The Smartest Credit Card Ever Made: Your Phone
Credit cards are extremely low tech -- they contain simple data to authenticate a transaction.
Now, several players, including banks to mobile carriers to financial networks, are looking at a new transaction device: your smartphone.
Indeed, financial institutions such as PayPal and MasterCard have issued some customers adhesive chips for their phones. The credit card information is stuck to the phone and can be used at any of the 200,000 contactless readers in stores around the nation. That's the low-tech version.
What's really a hot topic now, though, is Near Field Communication (NFC), which allows two-way wireless communication between a chip inside a phone and a receiving terminal. This means that soon, if you have a phone that supports NFC, you'll be able to not only pay for a purchase by waving your phone near a contactless reader, but you can also get instant loyalty points, coupons and rewards.
While the idea is intriguing for consumers and merchants alike, the question is whether NFC will work for US merchants -- and work well.
"Technology is usually only one small component that leads to the success or failure of ventures like this," said Charles Golvin, principal analyst with Forrester Research, explaining that the technical infrastructure, customer adoption, and low fees must all line up as well.
Even though countries like Japan and South Korea have been using mobile phones for payments for a while, paying with a smartphone is off to a slow start here, mostly for financial reasons.
"It's a business model problem," said Omar Green, the director of strategic mobile initiatives at Intuit, a company highly interested in using NFC with its millions of small business customers, who explained that there is still uncertainty about how merchants will actually be charged to use mobile payments from smartphones.
That said, several indicators point to 2011 being the year when mobile payments and NFC reaches a tipping point. First and foremost: Samsung now offers the Nexus S as the first NFC-enabled Android phone. Nokia says its smartphones will support NFC in 2011.
Visa's head of mobile Bill Gajda says the company has been holding pilots with four of its largest issuers. As part of that, all New York City taxis -- a whopping 13,000 -- now have a contactless readers in the backseat. Chicago and Boston taxis are also being outfitted with about 3,800 readers so far. In fact, transit is a no-brainer for mobile payments. Most people have their phone in hand all the time anyway so waving it past a reader to get through a turnstile seems beautifully efficient.
Mobile commerce expert David Eads of Kony Solutions, writing in his blog, says the iPhone 5 is expected to support NFC when it comes out.
In the blog post, he points out that, considering the trillions of dollars run through financial networks annually, Apple stands to increase revenue dramatically by getting involved in processing payments for things out in the real world. Conveniently, iTunes already has payment information for its 160 million customers. That's a match made in Heaven for Apple.
Most impressive, though, is an announcement from Verizon, AT&T and T-Mobile. In November, the companies announced that they're working together with Discover to build a NFC contactless payment network called Isis for the cell phone companies' 217 million customers. While holding hands with the competition might raise eyebrows, it's actually a brilliant idea.
According to Jaymee Johnson, the director of strategic development at T-Mobile who is also the Isis spokesperson, the joint venture has worked to provide a single unified platform to consumers, merchants, and banks that will streamline adoption of NFC. They realize that mobile payments using NFC aren't going to work if the merchant is seeing a different interface for every customer that walks through the door, says Johnson.
Intuit's Green says they're also trying to figure out how to deal with transaction fees. Once they are low enough, a smartphone will be an ideal transaction device.
About those fees, Forrester's Golvin said, "There is a going rate that is established for transaction fees on payment. I would be extremely surprised to see a merchant fee schedule for these payments that was radically different from what currently exists from the existing acquiring banks and payment networks."
Using a smartphone for transactions makes sense, especially for merchants who can capture new information about a customer, such as buying habits and preferences.
According to Jeff Miles, the director of mobile transactions at NXP Semiconductors (www.nxp.com), the company that invented NFC with Sony in 2002, NFC tags in stores are another tool that will benefit merchants and their customers. "Think of a small hardware store," says Miles. "I walk in and I'm looking at a new drill and Bosch has a promotion, so they put a smart tag in the store. I tap the tag and it gives me some product information and potentially could give me a coupon."
There are concerns with using a phone to pay for goods. For example, some wonder: what if your phone is stolen?
"[It would be] probably no worse than someone stealing a credit card and perhaps somewhat better because you can password protect a phone," said Rob Enderle, principal analyst with Enderle Group, adding that the Web service a consumer would be using with a NFC-enabled phone would likely contain financial information and it would not be on the phone itself.
Whether people will be eager to adopt NFC is another question. "Consumers are used to using existing methods of payment and as a race we are not very fond of change," Enderle said.
Golvin agrees. "The engrained behavior that people have for paying is pretty deep and it takes a lot to change that," he said. The coupons and loyalty rewards that would come along with NFC phone payments will help, he said. "Those things do make a big difference. If you can do all of that in the transaction, now you've given the customer a real incentive to change their behavior and use this alternate payment method."
Experts aren't sure at what point the average consumer will be paying for things with a wave of a smartphone. Regardless of when, it stands to chance that while today our phones rule much of our lives, tomorrow they just might control our money as well.