Academic journal article Chicago Fed Letter

Are Mobile Payments the Smart Cards of the Aughts?

Academic journal article Chicago Fed Letter

Are Mobile Payments the Smart Cards of the Aughts?

Article excerpt

This article compares the much anticipated but ultimately stalled smart card revolution of the 1990s with the current expansion of mobile payment platforms, and asks how mobile payments fit into the larger payment system.

In the past few years, payment networks and banks have begun to follow in the footsteps of start-up companies and offer mobile platforms, meaning in-person or remote payments via a mobile phone or other mobile device. Is this just another overhyped trend (like smart cards in the 1990s), a real payments revolution, or something in between? In short, are mobile payments the smart cards of this decade?

During the 1990s, payments industry analysts, policymakers, and academics predicted an eminent "smart card revolution" as providers began to use closed-loop trials and focus groups to test different types of cards. Smart cards look like credit cards but utilize a microchip to store identification and transaction information. The most famous smart card trial was the 1996 Olympic Games, when Visa developed a smart card for use at 1,500 merchants inside Atlanta's Olympic stadium. Consumers were not inclined to embrace smart cards, given the other payment options available, especially because they were accepted in only a limited number of locations. Smart cards never took off in the general marketplace during the 1990s, and they remained in the trial phase because of ongoing challenges related to infrastructure, marketing, standardization, and profitability.

A decade later, we are just beginning to see the adoption of contactless chip cards using radio frequency identification (RFID) technology. All of the major card networks and many large financial institutions have rolled out contactless products. Some very large merchants, such as McDonald's and Wal-Mart, have invested in RFID infrastructure. More than 40,000 U.S. merchant locations accept contactless payments. Analysts estimate that there are 27 million contactless cards in the U.S. today.1 Eleven years after the first major trial, smart cards finally seem to be gaining some traction.

In the current decade, a new payments revolution is being hyped that combines two subsets of mobile commerce-mobile payments and mobile banking. Mobile payments are defined as "any payment where a mobile device is used to activate and/or confirm the payment."2 A variety of solution providers, payments processors, and other institutions can offer mobile payments. Mobile banking, on the other hand, remains the exclusive domain of financial institutions that have a deposit relationship with a consumer. While mobile banking services can enable mobile payments, the reverse is not true.

Each subset of mobile commerce is predicted to grow exponentially in the marketplace. Some analysts predict that, globally, mobile payments will be worth $55 billion in 2008.3 But as with smart cards, while mobile payments have gained ground in Asia and Europe, they have not in the U.S. There are a number of reasons for this, including regulatory, market, technological, and cultural differences. First of all, the existing electronic payments infrastructure in the U.S. is expensive to replace, especially for merchants. In some cases, countries with less developed electronic payment systems have been able to move more quickly into mobile payments. Moreover, in some developing economies, such as those in the Caribbean and South Africa, the lack of telephone land lines brought more consumers into the mobile market faster.

At the same time, the U.S. wireless market is fairly atypical in the world in its complexity. There is no one set of standards for the high number of firms and networks involved in the wireless market, which can impede innovation and interoperability in different areas of the country. In Japan, on the other hand, NTT DoCoMo is dominant in the mobile market and was able to use its very large market share to influence merchants and financial services companies. …

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