Will Smartphones Replace Credit Cards?
Navigator. News source. Meal planner. Camera. Meteorologist. Smartphones can be customized to do almost anything except vacuum the floor and pay for purchases. While smartphones may never replace your vacuum cleaner, they may one day take the place of your credit card.
The United States is one of the few remaining developed countries that still uses magnetic strip credit cards. Many countries have switched to contactless payment systems with advanced technology. In the U.S., banks and retailers have not rushed into contactless payment systems because the changes are expensive. Each reader costs approximately $200 and the expense quickly adds up for retailers.
While banks are taking their time to advance beyond the magnetic strip, other companies are eager to compete with Visa and MasterCard. Those two companies handled 82%, or $2.45 trillion, of the consumer spending on general purpose cards last year in the United States, according to the Nilson Report.
AT&T, Verizon, T-Mobile, and Discover Financial Services are joining together to create a new processing system that allows consumers to wave their smartphones at cashier readers to make a payment. Discover will process the payment. Bloomberg News reported they will test the technology at stores in Atlanta and three other cities. Currently, there is no publicized timeline.
Once the technology is available, consumers will likely pay more to add a wireless chip or to upgrade their smartphones with secure payment capabilities. According to the Federal Reserve Bank of Boston, updating mobile phones with embedded microchips would increase manufacturing costs by $10 to $15 a handset.
Retailers don’t want to install readers until there is a market that will use them; consumers may be reluctant to sign up for enabled phones until they are certain that they can use them where they shop and eat. Smartphones will also have to prove to consumers that the wireless payments are secure and provide anti-virus protection.
Users also need to know if the smartphone purchase is backed by a credit, debit or prepaid card because the protections vary significantly for each one.
Currently, credit cards offer much greater purchase and fraud protection than debit and prepaid cards. If mobile payments are backed by a credit card and appear on the credit card bill, then the purchase will be backed by the same protections available on credit cards. If it is backed by a debit card or deducted from a checking account, it should receive the same protections as an electronic funds transfer. Funding by prepaid cards will provide little protection for unauthorized use or in a dispute with a merchant. There are no protections if the payment service is provided by the mobile carrier and the charges are added to your cell phone bill.
Smartphones are one possibility for replacing magnetic strip credit cards. Here are two others:
Chip and PIN
Chip and PIN cards use a chip (an embedded microprocessor) to store data. The cardholder enters a PIN (Personal Identification Number) to make a transaction. Advocates for Chip and PIN claim this also provides faster transactions and savings in processing costs.
Proponents claim Chip and PIN technology offers convenience and better payment security, reduces the risk of theft and the cost of fraud. The spread of Chip and PIN technology has created problems for Americans traveling outside of the United States because some merchants and transportation stations have completely switched to Chip and PIN and do not accept magnetic strip cards.
American issuers and retailers are resisting the changes because of the prohibitive expense to upgrade technology, replace terminals, and issue new credit cards. Javelin Strategy and Research estimates that rolling out the Chip and PIN technology could cost about $8.6 billion dollars: approximately $6.75 billion for terminal replacements; another $1.4 billion for card issuance; approximately $500 million for ATM upgrades.
U.S. banks have lost billions of dollars since 2008, and credit card regulations have eliminated or reduced important sources of revenue. Issuers are still trying to find ways to return to profitability. Spending billions of dollars on a new payment system is not a top priority right now.
Implementing a new payment system also takes time. It is also possible that Chip and PIN may become outdated itself and replaced by something new.
Attitudes towards the new technology could change because WalMart, the world’s largest retailer, may install payment terminals that are compliant with smartcard-based technology and Chip and PIN compatible. If WalMart commits to Chip and PIN, other merchants and processors will likely follow, but the transition will still take years.
DevideFidelity and Visa created In2Pay, a protective case that adds mobile contactless capability, allowing iPhones to be used for contactless payments. Visa’s payment application is the Visa payWave.
To make a payment, users will have to launch an app, click pay and waive the iPhone in front of a terminal that accepts contactless payments like payWave. In2Pay is compatible with smartcard industry standards. Visa is testing the technology this summer. Other issuers, providers and firms are also attempting products for contactless payment.
Skeptics question if paying with the app is more convenient than just pulling out a credit card or cash.