Editorial Policy

The Credit Cards vs. Smart Phone Battle. Are You Ready?

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By Eva Norlyk Smith, Ph.D.
August 19, 2010

Will smart phones overtake credit cards as the preferred payment method of consumers in the future? After all, the idea of being able to make a payment during checkout, simply by waving your iPhone instead of swiping plastic has undeniable appeal.

According to recent reports, wireless carriers AT&T, Verizon, and T-Mobile are preparing a major bid to enter into in the payment processing market. The companies reportedly have formed an alliance with Discover Financial Services and British-owned Barclays Bank to develop the technology that will enable smart phone users to pay for purchases via their cell phone. Transactions would be processed by Discover’s payment processing network, and Barclays Bank would aid in managing the accounts.

The “wave and pay” concept isn’t a new one; it has been used in so-called contactless credit cards with “near field communication” (NFC) chips. Installed in standard plastic credit cards, NFC chips send out low-power wireless signals that transmit credit card data to card readers without the need for any old-fashioned swiping.

Why bother to go to all the trouble with chips when smart phone apps could offer a similar payment option? The answer comes down to connectivity: while such apps might work perfectly in a heavily Wi-Fied down-town coffee shop, consumers making transactions out in Podunk, Alaska may find the reception too weak to process a payment.

Installing the technology in smart phones is the next step, though it won’t necessarily be cheap. Merchants accepting the new form of payment will have to buy a $200 electronic reader to process smart phone payments, and phones featuring the payment chips will cost an extra $10-$15 more. Despite the cost though, experts predict that the new technology will take off with little resistance. The new system reportedly will first be tested in four major U.S. cities, including Atlanta.

Industry experts predict that a new mobile payment system will be a game changer. Visa and MasterCard have long dominated the electronic payment processing industry; last year, the two behemoth payment processing networks processed 79 percent, or $2.45 trillion, of all consumer spending on credit and debit cards. Credit card rivals American Express and Discover shared the remaining 21 percent.

Wireless carriers are in an excellent position to enter the electronic payment market, as most Americans by now carry a cell phone in their pocket, and wireless carriers already have extensive billing networks set up. Some industry experts predict that nearly half of U.S. consumers will use some kind of mobile financial services within five years; acceptance among young consumers aged 18 to 34 is likely to reach eighty percent.

Merchants, not consumers, may be the first to benefit from increased competition in the electronic payment processing industry, however. Retailers have long complained over the ever-increasing transaction fees charged by Visa and MasterCard, and many hope that increased competition in the field will bring down the merchant fees stores charge each time a customer pays by credit card.

Whether or not that will eventually translate into slightly lower prices for consumers remain to be seen. Still, as competition heats up, Visa and MasterCard may well be forced to try harder-and the benefits of that are likely to eventually trickle down to consumers.