Smartphones Are About to Swipe Credit Card Companies' Profits
As the competition to provide mobile services in the smartphone market intensifies, the once-staid world of credit card processing appears to be headed for a massive price war. Last week, Google (GOOG) released an extension for its Chrome browser that enables mobile transactions and merchant accounts on Android phones.
But Google wasn't the first on the scene: In May, startup Square (headed by Twitter founder Jack Dorsey) rolled out a small credit card swipe device that can essentially turn any Apple (AAPL) iPhone into a point-of-sale terminal and a full-fledged card transaction processing system. Square was forced to stop shipping its systems after security complaints, but the wild market reception its product received indicated that there was plenty of pent-up demand for alternatives to old-style credit card transaction systems. In the meantime, PayPal (EBAY) is continuing its aggressive push towards mobile commerce, and the service has a long history of challenging big credit card companies and networks like Visa (V) and Mastercard (MA).
The upshot of all this activity is clear. As the smartphone revolution continues, the old systems of paying for things are likely to come under ever-heavier assaults, and the profit margins of legacy players will likely suffer.
Magnetic Stripes Are So Last Century
The shift to smartphones and, more importantly, the accompanying consumer awareness and acceptance of mobile payments in the U.S. (and to a greater degree abroad), is driving home a new technological reality. In the past, a magnetic stripe was required to seamlessly move payment information between buyers and sellers. Reading that stripe and using the data on it required specialized point-of-purchase hardware, security networks, and other exotica that made setting up and operating credit card terminals a non-trivial expense. Naturally, the companies running these networks desired a return on their investment -- hence, transaction fees ranging from 2% to 3% paid by merchants, enough to cause mom-and-pop stores considerable pain. In fact, small business have long tried and failed to negotiate those fees downward.
The smartphone effectively disintermediates the credit card companies, the terminal companies and all the folks who built those specialized systems. By definition, a smartphone is connected to a fast wireless data network of some sort. It can carry far more financial information than a magnetic stripe, and can be tricked out with far better transaction security than any credit card.
As smartphones shift the mobile payments issue from a hardware-and-network problem to a pure software problem, barriers to entry will come down because writing software is far easier, cheaper and faster than building out a massive distribution network for devices and nailing down a dedicated communications network. For consumers, smartphone access to multiple payment platforms will make carrying lots of plastic feel primitive. Imagine a special software service like Mint, which can aggregate and automatically manage dozens of payment platforms in a smart phone app, and you get the idea.
The big players in the transaction-processing business likely have a few years of breathing room before the next wave of the Internet catches up with them. But the coming changes will give small merchants some leverage over credit card companies for the first time. Google, Square and perhaps a handful of other mobile payments companies will soon be accepted widely. Another handful will be accepted by enough merchants to make a difference. And the competition will keep coming, forever and ever. Welcome to the new era of mobile payment madness.
