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Smartphones May Soon Replace Credit Cards AT&T and Verizon Wireless are readying a mobile payment system that could render plastic obsolete
By Peter Eichenbaum and Margaret Collins
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.”
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.
Eichenbaum is a reporter for Bloomberg News in New York. Collins is a reporter for Bloomberg News .
AT&T Inc. and Verizon Wireless, the biggest U.S. mobile carriers, are planning a venture to displace credit and debit cards with smartphones, posing a new threat to Visa Inc. and MasterCard Inc., three people with direct knowledge of the plan said.
The partnership, which also includes Deutsche Telekom AG unit T-Mobile USA, may work with Discover Financial Services and Barclays Plc to test a system at stores in Atlanta and three other U.S. cities that would let a consumer pay with the contactless wave of a smartphone, the people said. The carriers have been searching for a chief executive officer.
The trial would be the carriers’ biggest effort to spur mobile payments in the United States and supplant more than 1 billion plastic cards in Americans’ wallets. Smartphones have encroached on tasks such as Web browsing and street navigation and now may help the phone companies compete with San Francisco-based Visa and MasterCard, the world’s biggest payments networks.
“This is definitely a game-changer,” said industry consultant Richard Crone of San Carlos, Calif.-based Crone Consulting LLC. The firm advises card networks, issuers and phone companies. The mobile carriers “are the biggest recurring billers in every market. They are experts at processing payments,” Crone said.
Visa and Purchase, N.Y.-based MasterCard handled $2.45 trillion, or 82 percent, of U.S. consumer spending on general-purpose cards last year, according to the Nilson Report, an industry newsletter. That dominance has helped fuel profit growth for both companies. Visa’s annual operating income has grown sixfold since fiscal 2005 to $3.54 billion last year. MasterCard’s has surged more than fivefold to $2.27 billion.
The service, similar to those available in Japan, Turkey and the United Kingdom, would use contactless technology to complete purchases in stores. They’d be processed through Discover’s payments network, currently the fourth-biggest behind Visa, MasterCard and American Express Co. Barclays would be the bank helping to manage the accounts, said the people, who requested anonymity because of confidentiality agreements.
AT&T and Verizon Wireless are equal partners in the venture and T-Mobile has a smaller stake, one person said.
Representatives for the carriers, London-based Barclays and Riverwoods, Ill.-based Discover declined to comment on the venture.
“Mobile payments are the logical next step for consumers,” said Mark Siegel, a spokesman for Dallas-based AT&T. Siegel, Marquett Smith of Basking Ridge, N.J.-based Verizon Wireless, and Peter Dobrow of the Bellevue, Wash.-based T-Mobile unit, all said their companies “have nothing to announce.”
Retailers may be eager to help another network after years of fighting over transaction fees set by Visa and MasterCard. The merchants persuaded Congress last month to approve caps on interchange, or “swipe” fees, for debit transactions and filed a 2005 federal antitrust lawsuit that is still pending. The U.S. Department of Justice is weighing whether to bring a civil lawsuit against Visa for barring merchants from surcharging customers who use credit cards, according to the company.
“If we change our rules in these areas, this could cause a material, adverse effect on our business,” Visa said Monday in a regulatory filing.
Interchange fees on credit and debit cards exceed $40 billion a year and average about 1 percent to 2 percent of every transaction.
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.
Mobile technology for banking and payments is reaching “a tipping point,” with younger consumers leading the way, Mercatus LLC, a Boston-based consulting firm, said in a June 7 study. More than half of U.S. consumers, and almost 80 percent of those from the ages of 18 to 34, will use mobile financial services within five years, according to Mercatus.
MasterCard and Visa have been investing in their mobile solutions. Visa and Richardson, Texas-based DeviceFidelity, have developed technology that can transform phones consumers carry today, including Apple Inc.’s iPhone, into a payment device that can store multiple card accounts, said Bill Gajda, head of mobile for Visa.
“Visa is in discussions with a number of mobile operators around the world,” Gajda said in an interview Wednesday. “We continue to believe that the best opportunity to create a secure, scalable, mobile-payment service is by working together, converging mobile and financial networks, and extending the value of electronic payments to the mobile channel.”
In June, New York-based Citigroup Inc. introduced MasterCard PayPass stickers that can be affixed to the backs of mobile phones to make contactless payments at about 230,000 U.S. merchants, MasterCard spokeswoman Joanne Trout said in an e-mail.
Startups based near Silicon Valley, Calif., such as Zong, Bling Nation and Boku Inc., offer alternative payment solutions. Zong users enter their mobile phone numbers to make purchases on the Internet. Bling Nation works with community banks and local businesses, allowing customers to “tap-and-pay” with their devices. Boku lets online gamers buy “digital goods and social experiences,” the company says on its website.
`Card Is Dumb’
Any new payment system may face barriers that prevent the technology from taking hold 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 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 worthwhile if accepting mobile payments allows retailers to send rewards and information about promotions to their customers’ phones at checkout.
