Cash, credit or gadget?
For years, payment geeks have promised that cell phones would soon replace the jingle of pocket change, ushering in a utopian world where consumers could buy candy bars from a vending machine with a phone call. Just dial a number on the machine, and -- BANG -- your Juicy Fruits or Fritos drop into the tray.
Those promises never materialized, but worse yet, the value proposition never materialized. More than one analyst has called mobile phone payments a solution in search of a problem. After all, when would dialing a phone number be easier than pulling out a piece of plastic?
All that may have changed this week, as Starbucks announced that it had begun accepting payments made with iPhones and BlackBerrys at most stores. A major retailer leaping into this world with both feet could send a 120-amp charge into electronic wallets -- particularly because the Starbucks "Mobile Card" e-payments is fun, easy, relatively safe and gives consumers a reason to whip out their gadget instead of their wallet.
First, I'll tell you why I was pleasantly surprised with the Starbucks experience. Then I'll tell you why the credit card industry has a lot to fear from mobile payments, and most specifically from Apple.
Regular readers of this column know I like to try everything, but I'm often unimpressed and concerned that gadget-makers regularly ignore practical consumer needs and security issues. I've tried mobile airplane boarding passes, for example, then been embarrassed as haggard TSA agents tried in vain to scan my iPod Touch at the airport security line, causing substantial backups. I expected much the same experience at Starbucks on Wednesday morning, when I took my iPod Touch into a store just hours after the announcement. I fully anticipated I'd be late for work while untrained employees argued with each other about how to use the system.
I was wrong. It was simple.
I downloaded the Starbucks app in about a minute using the store's free Wi-Fi. The app told me immediately that I needed to link it to a Starbucks gift card, so I bought one of those for $10. I sat down, entered the card number into the app, waited about 30 seconds, and my app registered my new $10 balance. I then went back to the counter and ordered my coffee and a small vanilla bean scone. The cashier pointed to the bar-code reader on the counter and asked me to wave my iPod Touch under it. I pressed the "touch to pay" button on the screen, a bar code image appeared, and my purchase registered instantly. My app immediately indicated I had $7.41 cents left in my account.
Right away, I see the value. One of the grand mysteries of life as a U.S. consumer is: What's the balance on my gift cards? Starbucks had solved this problem for us.
In the end, the technology consumers see is very low-tech. Starbucks merely places a static bar code image on the users' handset that replaces the physical gift card. It even looks like the old gift card. But there's another benefit -- one fewer pieces of plastic in your wallet.
So there are at least two rational reasons to whip out a gadget instead of a credit card to buy something at a store that you actually want. This is big news.
The not-so-good features
There are a few other bells and whistles on the app; these I found weren't worth much. You can find nearby stores if you give the app permission to know where you are, but my search pointed me toward Starbucks stores that were miles away and missed much closer stores. You can also link the app to a credit card so it automatically recharges the balance. And you can use the app to earn "stars," the chain's version of loyalty points. I had a bad experience with both features, as I was unable to complete the registration process and gave up after several tries.
No matter; I already see a benefit for mobile payment that I'd never seen before, and I used the system in the exact same amount of time it would have taken to whip out a $5 bill.
"This is a very viable form of payment," agreed Avivah Litan, a banking analyst with consulting firm Gartner. "This could get people used to a new way of paying for things."
At any rate, no smart phone user should be walking around without password-protecting their handset, and I was pleased to see that Starbucks added an additional feature that lets users password-protect the Mobile Card app separately. A small pop-up even recommends turning on that security feature.
My security concerns about the Starbucks app revolve around data collection. If I had managed to fully register, Starbucks would know my birthday, my address and, most important, when and where I buy my coffee all the time. The firm might even know where I am at other times, too, such as whenever I chose to search for a nearby store. I wish the company would promise not to store that data, or to delete it after a certain reasonable amount of time. Of course, users of Starbucks' free wi-fi already surrender some of this information to the company, but Mobile App has the potential to collect a lot more.
It's easy to imagine additional uses for Mobile Card. Already Starbucks' app allows customers to pay at Target department stores. too. I'd be delighted to have a set of supermarket cards and gift cards loaded into my iPhone or iPod Touch, so my wallet would have more room for pictures of my 1-year-old niece.
