Bull Vs. Bear - The Mobile Payment Revolution Is Coming

By Stephen D. Simpson, CFA | August 19, 2012 AAA

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

Bull's Response
While mobile payment systems have been a hot topic for years now, they are finally becoming more real. Although there have been systems available for a while now (including the small dongles that could be used to quickly pay for gasoline at some stations), companies are now trying to find that right mix of hardware and software that will allow them to penetrate the huge North American retail and service space.

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Early Adopters Stepping up
Starbucks
(Nasdaq:SBUX) recently announced a partnership with Square that will see Starbucks equipping 7,000 of its stores with Square functionality and investing $25 million in this still-private mobile payment company. Elsewhere, McDonald's (NYSE:MCD) is trying eBay's (Nasdaq:EBAY) PayPal mobile technology in France and buzz is building that a U.S. trial is on the way.

This ought to inspire companies like Google (Nasdaq:GOOG) and Verifone (NYSE:PAY) to get into gear and push even harder to sign retail partners for trials or commercial rollouts. Nobody has yet decided how mobile payments are going to work, but anybody who is slow to get into the market risks having their competitors define the standards and functionalities for them.

SEE: Mobile Payments Could Replace Cash By 2016

It Has Been Proven Elsewhere
One strongly bullish factor for the U.S. mobile payments revolution is that it has been tried elsewhere and found to work pretty well. Japan's leading cellphone provider NTT DoCoMo (NYSE:DCM) has been offering mobile payment capability for years now (since 2004) and customers can use it at places like McDonald's, public transportation and vending machines. About two-thirds of DoCoMo's phones can use the mobile wallet technology and there are over 1.4 million stores that accept it, and roughly 20% of the company's more than 60 million subscribers use it fairly regularly.

But it's not just high-tech Japan that has adopted mobile payments. Oddly enough, mobile phone-based payment systems have proven very popular in Africa as well, due in large part to a combination of a pervasive mistrust of banks and those banks' unwillingness (or inability) to target the mass market with appealing and affordable services.

SEE: Retailers Are Going Mobile: How Can You Benefit

Time Is Money
In a relatively short period of time, I expect retailers to recognize the significant potential of mobile payments to improve efficiency, sales and profits. Places like Starbucks can be madhouses early in the morning, and more than one potential customer has come into the store, seen the long lines and left without buying anything. If mobile payments can shave off just 10 seconds from every customer transaction, that quickly adds up. Just as self-service payment kiosks have allowed retailers to improve service times and reduce labor costs, I expect the same will be true for mobile payments.

Big Brother Wants This
There's another bullish argument that favors mobile payments, and it's one that most people aren't going to like very much - mobile payments create a clearer trail for governments to follow later. Trade in illicit goods and/or on-the-gray markets does not require cash or credit cards; criminals dumb enough to leave a paper trail of their behavior don't remain free to conduct their business for very long. Consequently, I would think that law enforcement would be in favor of a system that can provide information on how much people are spending and where they are spending it - information that could be useful in tracing missing persons, fugitives and so on.

SEE: Mobile Money: Using Your Cell Phone To Transfer Funds

The Bottom Line
With more and more people living so much more of their lives through their smartphones, it seems inevitable that the U.S. will see a revolution in mobile payments. If your phone can tell you that your friends are at a certain restaurant, show you that restaurant's location and give you reviews on that restaurant in seconds, it only makes sense to add the capability of paying for your meal with that same phone. Couple that with the potential of improving sales growth and cutting costs for retailers who no longer have to handle cash or process card-based transactions, and it seems inevitable that the mobile payment revolution will come.

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

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