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Which will come first: mobile payments or flying cars?
Ah, the future. Flying cars, robot maids and a cashless society. One of these—the cashless society—at least has a chance, if only because so many financial services companies are hard at work figuring out how to replace cash and payment cards with smartphones.
In the world envisioned by backers of such schemes, especially those using Near Field Communication technology, which lets two NFC-enabled devices communicate with each other wirelessly, consumers and retailers would have little need for cash. In some cases consumers tap their smartphone against contactless readers at the checkout to make a payment.
In such schemes, retailers can offer consumers special offers via the smartphone, potentially encouraging loyalty, which might mean more visits and more transactions for the retailer.
Google Inc.’s Google Wallet and the Isis wallet, from a consortium backed by AT&T Mobility, Verizon Wireless and T-Mobile USA, each offer NFC-based smartphone payment apps. Financial services companies are involved in both schemes, providing the payment processing connectivity.
But even with these heavyweights chipping in, mobile payments have yet to gain widespread retailer or consumer adoption. Why is that? Among major reasons simply is the lack of demand from consumers and retailers, suggests Rick Oglesby, senior analyst at consulting firm Aite Group LLC. And without that demand, banks are reluctant to issue NFC payment credentials in addition to credit and debit cards, he says. Because about only 2% of merchant locations accept NFC, card issuers also must continue to issue a plastic card in addition to the digital one necessary for the NFC chip, Oglesby says “Therefore the cost of the NFC card is 100% incremental cost. At a time when there is very limited adoption on both the consumer and merchant sides, there’s no real business case for it.”
The situation is somewhat similar to a push in the mid-2000s by payment companies, like Visa, MasterCard and American Express, to get consumers to use, and retailers to accept, contactless cards that use a wireless technology from which NFC evolved. But persuading card issuers to issue credit and debit cards with embedded wireless chips took more than slick commercials, of which there were quite a few. The issuers had to bear the cost of the cards, which, if memory serves me correctly, was akin to 25 cents for a conventional magnetic stripe card and as much as $1 for one with a contactless chip inside it.
A similar price difference between magnetic stripe cards and mobile payments using NFC exists today, says Richard K. Crone, CEO of payments advisory firm Crone Consulting LLC. Generally, the cost to issue NFC payment credentials is about twice that for a conventional payment card, he says. That’s because of the costs associated with multiple parties required to issue NFC payment data, such as the card number, he says.”
A bank has to use an organization called a trusted service manager that actually loads the payment data, like the card number, expiration date and cardholder’s name, onto a sequestered area called the secure element on the NFC chip. But the complexity, and cost, increases when the trusted service manager used by the bank is not the same as the one used by the mobile payment organization, Crone says.
Despite these impediments, mobile payment backers must be getting their message across to consumers. More than 60% of U.S. adults believe payments made with smartphones will replace credit card and cash transactions at some point, according to a recent poll by market research firm Harris Interactive. Tellingly, only 30% of them think that will happen within the next five years.
The easier, and cheaper, path for mobile payments may be to rely on existing technologies that retailers and consumers are familiar with, Crone says, like bar codes and bar code scanners. And as these existing technologies can be hosted on remote servers—in the cloud—retailers need do little other than add a bar code scanner and update the software on their checkout systems to accommodate this type of mobile payment, Crone says. Merchants need the latest in bar code reader technology, optical scanners, to read bar codes on smartphone screens. More big chains have been adopting these new scanners.
For example, Starbucks Coffee Co.’s mobile app uses a bar code that identifies the consumer. When scanned at the checkout the code triggers the checkout system to deduct the payment from the consumer’s Starbucks account. “Bar code and bar code presentment have taken off,” Crone says. “They have proven to be far easier to deploy in a cloud-based environment.”
If cash is to be displaced at the checkout with mobile payments, much work needs to be done. Perhaps the days of using a smartphone all of the time at the checkout will coincide with the advent of the flying car.