Smartphones Look to Replace Plastic as Payment
Okay, so the gas-powered car killed the horse and buggy
as a mode of transportation (excluding the Amish). Video apparently killed
the radio star. So what’s next to go? According to a Bloomberg report,
plastic credit and debit cards may be doomed by smartphones.
As it turns out,
a number of wireless carriers, including AT&T, T-Mobile
and Verizon, along with Discover Financial Services and Barclays, have formed
a partnership and are testing a system in four U.S. cities that allows consumers
to pay for purchases with a wave of their smartphones.
The service being tested
is said to be similar to those already in place in Europe and Asia. Discover
would process payments and Barclays would help with the management of accounts.
If
successful, the test could be the beginning of real competition for MasterCard
and Visa.
“What is a cell phone, except a mechanism for consumers to address their
lives in whatever way they choose,” Gary Townsend, CEO of the Hill-Townsend
Capital hedge fund, told Bloomberg. “There’s certainly no
reason if an AT&T account can effectively be carried on a phone that a
JPMorgan or a Wells Fargo card can’t be there, too. In fact, the antitrust
issues would demand that that be allowed.”Â
Retailers, many of which have been engaged
in a rancorous dispute with the major credit card companies over interchange
fees, are generally supportive of any alternatives that make the payment market
more competitive.
“The
emergence of a secure and reliable competing network that serves the demand
from consumers for mobility payment options and reduces retailers’ costs
would be welcomed news,” Brian Dodge, a spokesperson for the Retail Industry
Leaders Association, told Bloomberg.
Discussion Questions: Will smartphones replace plastic credit and debit cards
in the U.S.? What are the biggest hurdles to be overcome for this to happen?
Would the emergence of a new payment network bring the benefits that retailers
are looking for?
[Editor’s Note] The Bloomberg article pointed out that MasterCard
and Visa are not sitting idly by. The two companies are both working on projects
to enable payments on mobile devices.
It’s reasonable to speculate that the plastic cards will be replaced by smartphones over the next decade, but Visa and MasterCard will continue to dominate the industry for years to come.
We are more than 50% of the way there, in my opinion. PayPal mobile can be accepted in some locations. I’ve paid for coffee using a mobile Starbucks card. While credit card companies and phone companies duke it out over who’s going to try to take the biggest slice of the transaction, merchant service providers and retailers are moving on, using prepaid cards and gift cards as a way to break the logjam.
And new mobile payment providers seem to pop up every day. I’m not sure that any of them will last once the big guys finally work it out and jump in, but right now it’s the wild, wild west out there – and that’s definitely good for the industry.
My phone is already at least as important to me as my car keys, these days. Adding payment capabilities will only make it more so–and I look forward to it.
I do strongly believe that smartphones will eventually replace a growing percentage of plastic credit cards. However, I do not subscribe to the belief that this will ever be 100%.
Mobile apps may supplement (and provide competition for) the credit card industry in the short term, but there are several roadblocks preventing “plastic” from becoming obsolete anytime soon. First, users of smartphones need to ensure the security of the devices; second, the costs of the phones (and data plans) are a big handicap to many potential users. The whole idea of “sponsored” smartphones (where you subscribe to particular apps such as credit card companies in exchange for subsidized data plans) needs further development.
When I see people struggling with smart phones at the airport because of gaps in technology between the phones and airline computers, I wonder how long it will be. There certainly has to be something coming out eventually to replace smart phones, or at least a smarter phone.
The idea is completely logical and the driver here–more competition for the card companies–makes alternative payment methods in the interest of retailers. It will also put carriers right in the middle of the monetization of mobile. However, the consumer value proposition appears rather weak–as opposed to paying with a credit card, I can pay with my phone. That alone I think is insufficient; there needs to be some kind of rewards, loyalty, or marketing integration with the system that provides incentives for customers to use mobile devices rather than cards. The credit card companies are master marketers with lots of consumer data, so don’t count them out of this equation quite yet.
Last semester, one of my students who was from Norway asked for help because she had to write a check. It seems that paper checks haven’t existed in Norway for 20 years. The UK has announced that it will eliminate checks entirely by 2015. Rick Moss recently reported of the system in Europe where credit cards are run at the table in restaurants with a mobile device (a system that has been around for more than 10-years.) The article reports that a system is already in operation in Europe to use a smartphone for payment. Last week I bought my movie tickets with my phone and the attendant scanned the bar code picture on the phone to let me in. The move to electronic is happening. Will it be the smartphone? It could be!
