Why big players find it hard to change the way consumers pay

This week brings big announcements related to how consumers pay, always a subject of interest to retailers. Three of the biggest retail banks—Bank of America, JPMorgan Chase and Wells Fargo—have created a joint venture called clearXchange to enable consumers to electronically transfer money to each other. And Google is expected to announce plans for a service that would let consumers use mobile phones based on Google’s Android software to pay at bricks-and-mortar stores with a wave of their phones past specially equipped wireless terminals.

No doubt these venerable organizations will declare that they are changing the way consumers spend money. But I doubt much will actually change.

For these schemes to succeed they have to provide value to consumers and to merchants. And the same goes for several other initiatives involving pay-with-wave payments at checkout counters. Without some real payoff, merchants won’t spend the money to deploy the special terminals and consumers won’t change their behavior.

And there has to be more than a tiny bit of value. Advocates of Near Field Communication, the contactless payment technology that Google and many others are backing, say retailers will be able to move consumers through checkout lines more quickly if shoppers can pay with a tap of their phones. But how much faster is that than swiping a credit card? There have been plenty of NFC trials, and little evidence that it’s saved merchants much money. In any case, many consumers would have to adopt this payment method for it to have any measureable impact on retailers.

And from the consumer perspective, is it that much easier to pay by tapping your phone on a terminal than handing over a card or cash? There have been heavily promoted trials of contactless payments in the U.S. going back to Atlanta during the 1996 Olympics when Visa and some of its largest member banks tried to get consumers to pay at local merchants with contactless chip cards. These trials produced no evidence consumers are clamoring for this. Nor have merchants involved in these trials shed tears when their contactless payment terminals were taken away.

If someone were to offer consumers a discount for paying this way, or offer merchants lower fees for accepting contactless payments, then we’d be talking. But that’s not likely to happen. Payments is a very low-margin business. Banks have never made much money out of facilitating consumer payments to merchants and service providers like utilities, although banks have made a few dollars from debit card interchange—one reason they’re furiously lobbying against a Federal Reserve proposal to limit debit card interchange fees that merchants pay to 12 cents a transaction.

Banks make their money by borrowing at low interest rates, typically from consumers who put money into bank accounts, and then lending it at much higher interest rates to businesses or to consumers in the form of credit card debt, mortgages, auto loans or college loans. There’s plenty of money in lending money for interest, but little in managing payments. In fact, I suspect the banks are deliberately not offering an alternative way to pay at retail with their clearXchange system because they don’t want to undermine their profits from credit cards.

Google and the banks likely are taking these steps to keep up with potential developments in payments, just so they’re not too far behind in the event one of these ideas catches fire. But Google hasn’t done much to promote its Google Checkout service for online retail payments after the first few months of promotions. Consumer payments isn’t Google’s thing. And the banks are more interested in consumers charging money to their credit cards.

If there’s a company to watch in this space it’s PayPal, which is all about consumer payments, and makes good money from it. In fact, PayPal now accounts for about a third of the profits of its parent company, eBay Inc.

PayPal has leveraged its expertise in online payment processing so that it makes money from consumers who pay with PayPal, charging merchants a fee similar to credit card fees, and by processing online transactions on behalf of merchants. PayPal has the know-how and the infrastructure, and it’s pushing aggressively into extending its service to mobile phones. Although Google and the banks may lose interest in changing how consumers pay, I expect that topic will remain top of mind at PayPal.