Technology: Zap, tap and go

24 Sep, 2012

On a bright morning at the ultra-hip Sightglass Coffee shop in San Francisco this week, Brad Miller, a healthcare technology consultant, is in need of a cappuccino.

By the time he reaches the counter, his picture has magically appeared on the iPad the shop uses as its payment terminal. The assistant identifies him by his photo and taps the screen to confirm a sale, and Mr Miller picks up his beverage. As he walks out, a receipt drops on to his iPhone.

For tech-savvy natives of San Francisco's South of Market district, a future without cards or cash cannot come fast enough. "I would love to not have to carry around a wallet and not have to worry about paying for things," says Mr Miller.

Such sentiments are music to the ears of the hundreds of companies – from mobile and tech groups to banks and retailers – racing to use new mobile technologies to upend the payments business. In the process, they are putting themselves at the centre of a world of commerce made possible by smartphones and tablets.

The potential is causing ripples among investors. Square, the three-year-old start-up behind the payment system used at Sightglass, scored a $3.25bn valuation this week with its latest round of fundraising. It is now one of the most talked-about groups trying to change one of the most basic human activities: spending money.

Square, one of about 150 similar payment systems being developed around the world, has become "the pioneer that has driven global attention", says Bill Gajda, head of mobile products at payments company Visa, turning heads even in countries like Japan and India that are on the forefront of innovation in payments.

Square is headed by Jack Dorsey, who also came up with the idea for microblogging service Twitter. The global attention owes much to the app's radical simplicity and slick design – qualities that have earned Mr Dorsey a budding reputation in the tech industry as heir to Steve Jobs.

Square's smartphone app is linked to a user's credit card or bank account. Mr Miller keeps it running in the background constantly on his iPhone, with a virtual tab open for him to spend money at Sightglass or any other store using the system. When he is within 100 yards his face appears on the coffee shop's register, and a single tap is all that is needed to complete a transaction. Security rests on the store assistant identifying him correctly from his picture and billing only for the goods ordered.

Stealing a favourite phrase of the late Apple boss, Keith Rabois, Mr Dorsey's number two at Square, calls the experience "magical" and says of the way it simplifies and cuts the cost of complex payments for small merchants in particular: "It just works." He also points out that the experience of using Square for the first time prompts some to rave about it on Twitter. "People don't do that when they've just used American Express."

Yet of all the challenges on the way to this post-cash, post-card existence, one stands out: most people are quite happy with the payment methods they already use. "It's really worth asking the question: is this a technology in search of a problem?" says Brian Walker, a tech analyst at Forrester Research. "Consumers today aren't challenged by the card swipe."

Ambitious hopes for mobile payments – of waving a phone in front of a cash register; even, like Mr Miller, not even needing to take it out – have been around for as long as the mobile communications industry. "Changing habits takes time," says David Marcus, president of PayPal, the payment arm of e-commerce site eBay. "Changing habits in money takes more time."

Nor has the technology been perfected. On a second visit to Sightglass the same morning, Mr Miller's picture does not appear on the store's register, something he says happens nearly a third of the time. The magic vanishes fast, he adds, when you are left fumbling at the counter to open an app and make a payment.

Other new mobile payment systems are also struggling with reliability. An assistant at a Peet's coffee shop south of San Francisco in Silicon Valley reports that a rival system backed by Google works only about half of the time. Last week a consortium of US mobile operators called Isis delayed the first trials for its own system as it tried to iron out the kinks.

In another sign that mobile payment systems may not be ready for prime time, Apple decided not to include the so-called near-field communications technology that lies at the heart of most mobile payments experiments in its latest iPhone, which went on sale on Friday.

None of this damps the mood of the optimists. With the cost of putting NFC technology into a cash register falling below $20, it has become a standard component in almost all machines sold, says Mr Gajda. Most handset makers, despite Apple's hesitation, are building it into devices.

The allure of the smartphone as a central part of commerce explains why companies are backing mobile payment, even if consumers have yet to catch on.

This future can be glimpsed at the Silicon Valley headquarters of PayPal, where a series of mock store fronts is used to try out new forms of shopping. PayPal conjures up the example of a passing customer drawn by a pair of knee-high black boots in a store window. The shop is closed so she pulls out her phone and photographs the matrix barcode in the window – it reveals the designer, the price and the fact that her size is in stock. She taps the screen, sending a message to the store owner to set aside a pair. When she returns, her phone "checks in" at the store, giving the shopowner access to her account. As she tries on the boots, an assistant brings a motorcycle jacket she thinks the customer might like, based on the history stored in her PayPal account. The customer takes both, and her PayPal account is debited to the tune of $768.

If visions such as this represent a shopping nirvana, then it is not surprising that companies from a handful of giant industries – banking, retailing, mobile communications and technology – are climbing over each other to get in on the act. All have their eyes on the same prize: providing "digital wallets" where smartphone users will keep the new, virtualised methods of payment, along with the many other items – loyalty cards, coupons, gift cards, receipts – accrued in their relationships with merchants.

Walmart, Target and a group of other big US retailers last month made a bid for a place at the heart of this new era with joint plans for a digital wallet. Retailers have already gathered extensive information about their customers and are likely to be more trusted than others to protect all the extra data that will flow from the coming wave of mobile commerce, says Dodd Roberts, a consultant to the project, known as MCX.

Meanwhile Visa, which has handled nearly $4tn of payments in the past year, argues that banks should put themselves in the driving seat by launching their own digital wallets. Different types of payment – those currently made with cards well as those made through online banking services – could be merged on to the same mobile platform, simplifying relations with customers. Also, access to a wealth of new data about how consumers are interacting with merchants would make it easier for banks to tailor their services to both groups.

Not to be outdone, mobile phone companies are trying to elbow their way to the centre of the action. They are well placed to dictate the payment technologies embedded in handsets, says Ryan Hughes, a founder of Isis, which was set up by Verizon Communications, AT&T and T-Mobile USA, the largest US mobile carriers. They also boast extensive customer service operations: lose your phone, they say, and with just one call to a mobile company all your accounts will be made secure.

Big tech companies such as Google and Microsoft are also moving in. Apple may have stopped short of mobile payments but it has seen the potential. Passbook, a new feature included in its latest mobile operating system, will hold digital loyalty cards, coupons and tickets, setting the stage for iPods and iPads to subsume a user's wallet.

Whether consumers are ready for the digital wallet is another matter. Mr Miller and his kind are still heavily outnumbered by those wedded to the ritual of handing over a card and signing a receipt or tapping a Pin number into a portable card reader.

Nor is it clear that the companies racing to cash in on mobile payments have worked out how to give as much weight to customers' interests as their own. A world where much of their shopping data are captured and used, for instance, to send discount coupons or targeted advertising may be welcome to some. But it also raises fresh questions about digital privacy – and risks casting smartphone users as passive objects for marketing campaigns.

To the optimists, the laws of the market will prevail. Only companies that give consumers something they really want will survive the inevitable shake-out that will hit the fragmented, confusing digital payments landscape likely to emerge in the next few years, says Visa's Mr Gajda.

Whoever is left standing at that point will be in a strong position to cash in on the new world of mobile payments and commerce.

Additional reporting by Tim Bradshaw

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