Could cell phones replace credit cards?

Some wireless carriers are exploring a system that would let you buy items with a wave of your cell phone.

By Kim Peterson Aug 2, 2010 2:26PM

Credit card © Floresco Productions/CorbisOn a day when stocks are soaring, MasterCard (MA) and Visa (V) were singing the blues as news broke about a new payment system that uses cell phones instead of credit cards.

Bloomberg reported Sunday that three major wireless carriers -- AT&T (T), Verizon (VZ) and T-Mobile -- may begin testing a system that lets people pay for items at cash registers simply by waving their cell phones. Although such a system is still in early stages, the news was enough to cause concerns about the credit card sector.

"This is definitely a game-changer," one industry consultant told Bloomberg. The wireless carriers may launch a test with Discover Financial (DFS) and Barclays (BCS) in four U.S. cities, the news service reported.

The new system could break up the astonishing stranglehold that Visa and MasterCard have on American spending. The two companies handled 82% of U.S. credit card transactions last year, Bloomberg reported, and since 2005, annual operating income has grown sixfold at Visa and fivefold at MasterCard.

But the credit card giants are not sitting idly by. They've been developing their own pay-by-phone systems, such as stickers that go on the phone and can be used to pay at the register.

Tying retail payments to cell phones is a no-brainer for the wireless companies. They already have strong ties to their customers, and already receive regular payments from them. Purchases at the register would presumably be added to a customer's monthly bill.

There are some cost barriers to getting the system in place -- a store would have to spend about $200 per reader, for example -- but retailers would welcome the competition if it meant getting a break on transaction fees.

Customers are getting smarter about credit-card fees, too, especially as banks have raised interest rates to sky-high levels over the past few years. If a cell phone company offered a cheaper alternative, who wouldn't want to explore that?

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