Smartphone Credit Cards: Are U.S. Consumers Ready to Trade In Their Plastic?Published: September 15, 2010 in Knowledge@Wharton
In the coming months, some American consumers will embark on an experiment that will finally begin to answer a question with multibillion-dollar implications for the nation's credit-card companies, mobile-phone carriers and tens of thousands of merchants doing business from coast-to-coast.
Will U.S. shoppers embrace the chance to make store purchases with a simple swipe of their smartphones? Such a system would eliminate the need to carry plastic credit cards and would accelerate the evolution of the mobile phone into an all-purpose device useful not only for talking, reading e-mail and listening to music, but also for handling financial transactions.
Yet, U.S. consumers have historically lagged well behind their counterparts in Asia, Scandinavia and elsewhere in adopting new uses for mobile devices. Many see the concept of one-swipe smartphone shopping as a potential security nightmare, a bad dream littered with such goblins as lost or stolen phones, erroneous charges, and invasions of privacy, courtesy of aggressive retailers.
The issue is taking on urgency amid new reports that the nation's two largest mobile providers -- AT&T and Verizon -- are on the brink of a major pilot project to test the use of smartphones as credit cards in up to four cities. As for the projected consumer buy in, industry experts are predicting that the smartphone will gain on plastic credit cards -- but at a slower pace than overseas.
"[Smartphones] have to be more convenient than credit cards, possibly cheaper and secure," says Shawndra Hill, a professor of operations and information management at Wharton. In addition, the enthusiasm of store owners ultimately will prove as essential to the success of the experiment as that of consumers, Hill and other experts note. "Of course, merchants will have to accept the proposed type of payment," Hill points out. "In order to get merchant buy-in, the new system will have to be easy to use and cheaper with respect to transaction fees and equipment compared to ... credit cards."
The End of Credit Card Dominance?
The concept of smartphone checkout swiping is obviously a major threat to America's well-entrenched credit-card industry, which now has an estimated one billion plastic cards in the wallets and purses of American consumers. A report in early August on Bloomberg News, citing industry sources, said that AT&T and Verizon may work with Barclaycard and Discover, the rivals of entrenched market leaders Visa and MasterCard, in developing their online infrastructure for making instant payments via a smartphone.
The technology behind the plan generally involves implanting small chips in smartphones that emit short-distance radio signals, and can be swiped or bumped against point-of-sale devices in store. The concept is not new: Indeed, experts note that smartphone payments started gaining popularity in Japan in the middle of the last decade. They have also gained in some predictable regions like Europe as well as in some less likely regions like Africa, where mobile-phone use is rising but a credit-card infrastructure had not previously been in place.
"Micropayments between individuals using cell phones have really taken off in parts of the developing world," Hill says. "However, this is due in part to the fact that [many] consumers in the developing world do not have a substitute -- for example, credit cards or bank accounts. Here in the [U.S.], where we have such a high penetration and usage of credit cards, the burden is on the firms proposing alternatives to demonstrate that using smartphones for payment is superior to other methods."
Wharton professor of legal studies and business ethics Kevin Werbach says that although the United States has often lagged behind the world in adopting smartphone practices, including data services, the obstacles may be even greater for mobile payments.
A rapid move away from credit cards to smartphone point-of-sale transactions would require more than just a behavioral shift for American customers who have been targeted successfully by card companies over the years to use plastic for routine transactions, experts maintain. It would also require a major new investment by merchants who spent heavily on new equipment in the last two decades to make credit-card use easier.
Moving Out of a Security Comfort Zone
But an even bigger hurdle -- as noted by Andrea Matwyshyn, also a professor of legal studies and business ethics at Wharton -- might be security concerns raised by customers asked to move away from their comfort zone of using credit cards and toward the new and unknown. For example, she points out that in the case of a lost or stolen smartphone or a disputed store transaction, customers might feel confusion over whether the task of rectifying the problem rests with the mobile carrier or the financial services firm handling the transaction.
