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The day may be coming when cell phones will replace credit cards, cash and checks

CONSUMERS, MERCHANTS NEED CONVINCING; SYSTEMS BEING TESTED

It's a scene repeated hundreds of times a day at grocery stores: A woman steps up to the checkout line, sets down her cell phone and digs through her purse for her debit card.

That will all change in the future. She won't set down her cell phone -- she'll ``swipe'' it over a reader that will instantly debit her bank account. Or maybe she'll text-message her payment.

Then again, perhaps she'll bypass the checkout line and push her cart past a device at the door that will detect special chips on each item and debit her purchases automatically.

Today, the clerk who asks ``will that be paper or plastic?'' might as easily be referring to whether you'll be paying with cash or check vs. a credit or debit card. But eventually Americans will be able to choose among high-tech alternatives that will transform how they shop, pay for goods, borrow money, dole out allowances, transfer cash around the globe and manage their finances.

The process could reshape the financial services industry as banks, phone companies, cell phone manufacturers, financial networks and scores of start-ups vie to profit by making transactions speedier, simpler, safer and cheaper for consumers and merchants. It also will force Americans to weigh trade-offs between convenience and savings vs. privacy and security.

Bay Area companies are playing influential roles mapping the way, from old-school titans such as Wells Fargo and Visa USA to New Economy ventures such as PayPal, Obopay and Yodlee.

``In some ways, you use whatever works -- but beware, it may not,'' said Silicon Valley technology forecaster Paul Saffo. ``With this kind of experimentation, it's unpredictable what will catch on and what will last long enough to make a difference.''

Replacing your wallet

Many experts think consumers already hold the future in the palm of their hands: cell phones that can be upgraded for all sorts of electronic commerce. The day is coming, they predict, when the cell phone will replace your wallet. It will embody your debit card, checkbook, credit cards, gift cards, phone cards, even that stack of tattered cards punched full of holes each time you buy a latte, bagel or pie.

``Debit cards, credit cards, bill-pay? That's where the puck is. Where the puck is going is definitely the cell phone,'' said Richard K. Crone, who heads Crone Consulting in San Carlos, which tracks electronic payment services. ``We've only begun to see the potential. It's limited only by creativity.''

Being tested

Already, some of these scenes of electronic commerce and mobile payments are being tested:

? Dad text-messages $20 to his daughter as she stands in line with friends at the multiplex so she can catch a movie and grab a burger after.

? A consumer in San Jose is alerted that she's being ripped off when she receives a text message asking her to confirm that she's making a $250 purchase in Paris.

? At midnight, an immigrant walks into a shop with a kiosk that allows him to transfer money to his wife's bank account, debit card or cell phone in Mexico.

As some experts see it, it's not really a question of what can be done, it's a matter of how soon it will happen. The pace won't be determined by technological innovation alone. Merchants must see a payoff -- either in smoother customer service or lower costs -- and consumers must jump on board.

If history is any guide, it could take years before anyone can brag of success. Take the ubiquitous automated teller machine. Though it was in prototype stage in 1966, the first ATMs weren't installed for a decade, and it was another decade before the demand for ATMs was unquestioned, Crone says. Ditto for online banking, which was in the concept stage in 1975 but didn't truly take off until 1995.

Mobile phones started to hit the market in the mid-'80s but were clunky, erratic and expensive. Today, they are common, with 2.5 billion cell phones in use around the globe -- compared with 1.7 billion televisions and 775 million personal computers, Crone says.

For clues to how the future will be shaped, look to Asia and Europe. Because they lack a unified, reliable and inexpensive telephone system to support the magnetic-stripe system that's ubiquitous here, they have long relied on credit cards embedded with chips -- so-called smart cards. It isn't much of a leap to tuck the chip into a phone instead.

But U.S. retailers will be reluctant to chuck their mag-stripe readers or train clerks to use new readers until it's worth their while.

Retailers have billions of dollars at stake on the outcome because every electronic transaction costs them money. For example, running a debit or credit transaction through a network like Visa or MasterCard costs them 1 percent to 6 percent of the purchase price in so-called interchange fees, Crone says.

That cost is so onerous that grocery stores, which make razor-thin profit margins, ranked it as their No. 2 worry behind only the cost of energy, according to a Food Marketing Institute survey released in October.

That opens the door for companies such as eBay's PayPal and Debitman Card of San Mateo to offer merchants a way to shave transaction costs.

Buying habits

There's another potential payoff for merchants. If it's easy for consumers to load their electronic wallets with loyalty cards, retailers also stand to win by tracking an individual customer's purchases and beaming coupons and promotions directly to his phone. Similarly, customers could use their phones to scan in ads from newspapers, magazines or the Internet or wave their phones over posters embedded with special chips to download promotional material or discounts.

Consumers will take convincing, too. Ventures like Obopay are wagering that high school and college students -- for whom a bank passbook is as antiquated as a vinyl album -- will be the trend-setting ``first adopters.'' Unlike adults, they see their cell phones as multifunctional baubles that aren't complete unless they can also be used to send text messages, snap photos and play music and games. It's not much of a leap to think a phone could serve as an electronic wallet, too.

Winning over their parents and grandparents is likely to take longer.

``Maybe the reason I feel this will be incremental is because it has to be in order for people to adopt this,'' said Jim Smith, Wells Fargo Bank's executive vice president of Internet channel and products. ``Maybe they're willing to try the next thing -- but not three things out.''

Ultimately, the pace of acceptance will depend on how fast someone devises a service that overcomes the resistance and wariness of consumers and merchants. In short, who will do for e-commerce and mobile payments what Netscape did for the Internet, eBay did for online auctions and Apple Computer did for portable music players?

``Consumers are very good about giving feedback about what exists already, but they're not good at projecting into the future,'' said Anil Arora, chief executive of Yodlee, a Redwood City start-up that is testing a service enabling consumers to flip open their cell phones to check account balances, pay bills and transfer money. ``There has to be a killer application that drives people to say, `Oh, I get it.'

``The question is: What will that killer app be?''

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