Goodbye, billfold. Hello, smartphone

About this series

We live in a consumer society, conducting dozens of transactions each week, if not each day. Five years from now, thanks to smartphones, the way those transactions happen may be radically different. Starting today and running through Wednesday, Atlanta-Journal Constitution cyber-security reporter Sean Sposito decodes the dizzying array of emerging technologies and the hidden workings of the banking system to show you what that future may look like. Think: merchant-controlled payment networks, credit and debit cards with computer chips embedded, verification via tokenization, even crypto-currencies. Buckle up, it’s going to be quite a ride.

  • Sunday: The future of money
  • Monday: But what about security?
  • Tuesday: The war for your wallet
  • Wednesday: Cryptocurrencies, a parallel universe

The local angle

From the inception of the credit card era, Atlanta has been one of the nation’s leading transaction hubs.

At the start, National Data Corp., founded in 1967, was responsible for routing a majority of the country’s payments. The Atlanta company had call centers around the country that shop employees would call to verify credit card purchases.

The sales clerk would read the numbers embossed on the card to someone at the call center, who would enter the information into a computer connected to the buyer’s issuing bank. If the bank said there was enough money, the call center employee would give the sales clerk an authorization code that promised payment.

But everyone wanted to make things faster — the game in payments is speed and ease. By the late 70s, cards had magnetic stripes that encoded the cardholder’s credentials, and the verification process was automated, though it still moved through phone lines.

Today, the significant payment processors with headquarters or offices in the state include Global Payments (an offshoot of National Data Corp), WorldPay, First Data, Elavon and TSYS, among others.

Looking ahead, with the hot action in financial technology all around mobile computing, metro Atlanta is still very much in the mix.

Among the companies based here are Sionic Mobile (a mobile commerce company that maintains loyalty rewards platform for merchants), Cardlytics (an advertising platform company that sits behind debit cards, including Bank of America’s BankAmeriDeals card) and ControlScan (a payments security company).

Square (which has applications for both acceptance and consumer payments) keeps offices at Atlantic Station.

Bitcoin is big here, too. BitPay, which handles the digital currency for merchants, is based in Atlanta.

It’s joined by Coinfirma, a company that provides bitcoin-cloud mining services to folks; CoinX, an Atlanta exchange that’s in private beta while it acquires money transmitter licenses across the country; PlayCoin, a bitcoin payment gateway company; Atlanta Bitcoin, which operates a bitcoin ATM; and CampBX, which maintains a bitcoin trading platform.

What’s what and who’s who

  • Mobile payment: a transaction in which the transfer of funds is initiated using a mobile phone, but not by voice.
  • Point-of-sale purchase: a purchase you make at the counter.
  • Mobile proximity payment: mobile-generated payments that are made at or within the physical proximity of a store's point-of-sale terminal.
  • Mobile peer-to-peer payment: sending money to another individual using a smartphone app; providers include Dwolla, PayPal and Venmo.
  • Mobile bill payment: a bill payment (for utilities or credit cards, for example) that are authenticated through a mobile handset.
  • Venmo: a service provided by Braintree, which is owned by PayPal, that allows folks to send cash to Facebook friends and others using a smartphone app and web portal.
  • PopMoney: a person-to person-payments service provided by bank tech vendor Fiserv. Bank of America, Wells Fargo and Chase customers, among many others, have access.
  • Square: a Silicon Valley startup that offers a free credit card reader that works with smartphones and tablets.
  • Stripe: a company that provides online businesses with the means of accepting payments.
  • PayNearMe: an electronic transaction network that lets folks pay their rent, utility bils and loans, as well as tarnsfer money, buy tickets, make online purchases; it's available through convienence stores such as 7-Eleven, Family Dollar and ACE.
  • WePay: Aa company that maintains digital tools for crowdfunding sites and small businesses, allowing them to receive payments.
  • PayPal: the eCommerce arm of eBay, which allows people to make online payments and transfer cash to friends using email, phone, text message or Skype.
  • Braintree: a payment processor, owned by PayPal, that maintains a set of software development tools companies can use to integrate payment capabilities into their apps and online spaces.
  • Crypto-currencies: a digital medium of exchange that's difficult to counterfeit because it employs cryptography, a branch of mathematics, for security; Bitcoin is the best known one.
  • Google Wallet: a service of the search engine giant that allows people to send money by email and tap and pay with certain smartphones.

