Tuesday, March 22, 2011

Digital Wallet Battle Heating Up

In the very near future, I believe phones will replace credit cards as the physical instruments used to purchase goods and services. All the big carriers as well as the manufacturers - Google, RIM and Apple - are jockeying for position to control this new engine of commerce.

Mobile payment data is what we are talking about here. How to store it? Who has access to it? How it is deployed? And most importantly, who makes the most money from it? Today, payment credentials are stored on magnetic strips on plastic credit cards. That technology is about to be rapidly replaced. Visa, American Express and Mastercard might be left out in the cold or need to adapt their business models radically.

This new technology will move payment credentials from magnetic strips on plastic cards to your phone. The act of purchase becomes contact-less whereby the swipe of a credit card through a terminal is replaced by simply waiving your phone in front of some sort of monitor that records the transaction and debits your account.

Where on the phone will payment credentials be stored? RIM would like the payment credentials hard-wired into the handset itself, allowing RIM to play a role in transactions and presumably earn percentage points on each purchase. Google has some phones that already have this capability. This would limit, to some extent, portability of information. Apple does not have built-in technology to allow mobile payments on the Iphone.

Carriers like Verizon and ATT want payment credentials contained on tiny SIM cards which store a user's data and allow such data to be swapped in and out of phones. In other words, the SIM card model would give the carriers greater control over payment credentials and presumably a slice of each transaction. The carriers' model weakens the link between consumer and handset and allows portability.

Currently, the Wall Street Journal reports that there are only 110,000 terminals in the U.S. where a person could pay with smart phones. Of the 55 billion credit card transactions last year, only 80 million were smart phone contact-less purchases. This market will be huge, I have no doubt. In light of ATT's recent acquisition of T-Mobile, this is something federal regulators should consider before approving the further consolidation of the wireless telecom industry.

As an experienced Internet Attorney, I offer a couple of predictions. First, the portable SIM card model will win and control/profits will fall to the carriers. Second, this will open up a whole new slew of financial fraud and identity theft the likes of which we have never seen.

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