AT&T and Verizon to turn phones into credit cards?

The nation's two largest cell phone operators are forming an alliance with the credit card company Discover Financial Services and global bank Barclays to create a new service that could displace credit and debit cards with smartphones, the news agency reported. AT&T and Verizon Wireless are believed to be equal partners in the venture, with T-Mobile--the fourth largest wireless operator in the U.S--holding a smaller stake, Bloomberg also reported. The companies are supposedly gearing up to test the new service in stores in Atlanta and three other cities, according to unnamed sources cited by Bloomberg.

Representatives from AT&T and Verizon Wireless declined to comment on rumors of the new alliance.

The way the service would work is that consumers would be able to use their smartphones, instead of plastic credit cards, to make purchases. Discover would process the payments and Barclays would be the bank that helps manage the accounts, the Bloomberg story said.

Using cell phones to pay for things is not a new concept. Similar systems already exist in Japan, Turkey, and the U.K. Thetechnology has also been tested in the U.S. for several years. Nokia and MasterCard launched a trial in the U.S. in 2003. In 2006, Cingular, which is now AT&T, teamed up with Nokia and financial institutions Citigroup and MasterCard to test new phones with MasterCard PayPass contactless payment capability.

This time around, it looks like AT&T and Verizon Wireless are working with Discover instead of Visa and MasterCard. This is a big deal considering that Visa and MasterCard are the dominant credit card companies in the U.S. Bloomberg cited an industry newsletter the Nilson Report, which stated MasterCard handled $2.45 trillion, or 82 percent, of U.S. consumer spending on general-purpose cards last year.

Visa and MasterCard also see big opportunity in mobile payments, and these companies have been investing for years in their own mobile solutions, according to Bloomberg. Visa has developed an iPhone App with DeviceFidelity that allows people to store payment information for multiple credit card accounts. Meanwhile, MasterCard is still promoting its PayPass service and has put PayPass stickers on the backs of mobile phones allowing people to make "contactless" payments, Bloomberg reported.

Still, mobile payments haven't taken off in a big way in the U.S. There are several reasons that could be hampering adoption, such as common standards for implementing technology so that merchants and retailers can deploy common sets of equipment and software to handle transactions. Consumers have also been nervous about security issues.

But all this could soon change as more merchants become equipped to handle payments, and consumers become more comfortable using smartphones to do more things. Today people rely on their smartphones to do much more than simply talk and text. Today, wireless consumers use their phones to check and send e-mails, access social-networking sites, and surf the Web. They also use thousands of mobile apps to do everything from streaming music to managing travel arrangements. So using their phones to pay for groceries, a new pair of shoes, or a train ticket may not be far off.