Smartphones as wallets: real deal or distraction?

Can smartphones really become wireless payment terminals?

In the last two months, we have had three announcements of add-ons for smartphones that will allow users to read the magnetic stripe on a payment card, in effect turning the devices into wireless payment terminals.

On December 1, 2009, Twitter founder Jack Dorsey announced a private beta for Square, Inc. through his Twitter account and a few technology blogs, including TechCrunch and the Los Angeles Times. Unusually, there has been no press release or mainstream press coverage.

On December 8, 2009, probably in response to the Square announcement, Verifone rushed out a press release announcing its own iPhone add-on, called PAYware Mobile. Verifone is the largest seller of payment terminals in the U.S. (and #2 worldwide), and will be partnering with First Data, one of the two top merchant processors in the U.S. (the other is Chase Paymentech).

On January 20, 2010, Digital Transaction News covered an announcement by Apriva of AprivaPay which comes in both download-only and Bluetooth-enabled hardware versions.

Three announcements in two months equals a trend, but how significant will it really be? While the technology definitely has its uses, I believe its ultimate impact will be limited for the following reasons:

First, the appeal of mobile applications is a relatively recent phenomenon, driven by an unusually successful product, the iPhone. Two years ago, (nearly) everyone was certain that Near Field Communications (NFC; the next generation of contactless chips) was the most likely direction, and now (nearly) everyone thinks it is dead (I realize the outlook is more positive outside the U.S.). The only thing that has changed since then is the emergence of the iPhone. Suddenly, mobile apps are interesting again, and now every company is rushing out an iPhone app. However, our experience with NFC should make us cautious, because this technology is similarly dependent on hardware.

The high penetration of iPhones among the analyst and high-tech community has, I believe, fostered a false impression that the iPhone is a mass-market platform. True, iPhone has been quite successful in the U.S., but it is not available anywhere else, where handset makers like Nokia and Motorola still dominate. Sales of "dumb" phones, which are actually quite capable these days, still outweight smartphone sales, even in the U.S. There are a growing number of competitors, including RIM, Google, Palm, and Nokia itself, which will complicate the app-based strategy as they gain share. Text message and mobile Internet strategies will continue to be important as alternatives.

Even if the hardware dependency were not an issue, we have to ask ourselves how large the market for a product like this really is. Clearly companies with remote workforces would be interested in this technology, because it would allow them to post payments more quickly, and improve productivity by leaving their personnel out in the field longer. However, beyond that limited group, there is no clear business case. I will continue to monitor this trend, but consider mobile Internet to have greater potential long-term.

What are your thoughts? Please let us know in the comment box below.

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