The first time I used my phone to pay for something was the most banal transaction in the entire world: I tapped my free flip phone to a console to buy a train ticket to school a few kilometers away. It was 2007, and I was living in Japan. But I kind of giggled the first time I did it at the Chelsea Cafe Grumpy, in 2012. Partly because I had to tell the barista my name in an oddly contrived way — “put it on Matt” — and partly because that particular Grumpy is (in)famous for banning computers.
There are few things so obvious in technology that you’re truly able to say it’s a matter of when they will happen, not if. Paying for things with your phone seems to be one of those things, judging by the number of companies that are trying to make it happen. Google, Microsoft, Intuit, PayPal, Venmo, and Square, just to name a few, would like to replace your wallet with your phone. Square has just inked a massive deal with Starbucks that’ll put in over 7,000 stores, where it will process every single credit and debit card transaction. And later this fall, customers will be able to use Pay With Square, the app that’ll let them tell baristas, “Put it on Joe,” without ever pulling their phone or wallet out of their pocket.
The Square deal is a big deal, precisely because it’s, um, a big deal. The thing about mobile payments is that while they involve real currency — your real dollars — they don’t quite work like dollars or credit cards. You can’t use them anywhere, and just because you can use GoPayment at one place doesn’t mean you can use it at the joint next door. If you play your cards right — I mean that sort of literally, plugging your credit and debit cards into the right patchwork of payment companies, provided you have the correct phone, and then visit the right places — you can kind of work your way through an entire day in Manhattan and San Francisco only using your phone to pay for things, particularly now that Google Wallet accepts all credit cards, not just a Citi MasterCard. A coffee at Grumpy, basic groceries at CVS, a sweater at Macy’s, a cab ride home. But this isn’t exactly an optimal experience. Cash is far, far more seamless.
So, really, why would you use your phone to do all that? Well, convenience, supposedly. Google offered a really compelling vision when it launched Wallet: When you tap your phone to pay for something, it would automagically apply any coupons you’d picked up online, along with any loyalty points for the shop you were in. One tap, three transactions. Square offers something slightly more convenient than a credit card swipe, when it works — when you walk into a store, the location-aware app automatically cues your face up on the register, so you can pay without pulling anything out your pants, and you get your loyalty points simultaneously.
You won’t see any of that kind of Square magic at Starbucks until later, though. While Square’s iconic point-of-sale system is an iPad with a Square dongle plugged into it, when you walk into a Starbucks, everything will look just the way it is now. You’ll have the option to Pay With Square, which will initially work like the current Starbucks mobile payment app — you’ll hold up your phone, which will display a barcode that the barista will scan, bleh. (The current Starbucks payment app and loyalty cards are gonna stay separate from Square for now as well.) In other words, the Starbucks contract is largely a backend deal that’ll be nearly invisible to most customers.
It sounds super mundane, but what we’re talking about ultimately is a play to be the OS for payment systems. Computers run Windows or OS X; Square wants every cash register to run Square. As of last month, it was processing $6 billion a year in transactions, with 2 million users and businesses accepting credit cards and Pay With Square working at 75,000 small merchants, though far fewer merchants use Square registers, which allow the magic “Put it on Bob” transaction to happen. So Starbucks’ 7,000 stores and the millions upon millions of dollars flowing through them is a massive step toward that. If Starbucks and NYC taxis are using Square, maybe it makes sense for McDonald’s to use Square. And J. Crew. And so on.
This is what has to happen for Square, or any other mobile pay system to make sense for normal people. PayPal’s got 110 million accounts in its back pocket, and it just inked a deal with VeriFone, the largest maker of credit card terminals in the world, to allow customers to use any PayPal payment method at over “one million high volume points of sale.” (80 percent of the top 200 retailers in the world use VeriFone point-of-sale systems.) And everyone in the industry is nervously gnashing their teeth over whether Apple’s going to put skin in the game — it has over 400 million iTunes accounts with linked credit cards, and while the PassBook coming to iOS6 isn’t going to be used for payments, it very easily could be. Now that is scale. With scale, these niche payment systems can start doing more cool stuff on a larger scale, like integrated deals, a la Foursquare or Groupon. Ubiquity breeds utility.
There are perhaps people who might be wary of using their phones to pay for things, but it’s ultimately just a matter of the right incentives to get people to switch. Namely, money. Shopping online was weird and scary once. Now half of Americans do it, spending on an average $1200 a year, with most shopping online to save money. To that point, 1 million people a week are already using their phones to pay at Starbucks, where they earn loyalty points, saving money. (And the current Starbucks payment app works at one place: Starbucks.) And Square and Google and PayPal and everybody else are more than willing to tell you just how safe and secure it is.
Those of us who adopt phone payments eagerly, though — will it change how we spend our money? Mike Dang of the excellent money site The Billfold says, at least in terms of Starbucks, “people who drink coffee are very stuck in their habits, so it might change how they pay, but it probably won’t change how much they drink, and therefore spend.”
Well, it probably won’t change how we spend anymore than credit cards, at any rate. Adam Alter, a marketing professor at NYU’s Stern School of Business tells me via email, “People don’t naturally connect two disconnected concepts (we’re cognitive misers who generally prefer to think as little as possible).” And when we use Square or other mobile payment systems, there’s a separation of “spending from material financial resources” because “you aren’t handing over cash” and because “you only feel the negative effects of the purchase long after the purchase itself takes place.” End result, says Alter, is that “mobile purchasing, like credit card spending, will promote impulse purchases like coffee and candy.”
But just think of the rewards.