Cell Phones and a Cashless Society

Smart Phones May Soon Replace Credit Cards

AT&T and Verizon Wireless are readying a mobile payment system that could render plastic obsolete. This is another step toward the global digital currency. Cell phone thefts will increase until the cell phone is biometrically linked to the owner.

August 4, 2010

Bloomberg - Smartphones may soon displace some of the estimated one billion credit and debit cards in American wallets.

AT&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 and MasterCard, 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, the fourth-biggest payments network in the U.S. behind Visa, MasterCard, and American Express. London-based Barclays 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, Home Depot, and Target. "A secure and reliable competing network that … reduces retailers' costs would be welcomed news."

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.

Flashback: The Future of Money in the Information Age

July/August 1996

Cato Policy Report - ...There are two different scenarios for electronic cash.

One is what we might call a fully traceable world--others might call it Clipper cash or data fascism. Making ordinary consumer payments totally traceable by government would curtail all kinds of activities, peaceful and not so peaceful.

One way to do it--familiar from science fiction--would be to require the consumer to identify himself by some kind of biometric, like a fingerprint or retina scan. Once identified, the consumer could access his account and conduct transactions. Of course, there would be central records of all transactions, and a customer could be locked out of the system at any point.

Another way is a little trickier: to create a chip that is in effect a portable bank officer. Like a Clipper Chip, it would be a little black box that everyone would have to carry with him in order to access his financial accounts and records. The consumer would have no way of knowing just what was on the chip; it might be sending out encrypted messages revealing his transactions to all kinds of parties. It might even be programmed to discriminate against certain people or to enforce arbitrary rules. The consumer's lingering doubt about what's on that chip would have a chilling effect on society.

I hope neither of those systems is implemented in the United States.

Another scenario would involve anonymous transactions. Of course, we already have anonymous transactions--using paper bank notes. Many people like paper dollars, but those dollars are very expensive. Perhaps 2 to 3 percent of the gross national product is tied up in maintaining the bank note payment system. Also, the paper dollar system makes possible counterfeiting, extortion, bribery, tax evasion, money laundering, and other criminal activities.

Some people think we have to strike a balance between the anonymous and fully traceable systems. But I think we can instead develop a system that offers the best of both worlds.

We would use the line-signature payment technology that is being launched by Deutsche Bank and other major European banks and that we have on chip cards and in electronic malls.

Under such a system, instead of receiving digital money from your bank, you would create randomly on your own computer serial numbers that could be hidden in a layer of encryption that only your own computer could unlock. Then you would submit money forms to your bank to be validated, remove the layer of encryption, and no one would know who you were when you spent that money. You would know whom you were paying, and you could always retroactively reveal the recipient of the funds. Thus extortion, bribery, and black-market trading would be no more likely with electronic cash than they are with checks because the recipient could always be traced by the payer and because the money would have to be deposited into a bank to be verified as valid. Each person's total revenue would be known--and subject to taxation--but not how he spent his money or his total wealth...