Consider Nikki Baird’s comment, “My phone is already at least as important as my car keys.” So, let’s eliminate her car keys and use a smart phone to lock, unlock and start her car. We can then use the smart phone to lock and unlock her house or anything else that she needs a key for. Do you think we would be able to turn the lights on and off from outside the house? Why not? In NYC, you can pay your transit fare by wanding your credit card over the turnstiles. Why not your smart phone? At Chase one can deposit checks by taking a picture of the check with their iPhone. Replace credit cards? EASY!
Benefits to retailers? Less cost, less hassle, more security and quicker transfer of $$$$.
We’ll see significant cellphone payment over time because customers will want it. And if retailers can reward customers who sidestep Visa and Mastercard, you’ll see progress even more quickly.
Plastic has greatly reduced checks and online payment continues the trend. The Post Office raising the price of a stamp to forty-four cents has been the greatest benefit for online payment. Note, in some area of the world, checks never existed. The “Great Recession” has reduced the balance and use of credit cards.
Smartphones will become a viable payment method in some market segments. The more likely scenario is smartphones being an alternative for debt cards. The greatest obstacle will be security. I lose my phone and the charges keep on coming.
Consumers accept mobile phone companies billing them–while holding their noses, though. In other words, the level of trust is doubtful and IMO, the claimed “expertise” of mobile operators in billing is questionable.
Let’s put it this way; how many times have you had to call your Visa or Mastercard provider to complain that they charged you for items you never bought? How many times have you spent $12.50 on an item at the store, while getting billed $13.00 by Visa, as they “rounded up” the total for their convenience.
Not saying they won’t get anywhere, but the mobile phone companies themselves are actually a major trust barrier here. And Discover or Barclays will not really alleviate that problem.
Smartphones will become a viable payment alternative and will grow more rapidly than other forms of payment as there will be times when it is more convenient for the consumer to use their smartphone rather than another form of payment. However, just as credit and debit cards have not eliminated the use of cash as a payment alternative, smart phones will not eliminate credit and debit cards as a form of payment.
I would be ecstatic if I could carry less “stuff” with me on a daily basis. But, I still see people writing checks at Walmart–and gas stations–etc. It’s not as if paper money ever went away, either. The thumbprint reader didn’t replace the credit card, and neither will the smartphone. There’s a place in the economy for all of it.
I think everyone would agree that competition is good and the idea of an electronic charge method that bypasses the existing network fees is appealing to everyone (except the current providers). What I don’t understand is why a cell phone is necessary to achieve this.
So the advantage of using the cell phone becomes merely a convenience issue for the consumer. Is it easier to carry around all your ID information in your cell phone and get rid of your wallet altogether? We already carry pictures and music in our phones. If we could add all our ID cards and use them for payment, I can envision the day when the wallet becomes completely obsolete. Combine this with an unlock feature for automobiles, door locks, etc. and the cell phone can also eliminate keys. Finally, you need a tethering feature so that if you walk out of range from your phone it will begin ringing and shutdown before someone else can use it.
Yes, I can see the cell phone replacing wallets, credit cards, cash, IDs, etc.
Something’s got to give here. The current state feels like a classic situation in which an emerging technology crashes into a marketplace inefficacy–and guess who usually wins? (Raise your hand if you are still paying big bucks to a land line phone or cable company!). This feels more like a “when” than a “whether.”
Visa, Mastercard and American Express have essentially been the only game in town in providing everyone the gold standard in transaction convenience all those years. Problem is that retailers who are operating on razor thin margins already are fed up with paying about 2% of all plastic transactions into those coffers. That’s north of $30 billion a year if you are keeping score. Those economics just aren’t sustainable as less costly and more capable alternatives emerge.
The smartest retailers will consider this transformation holistically. The fact that the device that will soon be at the center of the payment step of the transaction is also a potential pipeline for almost unlimited real time communication with a valued shopper will not be lost on them. What other shopper marketing, messaging, offers, information, etc, can be put into that pipeline? What shopper insights can be gained? How can phones (with GPS) enable higher order category management? At the end of the day, the simple act of paying might be one of the more mundane aspects of this brave new world.
