Mobile payments - Emptying pockets

2014-10-21 11:30:42

Even Apple may not manage to replace wallets with mobile phones

Oct 18th 2014 | From the print edition

Not dead yet

TRY buying things exclusively via mobile payments and you will surely die,

either of starvation or of a caffeine overdose. Coffee shops aside, hardly any

restaurants or retailers allow customers to pay by waving a smartphone. That

will soon change: on October 16th, just after The Economist went to press,

Apple was expected to announce that, within days, the latest iPhone s

mobile-payment feature, Apple Pay, will start working in America. It lets users

tap their phones on merchants terminals to make wireless payments.

Such technology has been around for years. It has failed to take off, however,

in large part because so many firms have fingers in the mobile-payment pie, and

often block others from grabbing a big piece of it. Google Wallet, a

mobile-payment service that started up in 2011 to great fanfare, for a long

time worked on only one of America s four big wireless networks, Sprint. The

other three have their own rival project, now called Softcard (it was named

ISIS until events in the Levant forced a change). A consortium of big American

retailers, such as Walmart and Target, also offers a mobile-payment service,

called CurrentC, as does PayPal, whose main business is online payments. And

then there are dozens of startups, from Stripe to Square, each with its own

take on mobile payments.

The fragmentation confuses merchants and consumers, who have yet to see what is

in it for them. From their perspective, the current system works well. Swiping

a credit card is not much harder than tapping a phone. Nor is it too risky,

especially in America, since credit cards are protected against fraud.

Upgrading to a new system is a hassle. Merchants have to install new terminals.

Consumers need to store their card details on their phones, but still carry

their cards around, since most stores are not yet properly equipped.

The hope is that Apple Pay will help overcome these barriers. As with iTunes,

for which the firm cut distribution deals with record labels and developed

software to prevent piracy, Apple has pulled together a complete ecosystem.

Card networks and banks have agreed to process payments, reportedly for lower

fees than normal. From its launch, Apple Pay will be accepted at 220,000

outlets in America, including big chains such as McDonald s and Whole Foods

(Apple has not said when the service will be available abroad).

Apple s technical choices may help to set industry standards. One is near-field

communication (NFC), a wireless technology that links smartphones and merchant

terminals. Another is tokenisation : the devices do not exchange card numbers,

but tokens (a sort of digital voucher), making fraud much more difficult.

Apple has also made mobile payments less arduous. Users who already have an

iTunes account do not have to type in their card details. They approve payments

by touching the fingerprint reader on their device. Owners of the firm s new

smartwatch, to be released next year, will only have to raise their hands. And

tokenisation is appealing, given the recent data breaches at big American

retailers (Kmart, the latest victim, announced on October 10th that some of its

customers payment cards had been compromised ).

But even Apple s magic may not be enough to make mobile payments fly. It is not

clear how merchants will benefit from Apple s new ecosystem: it does not offer

them lower fees for processing payments or useful data about their customers,

as CurrentC does. As a result, they may refuse to sign up for Apple Pay or

discourage its use. Even consumers may quickly lose interest. Early adopters

will try Apple Pay, but find that it is still easier to pay with a card, says

Tim Sloane of Mercator Advisory Group, another market-research firm.

Tapping a phone is likely to remain just one of several widely accepted ways to

pay. Starbucks s successful app, which lets customers pay by holding an image

on their smartphone up to a scanner, shows one way to increase the appeal of

mobile payments: it not only cuts the wait for the next dose of caffeine, but

also awards loyalty points. Petrol stations, grocery stores and public

transport seem ripe for similar services. That, in turn, may help to prepare

people for more outlandish forms of payment. Apple has developed devices called

iBeacons, small transmitters that can detect nearby iPhones, making it possible

to pay without even pulling out your phone.

Apple Pay may have a bigger, albeit indirect impact in the developing world,

says Irving Wladawsky-Berger, who until recently advised Citigroup on mobile

money. With many standards now set, he reckons, the technology will become

cheap and ubiquitous thus helping the world s 2.5 billion unbanked to connect

to formal finance. Mobile phones have already enabled poor countries to

leapfrog a few stages of development in telecoms and, in some cases, finance.

Cheap mobile payments will allow them to jump further.