Smartphones May Soon Replace Credit Cards

Smartphones may soon displace some of the estimated 1 billion credit and debit cards in American wallets. AT&T (T), Verizon Wireless, and T-Mobile are planning a venture to develop a mobile payment system that works with smartphones, posing a new threat to Visa (V) and MasterCard (MA), three people with direct knowledge of the plan say. The partners aim to test the system at stores in Atlanta and three other U.S. cities, the people say, though they didn't provide a timetable. The trial would be the carriers' biggest effort to spur mobile payments in the U.S. "This is definitely a game changer," says industry consultant Richard K. Crone. Mobile carriers "are the biggest recurring billers in every market. They are experts at processing payments."

While the technical details are sketchy, the service would let customers make purchases by holding a smartphone in front of an electronic reader in stores. Transactions would be processed by Discover Financial Services (DFS), the fourth-biggest payments network in the U.S. behind Visa, MasterCard, and American Express (AXP). London-based Barclays (BCS) would help manage the accounts, say the people, who requested anonymity because of confidentiality agreements. Representatives for the carriers, Barclays, and Discover declined to comment.

Retailers may be eager to support a rival network after years of tussling with Visa and MasterCard over transaction fees. "We have long argued that real competition is missing from today's payments market," says Brian Dodge of the Retail Industry Leaders Assn., which represents merchants such as Wal-Mart (WMT), Home Depot (HD), and Target (TGT). "A secure and reliable competing network that … reduces retailers' costs would be welcomed news."

Payment Trends

Visa and MasterCard are benefiting as people abandon cash and paper checks for cards and electronic payments, which account for more than half of U.S. consumer purchases, compared with 36 percent in 2003, according to The Nilson Report, an industry newsletter. Visa and MasterCard accounted for $2.45 trillion, or 79 percent, of $3.1 trillion in U.S. consumer spending last year on credit and debit cards. More than half of U.S. consumers, and almost 80 percent of those between the ages of 18 and 34, will use mobile financial services within five years, according to Mercatus, a consulting firm in Boston.

Any new payment system may face barriers that prevent the technology from taking hold quickly in the U.S., the Federal Reserve Bank of Boston said in a May policy paper. Consumers won't demand mobile payments "until they know that enough merchants accept them, and merchants will not implement the technology until a critical mass of consumers justifies the cost of doing so," the report said. Merchants would have to spend an estimated $200 per electronic reader, and updating mobile phones with embedded microchips would increase manufacturing costs by $10 to $15 per handset, according to the Boston Fed. That may be worth the money if accepting mobile payments allows retailers to send rewards and information about promotions to their customers' phones at checkout.

Visa and MasterCard are investing in their own mobile payment systems. MasterCard has worked for years with carriers, handset makers, and banks on developing mobile payment technologies in countries around the world, including Japan, Turkey, and the U.K., Chief Executive Ajay Banga said in an Aug. 3 conference call with analysts. "While the business model for mobile payments is yet to be proven in a tangible way across the world, I have no doubt that it will get proven in some form," he said.

The bottom line: A smartphone payment system from AT&T, Verizon Wireless, and T-Mobile could turbocharge mobile payments in the U.S.

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