Mobile phones are the smarter wallet
Our wallets are full of cards and cash. GDI researcher Karin Frick and UBS product expert Marco Menotti take a look at the payment methods of the future.
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April 24, 2012, Stephan Lehmann-Maldonado (text) and Mark Niedermann (images)
Ms. Frick, Mr. Menotti, how will we pay when shopping in 10 years' time?
Frick: That depends on where and how we're buying. New channels will need new ways to pay. My guess is that in 10 years' time we'll be shopping more on the internet, and sharing information on deals via social media platforms. Stores and checkout counters will look different too.
Menotti: We're not moving towards a cashless society, just one with less cash. Credit- and debit-card systems will become more important, while the plastic cards themselves will be less central. And the various channels are likely to be more interlinked: we'll order something online, pick it up in the store, and pay for it with a mobile phone.
Nearly half the sales at Migros and Coop are paid for in cash. Why is it so difficult to get people to break the habit?
Frick: There's a strong need to feel secure. If I can touch the coins, I can control them. We have a deep-seated preference for the tangible rather than the abstract. But progress is usually driven by technology and not by needs. Businesses are keen to introduce new ways of paying - and clients with a credit card can make spontaneous purchases. On the other hand, most people prefer to spend their money not fast - but wisely.
Menotti: Many purchases are also made with debit or credit cards, and this is on the rise, despite our rather slowly changing consumption habits. Studies have shown that a new payment method will only survive if it is convenient, transparent and secure - and if there are incentives to use it. But in some areas, we've changed our habits surprisingly fast. Social media such as Facebook have skyrocketed in just a few years.
Frick: These media tie into the primal human need to interact. Teenagers feel cut off from their peers if they aren't on Facebook. Mobile phones were originally used for business, and now they meet a social need. One reason for their triumph is Apple's technology: you don't need computer skills to use an iPhone or an iPad. Everything works by touch. It's more human, more intimate. The next generation of this technology will even let us feel if a surface is rough or smooth.
Will smartphones become the wallets of the future?
Frick: Yes. The mobile phone can turn into a very clever wallet. As well as cash, we're hauling around all kinds of different loyalty vouchers, membership cards and scraps of paper. All this could be integrated into an app. In future, clever apps could manage all my store cards and tell me where and how to pay for things, and what deals I can get. At the same time, we're seeing a countertrend toward gold coins. It's a Scrooge McDuck effect - distrust of the financial and monetary systems.
Menotti: In fact, many Swiss people withdraw cash only to deposit it again later. This is neither safe nor convenient. But it gives people the feeling "Now I've paid." There's a gap between perception and the facts. Is something safe, or do we just think it is? Clients feel that if there's a relatively complicated registration process for online banking, it must mean it's safe.
Frick: If we can manage to shift familiar mechanisms to new technologies they seem safer. So, on my iPhone I can put a (virtual) lock on my screen. After all, we have thousands of years of experience with money in physical form …
Credit cards are newer …
Menotti: However, I can withdraw cash all over the world with them, and pay in 30 million locations. It took decades to develop the credit card system, and a lot of investment. If we had to rebuild it today we'd throw up our hands in horror. There are over 100 projects at the moment trying to launch payment systems for smartphones. It's technically possible today to withdraw money from a cash machine with a mobile phone. But it will probably be a while before this becomes the norm. On the other hand, credit- and debit-card systems still have more to offer. In Switzerland they are used for a mere 20 percent of total possible payment transactions. In Canada it's 60 percent!
With Near Field Communication (NFC) data can be transmitted over short distances. What potential does this technology hold?
Menotti: NFC technology is already built into smartphones and some credit cards, such as the UBS MasterCard PayPass. But NFC only changes how we interact at the point of sale. For instance, I no longer need to sign anything. The credit card system in the background remains the same. It involves several entities, and would be very difficult to improve on.
Frick: It's exciting to think about how to get away from devices. I have an acquaintance whose children can open the door of the house with a fingerprint. They can't lose their keys. The main issue is: how can someone authorize an action without a mobile phone or a credit card? I can also imagine a system that recognizes faces.
Menotti: The cards are simply the medium. I don't need them to pay online. I just have to have the right information.
The internet is also a great place for scammers.
Menotti: On the internet, we mostly use credit cards for payments, even when using a service like PayPal, and it looks like the transaction is handled by someone else. Credit cards have safety measures such as 3-D Secure and sophisticated early warning systems. If a payment appears suspicious we can block it immediately. You'll get a call from us if you buy something in Tokyo and 10 minutes later you order something in New York.
Frick: This has happened to many of us - and it gives me a sense of security.
Menotti: We also measure fraudulent activity. Although this has increased, the effective losses have not. So our countermeasures are working. You can also check your credit card transactions on your mobile phone. You don't have to wait until you get your statement at the end of the month. Paying by credit card is very secure.
Google is experimenting with payment methods (Google Wallet), and Facebook is offering a type of currency with its credits. Are they shaking up the market?
Menotti: No. Facebook has some 800 million accounts, or about 10 percent of the world's population. Facebook collects our data, and we imagine they must have enormous power. But we set limits despite the information we entrust. Facebook and Google have huge respect for the credit card system, and their solutions are based on this.
Frick: Bitcoins were an attempt to launch a virtual currency. Which failed. Now trading markets are cropping up on the internet. Whether it's cars, vacations or services - there are several platforms where we can price, share and exchange everything. Our studies have shown that younger people in particular are distinguishing less and less between the virtual and the real world. The need to be connected on the net is greater than the need for privacy. And the internet can be accessed everywhere with a smartphone.
Menotti: Various exchange networks will be linked in future. Anyone could then swap any object for another. The advantage of money remains, however, that I can make purchases with it almost everywhere in the world. I think the likelihood of an internet currency ever replacing money is extremely small.
Who are prepaid cards suitable for?
Menotti: For young people, for individuals who otherwise couldn't get a credit card because of their financial situation, and for those with a great need to feel secure. Psychologically, prepaid cards increase the sense of security: I can only spend what I've loaded on the card. UBS is launching a prepaid card very soon.
Frick: Prepaid cards are very practical for parents who can put money on a card and spare all those long discussions about their children's spending.
Plastic money at a glance
You can use debit cards to withdraw money from ATMs and pay without cash in most stores. The amount is immediately debited from your account. The most popular debit card in Switzerland is the Maestro card, which UBS also issues.
These cards are used to pay without cash worldwide. Payments are not charged to your account immediately, but at the end of the month. UBS offers Visa and MasterCard credit cards.
Credit cards from MasterCard are also available with the PayPass function. They can be used to pay amounts up to 40 francs contact-free by holding the card up to the card reader - without a signature or a PIN code. This is possible for instance in McDonald's restaurants and at kiosks. Besides the PayPass function the UBS MasterCard PayPass offers all the advantages of a credit card.
Prepaid cards have all the advantages of a credit card, but you never buy "on credit." The card must first be loaded by bank transfer. TravelCash and InternetCash cards are also prepaid solutions. TravelCash is considered a further development on travelers checks. InternetCash is supposed to make paying on the internet possible for those without credit cards.
is director of bank products at UBS
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