Why the mobile payments frenzy doesn't matter

When all is said and done, it's about which banks process payments -- not users, developers, or IT

The blogosphere has been in a frenzy around mobile payments for several weeks now -- and I can't figure out why. It all started in December when Google said it would add near-field communications (NFC) short-range radio technology to the Android platform, which would let the phone act as a contactless key card, used for building locks and -- what got people's attention -- payment terminals. The buzz soon dissipated, only to return recently when the blogosphere lit up over who would win the mobile payments "war": the banks, the cellular carriers, and other companies. Apple with its iTunes Store and eBay with its PayPal were usually the targets of speculation.

You need to understand two things:

  1. NFC and other mobile payment technologies have been promised forever (well, at least a decade) -- and haven't happened.
  2. When mobile payments do happen (they will, eventually), it'll be a yawner for everyone but the company or consortium that gets to skim 3 percent off of every purchase made -- banks, credit card firms, or some other private taxer, er processor.

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When I was editor (from 2000 to 2002, a decade too early!) of a now-defunct magazine called M-Business, the mobile and banking industries were gaga over mobile payments. Payments would happen via SMS, though talk about using RFID or other low-range wireless chips was already common. Back then, only phone carriers would handle charges of a few cents, such as for per-minute phone calls, so the cellular carriers were going to leverage their billing systems to handle the charges, breaking both the credit card processors' oligarchy and enabling micropayments. At the time, the banks and credit card firms would rarely handle charges below $5, though now they go as low as $1 for "bundled" transactions such as at parking meters.

It didn't happen -- the cellular carriers were scared off by the hassle and liability of dealing with returned items and fraudulent charges. Additionally, the high processing fees (they get an upfront flat fee, plus 3 to 7 percent of the total) of credit card and other payment processing firms meant that sellers couldn't afford to use those venues for small-cost transactions.

In 2004, InfoWorld ran a story about Motorola's plans to add mobile payments to its cellphones. That never went anywhere, though it used the same NFC reader technology (MasterCard's PayPass) deployed at some gas station pumps and some stores. NFC of course is still around, and the credit card companies keep trying to get consumers and retailers to adopt it -- remember a year ago all the ads for the pay-and-go debit and credit cards that you could simply wave near a checkout terminal? How many of those have you seen in real life?

The dirty secret is that it costs a lot for merchants to replace all those terminals, which are not supplied by the payment processors. Although there may be some savings for processing transactions a few seconds faster (the equivalent of perhaps one fewer checker a day at a busy grocery store), the upfront cost is discouraging. And when you realize that the buyer still has to actively acknowledge the purchase over a set amount -- usually $25 -- by signing on a terminal, you can see the appeal of the technology quickly is reduced to those who sell cheap goods and services: frozen yogurt stores, cigarette and soda machines, fast food outlets, and parking meters.

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