Paying With Your Smartphone, Not So Smart

Imagine using your smartphone as your wallet. Google, Mastercard and Citibank recently teamed up to launch tap-to-pay trials in San Francisco and New York. The idea is to use coupons, a store's reward card or pay for your groceries with just a few taps on your phone. Tell Me More's personal finance contributor Alvin Hall talks about the pros and cons of "smartphone wallets."

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MICHEL MARTIN, host: Now, to matters of personal finance. We want to talk about your money and your phone. For many people, smartphones and some other cell phones have replaced the rolodex, alarm clock, calendar and MP3 player. But now some people want to use their phones as their wallets. And Google, MasterCard and Citibank recently teamed up to launch trials to allow consumers to use their smartphones to pay at the register in San Francisco and New York. They hope to expand to other cities this summer.

Now, that could mean no more shuffling through your bag for the credit cards, the loyalty cards, the coupon, the spare change. All you'd have to do is select the cards you want to use on your phone's screen, and then tap the phone to the store's terminal. Sounds easy, right?

We wanted to talk to our Money Coach Alvin Hall about this. Are there pros and cons of using your smartphone as your wallet? Welcome back. Thanks for joining us.

ALVIN HALL: Glad to be here, Michel.

MARTIN: Now, I understand that this actually isn't such a new idea. And, in fact, in Europe and in a lot of the developing world - like India, for example - this is actually common.

HALL: It's very common. Korea is probably one of the leading places for this. And they struggle with this. They have the same problem that we're having in America. They have competition among the various vendors, the credit card companies, the telephone companies. But then the Korean Communications Commission managed to build a coalition. So they're building a much more uniform base. They're building cooperation. In America, we're still at that phase where everybody is fighting for the property - intellectual property rights of this stuff.

MARTIN: That's what I was going to ask you. Why has this been so slow to catch on in the U.S.? One of the reasons I was thinking about this is that - I was thinking about the fact we reported on this in India, for example, more people have cell phones than have hard lines. And they use them for everything, especially for banking transactions and things like that. Why is it so slow to catch on here?

HALL: I think a lot of it deals with the companies. The phone companies want to grab that part of the market so that they can benefit from it. And we have four major mobile phone carriers. The banks are also involved in the area, so they want to get their slice of the pie. And then you have all the other vendors that involve the companies.

But, also, there's a huge cost, here. One, the companies who will have to use the service will have to get terminals in their stores and in the location. And the terminals are not inexpensive, and that seems to have been a barrier to firms adopting this widely.

MARTIN: Now, I have to tell you, I'm a fan of this - and use this technology to, you know, have a cup of coffee from time to time.

HALL: Starbuck's.

MARTIN: Well, I'm not mentioning any names.

(SOUNDBITE OF LAUGHTER)

MARTIN: But I'm a fan of a particular coffee company.

HALL: Yes.

MARTIN: Anyone who knows me knows this. But I understand that you actually have some concerns about using this technology more broadly to shop. Tell us what that is.

HALL: Well, I think the technology can encourage people to spend a little more freely than they should. Today, I had a conversation with a friend of mine about this, and he also goes to the same place that you go to, and he loves it. But they've built in an interesting psychological element. When you get - reach gold status, and he really often spends to reach gold status.

But the other part of it is that people tend to view this type of electronic spending as quasi-money. Think of the iPhone and how many people will sit there and download those apps into their iPhone and not think of the total cost, because in their minds, it's not real money. And that, to me, is a major concern. Unless they can build in an element that allows people to track what they're spending, that it will encourage people to overspend.

MARTIN: Why couldn't it be the other way, though? I mean, if you use the phone to check your balances - which you can also do, right?

HALL: Yes.

MARTIN: You can check your bank balance with ease. And I must tell you, again, I - in the spirit of full disclosure, I do this. And I also find it helpful to help my parents with their finances, who, at a distance, I can keep track of what's going on. So if there are any expenditures that have not been authorized, I know about it immediately. I'm a huge fan of that.

So, why would it work the other way? That it would help you sort of keep control of your balances, but you can see exactly what's going on in real time?

HALL: If you have that discipline and you want to do it, it's perfect. That's where I think this whole technology would benefit so many people who struggle with managing their finances, if they had your discipline and your curiosity. But a lot of people act like ostriches. They will spend the money, but then they don't look at what's the remaining balance. They don't use the phone in more proactive ways to help them manage their money. They view it as a form of freedom.

If they could tie these two things together, it would be a great product. But I also know, Michel, that once you start using these phones in a particular way and it's monitored very carefully, the institutions start to see this as a way to make money.

There's an interesting incident of this recently involving an app involving Smurfs, where a kid would be playing this game and they would load these berries into this cart. And all of a sudden, the people who had the phones would get these huge bills. As soon as these companies start seeing that people use a particular feature of this service, what they will then do is just place limits on it. You can only use it so many times. And then if you want to use it more than that, then you pay a premium fee.

MARTIN: You know, there's another market that operates that way. We won't - it's called drugs. They get you hooked. They get you hooked for free and then, boom, lower the boom.

HALL: Exactly. There's a great dictionary app that I really like. It allows you to speak into the phone and - but now I've noticed they placed a limit on it. You use it so many times, and they say, if you want 300 more, pay another 99 cents. Hold it here.

MARTIN: You're not going for that.

HALL: Exactly.

MARTIN: So, Alvin, a final thought from you: thumbs up, thumbs down on these banking apps and these shopping apps. Are you going to use one or not?

HALL: I'm probably going to use one, because I think it's good for me to understand how it works. But I'm going to tie it to an account where I have a limit on the amount that I spend. I don't want it to have access to my total checking account. But I'm pretty disciplined about it. What I'll use it for, as you do, is to track what I spend. And for that, I think is good, so you don't end up with a wallet full of all of these charge receipts and papers.

MARTIN: All right. TELL ME MORE's regular financial contributor Alvin Hall joined us from our NPR studios in New York. Alvin, thanks for joining us.

HALL: Thank you.

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