Who needs credit cards?
But cell phone companies have much bigger dreams for mobile payments. The Holy Grail, Litan says, is creating an entirely new payment system that cuts out middle men like Visa and MasterCard.
To do that, they are eyeing a more complex upgrade to gadgets, using a technology called NFC -- near field communications. New radio chips will be added to cell phones that can beam signals to specially designed receivers that will sit on checkout counters. The system will work like Mobile's Pre-Pass, or touchless credit card readers, similar to those recently installed in New York City's subway system.
Bar codes are simple, and work neatly with existing technology at most major retailers. But as I shared earlier with my airport story, they can also be kludgey (TIP: Turn your screen to its brightest setting before you get to the front of the TSA line. That'll help the reader pick up your bar code).
Supporters of NFC chips say they are much more reliable and robust than bar codes. They will require storeowners to spring for new machines, however, and such upgrades have a checkered past. Chip-enabled credit cards like American Express Blue have been around for more than a decade, but stores never bothered to buy the necessary readers to make those cards worth something.
Litan doesn't see that as a barrier this time. The RFC readers cost only about $50, she said, and she believes cell phone payment firms like Apple will be able to offer deep discounts on the fees merchants pay for accepting payments.
Already, Nokia has promised to add NFC chips to Android phones this year, and there is speculation that Apple will do so with the iPhone 5. There were even rumors that a dormant NFC chip is already in the iPhone 4.
"This will be a big year for mobile payments, when the chips get in those phones," Litan said.
Secretive Apple patents
Visa and MasterCard aren't standing idly by. They have their own consortium that is trying to steer cell phone firms to route transactions through their networks, so they still get their cut. Banks are getting in on the action, too. Bank of America recently announced it had success last year during limited testing of an NFC-chip based purchasing system.
"We have liked what we learned," B of A's Michael Upton told the American Banker last week. "It does … give us some of the market differentiation in terms of consumer adoption, behavior, preferences (and) perceptions by moving to some of the other markets."
But Apple's intriguing leap into the mobile payment space should concern the credit card associations, Litan said. This summer, the firm hired Benjamin Digier from a mobile payments company named mFoundry. That firm designed both Starbucks' new system and a similar system for PayPal. Meanwhile, Apple has applied for several patents that suggest it has big plans for iPhone payments, perhaps turning iTunes into a new kind of stored-value payment system that could rival both PayPal and the credit card associations.
"The thing about Apple is they could do a system like PayPal, but they also have a physical device in people's hands," Litan said. They also have millions of loyal customers who already trust the firm with dozens of small payments every month. "They have a big advantage," she said.
The timing might be just right for gadget money, mainly because consumers are rapidly abandoning plain, old cell phones for their sophisticated counterparts. Growth in smart phone sales has exploded -- 42 percent of all consumer handsets sold in the U.S. during the second quarter of 2010 were smart phones, according to NPD Group Inc. While NFC chips can be installed in simple handset phones, the Android and iPhone operating systems enable far more features.
Still, don't give up on cash just yet. Gadget payments are currently much more popular outside the U.S., where 100 million people have used some kind of mobile payment system, according to research by Gartner. Only 3.5 million U.S. phone users are expected to take the plunge this year, said Gartner researcher Sandy Shen.
Meanwhile, at an American Banker conference in May that focused on mobile payments, most analysts threw cold water on mobile payments based on near field communications, particularly in light of the infrastructure changes that will be required.
"Hasn't history shown that any type of new payment technology that focuses on the merchant never takes off?" said Thomas C. McCrohan, an analyst with Janney Montgomery Scott, according to a transcript. "Unless you focus on the consumer, these technologies never take off. ... I don't think it's going to happen."
The meeting also produced much discussion about the inherent fraud problems that arrive with any new payment system, and skepticism that mobile payment providers are ready for that challenge.
That said, competition in payments is a welcome development -- just ask any merchant who forks over 1 percent to 2 percent of their profits to banks every month. Consumers could benefit from lower prices, or at least simpler wallets and the full knowledge of their gift card balances.