Should Smartphones Replace Credit Cards?

By Mike Schuster Aug 02, 2010 1:00 pm

Sources say AT&T, Verizon, and T-Mobile are looking to supplant the Visa and MasterCard plastic in our wallets.

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A few years back, Visa (V) began an ad campaign that showed the ease and effortless dexterity one gains when using a Visa Check Card. But the well-oiled machine of a deli market and its Visa card-carrying customers is brought to a screeching halt when one Neanderthal finds it acceptable to pay in cash. The delay of handing over the money and waiting for the change is enough to garner glares from everyone in the establishment. And for good reason: He should know -- as well as everyone else -- that removing a credit card from your wallet and swiping it through the machine is a far quicker and smoother transaction than handling bills and coins.

But what if, as crazy as it sounds, that same transaction can be done with the gentle wave of a smartphone? A device, most likely, already in customers' hands on the checkout line.

According to Bloomberg, AT&T (T) and Verizon Wireless (VZ) are giving that question some thought.

Sources told the site that the two mobile providers, along with T-Mobile, are working with Discover Financial Services (DFS) and Barclays PLC (BCS) to test the feasibility of smartphone-based payments in Atlanta and three other US cities. Bloomberg describes the process as a "contactless wave" that will be similar to technology already offered in Japan, Turkey, and the UK. Discover will handle the processed payments -- which might allow the credit card company to gain some ground against Visa, MasterCard (MA), and American Express (AXP) -- and Barclays will manage the customer accounts.

While paying at the register via an iPhone (AAPL) or Droid (GOOG) may seem like the dream of a far-off future, the technology already has a head start.

This year, Twitter founder Jack Dorsey launched Square -- a credit card reader that plugs into your iPhone or Android phone that processes payments, receipts, and tips all within its corresponding app. Although there are fees for transactions, Square boasts no setup costs, subscription fees, or monthly minimum. It immediately turns any small-time merchant on the go into a high-tech seller.

And like Square, CardStar is also looking to add ease to the transaction process, but without any add-on accessory. CardStar's free app -- which works with iPhone, Android, and BlackBerry (RIMM) devices -- displays the barcodes found on the reward and club cards that clutter up everyone's wallet or keychain. The app calls up the account number from specific retailer chains and the cashier simply scans the barcode from the smartphone screen. The service is also expected to get a boost from a recent partnership with Foursquare, which allows the users to check into the location-based social network with every scan.

The pros of switching payments from a credit card to a smartphone account are debatable, however.

Sure, all your cards' information and transactions will be stored and recorded in a presumably password-protected app and online profile. But is it really easier -- or wiser -- for a customer to jiggle a delicate device worth hundreds in front of a radio sensor rather than just removing a credit card from a wallet? Why don't credit card companies take a cue from the UK -- or even New York's ancient subway platforms -- and just allow a similar "contactless wave" of a credit card in front of a sensor? Those cards don't even need to be removed from one's wallet.

And if you thought losing just your wallet or mobile phone was bad, think of losing both in one fell swoop. Cash doesn't seem so cumbersome anymore, does it?

Although industry consultant Richard Crone told Bloomberg that mobile carriers are "the biggest recurring billers in every market" and "experts at processing payments," mistakes in billing will always be made. So the decision to switch to smartphone-based purchases could come down to whether you'd rather argue with a Verizon or MasterCard representative.

Still, the option to adopt the technology shouldn't be prohibited. If that's where the industry is headed, it doesn't sound terribly bad as an alternative to a wallet full of plastic. But if customers actively want to pay by mobile phones, merchants will have to fork over $200 for every reader and smartphone developers will see a rise of $10 to $15 in manufacturing costs. Retailers and manufacturers better hope it's worth it, as Crone believes it to be.

"A mobile device is online, real-time interactivity that changes the customer relationship," Crone told Bloomberg. And channeling Rick Moranis as Dark Helmet, he added, "A card is dumb."

Let's hope the technology isn'tTwitter: @mcs212