Banks and other financial institutions shouldn’t care if people use plastic or phones–the innovative ones will be the engine behind the technology gobbling up those interest payments from consumers that oh so conveniently are using their phones to consume beyond their means. Speculators pondered that traditional media would be dead because of the internet and most have survived or are taking a very long time to fade away. True, the media universe is more fragmented than ever and new models are required to succeed, but they all still play a role in the mix. Similarly, in the foreseeable future, there will likely always be a role for plastic even as mobile payment systems become simple and easy to use.
Bill Gates wrote about electronic wallets in “The Road Ahead.” I think that was in 1995. Things change slowly. I suspect credit cards will be around for a long time, perhaps a very long time if the credit card companies can win the battle to put a standard electronic payment mechanism into the card itself.
My company is introducing one of the new solutions in this space, so not surprisingly I’m quite confident that the transition from plastic to mobile payment will happen, though I’m not as confident that it will be 100% transition within the next 10 years. Here’s why:
Coverage & Incentives. For a mobile payment solution to work, a vast majority of retailers are going to need to invest in new P.O.S. equipment to accept payment. Consumers think that paying with their phones would be nice, but don’t really demand it and aren’t likely to choose where to shop based on who is providing this convenience. This means that there’s no incentive for retailers to be early movers in making this investment unless they get something great on the deal.
Credit card companies aren’t going to offer that, because why should they lower their rates to install a new platform that will increase competition and force rates even lower? That’s not to say that credit card companies couldn’t benefit from mobile payments, because there are a number of ways they could. In fact, the technology to execute mobile payments through a cell phone has been around for years and there are a number of partnerships and proof of concepts that have gone nowhere in that time.
So why should things be any different now? What’s changing is consumer perception, and that’s what will ultimately drive adoption and get the ball rolling. The successful products that drive early adoption will be middle-ware, which can introduce a solution that gets around the coverage issue. It won’t be perfect at the start, but layering on technology later on is the easy part.
As long as we need cash (forever) we’ll need a wallet and in that wallet will be a plastic credit card. In some cases, cost-efficiency and marketing opportunities will provide the necessary change in incentives to sway retailers to push the relatively indifferent marginal consumer off of plastic and onto mobile payments. In the end though, plastic will persist for most consumers, even as mobile payments continues to grow.
This is timely. I just saw an article in today’s Dallas paper about a new app for iPhone and Android phones that lets those eating out or bar hopping pay their tab with those phones (the company is working on adding Blackberry also). Great idea, especially for those concerned that the credit card downtime is a perfect time to ‘swipe’ the info about the card, like some places have been accused of doing. In the meantime, I guess I’ll have to do it the old fashioned way, as I’m still a ways off from affording a smarter phone than the one I have.
Ahh…the changes keep coming. I can see Smartphones as an additional method of payment; but not as a complete replacement for credit cards. There is no end to what technology is capable of bringing us. And to think there is an entire generation of people who have no idea what a dial telephone was.
You have a glimpse of the future and it is here. Everyone but the credit card companies are going to win on this one.
The simple answer is yes–handheld payment will replace credit cards–and debit cards, and loyalty cards, and just about every other card in our wallet.
In fact, North America has been significantly slower than many developing nations to adopt mobile payment.
There are three key components of retail: “the meeting of the minds” buyer and seller having final agreement on a transaction; the delivery of the goods or services; and payment–the transfer of consideration. All three of these are rapidly evolving, with payment really being the simplest to have totally electronic with no other physical manifestation. It is clear that paper and plastic will remain as legacy systems, probably for a very long time. Totally electronic payment, however, will grow like wildfire, but will take a long time to ignite some of the non-tinder fuel.
The delivery of goods and services is the only component that requires physical inventory and physical movement of that inventory, with whatever delivery mechanism is most effective. For information that consists only of bits and bytes–books, music, software, etc–all electronic delivery is far advanced–with paper books, magazines, and news rapidly following music. It is this second component where bricks-and-mortar retailers hold some limited trump cards: immediacy, the ability to make “instant” delivery; and the experiential possibilities to enhance the SELLING process, the most important component.
The “meeting of the minds,” the selling process, may in every case be activated solely by electronic means–think Amazon and the free-for-all going on with online retailing. However, Smartphones are in a position to bring a nearly total convergence of ALL retail modalities: online, mobile AND bricks-and-mortar. COMB–Convergence of Online, Mobile and Bricks-and-mortar–as articulated here.
