Credit card processing will continue to evolve over the next generation, according to a prominent consultant with deep roots in the industry. And, inevitably, merchants who accept plastic will need to keep pace with the changes, working with their merchant services providers to stay on top of new technology.
Jerome Svigals — known as the “father of the credit card” for his work engineering the magnetic stripe technology on which it is based — predicts that within a decade high-end mobile phones (smartphones) will supersede plastic as the primary payments vehicle.
“Banks have got to start thinking ahead for this transition period,” the former IBM project manager told American Banker magazine recently. “If they don’t, they are going to be left with a set-up that will not be useful in this new environment.”
In his report “Retail Bank 2020: A Roadmap for the Future”, Svigals maintains that the U.S. retail banking industry will evolve to have three supporting pillars: smartphones, the Internet and intelligent banking applications. The Internet, he says, will become the primary banking channel, with smartphones elevated to the channel of choice for transferring funds, opening accounts and applying for loans.
Approximately 35% of today’s bank transactions take place at teller stations; Svigals’ predicts that number will shrink to 15% by 2020 and 5% by 2029. The shift to the Internet will result in 55% of transactions, 50% of service requests and 45% of sales being initiated online by the end of the decade; in 20 years, 80% of all transactions will be Web based.
The technology exists to make smartphones the rulers of the banking universe. Earlier this summer, PayPal demonstrated its new phone-to-phone payment mechanism that uses NFC (near field communications) radio technology that will be built into future handsets. The video showed two users exchanging funds by merely touching their phones together.
Meanwhile, AT&T, Verizon Wireless, and T-Mobile are partnering to develop a mobile payment system that works with smartphones. Businessweek says such a system would “turbocharge mobile payments in the U.S.”
With cash and checks steadily falling in popularity with U.S. consumers, non-cash alternatives like credit/debit cards and electronic payments already account for more than half of all their purchases, according to the industry newsletter The Nilson Report. Additionally, more than half of U.S. consumers — and close to 80% of those in the 18-to-34 age bracket coveted by retailers — will rely on mobile financial services within five years, according to Boston consulting firm Mercatus. These statistics appear to support the idea that smartphones will replace credit cards for a majority of consumers in the near future.
Of course, in the near term the transition from credit cards to smartphones for financial transactions may resemble a see-saw: Consumers holding off on adopting mobile payments until enough merchants accept them, and merchants delaying implementation until enough consumers demand it. But the trend seems clear. Smartphone owners, start your engines!