Sony and NTT DoCoMo have reached an agreement to develop technology that will enable Sony's Felica contactless smart card to be embedded inside mobile phones.

The two companies will form Felica Networks and develop a version of the Felica chip for use in handsets and applications which can be used with compatible phones. The two companies hope to finalise an agreement and establish the company by January.

Felica-based cards are already used by millions of people in Japan and other Asian countries as the base for several electronic payment, travel pass and security card applications. The company will work on getting the same technology and applications into phones so that users will not have to carry additional cards.

By embedding the chips inside mobile phones, the system will also benefit from a link to the telecommunications network with potential applications including the ability to replenish prepaid cards through a wireless internet service.

The first mobile handsets to include the cards will be issued in December as part of a trial, said Takuya Ori, a spokesman for NTT DoCoMo in Tokyo.

Widespread availability of NTT DoCoMo's second-generation and third-generation terminals with embedded Felica chips is expected between April 2004 and March 2005.

The technology developed by Felica Networks will not be restricted to the two companies. Plans are already being laid to license it to other handset makers and other network operators, said Ori.

The agreement extends a relationship in the Felica area that the two companies have had since the establishment of BitWallet in 2000. The two are the largest shareholders in the company that operates an electronic money system, Edy, based on the Felica platform, which is accepted in around 2,500 stores.

Other shareholders include major banks and credit card companies, which have announced plans to embed Edy in their credit and ATM cards, and telecommunication company KDDI, which is a rival of NTT DoCoMo and operates a competing mobile network under the Au brand name.

The most notable use of Felica is as the basis for Hong Kong's Octopus card. Launched in 1997 as a prepaid travel pass for the city's transport services, its use has been extended to become an electronic money card which can be used in vending machines, parking meters and convenience stores.

More than nine million Octopus cards have been issued and around seven million transactions are taking place every day.

Felica is also employed in Singapore's EZ-Link system, which is a prepaid card for transport systems and is now being extended to non-transport applications. More than five million cards have been issued.

Sony says 38 million Felica cards have been issued worldwide.

Martyn Williams writes for IDG News Service