Why the mobile payments frenzy doesn’t matter

The blogosphere has been in a frenzy around mobile payments for several weeks now — and I can’t figure out why. It all started in December when Google said it would add near-field communications (NFC) short-range radio technology to the Android platform, which would let the phone act as a contactless key card, used for building locks and — what got people’s attention — payment terminals. The buzz soon dissipated, only to return recently when the blogosphere lit up over who would win the mobile payments “war”: the banks, the cellular carriers, and other companies. Apple with its iTunes Store and eBay with its PayPal were usually the targets of speculation.

You need to understand two things:

1. NFC and other mobile payment technologies have been promised forever (well, at least a decade) — and haven’t happened.
2. When mobile payments do happen (they will, eventually), it’ll be a yawner for everyone but the company or consortium that gets to skim 3 percent off of every purchase made — banks, credit card firms, or some other private taxer, er processor.

When I was editor (from 2000 to 2002, a decade too early!) of a now-defunct magazine called M-Business, the mobile and banking industries were gaga over mobile payments. Payments would happen via SMS, though talk about using RFID or other low-range wireless chips was already common. Back then, only phone carriers would handle charges of a few cents, such as for per-minute phone calls, so the cellular carriers were going to leverage their billing systems to handle the charges, breaking both the credit card processors’ oligarchy and enabling micropayments. At the time, the banks and credit card firms would rarely handle charges below $5, though now they go as low as $1 for “bundled” transactions such as at parking meters.

It didn’t happen — the cellular carriers were scared off by the hassle and liability of dealing with returned items and fraudulent charges. Additionally, the high processing fees (they get an upfront flat fee, plus 3 to 7 percent of the total) of credit card and other payment processing firms meant that sellers couldn’t afford to use those venues for small-cost transactions.

In 2004, InfoWorld ran a story about Motorola’s plans to add mobile payments to its cellphones. That never went anywhere, though it used the same NFC reader technology (MasterCard’s PayPass) deployed at some gas station pumps and some stores. NFC of course is still around, and the credit card companies keep trying to get consumers and retailers to adopt it — remember a year ago all the ads for the pay-and-go debit and credit cards that you could simply wave near a checkout terminal? How many of those have you seen in real life?

The dirty secret is that it costs a lot for merchants to replace all those terminals, which are not supplied by the payment processors. Although there may be some savings for processing transactions a few seconds faster (the equivalent of perhaps one fewer checker a day at a busy grocery store), the upfront cost is discouraging. And when you realize that the buyer still has to actively acknowledge the purchase over a set amount — usually $25 — by signing on a terminal, you can see the appeal of the technology quickly is reduced to those who sell cheap goods and services: frozen yogurt stores, cigarette and soda machines, fast food outlets, and parking meters.

Those outlets process a lot of transactions, and when the day arrives that all debit and credit cards come with a built-in NFC chip, we’ll see those outlets quickly wave-enable their terminals. Then — and only then — will NFC start to become common on cellphones and smartphones.

When they do, some of us will happily link our Android, BlackBerry, or iPhone to our banking to use it as a debit card or perhaps to one of our credit cards. We won’t give it another thought — it will have no impact on anything else. We’ll marvel about it for maybe a year, then take it for granted.

The real action will be who gets to profit from the processing fees. I bet it will be the same organizations that do so now. Even if you use iTunes Store or PayPal as an intermediary billing service, eventually the payment goes through a credit or debit processor, which will split the fees with Apple or eBay (or whomever). So what? We’ll all care about that as much as we care about who makes the screens for our mobile devices. It’s only of interest to the handful of payments processors involved.

I am certain it won’t be your cellular carrier that handles the money: They’re way too cautious and internally dysfunctional to do anything other than, for the most part, provide decent networks. After all, they’ve been wringing their hands for more than a decade about their desire to be more than “dumb pipes” that only carry calls and data, which get cheaper and thus less profitable over time. (Remember when you used to hesitate to make a long-distance call due to the cost? That’s why today you now pay a flat fee for voice, often no matter what your actual usage.) But other than try to erect walled gardens, hog-tie customers with contracts, and get short-term device exclusives — all reactive sales approaches, not innovations — the carriers have done nothing innovative despite their angst. They’re still dumb pipes, and they’ll stay that way.

But that’s all industry inside baseball. Who processes the payments or whether you can use a smartphone as a credit or debit card will have zero impact on application developers (other than who they sign up with), users (other than who send them the bill), or IT. If mobile payments happen, they’ll be as important to mobile users, developers, and managers as credit cards are today — something they all use but is irrelevant to their technology concerns and opportunities.

This article, “Why the mobile payments frenzy doesn’t matter,” was originally published at InfoWorld.com. Read more of Galen Gruman’s Mobile Edge blog and follow the latest developments in mobile technology at InfoWorld.com. Follow Galen’s mobile musings on Twitter at MobileGalen. For the latest business technology news, follow InfoWorld.com on Twitter.