Moving payments en masse to Smartphones is a real no-brainer. Smartphones WILL play a very large role in inventory management–see RFID discussion here recently. But the REAL power of the Smartphone, and its greatest impact on bricks-and-mortar retailing will be in enhancing the SALES process, the meeting of the minds. That is, the Smartphone is (or can be) in reality, a VERY, VERY PERSONAL shopping assistant. The Smartphone can accelerate and simplify the meeting-of-the-minds.
Today, most of the “shopping assistant” functions are being evaluated in the old trial-and-error mode, also known as throwing mud on the wall to see what sticks. However, the real winners may be shrewder, rather than luckier. The Amazon sales process (electronic) is already highly advanced and rational. Not many bricks-and-mortar retailers realize it is the genius of that Amazon-like PROCESS that they need to bring inside the four walls of the store. It’s what I call the Amazonification of Walmart, simply using those companies as exemplary of the growing convergence (COMB.)
Ladies and gentlemen, buckle your seatbelts. There are exciting times ahead!
I suppose this may happen, but ultimately: so what?
Many of us can remember when charge cards weren’t even plastic, but embossed metal.
How about the US first gets on board with the smart chip in their credit cards? Traveling in Europe can be quite annoying these days with an “old-fashioned” US magnetic strip card.
The plastic will be here for some time due to security issues. It’s still nice to force the signature to validate the owner. This will continue for some time for more expensive items.
The “no signature required” limits will drive the use of a dual system for many years to come, limiting the smart phone as the only payment method.
Over time, we’ll definitely see increasing usage of smart phones as a means of payment. But I hesitate to say that the smart phone will completely replace plastic, as well as other forms of payment. That type of sweeping cultural shift is still many, many years away. And there are several hurdles that will need to be addressed, like security concerns, back-end infrastructure, availability across the retail industry, and the fact that not everyone will be able to afford a smart phone.
For retailers, the key thing to remember is that consumers value choice, i.e., shoppers want flexible ways to pay. Across the industry there are many ways to pay for goods (e.g., debit, credit, gift cards, PayPal, cash, check, layaway, etc.). Merchants must stay abreast of the needs and desires of their core consumers, including in the area of payments. What they want is what retailers should offer.
I share the belief that smart phones will continue to add functionality including the ability to be a payment platform. As several others have indicated, this will not likely be a quick transition. All concerned have to see this as a benefit.
As some respondents indicated, there are applications currently that where cell phones can function as this type of medium. However, where the retailer has to incur significant cost to be able to accept this type of payment such as at the gas station pump, it will be a very long time if ever before it occurs.
Will smartphones replace plastic credit cards? Well, perhaps in long run, until a cheap, secure and convenient biometric system is incorporated. Factors that currently hinder such growth are high costs of data plans for smartphones. Remember, not everyone yet has a smartphone. Security could also be an initial hindrance. Credit cards are still well protected / safely kept by individuals where as it’s easy to misplace your phone.
From the execution perspective, with sheer volumes and complexities of transactions, retailers would still need a third party to consolidate and execute transactions between the merchant and the buyer, which technically means that only the plastic aspect of credit cards is replaced by a smartphone. It’s not such a distant future that even Mastercard and Visa would be equipped with the new technology, hence not many benefits for retailers other than attracting the tech savvy generation.
The article didn’t say how the actual transaction would be handled. Would it be a direct debit from the user’s bank account? Would it be through a third party like PayPal (effectively debiting the user’s bank account)? Or would it more likely be just a different way to access a VISA or Mastercard account?
I kind of doubt society is ready to move back to a cash/check mentality, and there would still be a need for the credit card companies–the only real difference being that a smart phone is swiped rather than a plastic card.
Am I off base here, or is there some other process at work in this future world?
Smartphones demonstrate how consumers have consolidated their different needs into a single device. My phone now serves as my email, calendar, contact, video, music, news, and chat source–where such needs might have required multiple devices several years back.
I believe the credit/debit card will become just one other service to be consolidated into the single, portable source.
Ditto Professor Fader. The infrastructure required to support secure payments won’t change over night and Visa and MC will be integral players in the transition to mobile payments wherever it eventually has success.