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Will Smartphones Kill Credit Cards?

By Selena Maranjian – Updated Feb 14, 2017 at 5:00PM

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Prepare to kiss your plastic goodbye.

As if financial reform hasn't given credit and debit card companies enough to worry about, they must now grapple with an entirely new threat. The billion plastic payment cards we carry may soon be obsolete, their functions incorporated into cell phones.

Credit cards are certainly worth trying to steal business from. Just look at these staggering annual revenue levels:

  • Visa (NYSE: V): $8 billion
  • MasterCard (NYSE: MA): $5 billion

If smartphones could siphon off just 10% of that, they'd rake in $1.3 billion.

AT&T (NYSE: T), Verizon (NYSE: VZ), and T-Mobile have now banded together with Discover Financial Services (NYSE: DFS), the world's fourth-largest plastic-payments network after Visa, MasterCard, and American Express (NYSE: AXP). Instead of paying for purchases with plastic (or cash, for that matter), this new junta aims to let consumers flash their smartphones at a cashier's reader. Discover, not your phone company, will then process the bill.

Don't hold your breath
This brave new world might not arrive anytime soon For one thing, the estimated costs of $200 per reader add up to a lot for major retailers. If each of Sears Holdings' (Nasdaq: SHLD) 3,900 stores includes a dozen cash registers, it'd have to buy 46,800 readers, at a total cost of nearly $9.4 million.

Including this functionality will make the phones cost more, too. And consumers will have to prove willing to adopt the new technology. Some may worry that stolen phones could pay for a thief's purchases, though perhaps the system will feature PINs or other security measures. In addition, stores may not want to install readers until they're sure they'll be used, while consumers may not sign up for enabled phones until they're sure they can use them in many places.

Big in Japan
Then again, this method of payment has already caught on in tech-savvy Japan. Retailers may not love paying to install readers, but they really hate paying swipe fees (also known as interchange fees) for credit/debit transactions.

In 2005, supermarket chain Kroger (NYSE: KR) even banded together with several other retailers to accuse Visa of price-fixing and preventing retailers from negotiating lower fees. At the time, Kroger was paying about $350 million in interchange fees annually, more than three times what it had paid five years earlier. Visa allegedly raised its rate 11 times during that period. Kroger's interchange burden has almost surely risen since; its revenue soared from $56 billion five years ago to $77 billion last year, and a good chunk of those sales were likely charged to credit and debit cards.

Paying by smartphone could get a lot more tantalizing for shoppers if retailers promise to pass on the card-fee savings in the form of lower prices. That sounds like a win-win situation -- unless, of course, you're a credit card company.

Further Foolishness:

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Longtime Fool contributor Selena Maranjian owns shares of American Express. American Express and Discover Financial Services are Motley Fool Inside Value choices. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.

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Stocks Mentioned

Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
SHLDQ
Visa Inc. Stock Quote
Visa Inc.
V
$183.96 (-0.98%) $-1.83
Mastercard Incorporated Stock Quote
Mastercard Incorporated
MA
$293.58 (-1.60%) $-4.78
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$39.52 (-1.03%) $0.41
AT&T Inc. Stock Quote
AT&T Inc.
T
$16.01 (-1.42%) $0.23
The Kroger Co. Stock Quote
The Kroger Co.
KR
$44.86 (-1.41%) $0.64
American Express Company Stock Quote
American Express Company
AXP
$140.26 (-1.94%) $-2.77
Discover Financial Services Stock Quote
Discover Financial Services
DFS
$93.73 (-1.31%) $-1.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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