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The wave will supplant the swipe

Your mobile phone may soon replace your wallet. In the near future, the need to carry cash, credit and debit cards, loyalty/reward cards and transit passes may be replaced by a smart phone and a quick wave over a retailer's scanner

Your mobile phone may soon replace your wallet. In the near future, the need to carry cash, credit and debit cards, loyalty/reward cards and transit passes may be replaced by a smart phone and a quick wave over a retailer’s scanner.

Mobile-payment technology may provide significant upside to investors, given the potential scale of the global transformation. Some analysts predict the mobile-payment market will grow significantly over the next several years, potentially reaching $618 billion by 2016, according to a report by consulting firm Edgar Dunn & Co. and sponsored by MasterCard.

Behind this phenomenon is near-field communication technology, an emerging modality for very short-range, contactless exchange of digital information. While it has multiple uses, NFC technology is being incorporated actively into next-generation smart phones. First introduced to U.S. smart-phone users by Google with its Nexus S Android launch last December, several NFC-enabled BlackBerry models are due out this year. Apple is rumored to be testing the same technology for future iPhones, while Microsoft plans to release a new version of its Windows Phone software featuring NFC this year.

By 2014, Juniper Research Ltd. predicts that one in six smart-phone users worldwide will have an NFC-enabled phone equipped to support mobile payments.

Although aspects of the technology already are used in parts of Asia and Europe, widespread U.S. adoption has been hampered by a behind-the-scenes tussle between cellular-service providers, issuer banks, payment networks and others fighting to define roles and standards. Established payment giants such as Visa and MasterCard have been reluctant to relinquish certain rights to coveted transaction fee revenue or to form partnerships with carriers, transaction processors and banks in order to organize the financial ecosystem required for successful implementation of NFC technology.

Agreement among these parties, along with continued adoption by handset makers, merchant devices and semiconductor vendors will be required before NFC technology can become ubiquitous. Despite these obstacles, we believe the handset makers, forward-thinking retailers such as Starbucks and group-buying businesses such as Groupon will help make the case for the benefits of adopting NFC-based payment technology. In that case, the odds are good that the NFC-enabled mobile-wallet concept will be adopted in the U.S. over the next 24 months.

HUGE MARKET AWAITS

The potential for rapid growth is compelling, as surprisingly significant infrastructure already exists. In March, the Federal Reserve reported industry estimates that there were 70 million credit and debit cards and 150,000 contactless readers installed by U.S. merchants (many of them at large retailers, including McDonald’s and CVS) that have NFC-enabled terminals ready to be activated with a relatively simple software upgrade.

Many consumers already have embraced the digital lifestyle that will help drive utilization of this technology, and that will allow users to leave their physical wallets at home. For proof, look no farther than the rapid adoption of mobile devices (e.g., iPads), and consumers’ comfort levels with online payment processing (e.g., iTunes, Amazon, PayPal) and preference for new smart phones versus older mobile phones.

Protecting the consumer against the threat of being digitally pickpocketed is a concern. However, the technology can encrypt data transmissions, which makes it more sophisticated than that used in traditional card swipe methods. It also has been suggested that as with debit cards, mobile wallets would require a PIN code, especially for higher-value purchases. In addition, the phone could be remotely disabled if lost or stolen. Users also could set transaction limits, and card companies would continue to cover the cost of unauthorized purchases.

As businesses come to understand the potential benefits of NFC, market development opportunities are significant. Expect to see NFC in parking garages, on public transportation and in stadiums.

Given the scope of this coming transformation and the size of the addressable market, smart investors would benefit from spending time evaluating how the potential changes could affect the incumbents, as well as the emerging challengers, which will seek to assume leading roles as the NFC field develops over the next few years.

John Roscoe is a portfolio manager at Roosevelt Investments, which has over $5 billion in assets under advisement.