The wireless carriers have an advantage over Visa and MasterCard in the race to control the U.S. payments market because the phone companies have access to their customers’ mobile numbers and bank account information, said Crone, the industry consultant.
“A mobile device is online, real-time interactivity that changes the customer relationship,” he said. “A card is dumb.”
AT&T and Verizon are teaming up to create a “contactless” payment system for smartphones.
With rivalries aside, AT&T and Verizon Wireless are reportedly teaming up to replace debit and credit cards with smartphones. The partnership is also said to include T-Mobile and may eventually incorporate Discover Financial Services and Barclays Plc. Ultimately the collaboration would pose a big threat to the nation’s largest creditors, MasterCard and Visa.
The collaboration is considered a game changer because it would eliminate the need to carry physical credit cards in a purse or wallet. Similar to services offered in Japan, Turkey and the UK, consumers would simply pay for items by swiping their smartphone across a special “contactless” device. Purchase processing would be handled by Discover while Barclays would be the bank helping to manage the accounts.
According to Bloomberg, testing is slated to take place in Atlanta and three other US cities, however the carriers are currently scouting for a chief executive officer to head the collaboration. AT&T and Verizon would serve as equal partners while T-Mobile will have a smaller part in the venture.
The drawback to this type of payment system is that merchants would need to spend around $200 per reader. Mobile phones would also require an update that incorporated a special embedded microchip, increasing the manufacturing costs by $10 to $15 per device. Current devices could still be used in the new system by affixing a sticker that would make contactless payments possible as seen with Citigroup’s MasterCard PayPass.
Is this a dangerous idea? Or the way of the future? Losing a smartphone is probably no different than losing a wallet in terms of credit cards, however the former solution could be secured by using a keycode, locking would-be criminals out of the device.
Will the smartphone replace the driver’s license too?
AT&T and Verizon Wireless are teaming up to turn your cell phone into a credit card, according to a story published by Bloomberg on Sunday.
The nation’s two largest cell phone operators are forming an alliance with the credit card company Discover Financial Services and global bank Barclays to create a new service that could displace credit and debit cards with smartphones, the news agency reported. T-Mobile USA, the fourth largest wireless operator in the U.S. is also believed to be a minority partner in the venture. AT&T and Verizon Wireless are believed to be equal partners in the venture with T-Mobile holding a smaller stake in the venture, Bloomberg also reported. The companies are supposedly gearing up to test the new service in stores in Atlanta and three other cities, according to unnamed sources cited by Bloomberg.
Representatives from AT&T and Verizon Wireless declined to comment on rumors of the new alliance.
The way the service would work is that consumers would be able to use their smartphones, instead of plastic credit cards to make purchases. Discover would process the payments and Barclays would be the bank that helps manage the accounts, the Bloomberg story said.
Using cell phones to pay for things is not a new concept. Similar systems already exist in Japan, Turkey and the U.K. The technology has also been tested in the U.S. for several years. Nokia and MasterCard launched a trial in the U.S. in 2003. In 2006, Cingular, which is now AT&T, teamed up with Nokia and financial institutions Citigroup and MasterCard to trial the new phones that have MasterCard PayPass contactless payment capability.
This time around, it looks like AT&T and Verizon Wireless are working with Discover instead of Visa and MasterCard. This is a big deal considering that Visa and MasterCard are the dominant credit card companies in the U.S. Bloomberg cited an industry newsletter the Nilson Report, which stated MasterCard handled $2.45 trillion, or 82 percent, of U.S. consumer spending on general- purpose cards last year.
Visa and MasterCard also see big opportunity in mobile payments, and these companies have been investing for years in their own mobile solutions, according to Bloomberg. Visa has developed an iPhone App with DeviceFidelity that allows people to store payment information for multiple credit card accounts. Meanwhile, MasterCard is still promoting its PayPass service and has put PayPass stickers on the backs of mobile phones allowing people to make “contactless” payments, Bloomberg reported.
Still, mobile payments haven’t taken off in a big way in the U.S. There are several reasons that could be hampering adoption, such as common standards for implementing technology so that merchants and retailers can deploy common sets of equipment and software to handle transactions. Consumers have also been nervous about security issues.
But all this could soon change as more merchants become equipped to handle payments, and consumers become more comfortable using smartphones to do more things. Today people rely on their smartphones do much more than simply talk and text. Today, wireless consumers use their phones to check and send emails, access social networking sites, and surf the Web. They also use thousands of mobile apps to do everything from streaming music to managing travel arrangements. So using their phones to pay for groceries, a new pair of shoes or a train ticket may not be far off.
(Updates with executive comment in fourth paragraph.)
Aug. 2 (Bloomberg) — Bahrain Telecommunications Co. is seeking a credit rating to tap debt markets and raise funds for acquisitions as competition at home forces it to look abroad for growth, Chief Executive Officer Peter Kaliaropoulos said.
