R.I.P., Credit Cards: New Tech May Signal the Death of Plastic
On a frigid February evening in 1949, a New York City businessman named Frank McNamara made an embarrassing mistake that would end up forever changing the world.
Among other things, this fateful error would ultimately spawn a $2.5 trillion industry, redefine the way business was done in nearly every country on Earth, and launch countless Fortune 500 companies.
It's an interesting story, to be sure, but perhaps even more intriguing is the fact that there's now a groundbreaking technology out there that could bring the 63-year-old industry McNamara unwittingly created to its knees.
This technology -- known as near field communication -- or just NFC for short -- will force thousands of companies all over the world (perhaps even your own) to completely rethink the way they do business -- and potentially make well-positioned investors some big money.
So it's little wonder that everyone from Google (GOOG) to Microsoft (MSFT) to Apple (AAPL) is now looking to get involved.
The Mistake That Started It All
As the story goes, Frank McNamara had just finished dinner with his lawyer and the heir to the Bloomingdale's department store fortune when he discovered something that horrified him: In his haste to get out of the house that morning, he had forgotten to put his wallet in his back pocket -- leaving him no way to pay for the meal he'd just treated his business associates to.
Ultimately, McNamara was forced to call his wife and have her bring him enough cash to cover the tab.
While the ordeal was incredibly embarrassing for McNamara, it also gave him a crazy idea.
One year later, he had turned that crazy idea into reality. To celebrate, McNamara returned to the very same restaurant -- again, with no cash whatsoever. Only this time, rather than having to have his wife bail him out, he simply slapped down a piece of cardboard that would later come to be known as a "Diners Club Card."
Initially, McNamara issued the multipurpose charge card he'd developed to a few hundred friends, and, at first, it was accepted at just 14 locations around New York City.
But word of this new, easy way to pay quickly spread. In fact, just one year after he unveiled the card, some 42,000 people were using in it major cities all over the country.
An Unstoppable Snowball Begins to Roll
Of course, as more and more people began using these cards, more and more businesses were forced to start accepting them -- or lose customers to those who did. And once more businesses began accepting them, even more people began wanting to use them.
Incredibly, by 1959, more than 1 million people were carrying Diners Club Cards -- meaning their usage had grown 5,000-fold in less than a decade. And by 1967, they were being accepted in over 130 countries and territories around the globe.
Today, more than 10,000 credit card transactions take place every single second -- and the total value of goods and services purchased with them totals more than $2.5 trillion per year.
Plastic Is About to Become Passé
Given that we now use smartphones to do everything from checking the weather to sending emails to watching YouTube videos to getting directions to making restaurant reservations, it only makes sense that we would use them to pay for things, too.
Thanks to near field communication, we may soon be able to do just that.
This technology allows two NFC-enabled devices placed within a few inches of each other to wirelessly swap data -- meaning you can simply touch your NFC-enabled smartphone to an NFC reader any time you need to pay your bar tab, buy new golf clubs, or even get groceries.
This revolution in payments is already beginning to take shape.
Nokia (NOK), Sprint (S), and Research In Motion (RIMM) are all reported to be working on building NFC-enabled smartphones -- and it is widely rumored that NFC may well be a prominent feature of the next iPhone.
Meanwhile, rather than risk being left behind forever, traditional credit card companies like MasterCard (MA), Visa (V), and American Express (AXP) are partnering with the likes of AT&T (T) and Verizon (VZ) to develop their own NFC-enabled devices -- and Visa, in particular, is going to great lengths to showcase the technology at the upcoming Olympics in London.
But this technology is nothing new in the United Kingdom. That's because mobile provider Orange has already teamed with a number of other companies including MasterCard and Barclaycard to offer NFC payment options at roughly 50,000 locations around Britain -- including fast-food chains like McDonald's (MCD) and Subway. (Click here for an eye-opening presentation on this technology and a little-known company one of America's top investors is calling "the Intel of NFC.")
Imagine how our daily routines will change if everything works out like the technology's supporters hope it will.
- We'll never have to worry about feeding coins into parking meters or vending machines ever again.
- We won't need tickets to board a train or get into a ball game.
- We won't be asked for our license and registration when we get pulled over, a passport when we cross the border, or an ID when we go to the gym.
- We won't use keys to unlock our cars, our offices, or even our front door.
- Stores and restaurants will no longer give us printed receipts, and business cards will become a thing of the past.
Instead, we'll use our smartphone in place of all of these things and more. (Got a brilliant use for NFC that hasn't been discussed here -- or even thought of yet? Chime in in the comments section below and let us know.)
But Will It Really Kill the Credit Card?
Granted, not even NFC's biggest supporters believe that credit cards will go away altogether -- but then again, for the past two centuries, nobody thought Britannica would stop ever stop printing encyclopedias.
NFC still has some major hurdles to clear before it becomes the mainstream payment system many believe it will. And concerns over how secure this technology really is will no doubt keep plastic in more than a few wallets for the time being.
But when you consider that the mobile experts at Juniper Research estimate that 1 in 5 smartphones will be NFC-capable by 2014 and that the mobile payment market will triple in value to $675 billion by 2015, you'll see why this is one snowball investors might want to keep a close eye on.
Motley Fool contributor Austin Edwards owns shares of Apple, AT&T, and Google. For more info on the coming NFC revolution and the one little-known stock Motley Fool analysts say is leading the charge, see our free in-depth video report.
The Motley Fool owns shares of MasterCard, Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Nokia, Google, Microsoft, Visa, and Apple, as well as creating bull call spread positions in Apple and Microsoft and writing a covered strangle position in American Express.