Is Pay-by-Phone on the horizon?
By Mike Yoder, Chief Operating Officer of Advanced Information Systems
Yes, and to a limited extent it’s already here. Using your smart phone to pay for purchases at retail stores has been talked about for years and over the last few years has become a reality in Japan and Europe. But in the US this technology has been slow to launch. Here I’ll discuss how soon we can expect to see pay-by-phone in the US and highlight a few companies that aren’t waiting and have already developed applications that allow users to pay with their smart phones.
Early Adapters
Earlier this year Starbucks launched a limited pay by phone program in the US. Customers who install the Starbucks Mobile Card iPhone application on their iPhones can simply swipe their phone over barcode readers at select stores to pay for their transactions. The payment is deducted from the consumers Starbucks card which can be loaded with funds from a credit card from the mobile application or from the Starbucks website.
Bling Nation is a startup that is offering the Bling Tag, a microchip you simply stick to the back of your phone and swipe to instantly pay for purchases. Once again you load your account with money from your bank, credit card or PayPal account and purchases are deducted from your Bling Nation account.
With half a billion dollars in mobile payments projected by PayPal users alone in 2010, it’s easy to see why PayPal would be an early adopter of this technology. PayPal’s Mobile now allows customers to transfer money between each other’s accounts by simply “bumping” their phones together.
Financial Institutions getting on board
Visa & Bank of America are scheduled to roll out a Pay-by-Phone program in New York this month. This solution incorporates the need for a special chip installed into the user’s phone that emits radio signals which transfers payment information from the phone to the point-of-sale device in stores. Visa has plans to expand this program to other banking institutions later this year.
A partnership between AT&T, Verizon, T-Mobile, Discover Financial Services and American Express was formed earlier this year to work towards bringing this technology to the masses. But with big names such as these you can expect progress to be slow.
Paying with Credits v/s Financial payments
Two types of payments seem to be developing in this area. The early adaptors are companies that essentially allow you to pay with what are really credits. In the case of Starbucks and Bling Nation, you load your account by transferring money from your credit card. Purchases then are deducted from your Starbucks or Blink Nation account not directly from your bank or credit card account.
The second types of payments are true financial transactions that involve deducting funds directly from your bank account or credit card account. These transactions require a coordinated effort by financial institutions, retailers and the mobile phone developers. These are just now starting to arrive in the US market and involve the addition of smart chips installed in the phone. These chips are fairly cheap ($10) and could easily become a standard feature on all smart phones once these pilot programs prove a consumer demand exist.
What to Expect
I anticipate we will continue to see an increase in the Starbucks and Bling Nation type of solutions but they will be limited by the number of retailers who they can sign up to process their transactions. We’ll see an explosion of pay-by-phone usage once the financial institutions and phone companies complete their pilot programs and work toward a nationwide deployment.
Because the Pay-by-phone model brings new players to the table for Financial transactions, the credit card giants Visa & MasterCard are not too excited. The last thing they want to see are other large corporations tapping into the 2.4 trillion dollars US credit card transactions business that they largely own. But as is often the case with industry leaders, they will now have to respond by making their own offering in this space because others are starting to do it without them and cutting them out completely. In the end this is good news for the consumer.