The fixed and mobile-phone and Internet-service provider, known as Batelco, may receive the rating in about eight weeks, Kaliaropoulos said in a telephone interview today. The company is looking for acquisition targets valued at about $1.5 billion from North Africa to the Asia-Pacific region, he said.
Middle East phone companies are expanding abroad into markets with young and growing populations. These countries often have lower penetration rates, or proportions of people with phones, than more developed European or Persian Gulf markets.
“Our challenge is finding acquisition targets that are right at the right price,” Kaliaropoulos said. “We are in discussions. The global economic environment has created opportunities as prices for assets have come down, but the good targets people aren’t selling.”
Batelco, whose Middle East business includes divisions in Saudi Arabia and Jordan, could raise about $1.2 billion in debt to foster expansion outside the region. JPMorgan Chase & Co. is advising Batelco in pursuing a rating, Kaliaropoulos said. The company has no plans to sell debt at the moment and will borrow depending on its needs for acquisitions, he said.
The company aims to form “clusters” in regions where it sees growth and a high level of phone traffic between countries within those markets, he said. Kaliaropoulos didn’t give further details on what companies Batelco was pursuing or how advanced talks were.
Competition at Home
At home, Batelco’s average revenue per user, an industry measure of how profitable each client is for the company, has slumped by 12 percent to 15 percent in the last year to about $10 now, Kaliaropoulos said.
The company said last month that second-quarter profit declined 20 percent as greater competition in its home market eroded sales, even as customer numbers rose. Viva, a unit of Saudi Telecom Co., became Bahrain’s third mobile-phone company when it started services in March. Batelco also competes with Kuwait’s Mobile Telecommunications Co., known as Zain.
Kaliaropoulos said the company has not received any instructions from government authorities to restrict services of Research In Motion Ltd.’s BlackBerry smartphone after regulators in the United Arab Emirates ordered phone companies to cut off some e-mail and messaging services in October.
“There hasn’t been any consultation between us and the regulator on this,” he said.
Bahrain is imposing a ban on sharing of a local news service on BlackBerry devices to avoid “confusion and chaos,” Gulf News reported April 9.
–Editors: Simon Thiel, Tom Lavell.
”YOUR credit history is history,” says the bloke on telly in the Radio Rentals ads, and I just had to find out why anyone would seek out customers with a proven inability to pay bills.
What’s more, I assumed this trawling of the nation’s worst customers represented bottom-fishing of the lowest kind.
Actually, John Hughes, the man behind the highly successful ”no credit history checks” campaign at Radio Rentals – which is the main business of stockmarket-listed company Thorn – offers two surprises.
First, Hughes is seeking business at this end of the market because he says one in three people listed as credit defaulters is on the list due exclusively to unpaid phone bills. In most respects they have a good record.
Second, far from grubbing a third-rate business from second-rate customers, the Thorn group happens to have some of the strongest numbers in the market.
Little wonder, then, that Hughes too is anything but predictable. The one-time food industry executive (his last job was as chief executive at Domino’s Pizza) is outspoken and forthright.
”The situation with mobile phones is shocking,” he says. ”You’re getting kids with $50 plans – they get an upmarket phone and download a range of stuff, next thing they’re hit with a very big bill, they ignore it and before they know what’s happened they have a ‘credit history’ that’s a black mark against them for years.”
He has a point. The big phone companies have quietly become key providers of credit to the poorest and most immature market sectors. It only takes a bill of $100 to be unpaid for more than 62 days and people get a credit history that will be on the books of every bank and finance company in Australia for at least five years.
And though we have long known that bad credit hits the poorest and the youngest, until Hughes came along it was never recognised that the system was so obviously unfair.
Armed with an array of statistics – a survey from credit researcher Veda Advantage that shows 18-25 year olds are twice as likely to apply for credit as other age groups, a Melbourne University study that shows the biggest credit issue among indigenous Australians is mobile phone bills – he suggests: ”The telephone companies are unregulated credit providers; people deserve better.”
”Just because someone did not pay a phone bill doesn’t mean they should be stopped years later from getting a loan,” Hughes says.
Some might not take Hughes seriously, until they see Thorn’s recent record. Despite a whopping 60 per cent of its customers having some form of ”credit impairment”, the stock goes from strength to strength, with an 85 per cent return to shareholders in the past year.
Of course, when you examine it more closely, the Radio Rentals ”no credit checks” campaign is not exactly ignoring credit issues. The company, which rents out everything from flat screen televisions to gym equipment, follows a rigid scorecard process that checks all aspects of a customer’s ability to pay in the future, all that matters to Hughes.
You might not like this story. You might feel uneasy about finance companies that operate at this level, where the poorest and least informed are cannon fodder. But one thing is clear: phone companies put thousands of customers on to credit checklists every day and the market has come up with an answer for a rotten process. It’s just a surprise the providers of that answer are themselves so successful.