For the better part of five years, the tech press has been hyping a brutal war-of-all-against-all for a business known as mobile payments—basically, using your phone to pay cashiers rather than unsheathing your credit card. Americans spend over $4 trillion each year at the checkout counter. Assuming that 60 percent of those transactions involve credit-card and debit-card swipes, and that the card-processing fees average upward of 1 percent of the sale, we’re talking about tens of billions of dollars awaiting the winner of this Hobbesian smack-down. Hence the obsessive interest of tech companies like Apple, Google, and PayPal, and wireless carriers like T-Mobile and AT&T—to say nothing of the existing middlemen, like Visa and American Express, who desperately want to cling to their spoils.
And yet despite these companies’ considerable efforts, the actual prize keeps failing to materialize. At least in the United States. Consumers in Asia, Africa, Europe, and South America are all warming to the idea of buying stuff with their phones. But American shoppers are unmoved. The uptake has been so flaccid that the consulting firm Gartner recently downgraded its projections of worldwide mobile payments growth, specifically fingering “low adoption” in North America as the culprit.
It’s all the more puzzling given that the proposition works out beautifully on paper. Retailers, who pay the credit card fees (after passing much of them along to you), should have every incentive to lower them, which mobile payments companies accomplish by policing fraud better and driving a harder bargain with the credit card giants. Mobile payments would also help retailers collect more data about your shopping habits—never a bad thing from their perspective. For their part, consumers should enjoy the ease and security of ditching their wallets and, say, simply touching their phone to a sensor in order to complete a sale.
The reason this isn’t happening seems simple at first, but offers an interesting insight into human psychology. In a nutshell: Americans rather like using their credits cards in stores, notwithstanding their periodic kvetching. In parts of Africa and South America, the banking infrastructure is somewhere between unreliable and non-existent. Transacting by way of cell phone is far more practical. In parts of Europe, the banking system is more advanced, but lines in retail outlets are so notoriously long that consumers will do anything to move through them more quickly. Again, one sees the appeal of paying by cell phone.
But in the States, lines are typically more manageable, and swiping a credit card is almost as seamless as breathing, even if the process could be sped up slightly. In this context, mobile payments can look like a solution in search of a problem. A recent survey by the retail consultancy RSR Research asked consumers how they expected to pay for in-store purchases in five years, then presented several options. Fifty-nine percent of Brazilians, 48 percent of Russians, and 42 percent of Germans envisioned themselves paying by mobile phone. By contrast, a mere 24 percent of Americans responded the same way. (And, in case you’re wondering, young people are not the answer here: Even fewer Americans aged 18-to-29 expected to switch to their phones—a mere 22 percent.)
Does this mean all the attention surrounding mobile payments has been pure froth? Not necessarily. But it does teach us something about how technology actually gets adopted—and, for that matter, about behavioral change of any kind. Consider Paula Rosenblum, an analyst at RSR who was absolutely convinced she would be using PayPal’s mobile payment scheme when it first came out. She loved the security of it—the fewer companies she exposes her credit card to, the better, in her book. She loved how it didn’t even require reaching into her pocket for her phone, unlike other mobile-payment apps. You just enter your cell number and a PIN on the register keypad. The only hitch? In practice, she almost never uses it. “I myself was shocked by how often I forget,” she recently told me. “I’m habituated to pulling out my credit card.”
It’s this habituation that’s the key. Humans are prisoners of inertia. The places where mobile payments seem to be taking off are places where the credit-card swiping habit never truly formed—like parts of Africa and South America—or places like Russia, where it was sufficiently unsatisfactory (think long lines) as to make consumers open to forming new habits. Even people like Rosenblum, who recognize the theoretical improvement mobile payments represent, apparently won’t form a new habit unless they deem the old one to be a serious drag.
But, as it happens, there are at least a few small slices of the U.S. economy where this is already the case. People now routinely pay for parking on their mobile phones because it’s a complete downer to dart back to the street every two hours. Hundreds of thousands of us now use car services like Uber, which has improved on the taxi industry’s existing cash or balky-credit-card-reader options with a painless pay-by-phone application.
Or take Dwolla, an Iowa-based payments company that’s raised over $20 million from investors. When Dwolla’s co-founder, Ben Milne, helped start the company in 2008, his ambition was to displace the likes of Visa and MasterCard by building a network from scratch and charging stores and their customers next to nothing to move money around. A few years in, Milne conceded that “retail is a really hard place to convert users in terms of getting them to pay with another payment form.” But that wasn’t the end of the story. It turns out the company is growing rapidly by taking on more tedious transactions. “Where Dwolla is having the most success is with local governments, state governments, who’ve never accepted an electronic payment. There are literally checks sent in,” says Albert Wenger, a partner at Union Square Ventures and Dwolla board member. “They’re not trying to replace one form of payment with something slightly better. They’re replacing a complete pain in the ass with something that works pretty well.”
And then there are restaurants. Even at this late date in history, the typical restaurant experience involves sitting down, eating your food, and then waiting around for an eternity before receiving your bill and (often after another eternity) signing off on the credit card transaction. (There may be a third eternity if you have to split a bill and tip among multiple customers.) Today, a New York-based start-up called Cover is attempting to change that, allowing diners to pay by mobile phone as soon as they’re ready. “My cofounder and I were always meeting at restaurants,” says Cover’s Mark Egerman, formerly of the Consumer Financial Protection Bureau. “We were waiting for our check saying, ‘It would be wonderful if it were an Uber-like experience, where you just leave’.”
Cover currently works with 75 restaurants in New York, including a few big names like Momofuku and Carbone. It processes several hundred thousand dollars each month in transactions, a figure that’s growing at a 20-30 percent clip. If Cover continues to catch on, it’s not hard to imagine it changing not just how people pay for their meals, but—much further down the line—the way we pay for all our in-store purchases. “We want payments as a way for people to feel good,” says Egerman, who hopes to one-day expand into other bars, hotels, and event concessions.
It’s about habit formation, in other words. Even though new technologies initially take off where the need is most obvious, says Wenger, they gradually spread through the economy as people get conditioned to using them. And there is historical precedent for thinking that the habits we form while paying for dinner could determine how we pay for pretty much everything else. In 1949, a businessman named Frank McNamara went to pay his check at Major Cabin’s Grill in New York, only to discover that he’d left his wallet in another suit. The mortifying experience led McNamara to hatch a way for restaurant patrons to pay without carrying cash. Diners Club, the world’s first charge card, was born.
Diners Club spread rapidly across the hospitality industry, into hotels and airline reservations, before eventually losing out to bank-backed imitators, like Visa and MasterCard. But it revolutionized the way we thought of paying for goods and services, teeing up the 65-year reign of the credit card. If mobile payments are going to launch their own new era, it’s not a stretch to think it could begin at a four-top near you.
Noam Scheiber is a senior editor at The New Republic. Follow @noamscheiber