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The digital wallet of the future

For many folks the idea of getting rid of your wallet and replacing it with an app on your smartphone seems like a no-brainer. Last fall, AT&T, Verizon and T-Mobile have teamed up to help make that happen.

The three wireless rivals created a joint venture called Isis that hopes to use near filed communication chips (NFC) embedded in next generation smart phones to replace your credit cards. But there are some big barriers facing the wireless giants.

Before your wallet is relegated to the trash heap, millions of merchants from coast to coast will have to spend money retooling their cash registers to read NFC phones. And Isis will have to take on MasterCard and Visa.

Those two credit card processors earn more than $50 billion in fees each year by taking a percentage off the top of every purchase in America that's made with plastic. And Americans use plastic to buy more than $3 trillion in goods and services each year.

Working with Discover, Isis hopes to undercut the credit card giants on fees and offer merchants who participate new highly targeted marketing opportunities.

"The ultimate goal of this network is to move beyond payments. So the way the industry prices today will look very different in the future. I think we provide value in a much greater way," says Michael Abbot, a former credit card executive and Isis's new CEO.

Abbot paints this picture:

"You think about the consumer today when they shop at the grocery store. They are checking out. They have to fumble through their purse or wallet. They have to find one of the five or six different cards they want to pay with. Then they have to go in and dig in again and find their key ring and scan their loyalty card and dig in again find the coupons, scan the coupons cross their fingers and hope they work. And if they get through all that they get another register receipt with yet another coupon. What Isis is all about is simplifying all of that. It will keep all that organized in a very simple fashion inside your phone - automatically."

But that's just one vision of a digital wallet. Companies like Bling Nation are taking a similar path using slightly different technology.

And Dynamics Inc., which makes smart credit cards, has decided not to challenge Visa and MasterCard at all. Instead of trying to build a credit card into your phone - Dynamics is building tiny but powerful computers into old-fashioned plastic cards.

The companies introduced a line of cards with different features. One lets you pay with loyalty points right in the store. Another Dynamics card is focused on security. It wipes clean your magnetic stripe after every purchase and requires a pin code before the card can work. Yet another lets you consolidate multiple debit and credit account onto one piece of plastic.

Finally there's PayPal - you can check out its Jetsons'-like vision of the payment future in the video below. Enjoy, but don't hold your breath.

At Intuit, Omar Green, is still a skeptic. He doesn't think any digital wallet will take off until it actually offers consumers a real service.

"The problem that needs to be solved isn't how do I spend my money faster," Green says. "The problem is how do I spend my money more wisely. And that is not being tackled by any of these folks right now."

Green thinks for a digital wallet to take off it will have to offer consumers advice they can't get anywhere else. It will steer them away from credit card fees and overdrafts and help them fight back against banks.

Green says it possible for software engineers to create a really smart wallet. Even one that's "smarter about your money than you are," he says.

For more on digital wallets, check out my radio story.

About the author

Steve Henn was Marketplace’s technology and innovation reporter for the entire portfolio of Marketplace programs until December 2011.

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