If you have a life, you probably haven't been following the great Apple iPhone 5/Near-Field Communications (NFC) debate. Good for you. But spare a minute to catch up, because it could -- admittedly a few years down the line -- affect the credit cards in your wallet in a big way.
What's the big deal with NFC?All the big credit card payment networks ( American Express, Discover, MasterCard and Visa) have over the last year published plans for the introduction into the U.S. of "EMV" cards, the ones that have onboard microprocessor chips. These "roadmaps" have also included provision for NFC, the technology that allows you to wave or tap an enabled card or smart device near a point-of-sale payment terminal instead of going through the usual swiping process. Mastercard's PayPass and Visa's payWave already allow this in the relatively small number of merchant outlets that are currently equipped with NFC terminals. However, in September, Apple released its iPhone 5. And, unlike some smartphones, it does not come with NFC capabilities. This means that the most anticipated new method of payment terminal checkout just got slighted by Apple. The question is why?
NFC transactions still incur swipe feesCredit card networks charge merchants a swipe or interchange fee every time a card is swiped, waved or tapped by the customer. Credit card swipe fees are already under threat from legislators who'd like to cap them, just as they did on debit cards in 2011. And anyone who's now paying for what used to be a free checking account can guess what that could mean for their credit cards. Swipe fees are one of credit card companies' biggest revenue streams, and any significant reduction in their flow could see the widespread introduction of annual fees and a slashing of rewards programs.
Skipping NFC entirelyIn a Huffington Post article, Brett King states, "The problem for the [banking/credit card] industry is that right now we're doing away with the swipe paradigm altogether, primarily because there wasn't a rapid enough adoption of NFC-enabled payments. We've simply circumvented the poor user experience of the swipe card, for a richer user experience on the mobile device." Merchants now have alternatives to traditional network swipe fees and adopting services, such as Square and PayPal, which avoid the swipe fee entirely. Starbucks, which in August struck a new deal with Square Inc., a payments provider, has for some time operated its own closed-loop, prepaid, mobile payments app that entirely circumvented the current swipe-fee oligopoly. People like Brett King expect that phenomenon to become increasingly common, and for card issuers' revenues from swipe fees to be slowly whittled away.
Where does the money go?There is, of course, a continuing debate about the pros and cons of swipe fees. In 2009, the value of those collected just by MasterCard and Visa was between $35 billion and $45 billion, according to a Federal Reserve report. Most of that would have been passed on to card issuers. Merchants argue that these fees drive up prices in-store for all shoppers. Under this analysis, the poor and unbanked, who have to pay for everything using cash or even food stamps, are subsidizing through these higher prices the free use of plastic and all those rewards credit cards' goodies for much richer folk. Banks and credit card companies contend that cutting swipe fees is only going to transfer a big chunk of their incomes to merchants' bottom lines. They say that there's no evidence that reducing this cost will result in lower prices at the checkout.
Who knows which argument is correct? But one of these days we may find out. For now, it appears that Apple may be betting mobile wallet apps that include a payment provider will soon be dominating the mobile payment field. Like a good game of leapfrog, Apple could be waiting to hurdle the competition.