When Jon Fischer stops by Royal Grounds Coffee in south Minneapolis, he doesn't have to bother to bring his wallet — or even cash.
An application on Fischer's iPhone tells him what he owes for his small iced Americano. With a finger tap, Fischer sends his debit card information to the iPad that the shop uses as a cash register. And that's it. He's paid up.
"I'm in real estate," he said. "So, my phone is always with me. When I run up to the coffee shop I can just grab my phone, don't have to grab my wallet."
Fischer can't do this just anywhere. Most merchants are not yet set up to accept payments made with smartphones. That's changing, though.
This coffee shop uses a smartphone payment method devised by a San Francisco company called Square. The company says 75,000 small businesses across the country have adopted the system.
Square gives away tiny credit card readers that plug into smartphones and other devices. Square offers small businesses low rates on fees and charges for credit and debit card transactions. Later this fall, consumers will be able to use Square's phone payment application at some 7,000 Starbucks shops.
"WE VIEW THIS AS THE FUTURE"
But before most people can pay with their phones, there are many technical, business and other issues to sort out.
"This is not even a nascent industry yet," said David Robertson, who publishes the Nilson Report, which tracks the payment card industry. "There's still jockeying for position. Maybe your bank will provide the 'wallet.' Or maybe the telecom companies. Or maybe Google."
Or Apple. Or PayPal. Or perhaps Target, Best Buy and other major retailers that have joined forces to develop a mobile payment network of their own. The big retailers have not set a launch date but they're confident e-wallets will be a hit with consumers.
"We view this as the future of payment systems," said Target spokeswoman Amy Reilly. "It allows you to carry around less, and check out quickly and not have to fumble with a lot cards and cash and other stuff."
Target customers can already receive and store coupons and gift cards on smart phones. To redeem the coupons and cards, shoppers let cashiers scan barcodes displayed on phone screens. Starbucks also offers its customers something similar. They can also use their phones to store and redeem prepaid Starbucks cards.
Retailers have long complained about the transaction fees they pay to card issuers. A shift to smartphone payments could result in more favorable terms for retailers.
Small businesses switching to Square, for instance, to process card and phone transactions report the move can save them hundreds or thousands of dollars a year.
Proponents of the digital wallet say credit and debit cards stored on phones should be more secure than the plastic cards nestled in consumers' wallets.
Robin Dua is head of product development for Google Wallet, which currently allows shoppers to make phone payments at some 200,000 stores.
"There's a PIN that users have to enter before they can access Google Wallet and do a transaction," he said. "In the event users lose their phone, they can actually go online and disable their Google Wallet on their phone."
A WALLET REPLACEMENT?
Google has partnered with Citibank and MasterCard as it tries to push its Google Wallet app. Google won't reveal how many people are using its e-wallet.
For now, the Google app only works on a handful of Android phones capable of near field communication (NFC). That's a new wireless technology for communication between devices very close to each other.
Google insists NFC chips are on their way to becoming a standard feature in all smart phones. But so far Apple has not included NFC capability in any of its phones, including the iPhone 5, which debuted last week.
Apple has not yet offered a digital wallet. But the company recently introduced its Passbook app, which allows iPhone users to organize and redeem digital coupons, boarding passes, tickets and loyalty cards. Industry analysts say Passbook is a step toward a full-blown digital wallet.
Robertson of the Nilson Report said retailers are interested in doing a lot more with digital wallets than just collecting payments at the checkout.
"It's about selling," he said.
And marketing and advertising.
"When you have a mobile phone you will be identified, potentially, as soon as you walk into Neiman Marcus, Nordstrom, Macy's, or anywhere else," he said. "You could get a text message sent to you that offers you something that is designed to appeal to you. It's not some sort of mass-market blanket offer."
Robertson believes smartphones will inevitably end up being widely used as wallets.
But Forrester Research analyst Sucharita Mulpuru is skeptical.
"There's too many issues with connectivity, battery life, with the signal not being read appropriately," she said. "The card is just really seamless."
And she notes shoppers — and merchants — don't have to worry about plastic running out of power or hitting dead zones where a card becomes useless.