Don't cut up your credit card (yet)

December 10, 2013: 5:00 AM ET

Coin, Square and other next-generation payment technologies have credit card companies excited -- and scrambling.

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FORTUNE -- This week, I have bounced between decked-out department stores, cozy cafes, and speeding taxis, swiping my credit cards all along the way, more than 20 times in total. Despite the iPhone in my pocket -- an Internet-connected device that can communicate, geolocate, and yes, pay for goods across the globe with one tap of the finger -- each time I dug into my overstuffed wallet in search of my preferred form of payment: a plastic card with a magnetized strip.

Don't get me wrong: I'm a fan of flash sale websites, lazily ordering dinner using Seamless, and Uber-ing all over town. But I'm also always armed with plastic, which is why I was so excited when I saw the introductory video for Coin, the startup behind a card-shaped device that consolidates my many credit cards into a single, swipeable replacement. I'm not alone: Based on the updates I've seen recently in my Facebook newsfeed, my twentysomething friends are enthusiastic for it, too.

For several years, we've had technology available to us that allows us to pay for goods with our smartphones, no wallet necessary. So why are we so excited for a product that seems like a step back -- a clever, digital twist on an experience that otherwise hails from the 1950s?

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Kanishk Parashar has been wondering the same thing. In 2010, his company SmartMarket created a way for people to buy items from stores using their phones. Merchants could initiate a transaction using the SmartMarket mobile application -- on an iPad used as a point-of-sale device, for example -- and customers could confirm the transaction using their nearby mobile phones. The whole thing worked using geofencing technology and did away with that most persistent of shopping technologies: plastic cards.

Plenty of people downloaded Parashar's app, but few were actually using it. "I thought that was the future. It was pure mobile, with no need for plastic," Parashar recalls. Despite its buzzy reception, SmartMarket faced a chicken-and-egg problem: Merchants didn't want to replace their existing cash registers, and consumers didn't see merchants openly using it. It failed.

Parashar's newest venture, Coin, attempts to push payment tech forward without taking such a great leap. Like SmartMarket, Coin aims to further digitize payments. Unlike SmartMarket, Coin keeps the swipe-able card experience that people are used to. "It occurred to me that it's such a mass market with so many consumers [that] the only way to make something happen is when a single company can adopt something new to interact with something old," Parashar says.

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Square, the mobile payments company founded by Twitter's Jack Dorsey and engineer-turned-entrepreneur Jim McKelvey, approached the problem with a similar mentality. Though smartphone adoption was rapidly increasing at the time of the company's founding, the two chose to use the connected devices as enablers, rather than replacements, of plastic cards. With simple-to-use software and a square-shaped dongle that plugs into a mobile device's audio port, vendors could process debit and credit card transactions in places without outlets.

It was a hit. "It's important to meet people where they are and not push them too far out of their comfort zones," Square spokesman Aaron Zamost says.

The lesson here? When it comes to changing user experience, incremental beats radical every time. That's why Square last year introduced Wallet, a SmartMarket-like mobile app, and Cash, a PayPal-like service that allows people to send their friends money via e-mail. Both services have been done before by companies such as Google (GOOG) and PayPal; the difference here is that Square took the time to acclimate its customers to digital payments before further removing elements of familiarity in the transaction process.

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You might think that Coin, Square, and others threaten the dominance of leading credit card companies such as Visa (V), MasterCard (MA), and American Express (AXP); all three have made lackluster attempts at digital wallet technology in recent years. But the reality is that the Squares and Coins of the world can only exist because of credit card companies. They remain the connective tissue between consumers and merchants through a network of financial institutions, says Jim McCarthy, Visa's global head of innovation and strategic partnerships. Which means Coin, Square, and others are doing the hard work to change consumers' expectations, after which the entire industry benefits.

Which is why those credit card companies are less concerned with buying behaviors than they are with security. Years after they became standard in Europe, "chip and PIN" cards are slowly being deployed to cardholders in the U.S. Since Coin only uses magnetic strips -- the company says it's currently working on "chip card" capabilities -- McCarthy remains wary of supporting it.

"[Coin] is a bridge technology that uses mobile that I don't think anybody would think is a step forward," he explains. "It's a headscratcher. We've seen these models before, and we haven't seen this kind of demand." He added that the Isis mobile payment system -- a joint venture between AT&T (T), T-Mobile (TMUS), Verizon Wireless (VZ), and one of Visa's partners -- and similar services like Square Wallet and Paydiant are preferable because they allow shoppers to present a picture or QR code at the point of sale, which acts as a token that links to a card on file. The problem, of course, is that people aren't widely using this technology. At least not yet.

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In October, Visa, Mastercard, and American Express proposed a new global standard for mobile payments. McCarthy says Visa will make tokens available for commercial use in April 2014 and believes the release will greatly increase face-to-face mobile transactions. The central challenge remains, however: Consumers and vendors today are confused by the diversity of payment options. When you buy a holiday gift, will you swipe, tap, snap, or wave? And which app will you choose to use?

McCarthy is optimistic: 2014 will be mobile payment's year, he says. Other players are more cautious. Erik Vlugt, VP of Product for Verifone, doesn't think that people are ready for a dramatic change, despite the continued hype around mobile payments. "We've seen that shift in our business," he says, "but I don't think that it's realistic to accept that all merchants will make that shift [in the near future]. High-end retailers maybe, but that's it."

Players in the space aren't worried. Whether Square, Isis, Paydiant, or something else, the raft of new payment technologies is helping everyone involved attract new customers and tap undeveloped markets that haven't traditionally used debit and credit cards in the past but are now saturated with mobile devices. "Mobile is the key to use doubling us in parts of world where they don't have cards," McCarthy says.

So where does that leave this holiday shopper? Back to basics. It's pretty clear that I'll be wearing out my magnetic strips for gifts this year, as I have for any other. But fingers crossed that there's a Coin waiting under the tree for me.

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About This Author
Colleen Leahey
Colleen Leahey
Fortune

Colleen Leahey joined Fortune in May 2011 to cover leadership, technology, and small business. She also focuses on building the Fortune Most Powerful Women franchise in the digital and live media space and manages programming for the MPW Summit. Previously, Colleen worked at The New Yorker and Bicycling magazine. She is a graduate of Georgetown University and lives in Manhattan.

Email Colleen Leahey | @cmleahey
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