Loop’s interesting twist on the mobile wallet

Boston-based startup Loop is introducing yet another smartphone payments technology in an already extremely crowded market. Given that in-store mobile payments have hardly taken off, it might seem Loop is flogging a dead market, but it has a unique approach to the digital wallet.

Loop’s core app doesn’t require its own dedicated transaction network. Instead it’s merely trying to virtualize the plastic we all carry around in our wallets, letting consumers virtually ‘swipe’ them at any check-out stand the same way they would their credit, debit, gift and loyalty cards. Loop is riding over the existing point-of-sale equipment and payment processing networks retailers already use.

Here’s Loop CEO Will Graylin explanation of how the technology works:

“We invented a magnetic transmission technology that generates changing magnetic fields by putting alternating current through an inductive loop over a short period of time, which can be received by the magnetic read head.  This signal emulates the same magnetic field change over time that takes place when a magstripe card is swiped across the mag read head. Loop works in close proximity (about 4 inches) that can be received by any magnetic reader.”

Basically Loop is creating a contactless payment system that tricks any magstripe reader into thinking a physical card is being swiped. Though, the system doesn’t require any specialized hardware or software at the point of sale, it does require the consumer to invest in hardware. A card reader is necessary to load the card’s magstripe signature into the phone, and a special case or smartphone-connected fob is required to produce the magnetic field that emulates the card swipe.

Loop says that eventually its magnetic secure transmission technology will be embedded directly in mobile phones, eliminating the need to carry around any specialized hardware. But that strikes me as extremely wishful thinking. Some device makers like Apple(s aapl) are still reluctant to embed near-field communications (NFC) chips into most phones. It’s highly unlikely they would embrace a proprietary technology that works with a single app.

Loop mobile payments hardwar

Requiring consumers to invest in specialized hardware is a huge obstacle to mass scale adoption, but if it works, Loop’s technology has other things going for it. It claims that its app can be used at 90 percent of existing point-of-sale systems – that’s saying a lot. One of the main reasons the mobile payments market has been so lackluster is that customers can use the technology in relatively few places. From a convenience standpoint, it’s just must easier to carry plastic.

Tech startups, internet giants like Google(s goog) and payments companies are all search for the Holy Grail of mobile wallets. The only company that’s really made an impact so far is Starbucks(s sbux), and you can chalk its success up to ubiquity. Starbucks mobile payment apps and digital gift cards work in any location. PayPal(s ebay) in part has modeled its forthcoming in-store payments system on the Starbucks’ QR code approach. PayPal announced today it would field a new version of its mobile app next year that will work for any merchant that accepts Discover Card(s dfs).