In a rare situation indeed, 3 huge competitors within an industry (wireless services) are teaming up to take on a different industry (payments). AT&T, Tmobile, and Verizon are joining forces to take on Visa and Mastercard with their own payments system. Your payment device of choice? Your phone of course. In business school terms, this is a rare occasion indeed, to see industries try to take a foothold in another industry altogether instead of buying their way in or simply just growing their own industry. Now of course they aren’t doing this alone, they’ve teamed up with Discover who is 4th in the payments game behind the big guns and Amex. From Discover’s perspective, they’re willing to do just about anything to get an advantage over the other guys.
The way this works is your phone would have a special signal in it that could tell a credit card terminal your information. The transaction is processed just by holding the phone up to a sensor. Plain and simple. The phone companies are interested in this game because there’s money to be made here, with some credit cards costing the merchant 4% of the purchase amount. They could drive adoption by doing some kind promotion where for the first year the transaction cost is nil or really low.
I think this could be really cool in a few years. Initially, transactions will probably be dumb. If you’ve used a card with a chip in it before you’re familiar with how this would probably work. But it won’t be long until it’s an actual payment app. Here’s my hypothetical scenario, you’re standing in line at the convenience store buying your usual sundries but your spouse is impatiently waiting in the car for you to go. You launch the payment app and RFID tags in your sundries will tell a server what you have. It rings up the total on the app. You say OK and walk out of the door. You get a digital receipt on your phone and can email it to yourself or do something else to print out a hard copy. To keep things secure, you have a password on your app, just like a PIN on a debit card. This is all years away, but technologically speaking this as all possible now.
But, to ignore the 800 pound gorilla in the room would be foolish. Visa has the power to stop this whenever they want. Merchants thrive on Visa as they do own the payments market. If you don’t have Visa, people will simply stop going to your store. If you don’t believe me then just try to find a store that doesn’t do Visa. They’re rare. If Visa doesn’t like what the phone companies are doing with Discover they may use their market power to discourage merchants from participating in the program. But then again, such moves might get the attention of the Department of Justice. Either way it would be dumb to assume that Visa isn’t working on something like this already.
Regardless, this is a development that I welcome. Since I studied business in school, moves like this are interesting to watch. The credit card industry hasn’t had a revolution in decades. This will increase competition, which is always good for the consumer. And I’ll be the merchants will like it too since they’ve lobbied heavily for credit card reform in all the financial regulation bills to get greater protection from fees from the payment companies and banks.
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 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
