Smartphone pay has credit, debit cards wobbling on the ropes

A cell phone with the MasterCard logo on screen.

Smartphones may be taking the place of credit and debit cards soon. (Photo Credit: CC BY/Edmund Jenks/Symbology)

Banks and credit card companies have made a great deal of money off consumers who have depended upon them for both impulse and emergency purchases via short term credit. However, there may soon be a way for consumers to escape the wheel of revolving interest debt if AT&T and Verizon Wireless have their way. According to Bloomberg, the swipe-and-pay “PayPass” technology used on some smartphones is ready for a revolutionary – many say evolutionary – step. Smartphone pay for purchases and bill pay may become a reality soon, making credit cards and even debit cards obsolete. Mobile billing via the wireless carriers would simply place charges on the consumer’s monthly wireless bill.

Smartphone pay threatening Visa, MasterCard

A proposed partnership between AT&T, Verizon Wireless and T-Mobile would work through Discover Financial Services and the Barclays banking conglomerate. Consumers would be able to pay with a “contactless wave of a smartphone,” according to the Bloomberg report. Considering the growing popularity of smartphones in the United States, more than 1 billion plastic cards could be in danger of hitting the junk drawer if smartphone pay takes off as experts predict it will. Wireless technology consultant Richard Crone called the proposed payment technology a “game-changer” that will fit naturally into the mobile billing industry, as America’s carriers are “the biggest recurring billers in every market” and they are “experts at processing payments.”

What Visa and MasterCard stand to lose

Visa and MasterCard combined handled $2.45 trillion of U.S. consumer spending on general-purpose cards in 2009. That’s 82 percent of U.S. spending within that market, according to industry newsletter Nilson Report. That kind of dominance contributed to $3.54 billion operating income for Visa and $2.27 for MasterCard last year. ATM interchange fees (aka swipe fees) on debit card purchases also generate a significant amount of money for banks, as much as $40 billion per year. Smartphone pay won’t completely replace credit cards, as mobile billing won’t necessarily offer revolving credit, but debit cards in particular could be severely damaged. Short term credit such as payday loans could show  significant gains against credit cards, particularly through mobile applications.

Younger consumers leading the charge

A study by Boston-based consulting firm Mercatus LLC indicates that 80 percent of consumers between 18 and 34 years of age are ready to begin using smartphone pay and similar mobile financial services. There are retail barriers that must be overcome first, according to the Federal Reserve Bank of Boston, but there would also be incentives. According to Bloomberg, it costs retailers approximately $200 for each credit card reader. If smartphone pay becomes universal, that would save retailers money and only cost smartphone manufacturers another $10 to $15 per handset. Retailers would also likely be able to send rewards and other information directly to consumers via the smartphone pay interface.



Federal Reserve Bank of Boston

Your smartphone can also serve as a retail credit card terminal

Other recent posts by bryanh