Sources: Forrester Research, Google, PayPal, DataMonitor, Federal Reserve Bank of Atlanta, Crunchbase.

Here’s the thing about Taka Torimoto: he’s more likely to remember his smartphone than his billfold. And that spells opportunity for a whole raft of new players in the lucrative payments industry.

A 41-year-old technical consultant with an engineering degree from Georgia Tech, Torimoto has paid for fast food with the tap of his phone and sent money just as you would attachments in emails. His father digitally sends the grandkids cash for Christmas. No more checks.

Torimoto’s voice rises with excitement as he talks about the new possibilities. “Payments is one area that is going in so many different directions.”

For the first time since the advent of credit cards, there are new ways to pay that don’t involve cash, check or plastic. Most are built on top of the existing payments system, but — courtesy of that hand-held computer in our pockets and purses — offer new vistas for both consumers and tech entrepreneurs.

“It’s clear that the mobile phone is the device that people are going to be using in the future to pay,” says David S. Evans, Chairman of the Global Economics Group. “It’s not going to be a plastic card.”

And whether you’re looking for legacy players or innovators, Atlanta is right in the thick of the action. It’s been a payments hub for half a century, and is well poised to maintain that status.

Inflection point

By 2017, Forrester Research estimates, Americans will spend roughly $90 billion using a smartphone or other handheld device, a more than seven-fold increase from the amount spent in 2012. The firm’s figures include mobile remote commerce; mobile peer to peer payments and remittances; and mobile proximity payments.

Even if its estimate is too optimistic — as projections in this arena have tended to be — the pace at which startups are emerging is already head-spinning: Stripe, PayNearMe and WePay, among more than a thousand others, fueled by billions of dollars in venture capital.

For consumers, mobile payments mean greater convenience and better security. For merchants and banks, they present new opportunities to track you and target sales pitches and rewards to you. And they give tech entrepreneurs a low-cost entry point into the multi-billion dollar payments pipeline.

So why aren’t already living in a post-plastic world?

In part, because everyone involved in the chain – merchants, card issuers, traditional processors, tech innovators and consumers – is looking to maximize how much money they keep at the end of the day. Sometimes, the interests of two or more players align, but often they don’t.

Sorting it out – via market forces and regulation — is likely to make for a period that’s exciting, bewildering, messy and frustrating. And right now, we’re at an inflection point, where what emerged as a handful of novelties is becoming a new way of doing business.

Race to the top

That’s evident in the changes the incumbents are making. Banks, payment networks such as Visa, Mastercard, Discover and Amex, and the tech companies that serve them, such as FIS and Fiserv, are scrambling to keep up.

“In 2014, you’ll see larger payments entities scramble to accelerate the pace of their innovation to catch up to these smaller and more nimble competitors,” predicted PayPal president David Marcus, in a blog post.

“Meanwhile, smaller players will scramble to achieve the scale and experience needed to compete in a global business,” he wrote. “As a result, billions of dollars will be at play in the payment industry, and 2014 will be a year of game-changing disruption.”

Last year, PayPal, launched 58 new products, partly because of new threats, according to a recent New York Times report.

And earlier this year the ecommerce arm of eBay announced PayPal Beacon, a Bluetooth device that reads payment information from a smartphone. With that device, someone like a restaurant server would no longer have to take your card away from the table to complete a transaction.

That’s in addition to a partnership with Discover, which lets folks use PayPal in the checkout line at some of the nation’s largest merchants. PayPal has also recently acquired progressive payment processor Braintree, which has regulatory approval to move money nationwide.

