AT&T, Verizon to Target Visa, MasterCard With Smartphones

Bloomberg

 

AT&T Inc. and Verizon Wireless, the biggest U.S. mobile carriers, are planning a venture to displace credit and debit cards with smartphones, posing a new threat to Visa Inc. and MasterCard Inc., three people with direct knowledge of the plan said.

The partnership, which also includes Deutsche Telekom AG unit T-Mobile USA, may work with Discover Financial Services and Barclays Plc to test a system at stores in Atlanta and three other U.S. cities that would let a consumer pay with the contactless wave of a smartphone, the people said. The carriers have been searching for a chief executive officer.

The trial would be the carriers’ biggest effort to spur mobile payments in the U.S. and supplant more than 1 billion plastic cards in American wallets. Smartphones have encroached on tasks ranging from Web browsing to street navigation and now may help the phone companies compete with San Francisco-based Visa and MasterCard, the world’s biggest payments networks.

“This is definitely a game-changer,” said industry consultant Richard Crone of San Carlos, California-based Crone Consulting LLC. The firm advises card networks, issuers and phone companies. The mobile carriers “are the biggest recurring billers in every market. They are experts at processing payments,” Crone said.

Market Dominance

Visa and Purchase, New York-based MasterCard handled $2.45 trillion, or 82 percent, of U.S. consumer spending on general- purpose cards last year, according to the Nilson Report, an industry newsletter. That dominance has helped fuel profit growth for both companies. Visa’s annual operating income has grown sixfold since fiscal 2005 to $3.54 billion last year. MasterCard’s has surged more than fivefold to $2.27 billion.

Visa fell 1.5 percent to $72.23 at 4:15 p.m. in New York Stock Exchange composite trading and MasterCard declined 3.6 percent to $202.52, the worst performance in the Standard & Poor’s 500 Index.

The service, similar to those already available in Japan, Turkey and the U.K., would use contactless technology to complete purchases in stores. They’d be processed through Discover’s payments network, currently the fourth-biggest behind Visa, MasterCard and American Express Co. Barclays would be the bank helping to manage the accounts, said the people, who requested anonymity because of confidentiality agreements.

‘Logical Next Step’

AT&T and Verizon Wireless are equal partners in the venture and T-Mobile has a smaller stake, one person said.

Representatives for the carriers, London-based Barclays and Riverwoods, Illinois-based Discover declined to comment on the venture.

“Mobile payments are the logical next step for consumers,” said Mark Siegel, a spokesman for Dallas-based AT&T. Siegel, Marquett Smith of Basking Ridge, New Jersey-based Verizon Wireless, and Peter Dobrow of the Bellevue, Washington- based T-Mobile unit, all said their companies “have nothing to announce.”

At Discover, spokeswoman Leslie Sutton said the company “is always evaluating technology solutions that make things faster, safer and more convenient.” Barclays spokesman Kevin Sullivan said, “facilitating mobile payments is a big part of Barclaycard’s strategy globally.”

The phone companies probably wouldn’t replace the biggest U.S. credit- and debit-card issuers, including JPMorgan Chase & Co. and Wells Fargo & Co., said Gary Townsend, CEO of Hill- Townsend Capital LLC, a Chevy Chase, Maryland-based hedge fund that specializes in financial firms.

Swipe Fees

“What is a cell phone, except a mechanism for consumers to address their lives in whatever way they choose?” Townsend said today in a telephone interview. “There’s certainly no reason if an AT&T account can effectively be carried on a phone that a JPMorgan or a Wells Fargo card can’t be there, too. In fact, the antitrust issues would demand that that be allowed.”

Retailers may be eager to help another network after years of fighting over transaction fees set by Visa and MasterCard. The merchants persuaded Congress last month to approve caps on interchange, or “swipe” fees, for debit transactions and filed a 2005 federal antitrust lawsuit that is still pending. The U.S. Department of Justice is weighing whether to bring a civil lawsuit against Visa for barring merchants from surcharging customers who use credit cards, according to the company.

‘Material, Adverse Effect’

“If we change our rules in these areas, this could cause a material, adverse effect on our business,” Visa said today in a regulatory filing.

Interchange fees on credit and debit cards exceed $40 billion a year and average about 1 percent to 2 percent of every transaction.

The people with knowledge of the carriers’ venture didn’t say how much merchants may be charged per transaction or when the trial will start.

“We have long argued that real competition is missing from today’s payments market,” said Brian Dodge, a spokesman for the Retail Industry Leaders Association, which represents merchants such as Wal-Mart Stores Inc., Home Depot Inc. and Target Corp. “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.”

‘Tipping Point’

Visa and MasterCard are benefiting as people abandon cash and paper checks for cards and electronic payments, which account for more than half of U.S. consumer purchases, compared with 36 percent in 2003, according to the Nilson Report.

