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Innovations and Payment Systems

Despite chipless iPhone 5, smartphones march on as payment tools


The hot new iPhone doesn’t have a chip in it to allow payments, but experts still expect we’ll soon pay with the same gadgets we yak with

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The day when consumers routinely pay at stores with their smartphones is still coming, and still soon, experts say, even though Apple’s new iPhone 5 doesn’t include the technology that could have accelerated that trend.

When Apple unveiled its latest iPhone Sept. 12, many analysts were hoping that it would include something called a near-field communications chip, or NFC chip, which would have allowed iPhone owners to wave their phones at certain retail checkouts and have the transaction charged to their credit or debit card.

Many Android phones, such as those made by Samsung, LG and HTC, have such chips. But the latest iPhone — expected to be purchased by as many as 58 million people — doesn’t have that NFC hardware. The iPhone 5 becomes available Friday amid a huge buzz: Apple has already announced a record number of first-day orders for the device.

Still, experts in mobile payments say the vision of using phones at cash registers is still likely to become reality in the next few years, despite Apple’s decision to exclude the NFC chip from its latest must-have device.

“It’s hard to say this has a negative effect on mobile payments,” says Ron Shevlin, senior analyst with Aite Group, a research and advisory firm. “It just doesn’t light the fire under mobile payments that it might have otherwise, given the effect Apple tends to have on things.”

Still in early stages
The mobile payments industry is still in its infancy. As with many emerging technologies, there are still plenty of questions to be resolved before paying with smartphones replaces pulling out plastic or cash. Besides the basics of finding technology that works, one of the chief issues to be resolved is this: What will motivate consumers to ditch plastic and use their phones instead?

Maybe the answer is convenience — having one centralized device that combines credit cards, loyalty cards and coupons. Maybe it is price — having discounts or other goodies to incentivize consumers to pay with phones. The answer is unclear, because the business model has not been fully developed.

“There’s got to be a reason for you to start to migrate the things in your wallet to your mobile phone,” says David W. Schropfer, head of mobile commerce for the Luciano Group, a telecommunications and payments consulting company. “There’s got to be something in it for you.”

In addition, the technology is not available widely enough to revolutionize the way people pay at stores. Without consumers demanding mobile-payment technology, phone-makers have limited incentive to install NFC chips on phones, and retailers are often wary of spending money to upgrade their point-of-sale terminals.

Many analysts describe the situation as a standoff, or a chicken-and-egg dilemma. Aside from a small number of early adopters, neither retailers nor smartphone users are clamoring for mobile-payment technology.

“Merchants and consumers are sort of staring at each other, waiting for each other to blink,” says Dave Kaminsky, an emerging-technologies analyst with Mercator Advisory Group.

Retailers get a push
However, the retail side could be poised to take the plunge as merchants are expected to replace their terminals to comply with new fraud-liability rules from card processors that encourage chip-and-PIN transactions. Most new terminals have NFC technology.

Phone-makers, meanwhile, are trying to acclimate users to tapping and waving phones. Ads for the NFC-enabled Samsung Galaxy S III, for instance, highlight the ability of the phone to share photos by merely tapping the phone with a friend’s Samsung Galaxy S III.

U.S. consumers pay with their phones less than counterparts in other countries. According to a survey this year by ACI Worldwide, 30 percent of U.S. mobile-phone users say they have used phones to make a payment, compared with 76 percent in India and 70 percent in China. Of U.S. consumers who have not made mobile payments, two of three say the top reason is that their phones are not equipped to make such payments.

However, even in the U.S., there are examples of mobile payment networks that are taking off. The most prominent are:

  • Google Wallet. Launched in 2011, this free service allows users to store credit and debit cards, loyalty cards and coupons on a mobile phone with NFC technology. The merchant must accept MasterCard PayPass, which Google says is available at 140,000 retailers nationwide.
  • Starbucks. Considered the leading retailer in accepting mobile payments, the coffee store giant has an app that lets phone users scan a special barcode, which is linked to a prepaid Starbucks account. In August, the company invested $25 million in mobile payments startup called Square, which allows mobile barcode payments linked to credit cards.

Other mobile technologies taking off
Of course, it is not certain that NFC technology will wind up dominating. Other parts of the world where mobile payments have taken off rely on more established platforms. In Kenya, for instance, mobile payments and banking have grown rapidly by using SMS (short message service) texting technology. More than 80 percent of Kenyan mobile-phone customers use mobile payments, according to the World Bank.

With its iPhone 5 and new mobile operating system (iOS6), Apple is also encouraging development of a different mobile-payment technology: scannable barcodes. The iOS6 software includes an application called Passbook, which allows users to consolidate coupons, tickets and loyalty cards from participating merchants on their phones.

The app will allow users to display airline boarding passes, movie tickets, gift cards and other items on phones so retailers can scan them. Companies including Delta Air Lines, Target, Fandango and Ticketmaster have already signed on. Passbook does not link to credit or debit cards, but that could be an eventual step.

Kaminsky predicts that bar codes on phones will develop rapidly in the next few years, even as NFC continues to develop. He predicts that by 2016, one-third of U.S. cellphone customers will use their phones for mobile payments.

But, he says, with so many different technologies and stakeholders, it is unclear how exactly how the march toward mobile payments will shake out.

“There are clear signs that it is starting,” he says. “It’s a matter of watching to see how it all unfolds.”

See related: Credit checks required for iPhone activation

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