It’s marketing its services to mobile-based innovators such as Uber, Airbnb and TaskRabbit, which facilitate transactions between individual sellers and buyers of, respectively, rides, lodging and doers of household errands and other tasks.

And we haven’t even talked yet about Bitcoin and other cryptocurrencies, which operate in a parallel payments universe, completely outside the existing system.

To be sure, some of the innovations won’t stick.

“Innovation and disruption is an inherently inefficient and lofty process,” said Matt Harris, managing director at Bain Capital Ventures. He harkens back to the first wave of dot-coms, with its rash of failures.

“We are at that now, at least in consumer financial services,” he said.

But some of the experiments will succeed, and at least a few will change the landscape for all of us.

At our core

The practice of paying others is at the psychological core of who we are. It lets us buy, sell and, most importantly, earn through our labor. It allows us to say thank you in a tangible way.

Effectively, anything can be a form of payment as long as it is widely distributed, safe, accepted by both buyer and seller, and regulated by a system of rules. Over time, forms of payment have included cattle, wampum, notes issued by individual banks (which were IOUs for gold and silver held in their vaults) and currency backed by the “full faith and credit” of the United States.

The current system, in which we carry plastic cards that identify us and vouchsafe our ability to pay the debts we incur to the people who accept them as payment, evolved in the 1950s and ’60s.

To understand who all is in the chain, first you have to get hold of the process. Here’s how it works:

You swipe your card, say, at your favorite deli counter. Several different things happen almost simultaneously.

First, a card reader, the black box in front of the cashier, scans the magnetic stripe on the back of your card. That information is transmitted through an acquiring processor such as First Data or Total System Services Inc. (TSYS), which sends your personal details to the payment network whose logo is on the card – say, Visa or MasterCard.

That company forwards the information to the issuer, such as your bank, which makes sure you have enough money. If you do, the issuer sends an authorization code back down the food chain to the merchant in milliseconds.

The money doesn’t move quite as fast; it’s transmitted to the merchant in a settlement process that happens overnight.

For performing its role in the dance, each intermediary receives a small cut.

Last year, issuers, which tend to receive the largest cut, earned an estimated $230 billion in transaction-specific revenues globally, according to a report from the Boston Consulting Group.

As a part of that, merchants pay anywhere from 2 percent to 3 percent of the sales price to accept a credit card, and 21 cents plus 0.05 percent of the transaction value to accept debit cards, a rate that’s gone down because of action by Congress.

Innovators want to step inside that system. In return for adding something of value, such as a more seamless experience, they want to receive something of value, either an added fee or information about your buying habits that they can parlay into money.

Take Atlanta-based Sionic Mobile, which asks merchants to pay a 1 percent transaction fee when customers pay with ION Rewards. Today, shoppers can earn and spend those loyalty rewards at roughly 25,000 stores nationwide. The rewards program gives them an incentive to do more of their shopping at those stores.

Some merchants (think: Starbucks) have jumped directly into the fray, developing apps that generate codes you can scan at the point of sale to complete a purchase.

Hacking forward

Torimoto is in that mix, an avatar of what’s to come. He’s a former employee of Alpharetta-based CorFire, which helped Google create its first iteration of Wallet and Dunkin Donuts build payments into its mobile app.

As for his own usage of Wallet, arguably the farthest mobile payments have crept in the real world, he’s barely touched it — except of course for that one time in a McDonald’s a year or so ago just to see if it worked.

Most merchants don’t yet have the technology to let him tap his phone rather than swipe a card; others, even some of the big-boxes, are reportedly turning the capability off.

And the points you get on your credit card don’t necessarily get passed through in the same way. Yet.

This year, in Torimoto’s view, won’t be one of breakthroughs. But he does expect spurts of innovation cropping up across the payments horizon.

“Everything, I feel like everything, right now, is almost like a hack job,” he said.

But each successful hack accelerates the pace of change. It’s just a matter of time.