Digital payment technology used to be the stuff of science fiction. But the idea of being able to walk into a store, pick up an item and pay for it using a smartphone, then walk out (avoiding lines at the cash register) is more than a dream — it’s happening now.
Apple (NASDAQ:AAPL) already offers EasyPay, a system that lets iPhone owners waltz into an Apple Store, scan the barcode of an item using the EasyPay iPhone app, then click the “Purchase” button. The item is charged to the credit card associated with the buyer’s iTunes account. According to a Cult of Mac test of the system, big-ticket items (like computers or iPhones) still require payment at the register, but otherwise it makes buying Apple gear faster than ever.
And on Wednesday, Starbucks (NASDAQ:SBUX) and privately held Square announced that the coffee giant would deploy Square’s mobile credit card payment technology across 7,000 outlets. Starbucks is also investing $25 million in Square.
Businesses are currently paying huge amounts to banks to process debit and credit card transactions, while consumers are looking for convenience. With smartphone penetration in the U.S. close to the point where the majority of people carry one, the numbers to support a movement to digital payment are there.
What Is Digital Payment?
Digital payment schemes take multiple forms. At the bricks-and-mortar level is the familiar scenario where a physical plastic card and cash register are involved in a transaction. Here the digital payment battle is being fought on two main fronts:
- Mobile card reader technology replaces the card readers that stores and restaurants use with a dongle that plugs into a smartphone. This makes it easy for anyone to accept credit cards without the need for expensive infrastructure. It can also cut down on checkout lines by letting staff equipped with inexpensive mobile devices circulate and quickly process customer purchases.
- Digital wallets (credit cards and other payment accounts stored online) that let users pay for purchases using their smartphone and some variation on NFC (near field communication) wireless technology.
Banks Fear Digital Payments
Processing those plastic transactions can be very profitable. And while many traditional banks are exploring digital payment schemes of their own, they worry that their merchant customers are now willing to move to nontraditional vendors. To encourage such a move, eBay‘s (NASDAQ:EBAY) PayPal, Square and others are offering merchants incentives ranging from free hardware and mobile services to lower transaction fees.
While plastic is convenient for consumers, it’s expensive for retailers. According to a Forbes piece on the issue, U.S. gas station operators rang up over $11 billion in credit card processing fees in 2011 — that one expense exceeded their profits for the year, making any alternative attractive.
Even worse, digital payment can be the wedge that lets these companies get into competition with banks for other businesses, like lending money. So, a lot is at stake in this battle. Here are some of the bigger players in digital payments:
- PayPal is one of the first and most popular online payment platforms. It has nearly 110 million active users and reported Q1 revenue of $1.31 billion (on transaction volume of $33.9 billion). Retailers such as Home Depot (NYSE:HD) are currently rolling out in-store PayPal payment capability.
- Google‘s (NASDAQ:GOOG) Google Wallet can be tied to virtually all credit cards. Through use of an app on a supported Android smartphone, users can “tap” to pay at a range of stores equipped with NFC readers.
- Apple EasyPay is specific to Apple retail stores at the moment, but with the Passbook feature in the upcoming iOS 6, Apple appears to be preparing to grab a bigger chunk of the digital wallet.
- Square offers mobile credit card processing as well as card-free payment for Android and iOS devices.
- Intuit (NASDAQ:INTU) competes against Square with its GoPayments smartphone card reader. According to The Economist, GoPayments customers increased by 1,200% last year, including the Salvation Army (which is using the technology in its red kettle fundraising drives).
What Could Go Wrong
However, all these various offerings come with a downside: the potential for a fractured market, which is a fear of consumers and retailers alike. If a slew of companies each offers its own digital payment service, retailers could face a situation where they have to implement a wide range of technologies, options and apps to accommodate shoppers. Consumers worry that if they throw in with Apple (for example), they may walk into a Microsoft (NASDAQ:MSFT) store, pull out their iPhone and be unable to pay.
Security is another concern. One thing that recent cyber-criminal activity — including the highly publicized hack of a Wired writer using his Amazon (NASDAQ:AMZN) and Apple accounts — has highlighted is the risk inherent with many of today’s online payment schemes. And with accounts interconnected, the concept of tying a mobile device app to a credit card account in the cloud does have risks. For example, the Wired hack showed it was possible to play off customer-service teams at Apple and Amazon to gain access to accounts that included credit card information.
Despite such challenges, at this point it seems as though digital payments are destined to go mainstream, and sooner than many people may have expected. Security concerns will be addressed, and convenience combined with cost savings for retailers will likely trump any fear.
The real question facing investors is whether the market is going to fragment — with traditional banks and potentially dozens of independent providers like Square all taking a piece of the pie — or whether a few companies like Google and Apple will leverage their mobile technology advantage to dominate and become standards.
Choice is good, but if digital payment fractures too badly, the movement could stutter.
As of this writing Brad Moon doesn’t own any securities mentioned here.