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No Plastic Needed: Consumers and the Future of Mobile Payments

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Swiss Army-like mobile devices aren't just the stuff of Kubrick movies. While your smartphone already enables you to simultaneously run a conference call, check your stocks, and defeat hordes of thieving pigs, mobile devices may also transform the way you interact with money.

With the impetus of Google Wallet, Isis, and other emergent mobile payment technologies, a generation of mobile payment applications is challenging the domination of traditional players -- banks and payment processors -- in the payments space.

For U.S. consumers, competition could be a great thing. There are significant benefits beyond having a sleeker, aluminosilicate glass-covered alternative to your worn leather wallet. But mobile payments can serve more than our need for convenience.

For unbanked and impoverished people, the explosive demand for mobile payments and online commerce in emerging markets represents a significant shift in financial access. More than half of citizens of the developing world are cell phone subscribers, reports the U.N. These are people who could have access to financial services for the first time thanks to mobile payments.

With the size of the payments market -- credit cards alone process $2.5 trillion in payments annually -- and enormous opportunity for technology disruption, this is a potential global finance-tech transformation. Mobile payments have significant implications for everyday consumers from San Francisco to New York, as well as from Surat to Nairobi. Let's take a look at why this high-tech trend may turn the U.S -- and the world -- into a plastic-less, cashless consumer culture in our lifetime.

Should Consumers Hop on the Mobile Bandwagon?

Early adopters will be getting in line for Google Wallet and carrier-led rival mobile payment platform Isis. But the average consumer might not be far behind. It's not just convenient and the high-tech cool to "touch-and-go" pay with your phone. Mobile payments have practical, valuable benefits that may compel everyday consumers to toss their trifold for a mobile wallet.

  1. Interaction with your spending -- With the average consumer facing $6,285 in credit card debt, according to CreditKarma.com, mobile wallets can take on a sort of "financial conscience" to curb debt and encourage financial responsibility. Interaction with a digital interface, rather than a flat plastic card, opens the door to integrated apps and services for budgeting and real-time account tracking. For example, MasterCard's mobile payment app has built-in money management features such as options to set spending limits and alerts, approve or block purchases in a category, and enable overseas activity. While some credit cards offer activity monitoring online, mobile payments are real-time and preemptive. A spending alert popping up before you make a payment on your phone is harder to ignore than a credit card statement at the end of the month.
  2. Integrated shopping opportunities -- To really push adoption, mobile payments can't rely on contactless payments alone. Smartphones can't just be bulkier, digital credit cards. The beauty of mobile payments is its intersection with mobile commerce. Take Google Wallet's "integrated experience" that combines deals, location-specific advertising, as well as payments. Value-added services for both consumers and merchants are the real staying power for mobile payments. For consumers, that means targeted offers and discounts, inventory searches and shopping solutions like hyper-local deals. For merchants, there's potential for customer tracking, purchasing data, and cost-effective advertising. Mobile payments aren't just a way to spend your money; it converges ways to save money, track money and shop differently.
  3. Convenience when you shop -- As we log hundreds of face-to-screen hours daily and carry cellphones everywhere, mobile payments goes beyond consolidating accessories. Mobile payment platforms remove the physical limitations on where you can pay, how you pay, and to whom. Mobile payments streamline payments, making them faster at checkout through easy payment transfers such as Near Field Communications (NFC) technology. Across the five main types of mobile payments, the dominant payment trends will be the ones that allow consumers to make the easiest payments wherever they are, which is increasingly not in a physical store or with cash or credit card in hand.
  4. Better security -- 1 in 10 U.S. consumers is a victim of identity theft, reports Javelin Strategy & Research. Mobile payments can help stymie these numbers with improved security over traditional credit cards thanks to two-factor authentication, meaning you'll need your phone as well as a PIN number in order to complete a transaction. Credit cards have one-factor authentication, in which you only need the card at point of sale, swipe, and the transaction is complete. Security measures for mobile payments will likely improve in leaps and bounds, especially under pressure from regulators and consumer watchdogs. For example, Google Wallet fortified its security measures by storing credit card data on a computer chip in the phone's hardware, isolated from the phone's hacker-vulnerable operating system software. Plus, smartphones offer apps that remotely lock and erase the phone's data in the case of loss. A lost or stolen wallet simply doesn't have the same safeguards as a lost smartphone.

Will Smartphones Effectively Replace Credit Cards?

The short answer is no, at least not yet.

While early adopters will build mobile payments' growth, there won't be a hockey stick-shaped adoption rate in the U.S. anytime soon. Early adopters may be on board, but because of supply and demand, it'll take time to hit mainstream. Consumers want merchants to support it, but merchants want to see enough consumers who will use it.

Changing the U.S. payments infrastructure by replacing credit card terminals for mobile payment technology is a huge, long-term undertaking. For many mom-and-pop shops and small retailers, it's a burden to invest in pricey Near Field Communications machines, mobile point-of-sale terminals, or whatever might emerge as the winning technology. And while the Walmarts and Targets can absorb the cost, cards and cash are still the dominant means of payment, so there's no urgency to switch to mobile payment technology.

To get merchants to adopt new hardware and technology nationwide is like teaching old dogs really expensive tricks. Think of the metric system; while the rest of the world seems to have switched, we have yet to budge. Or EMV chip technology, which is standard in Europe, yet has barely penetrated the credit card market here in the U.S. However, being stubborn about mobile payment technology could cost us in global commerce.

Mobile payment adoption is difficult in the U.S because of an entrenched credit card and cash payment infrastructure; however in many developing countries, the ubiquitous infrastructure is prepaid phone dealers and cell phone networks.

Across the globe, mobile payments are not just for high-tech convenience. It's transformational in the developing world, opening much-needed financial service capabilities to poor, unbanked, and rural citizens. Developing regions like India and sub-Saharan Africa are growing in reliance on mobile payment systems for day-to-day transactions. While it would be difficult to find a credit card swipe machine in rural Africa, a staggering number of people have cellphones or prepaid phones.

In 2007, Kenya launched a SMS-based money transfer system called M-PESA to help poor, unbanked Kenyans turn their cellphones into mobile wallets. Today, M-PESA boasts 9.5 million subscribers doing daily person-to-person money transfers. Notably, this service was designed as a convenient, practical payment solution for poor and unbanked Kenyans. Obopay takes a similar approach in India.

The global unbanked population with mobile phones is expected to grow 70 percent over the next year to 1.7 billion people by 2012; it would come as no surprise if the growth of mobile payments exploded as well.

In addition to developing countries, Western Europe and China are among the largest mobile payment regions. Japan adopted mobile payments back in 2004, where less competition in the mobile payment space and diminished use of credit cards helped launched mobile payments six years sooner than in the U.S.

Slow and Steady Doesn't Win the Race

American Express executives said they expect new payment methods to "leapfrog plastic cards." Traditional players of the payment space such as Visa, MasterCard and American Express are forging partnerships and making investments in the Squares, Paypals and Google Wallets of the world to get a piece of the action. In fact, Juniper Research reports consumers will use mobile payments to pay for $670 billion worth of goods and services by 2015.

However, don't expect nationwide adoption anytime soon. In the U.S, it's still a matter of rolling out a technology and business that can scale. Getting credit card issuers and mobile carriers on board is tricky, and it'll be a lengthy rollout of new technology.

While we're far from ditching our wallets, we are embarking on a new era of payments. The future of payments, and how we interact with our money, might be snug in your pocket right now.

Justine Rivero is the Credit Advisor for CreditKarma.com, the pro-consumer credit advocate that helps more than 3 million consumers realize the everyday cost savings of having great credit health.

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