Mobile payments in stores: the big Catch-22

Half of all U.S. consumers carry web-enabled, computer-like smartphones that can be used for many things. And that percentage keeps steadily creeping up. Among the ways consumers could use their smartphones is to pay at store checkout counters, in place of cash or plastic. The technology exists to enable a smartphone to serve as a wireless payment card; the consumer would just wave the phone near a special terminal that emits radio signals and the phone, containing a chip and antenna, would transmit the consumer’s card account data to the cash register.

Technology is not the problem. The problem is how to interest consumers in using this method of payment. It is only when many consumers want to do it that merchants will make the needed investment in point-of-sale hardware and software. And, by the way, consumers will be interested only if nearly all merchants accept this form of payment. If you have to ask a store clerk—Can I pay with my phone? —it will be too much trouble for many shoppers. Consumers already have a number of convenient ways to pay in stores and are hardly clamoring for a new one.

Visa learned this lesson in 1996 when it tried to convince consumers in Atlanta to use stored value, chip-carrying credit cards in Atlanta during the Olympic Games. The cards could be used on Atlanta’s rail and bus system, so they had a built-in utility. And Visa put considerable effort into signing up Atlanta-area restaurants and shops to take these Visa Cash cards. But consumers didn’t use the Visa Cash feature very much, except in the transit system. It was too much of a hassle to try to figure out which merchants accepted Visa Cash, and which didn’t, so they just paid like they always did.

Those chip cards had to be inserted in a terminal, but that didn’t require much more time than tapping the card on a reader. In subsequent years, Visa, MasterCard and American Express tested out chip cards with the same kind of wireless payment functionality that could be built into mobile phones. About the only place it’s worked is in Hong Kong, where the Octopus card that millions of Hong Kong residents use every day on the city’s heavily traveled mass transit system is now accepted in many shops for small payments. That card has become so widely accepted that consumers routinely use it.

How to achieve that level of ubiquity is the challenge that faces proponents of contactless payment systems that would make use of mobile phones. It’s true the mobile phone—which are, after all, computers connected to the Internet—could potentially provide a lot more benefit than the relatively dumb chips on the Visa Cash cards tried out in Atlanta in 1996 or today’s Octopus card. For example, the consumer could download a coupon from the Gap web site and apply it when she goes into a Gap store. She could accumulate rewards points for each purchase at a Wal-Mart store or at Walmart.com and apply those either in store or on the web. Nordstrom could recognize when a loyal shopper is within a mile of one of its retail locations and beam her a discount code good in that store for just the next two hours. All those scenarios would be appealing to both consumers and retailers.

But how do you make this new payment system ubiquitous enough that many consumers will try it out and make it the way they normally pay? It’s a question that mobile network operators, banks, merchants and technology providers in many countries are trying to figure out. In the United Kingdom, three of the four major wireless carriers got together and decided to create a common mobile wallet that each could offer to its subscribers. Since the three companies serve 90% of mobile phone subscribers in the United Kingdom, it’s a plan that could, if promoted aggressively, lead many consumers to give it a try. That, in turn, might convince a lot of U.K. retailers to deploy the terminals required to communicate with this mobile wallet, especially if the wireless carriers subsidize that new hardware.

But, precisely because those three operators together dominate the market, competitors have called on antitrust regulators to block the plan. Those complaining include the fourth U.K. wireless carrier, which is not participating, and such U.S.-based technology companies at Google Inc. and the PayPal unit of eBay Inc. Both Google and PayPal have their own ambitions in mobile payments. And, indeed, the European Union announced last month it would investigate the proposed mobile wallet venture for possible antitrust violations.

So here’s where we stand: Success in introducing the new payment form likely requires ubiquity, and ubiquity could well be construed as illegal monopoly. Is it hopeless? Not quite. There’s always the chance that antitrust regulators will decide they should give emerging technologies some room to develop before the bureaucrats step in.

Even more likely, I believe, is that someone that doesn’t have dominant market share at the moment will come along with a really good idea that makes consumers want to use it, and thus prompts merchants to respond. Think about the iPod that Apple Inc. introduced just over a decade ago, along with its iTunes store for buying music consumers could download to the portable music player. Consumers loved it, and the way music is sold changed forever.

No one has yet come up with such a dazzling mash-up of the smartphone and in-store payment. But that doesn’t mean someone won’t. The combination of a portable device consumers have with them at all times and access to the Internet is powerful. It’s just going to take the next Steve Jobs, Mark Zuckerberg, Sergey Brin or Larry Page to figure out how to turn the phone into a compelling payment and loyalty device. My bet is regulators will still be weighing the merits of the various mobile payment joint ventures when that truly innovative idea comes along and changes the landscape forever.