A guide to the rapidly expanding world of digital dollars

If the pundits are to be believed, currency will soon be a relic of the analog age, as quaint as a typewriter. In place of bills and coins (and in many instances, plastic credit cards), behold the smartphone. Analysts predict the mobile payments category will grow to $630 billion by 2015. “We’re starting to see this gaining traction, but it will be years before every merchant and every consumer accepts it,” says Todd Ablowitz, president of mobile payments consulting firm Double Diamond Group LLC. “What matters to retailers is this: Consumers love their mobile phones and they react to offers, especially younger consumers.” Mobile transactions come in a few garden varieties. Here’s what you need to know:

1. Mobile acceptance
Square Inc., co-founded in 2009 by Twitter co-creator Jack Dorsey, is the best-known name in mobile acceptance, a term denoting a service that lets businesses accept credit cards using smartphones and iPads. A square-shape card reader that plugs into the device serves as the terminal. Each swipe carries a one-time fee of 2.75 percent. Apriva, VeriFone, and Intuit are other firms competing in the space. “It’s great for smaller merchants that only accept cash,” says Ablowitz. But larger merchants like this solution, too, because it enables clerks to look up past purchases and check inventory in addition to accepting payment. Among the believers: Nordstrom, which just purchased 5,000 devices to test-market mobile checkout.

2. Remote mobile payments
Imagine you’d like to buy a ringtone, a book on Amazon, or a backyard grill from Sears. In the past, you might have picked up the telephone and placed an order or paid for the purchase on your computer using well-established e-commerce channels. In the future (or present), you’ll execute the transaction from your mobile phone. You might pay for the ringtone with iTunes, and larger purchases with a credit card or PayPal, but the principle is the same: You’re making a remote mobile payment. In a similar vein, there’s Zong, a “carrier billing” service recently purchased by eBay and operated by PayPal. It allows consumers to buy products using just a mobile phone number; the charges appear on their wireless bills.

3. Face-to-face mobile payments
Starbucks customers at 9,000 ­locations no longer need their wallets to buy a cup of joe—provided they have smartphones and have purchased and registered their Starbucks cards. “Enter your card number and your device will display a barcode you can use as your Starbucks Card to make purchases,” touts the coffee giant’s website. Starbucks’ 2-D barcode, introduced in 2009, is among the earliest face-to-face mobile ­payment systems in the market.

Courtesy of Google
Coming soon: Google Wallet, which lets people pay for goods with their smartphones using virtual versions of their credit cards

Many in the industry, however, believe that an even more significant face-to-face payments technology is NFC, or near-field communication, which has the support of Google. The behemoth is promoting its soon-to-be-released Google Wallet with the slogan: “Make your phone your wallet.” The service “stores virtual versions of your existing plastic cards on your phone,” according to the company. “Simply tap your phone to pay and redeem offers using near-field ­communication.” Bloomingdale’s and Macy’s are just two of the biggies that have signed on as merchants.

“I actually think NFC is as big as the Internet,” Ablowitz says. It boils down to this: NFC allows merchants to understand not just what consumers buy, but how they shop—and that business, as NPR noted in a recent broadcast, could be worth billions.

4. Person-to-person mobile payments
M-PESA, a Kenyan company owned by mobile operator Safaricom, is a type of “mobile money” initiative that allows people to store and exchange money using ordinary mobile phones. More significant in developing markets, person-to-person mobile payments are helping to democratize commerce—one reason the Bill and Melinda Gates Foundation has funded a similar initiative in Afghanistan.

5. Coupons, discounts, and offers
Here’s where things get interesting. “Say I get an offer from Bloomie’s for 10 percent off from 5 to 7 p.m. tonight,” Ablowitz says. “I pick up a blouse and I’m ready for my 10 percent off. I go to the clerk and tap my phone, and the POS will see that I’m a customer. It will register my discount and take my money from ­whatever card I have linked up to Google ­Wallet.” The revolutionary aspect, he says, is “this convergence of face-to-face with offers and discounts; it represents trillions of dollars in ­commerce.”