can "send" money from their PayPal account to a friend's via text message or through an interactive voice response system. In addition, PayPal Mobile offers two sister services: Text to Buy and Text to Give. Text to Buy allows mobile users to buy goods from a business by entering a "short code" they might see in an ad. Text to Give lets users donate money to a charity via a text message. PayPal has enlisted entertainment networks Bravo and MTV to promote items with short codes, so mobile users can make impulse purchases via their mobile phones. PayPal calls the customers back to verify their orders and shipping addresses. Sending and receiving payment is free to consumers and typically costs merchants a transaction fee of about two percent to three percent.