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Are mobile payments the demise of credit cards?

Over the past year, companies such as Starbucks, JCPenney, McDonald’s, Google Wallet, ISIS and Dunkin’ Donuts have all made great strides in the mobile payments space. Many industry experts believe that going forward, consumers will turn to their mobile devices, rather than taking out their credit cards.

“Will digital devices eventually remove the requirement for physical tokens of authentication?” said Nick Holland, senior analyst at Yankee Group, Boston. “If recent history and the demise of film cameras, CDs and printed media is anything to go by, then yes.

“Digital content trumps physical media everytime due to cost reduction and the ability to deliver content immediately,” he said. “Digital mobile payments will mean the demise of credit cards, but the death will be a very long, slow one considering how slowly the banking industry moves and how entrenched plastic cards are as a means of paying.

“We still have magnetic stripe cards in the United States – a 50-year-old technology. Conceivably it is a decade or more before we start to see credit cards get trumped by mobile. A more interesting question is ‘are mobile payments the demise of credit card networks.’”

Making advancements
According to Mr. Holland, newcomers such as Google, PayPal and Isis will continue to rely heavily on existing credit card payment rails with the caveat that the requirement to issue plastic cards removes some of the safety net for credit card networks and allows new entrants.

“The recent MCX announcement could be particularly troublesome if merchants band together to effectively bypass the card networks and credit card payments entirely,” Mr. Holland said.  

The executive does believe that the increased smartphone penetration coupled with some big, national mobile payment initiatives such as Starbucks’, will mean that inevitably there are more consumers using their phones to pay.

“It will still however be very much a minority phenomenon,” Mr. Holland said. “Old habits die hard and consumers will still be carrying their wallets with them.

“Initiatives that leverage QR codes or numeric data entry are winning favor over NFC due to the lower cost of entry,” he said. “The elephant in the room – Apple – has made some interesting acquisitions and patent applications recently and Passbook seems to have the makings of a digital wallet offering.

“However, beyond the press releases and the significant media interest in mobile payments, it will continue to be business as usual for most merchants and consumers. Cards and cash still work fine.” 

The mobile payments space is clearly heating up.

In 2010, Starbucks unveiled the largest combined mobile payments and loyalty program in the United States.

Through the Starbucks Card Mobile application for Apple’s iPhone and iPod touch, users can check their balance, reload their card and view transactions.

In April, the company reported that it has processed 42 million payments via its mobile application (see story).

Most recently, the coffee giant has teamed up with Square to enhance the payment experience for its customers, as well as transform the way buyers and sellers transact (see story).

Earlier this month, Dunkin’ Donuts accelerated its position in mobile commerce with a new iPhone and Android application that lets consumers pay for beverages, food and merchandise at the point-of-sale (see story).

Additionally, McDonald’s announced that it is entering the mobile payments space and testing a new mobile payments service with PayPal that lets consumers order their favorite meals at participating restaurants in France (see story).

These initiatives prove that the mobile payments space is here and it is staying.

However, it will be a while until the medium forces credit cards into extinction.

“Credit cards provide a valuable service to both merchants and consumers,” said Drew Sievers, cofounder/CEO of mFoundry, San Francisco. “While merchants would like to pay lower interchange rates, consumers ultimately will drive the decision on cards.

“Today, credit cards are ubiquitous, which makes them incredibly difficult to displace,” he said. “Consumers will continue to demonstrate comfort with mobile payments.

“As we’ve seen with Starbucks, if you provide a simple mobile payment approach that provides real consumer value, then you will see the corresponding levels of adoption. Mobile will continue to be a confusing payment method for consumers until a more ubiquitous solution grabs a foothold in the market.”

Wilson Kerr, vice president of sales and business development at Unbound Commerce, Boston, says that the infrastructure that allows credit card payments to work is established and will not go away anytime soon.

Mobile might well serve as a trigger for payments, but the credit card companies will likely be behind the processing of these transactions.

“This is why we have seen all the credit card companies partner with mobile players,” Mr. Kerr said.

“Using mobile to pay for a vending machine purchase for a cup of coffee or even to exit the parking lot are very different than making major purchases,” he said. “Starbucks is the gold standard regarding the use of mobile payments, integrated within an app, to increase efficiency in the store and provide additional utility and value to their customers.

“Smart retailers should investigate white label mobile payment solutions, that allow them to control their own destiny. If they already have a mobile site or a mobile app integrating this functionality, via in-store pickup, for example, is a great way to start.”

Final Take
Rimma Kats is associate editor on Mobile Commerce Daily, New York