Credit card companies fully expect that mobile payments via smartphone will someday replace the traditional wallet full of plastic. They do not necessarily fear that day, because they intend to be part of the mobile payment world.
Many attempts have been made to establish mobile payments as a replacement for credit cards, from Google Wallet to the mobile phone company-backed Softcard to PayPal to the now-disturbingly- named ISIS Mobile Wallet. Some of the efforts have tried to make use of the credit card companies, while others have tried to compete directly with them.
None have taken significant share from the traditional credit card swipe, and while the reasons vary, there is one common thread – they cannot reach a tipping point of retailers that have the necessary readers to use the technology. In turn, consumers will not adopt a technology that is only useful in a limited number of places.
While the NFC (near-field communications) technology behind mobile payment systems has existed for well over a decade, the lack of a standardized system that consumers can adopt en masse has left the technology operating well below its capabilities.
So how will the marriage of smartphones and credit transactions actually happen? Will it be a cooperative or competitive effort? It seems more likely to be a cooperative effort between groups that can supply complementary pieces of the puzzle. The recently announced Apple Pay is an intriguing attempt to bridge the gap.
Apple has apparently worked out deals with most banks and credit card issuers to take a cut of the traditional credit card transaction fees (reportedly in the range of 0.15% of the transaction value). According to Apple, the card issuers that have signed on as of mid-September represent 83% of all credit card transactions.
The security advantage also currently goes to Apple. The combination of the iPhone’s Touch ID fingerprint reader and “tokenization” security give Apple Pay a decided security advantage over traditional magnetic strips.
replaces your credit card number with a randomized number for retailer transactions – removing your actual credit card number from the process. Thieves have no reason to steal the token information; it is useless for other transactions.
While Apple Pay is off to a good start, it has several large challenges ahead.
- Readers – Unless Apple is willing to subsidize a massive scale upgrade of readers at retailers – which it certainly could afford to do – Apple Pay may die the same slow death as other systems. It doesn’t matter how great Apple Pay is if few retailers have upgraded readers.
- Apple Exclusivity – Apple’s infamous closed systems are great in many respects, but they are not going to dislodge enough market share based on Apple Pay and iPhones alone. Apple will need to find some accommodation for other mobile phones to use Apple Pay and make it platform-neutral, or the other mobile phone manufacturers and their allies will make a similar system and take over significant market share – as they do with many Apple innovations.
If Apple does institute platform neutrality, can they still guarantee the same level of security? That is not a question Apple would even consider addressing at this point.
Somebody will eventually bridge the gap between smartphones and credit cards. It may be Apple; it may not. Either way, mobile payments via smartphone will eventually take over from the traditional credit cards through combined convenience and security improvements – and it would be a big surprise if the credit card companies do not play a significant role in their adoption.
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