Shamir Karkal and I were talking about a panel he attended at SXSW on mobile payments. On the panel, Tom Lantzsch from the chip designer ARM mentioned that its chips incorporate the ability for smartphones to send and receive payments. Why haven’t mobile carriers and software developers embraced this and similar technologies more quickly? Well, the process seems to be starting now. Google has already released a smartphone supporting Near Field Communications (NFC). And Apple is expected to follow soon. What will happen to cash when NFC chips come standard and the US adopts modern mobile banking technologies?
While the end of cash has long been trumpeted in the US, technologies that enable customers to use their mobile phones to make purchases have been widely adopted elsewhere. In Europe, Africa and especially Asia mobile payments and mobile banking are becoming dominant. The methods are varied. Direct mobile payment services such as Payfone allow you to charge things like apps and bills directly to your smartphone bill. 23% of Kenya’s population uses M-Pesa to text money, allowing urban migrants to transfer money home to their villages. And Hong Kong debuted Octopus, the world’s first contactless payment system in 1997. In 2010 there were 23 million Octopus cards in circulation. That’s three times the number of people living in Hong Kong.
The obstacles to the adoption of these technologies are fairly obvious: user authentication can be tricky, mobile operators need to integrate new systems and processes, and – particularly in the case of NFC – multiple stakeholders (device makers, carriers, merchants) have to agree to standards and invest in infrastructure. But they’ve made great strides in Korea and Japan. Why not in the US?
Part of it is the leapfrogging effect in telecommunications. The US, at great cost, established the most advanced telephone network in the world over a century ago. Over time, new technologies were layered upon old ones, creating a patchwork that has become ever more expensive to replace. Countries that were more recently modernized benefited hugely by learning from our mistakes. They were able to establish networks that were not only more advanced from the get-go but also more adaptable to shifting technology. In addition, many countries have state-run telecommunications companies whereas the US does not. It’s easier to revolutionize your country’s communications infrastructure when you’re the government, you call the shots, and have nearly unlimited access to capital. Because of the US’s competing technology standards and relatively fragmented wireless industry, it is difficult for rapid innovation to occur. As a result, the US lags behind.
Also, US banking infrastructure is partly to blame. Because our landscape is saturated with bank branches, ATMs, and card-based point-of-sale systems, there is less need from Americans to adopt technologies such as NFC. And we’re never too far from a cash machine stuffed with tens of thousands of dollars. The vast majority of merchants also accepts “traditional” magnetic stripe cards and can give you cash back. On the other hand, in countries with fewer ATMs and lower card acceptance among merchants, your mobile is essential to maintaining contact with your finances.
There are signs though that the US may be reaching an inflection point. Individuals are already using their phones to spend money – witness the successful SMS-based campaign to donate relief to Haiti after Hurricane Ike in 2008. Visa also announced a mobile contactless payments solution that will be compatible with smartphones. Similarly, telecom operators, including AT&T, Verizon and T-Mobile are teaming up to provide mobile payment services. Startups are also working to fulfill the promise of mobile payments. And BankSimple will allow its customers to pay bills on-the-go and instantly transfer money among each other. More and more US banks are offering mobile versions of traditional services such as bill payment – a signal that mobile is starting to get the attention it deserves.
It’s hard to imagine that I’ll ever stop using cash. Even if Apple and Google begin offering NFC-enabled devices that are rapidly snapped up by consumers, it will take time for these devices to become ubiquitous, and for merchants to accept NFC payments. After all, as of 2010 there were over one billion debit and credit cards in circulation in the US alone. And it’s not a forgone conclusion that Apple and Google’s payment platforms will be interoperable. It seems cash will be here to stay for the foreseeable future.