• Bloomberg, Monday, August 2, 2010 10:45 AM

Peter Eichenbaum and Margaret Collins report that the biggest U.S. mobile carriers are working with Discover Financial Service and Barclays on a smartphone system that would replace credit and debit cards. The partnership involves AT&T, Verizon Wireless and T-Mobile USA, which has a smaller stake than the larger carriers.

"This is definitely a game-changer," says consultant Richard Crone. It seems to make sense for mobile carriers, who already are expert at processing payments, and [for] consumers. "A mobile device is online, real-time interactivity that changes the customer relationship," he says. "A card is dumb."

For their part, retailers welcome the looming battle between the carriers and Visa and MasterCard. "We have long argued that real competition is missing from today's payments market," says Retail Industry Leaders Association spokesman Brian Dodge. "The emergence of a secure and reliable competing network that serves the demand from consumers for mobility payment options and reduces retailers' costs would be welcomed news."

The service is similar to those already available in Japan, Turkey and the U.K., three sources tell Eichenbaum and Collins, using contactless technology to complete purchases. Discover's payments network would process the transactions and Barclays would help to manage the accounts. A test is being planned for stores in Atlanta and three other U.S. cities.

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