Credit Cards, An Endangered Species

by Ray Blanco.

Previously, mobile phones have helped us satisfy our need to communicate. Now, however, they are beginning to satisfy the need to engage in commerce by providing a convenient means of exchange. Smartphones are becoming a tool to accomplish what has previously required the use of cash, checks or credit cards.

Unlike a piece of plastic with a magnetic stripe, a payment system based on an intelligent, networked device has the advantage of providing real-time feedback on account and payment information. Combine these advantages with the fact that most of us are carrying a mobile device anyway, and a virtual wallet could eventually make credit cards as uncommon for retail transactions as personal checks are today.

Despite the obvious advantages, mobile wallets have seen slow adoption in the United States compared with elsewhere. Other places that lack the banking system the US enjoys, but have cell phone coverage, have led the way in using mobile payment technology. In locations in Africa, Asia and Latin America, money is often stored in a mobile account and transferred to another one during a purchase by bringing the buyer’s and seller’s cell phones into close proximity. This is done by means of a short-range wireless connection called near field communications (NFC). Just as elsewhere, NFC will lead the mobile-transaction revolution in the US.

NFC is a set of radio communication standards that allow devices to communicate with each other over short distances. It is also very fast at establishing a network connection, taking only a fraction of a second. If you’ve ever used a contactless payment system before, such as the kind that you can attach to your key ring and use at a gas station, you’ve used an early form of NFC. These objects use radio frequency identification (RFID) chips that transmit a unique, secure identification code that performs the same function as the magnetic stripe on a credit card. Unlike NFC on a mobile device, however, these systems allow only one-way communication. As such, these aren’t much more than easier-to-use credit cards.

With major payment processing companies finally signing onto the mobile payments game, the US is entering an inflection point for NFC technology. Much of the infrastructure has already been built. In the 2000s, for example, Visa and MasterCard developed payWave and PayPass, respectively, both contactless payment technologies. More recently, Visa, MasterCard, Discover and American Express have licensed these systems to Google for use in smartphones with its mobile payment system, Google Wallet.

Along with the software and systems sides of the mobile payment equation, we are seeing increasing numbers of smartphone models equipped with NFC technology. 2011 was the biggest year on record for NFC adoption, with 35 million new smartphones equipped with the technology, according to IMS Research.

With this kind of growth and industry support, NFC technology is set to revolutionize the way we pay in a manner very similar to what the credit card industry accomplished in the second half of the 20th century. Innovators pioneering the transformation with a strong market position should do very well for themselves and their investors.

In 2011, NFC-enabled smartphones made up less than 10% of the total share, according to the IMS figures. This percentage is expected to swell over the next couple of years. Technology market analysis firm iSuppli predicts NFC-enabled phone sales could reach 544 million in 2015:

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NFC adoption in 2011 was somewhat slower than expected. This state of events, however, can’t last forever. New technologies are often subject to fits and starts in early stages. The long-term trend, however, is for growth in mobile payments technology to assert itself far more prominently than it did in 2011.

Regards,

Ray Blanco,
for The Daily Reckoning

Ray Blanco was in his basement learning how to build what's called a "Wilson Cloud Chamber," a supercooled device for detecting particles of ionizing radiation. Now, he is an expert in advanced robotics, avionics, genomics, and biotechnology. Blanco was raised in Miami,FL, after his family fled Cuba in the 1960s. He is co-editor of Technology Profits Confidential and contributes to Breakthrough Technology Alert and Penny Sleuth.

  • boomerken

    Another made for tyranny payment system. Incredible!

  • kdrichards

    The fact that credit cards allow users to spend more than they can repay (resulting in a balance and paying a high interest rate) can be a severe disadvantage for people with poor financial planning skills. But despite the bap rep that credit cards get there are huge advantages for responsible individuals:

    1) Using a credit card does not give a multitude of strangers direct access to your bank account(unlike direct payment methods), no small consideration in these days of rampant fraud.

    2) In the U.S. credit card users are protected by U.S. law from having to pay all but $50 worth of charges from illegal use. Other forms of payment do not enjoy this level of protection, and users only have whatever protection is offered by their bank.

    3) With a credit card, the user doesn’t have to worry about whether a purchase will reduce the bank account to a negative balance, possibly resulting in bill payments not being made and/or penalities being applied.

    4) Many credit cards give users cash rebates, frequent flyer miles, or other consideration just for using the card.

    5) Credit cards allow you to time shift payments by up to 4 weeks, i.e., you buy something today, but don’t actually pay for it until the bill is paid several weeks later.

    6) Better credit cards don’t charge interest as long as the balance is paid off each month.

    7) The line of credit on a credit card provides a nice cushion against emergencies, especially since just about everyone accepts credit cards these days. For example, I once had a major RV breakdown while traveling on vacation which ended up costing a couple thousand dollars total, which was easily taken care of with a credit card. No worries, no fuss, and I was back on the road in a couple of days.

  • Willow

    So, are cell phone users also going to be charged interest on their bills? How are they going to calculate credit scores if people can simply charge up their cell phone bills?

    At some point, there will have to be a max, and people with poor credit may be denied cell phones. (They are today, in fact, if their credit is very poor.) What are they going to do? Cash might not always be around as an alternative.

    There are going to be haves and have-nots with cell phones-as-payment, just as there are today with credit cards and bank accounts. This fact of life is not going to change.

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