Mobile Payments Will Make Credit and ATM Cards Almost Obsolete

This article is by Matthew Friend, managing director of Accenture Payment Services.

Eight-track tapes, rotary phones, videocassette recorders.
Think of outdated technologies and these probably spring to mind.

Will plastic cards eventually join the list? 



Certainly the demise of credit and debit cards isn’t imminent,
but they’re going to begin to lose their appeal in a world where transactions can increasingly be done by smartphone.

With payments more and more going mobile, retailers, banks, card companies, phone operators and just about everyone in between are scrambling for position.
Mobile payments will hit

- $720 billion a year by 2017,
- Up from $235 billion last year,

according to the research firm Gartner.

To be sure, many consumers still walk around today with a stack of plastic jammed into their wallets.
Nearly 550 million credit cards and roughly 590 million debit cards are in use in the U.S.

Plastic cards are used for 75 billion transactions a year, worth more than $4.7 trillion. 

That translated to $21.5 billion in collective profits for seven of the largest U.S credit card issuers last year.

But change is coming, and failure to adapt will carry great risk. For banks, the question boils down to whether they will lead the change or allow rivals to take the payments business away from them. With payments bringing in up to a quarter of banks’ revenues, this is not an idle question.

Payments are a highly contested arena. 

• Google
• PayPal 
• Square 
• American Express
• MasterCard
• Visa, among others, 

have all developed mobile payment platforms. 

Paypal is now the number one or two online payment method in a half dozen countries, including the U.S. Starbucks, whose mobile app is the most used digital payment app, gets more than 14% of its U.S. payments through its mobile app, up from 10% a year ago. 

And Starbucks captures a third of its revenues through its own loyalty card. 

Wendy’s has announced a new program that allows customers to pay using their smartphones at its 5,800 locations, following a similar announcement by Burger King.

Apple’s shadow also looms large. It is reportedly looking into jumping into mobile payments by deploying its devices and the credit card data of more than half a billion customers to handle how they pay for things online as well as at brick-and-mortar retail stores.

Of course, plastic cards will continue to have a presence in the coming years, that’s why card companies are spending big on digital wallets and social media propositions connected with their plastic. But they must reinvent themselves by developing ways of paying for goods and services that don’t rely on plastic or digital cards.

That’s because consumers expect their smartphones to improve and simplify their lives. They demand greater immediacy and convenience in their day-to-day activities. Increasingly, airline passengers can present electronic boarding passes displayed on their phones. New York and Washington are moving toward electronic fare payment systems for their buses and subways. Using plastic cards online, on the other hand, is arduous, requiring an awkward process of entering 16-digit numbers, addresses, start and end dates, and codes.

Smartphones increasingly act as a remote control for activities ranging from ordering taxis to programming central air conditioning. 

Controlling payments from your bank account is the next step. 

Danske Bank’s MobilePay app is an example. 

It allows the Danish bank’s customers to log in with a four-digit PIN, enter the amount and mobile number of the recipient, and send the money like a simple text message. The app can also be used at retailers that have registered. It has more than 1.2 million active users.

The U.S. isn’t as far along. JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Capitol One, and others are building their own mobile payments apps. The next step is to tie into proprietary networks such as clearXchange to enable widespread peer-to-peer payments and real-time business-to-consumer payments.

Banks have an inherent leg up on their new mobile payments competitors, because they own the accounts where customers keep or borrow their money. If they enable those accounts to make payments directly wherever a customer wants, they may be able to retain their dominant role in consumer payments. And despite the reputational damage they suffered from the financial crisis, consumers surveyed by Accenture trust them above any other providers when it comes to handling personal data. That’s another critical advantage.

How can smartphone-based payments be increased? 

More than half of the consumers we surveyed  said they were highly likely to pay by phone more often if they could in so doing track receipts, manage personal finances, and show identification or proof of insurance. 

They also said they would pay by phone more often if offered instant retailer coupons, reward points, and preferential treatment. 

Since the average U.S. household belongs to 21 loyalty programs, you can see the benefit of consolidating and managing these programs in a single place. Many mobile applications already available, such as CardStar and Key Ring, allow users to store all their loyalty card data on their mobile phones.

At the moment, U.S. payments players are focused on October 2015, when retailers and card issuers that haven’t adopted smart card technology—credit and debit cards embedded with microprocessor chips—will begin to be liable for fraudulent transactions. That technology has long been used in Europe and has helped increase security and reduce fraud there.

The transition to smart cards will be a milestone, but it is still just an interim step. Banks should not lose sight of the real revolution already underway, mobile payments.

For banks, it’s clear that digital payments will not generate the fees they currently derive from plastic card transactions. But they face a bigger threat, losing customers, if they get muscled to the sidelines in the payments business.