Question: Will mobile payments become America's most popular transaction method in the near future?

Bear's Response
I went into my local Starbucks (Nasdaq:SBUX) the other day and right there beside the cash register was a little card advertising its mobile app that makes paying even faster. Clearly, mobile phones are changing the way we conduct business. Many feel we are at the beginning of a mobile payment revolution. I'm not so convinced and I'll explain why.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

What History Tells Us
For those of you old enough to remember, think back to the Sony (NYSE:SNE) Betamax. Sony thought it had the world by the tail when it introduced the analog videocassette magnetic tape recording format in May 1975. It thought it could dictate an industry standard, but JVC had other plans, introducing its own format (VHS) one year later. By 1984, 40 companies used VHS compared to 12 for Betamax. The last Sony Betamax VCR rolled off the line in 2002, only 27 years after its development. I mention this because it's a classic example of what happens when a company or group of companies places a bet on the wrong horse. I'm not suggesting for one minute that the Betamax was the downfall of Sony. However, that product certainly cost the company significant revenue and profits after fighting a 27-year losing battle.

Chicken-and-Egg Dilemma
The broad-based acceptance of mobile payments, as Adam Blair points out in an article for Retail Info Systems News, is a chicken-and-egg dilemma. The two ingredients necessary for mobile payments to become an everyday part of life: consumers must accept mobile payments as safe and secure and retailers must invest in the point-of-sale hardware and software required to handle the transactions.

At the moment, everyone is standing around and waiting for the other guy to make a move. According to AC Nielsen, there are 91.4 million smartphones in the U.S. and more than one billion worldwide. That sounds like a lot, but the smartphone penetration in the U.S. is just 35%, less than Singapore, Canada, Hong Kong, Sweden and Spain. This means that there are almost 170 million phones in the U.S. that currently wouldn't be able to utilize mobile payments, even if consumers and retailers were ready to do so. The broad-based acceptance of mobile payments will only occur when the percentage of smartphones in the U.S. is significantly higher. That could take a decade or more.

SEE: A Primer On Investing In The Tech Industry

The Major Players in Mobile Payments
(Nasdaq:GOOG), Isis (owned by AT&T, T-Mobile USA and Verizon), PayPal (owned by eBay) and Square are the major players in the mobile payments game. In addition, you can include the Merchant Customer Exchange, which is a group of retailers that includes Walmart (NYSE:WMT), Target (NYSE:TGT), Best Buy (NYSE:BBY) and 7-Eleven. This super-group is in the midst of hiring a CEO and developing its own payment system. Payments consultant Rick Oglesby of the Aite Group suggests that big retailers are doing this because of the inadequacy of the solutions currently offered in the marketplace.

Lastly, there are individual retailers. Starbucks announced a deal August 7 to collaborate with Square, which will process all of Starbucks' credit and debit transactions. It's a very crowded field getting more crowded by the day.

According to Juniper Research, mobile payments total $325 billion worldwide and should reach $1.3 trillion by 2017. Given $1.3 trillion represents approximately 4% of retail sales on a global basis, the members of the Merchant Customer Exchange see enormous potential for mobile payments and therein lies the rub. All we have at the moment is potential. Nobody's actually sat down and analyzed what all of this is going to cost. It reminds me of the green energy dilemma. Plenty of companies are looking to benefit from it but very few seem to be making any money. A revolution can't sustain itself without profits.

Square's worked out a deal with Starbucks that's going to cost the payment firm 4 cents per credit card transaction and 14 cents per debit card transaction. The problem is it can't make money on low value payments or LVPs for short. You can blame the current card payment system for that. In the past, banks kept transaction costs low for LVPs by utilizing a two-tier pricing system where items of a greater value, like a cruise, were charged higher fees to subsidize the LVPs.

Then the Durbin amendment was signed into law in 2010, limiting how much the banks could charge per transaction, which meant they could no longer subsidize LVPs. According to Nebo Djurdjevic, CEO of Cardis Enterprises International, creator of a payment aggregation plug-in to deal with the problem, says something like 70% of cash retail purchases are LVPs. Until the aggregation of LVPs is commonplace, it's going to be difficult, if not impossible, for the mobile payment revolution to really take off.

SEE: Mobile Payments Could Replace Cash By 2016

The Bottom Line
Veteran business journalist Bill Snyder's recent article in sums it up best when he suggests, "... run, don't walk, away from any mobile payments system for the foreseeable future." This revolution is nothing more than an attempt by retailers to get more hard data from its customers so they can sell you some more stuff you don't need. It's a solution in search of a problem.

At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Don't forget to read the Bull Side of this debate and weigh in with your opinion below.

Related Articles
  1. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Investing News

    Is the White House too Optimistic on the Economy?

    Are the White House's economic growth projections for 2016 and 2017 realistic or too optimistic?
  5. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  6. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  7. Economics

    Can the Market Predict a Recession?

    Is a bear market an indication that a recession is on the horizon?
  8. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  9. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  10. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center