Smart Phones Changing the Credit Game

In a move guaranteed to shake the halls of finance, smart phones like the Android Apple’s iPhone will soon be able to make credit purchases in lieu of plastic cards. For the consumers, this will give another, more convenient option for shopping, but for Credit Monoliths like Visa or MasterCard, it could mean a loss of billions in transaction fees.

Consumers use their smart phones often to make online purchases or app purchases, so it seems a natural progression to buy with their phone at face-to-face transaction points. In the works are apps to manage multiple cards, live spending reports, and even “buy and tip” style purchasing for restaurants and the like.

Where smart phones are changing the game is in the long-established credit networks, responsible for handling over 50% of sales transactions in the last year alone. Normally, as with a plastic or “dumb” card, there are transaction fees amounting to 1-2% of the sale that the seller must pay. Last year, these “interchange” fees totaled to around $44 billion. When smart phone transactions are introduced, they will take a significant cut of this from the credit card companies.

Smart phone transactions must still have a credit company behind the sale, and currently Discover is working with AT&T and Verizon to do credit transactions through their networks. T-Mobile will be joining as well in a minority-share capacity.

As far as costs go, the wireless chip will add $10-15 dollars to the manufacturing cost of each phone, as well as $200 to vendors for a smart-phone-reading unit. There is room to wonder though, why the additional costs wouldn’t be absorbed by credit card companies as operating costs, instead of passing it on to consumers and vendors, then charging again for the privilege of using the new equipment.

However, with smart phones just now entering the picture, it will be some time before we see how the landscape will look when it’s all said and done.