"No software program will ever be perfect," Matwyshyn states. "When we have overreliance and over-exuberance about technical solutions -- no matter how effective -- there is always a danger of jumping in before addressing the potential risks and the ability of the average consumer to handle the errors that happen because of technology-based problems. Consumers will have credit-card companies to deal with but also cell-phone carriers. The interaction of these two different companies may muddy the picture for the consumer [when it comes to] even knowing which company to approach with respect to these errors."
As a way to tackle those concerns, Matwyshyn strongly urged the mobile phone companies and their partners to start their pilot projects with new websites that would be heavily oriented toward customer service and resolving problems. "One of the most effective mechanisms that could be used in this kind of situation is for a company to build out a very consumer-friendly website that answers questions, with a [customer service mechanism] that can address them on an ongoing basis," she says. "From the companies' perspective, the types of problems they are likely to encounter can be mitigated as they start working on various solutions."
According to Kartik Hosanagar, a professor of operations and information management at Wharton, consumers may find the core security issues in switching to smartphones at the point of purchase -- such as creating new passwords -- not too different from the type of issues they already encounter with credit cards. However, he suggests that making purchases with a device that is essentially a mini-computer may have shoppers worried that they are facing a new risk from cyber criminals.
"You've got one device [that] is sort of in the network and is potentially being used for all kinds of interactions, like messaging or accessing the web -- and now the adding of credit-card-type payments brings the possibility of malware and viruses," Hosanagar points out. "Accessing the credit card makes it easier for a hacker to use your credit card. Can they can get into [your account] online?"
A Retailer's Friend -- or Foe?
But consumer concerns may not matter much if American retailers don't embrace the new technology and the infrastructure needed for it to work. New would-be players in the sector like AT&T and Verizon are betting that they will, in part because many retailers are not happy with the current dominance of traditional credit card firms. Indeed, retailers just this year successfully lobbied Congress to approve limiting so-called swipe fees for debit transactions on the heels of a related pending federal anti-trust suit. Bloomberg News recently reported that the Justice Department is considering a civil lawsuit against Visa for preventing retailers from surcharging their credit-card customers.
Those developments suggest that merchants would likely welcome more players to the field, but Honsanagar is not completely convinced. "The merchant has to be willing to install readers and terminals -- and the merchants may not be as willing to rush into this as consumers," he says. He noted that it took roughly three or four years for the system of smartphone payments to become fairly ubiquitous in mobile-friendly Japan; it would almost certainly take longer to become as entrenched in the United States.
However, one aspect that might encourage retailers to move more quickly is the recent rise in interest in coordinating smartphone use with highly targeted marketing approaches. The efforts involve technology that can identify, through microchips, when a consumer is entering a store or making a purchase and can be used to offer instant coupons or discounts, which are delivered to the smartphone via the Internet.
Having so much data about individual consumers' habits all in one place is "a potential game changer for advertising," maintains Wharton's Hill. "Together, the partner firms [in a smartphone credit card venture] will have access to a rich history on consumers who use their services. The data on these users will include their close social networks via phone calls; location data via cell tower information [and purchase histories], as well as the time of [those] purchases. The aforementioned data in total are perceived to be the 'Holy Grail' for advertisers in modern times, and no one firm has access to it all in a clean format, in the way that [AT&T and Verizon would.]"
Indeed, whatever consumer and merchant qualms may linger about security and related issues, most experts believe a gradual move toward smartphones as a means of payment is inevitable, especially with the advent of younger shoppers more deeply immersed in mobile phone culture. Yet, there are signs that the entrenched credit card companies will not yield the new platform without a battle. Industry leader Visa, according to a Reuters report, is also eyeing a pilot with smartphone payments in the New York area that would be offered in conjunction with Bank of America perhaps as early as this fall.
"The number of transactions is so vast that once consumer behavior starts to change, there is potentially so much at stake that subtle shifts over time can be a huge market," says Werbach. "Mobile payments may be a slow takeover because users don't see a huge increase in convenience over credit cards. But this is one application that doesn't have to have a big bang for the buck to have super value."