I’m surprised this move, of cell phone providers getting into the payments game, hasn’t come sooner. Visa and MaserCard charge fees vastly in excess of their costs, which is usually an invitation to competition, but payment services have high barriers to entry. But cell phone carriers already have some of the key elements of the needed infrastructure: the ability to track and bill for transactions, and a large existing customer base, so it has the major elements of a payments system. Its missing components are customer service/chargebacks and (the real biggie) a merchant network.
I was hearing about mobile phones as a payment system more than ten years ago (one network, MobilCash, had 500 million customers in 15 countries as of 2007; my dim recollection was that early versions of this type of service was on offer in some parts of Europe in 1997). The merchant fees charged by Visa and MasterCard on debit transactions are particularly high; competing vendors will force some useful price discipline.
AT&T Inc. and Verizon Wireless, the biggest U.S. mobile carriers, are planning a venture to displace credit and debit cards with smartphones, posing a new threat to Visa Inc. and MasterCard Inc., three people with direct knowledge of the plan said.
The partnership, which also includes Deutsche Telekom AG unit T-Mobile USA, may work with Discover Financial Services and Barclays Plc to test a system at stores in Atlanta and three other U.S. cities that would let a consumer pay with the contactless wave of a smartphone….
The service, similar to those already available in Japan, Turkey and the U.K., would use contactless technology to complete purchases in stores. They’d be processed through Discover’s payments network, currently the fourth-biggest behind Visa, MasterCard and American Express Co. Barclays would be the bank helping to manage the accounts, said the people, who requested anonymity because of confidentiality agreements.
AT&T and Verizon Wireless are equal partners in the venture and T-Mobile has a smaller stake, one person said….
“This is definitely a game-changer,” said industry consultant Richard Crone of San Carlos, California-based Crone Consulting LLC….The mobile carriers “are the biggest recurring billers in every market. They are experts at processing payments,” Crone said.
Mobile technology for banking and payments is reaching “a tipping point,” with younger consumers leading the way, Mercatus LLC, a Boston-based consulting firm, said in a June 7 study. More than half of U.S. consumers, and almost 80 percent of those between the ages of 18 and 34, will use mobile financial services within five years, according to Mercatus….
Merchants would have to spend an estimated $200 per reader, and updating mobile phones with embedded microchips would increase manufacturing costs by $10 to $15 per handset, according to the Boston Fed. That may be worthwhile if accepting mobile payments allows retailers to send rewards and information about promotions to their customers’ phones at checkout.
The wireless carriers have an advantage over Visa and MasterCard in the race to control the U.S. payments market because the phone companies have access to their customers’ mobile numbers and bank account information, said Crone, the industry consultant.
“A mobile device is online, real-time interactivity that changes the customer relationship,” he said. “A card is dumb.”