Mobile technology for banking and payments is reaching “a tipping point,” with younger consumers leading the way, Mercatus LLC, a Boston-based consulting firm, said in a June 7 study. More than half of U.S. consumers, and almost 80 percent of those between the ages of 18 and 34, will use mobile financial services within five years, according to Mercatus.

“Rapid and broad-based consumer adoption of mobile financial services is imminent,” as people rely on their phones to manage every aspect of their lives, said Mercatus Managing Partner Bob Hedges, former head of retail banking and payments at Fleet Bank. “Consumers want it to happen.”

MasterCard and Visa have been investing in their own mobile projects. Visa and Richardson, Texas-based DeviceFidelity, have developed technology that can transform phones consumers carry today, including Apple Inc.’s iPhone, into a payment device that can store multiple card accounts, said Bill Gajda, head of mobile for Visa.

Zong, Bling, Boku

“Visa is in discussions with a number of mobile operators around the world,” Gajda said in a July 28 interview. “We continue to believe that the best opportunity to create a secure, scalable, mobile-payment service is by working together, converging mobile and financial networks, and extending the value of electronic payments to the mobile channel.”

In June, New York-based Citigroup Inc. introduced MasterCard PayPass stickers that can be affixed to the back of mobile phones to make contactless payments at about 230,000 U.S. merchants, MasterCard spokeswoman Joanne Trout said in an e- mail.

Startups based near Silicon Valley, California, such as Zong, Bling Nation and Boku Inc., offer alternative payment solutions. Zong users enter their mobile phone numbers to make purchases on the Internet. Bling Nation works with community banks and local businesses, allowing customers to “tap-and- pay” with their devices. Boku lets online gamers buy “digital goods and social experiences,” the company says on its website.

‘Card Is Dumb’

Any new payment system may face barriers that prevent the technology from taking hold in the U.S., the Federal Reserve Bank of Boston said in a May policy paper.

Consumers won’t demand mobile payments “until they know that enough merchants accept them, and merchants will not implement the technology until a critical mass of consumers justifies the cost of doing so,” the report said.

Merchants would have to spend an estimated $200 per reader, and updating mobile phones with embedded microchips would increase manufacturing costs by $10 to $15 per handset, according to the Boston Fed. That may be worthwhile if accepting mobile payments allows retailers to send rewards and information about promotions to their customers’ phones at checkout.

Contactless, or near-field communication, technology “is no less secure” than today’s plastic cards, according to the Fed. Consumers may also be able to sync their phones to a computer, allowing them to make purchases even if there’s no mobile signal or the battery dies.

“These are important issues if people are to be convinced to rely on this technology as an alternative to carrying a wallet,” the policy paper said.

The wireless carriers have an advantage over Visa and MasterCard in the race to control the U.S. payments market because the phone companies have access to their customers’ mobile numbers and bank account information, said Crone, the industry consultant.

“A mobile device is online, real-time interactivity that changes the customer relationship,” he said. “A card is dumb.”

AT & T will Take $1Billion Non-Cash Charge for Health Care

NEW YORK (AP) - AT&T Inc. will take a $1 billion non-cash accounting charge in the first quarter because of the health care overhaul and may cut benefits it offers to current and retired workers.

The charge is the largest disclosed so far. Earlier this week, AK Steel Corp., Caterpillar Inc., Deere & Co. and Valero Energy announced similar accounting charges, saying the health care law that President Barack Obama signed Tuesday will raise their expenses. On Friday, 3M Co. said it will also take a charge of $85 million to $90 million.

All five are smaller than AT&T, and their combined charges are less than half of the $1 billion that AT&T is planning. The $1 billion is a third of AT&T's most recent quarterly earnings. In the fourth quarter of 2009, the company earned $3 billion on revenue of $30.9 billion.

AT&T said Friday that the charge reflects changes to how Medicare subsidies are taxed. Companies say the health care overhaul will require them to start paying taxes next year on a subsidy they receive for retiree drug coverage.

White House spokesman Robert Gibbs said Thursday that the tax law closed a loophole.

Under the 2003 Medicare prescription drug program, companies that provide prescription drug benefits for retirees have been able to receive subsidies covering 28 percent of eligible costs. But they could deduct the entire amount they spent on these drug benefits - including the subsidies - from their taxable income.

The new law allows companies to only deduct the 72 percent they spent.

AT&T also said Friday that it is looking into changing the health care benefits it offers because of the new law. Analysts say retirees could lose the prescription drug coverage provided by their former employers as a result of the overhaul.

Changes to benefits are unlikely to take effect immediately. Rather, the issue would most likely come up as part of contract negotiations between the company and unions representing its employees and retirees. AT&T is the largest private employer of union workers in the U.S.

Candice Johnson, spokeswoman for the Communications Workers of America, which represents more than 160,000 AT&T workers, said these employees have contracts in place until 2012. An agreement covering retirees also runs through 2012.

AT&T rival Verizon Communications Inc. was among 10 companies that sent a letter to congressional leaders in December warning that their costs would increase with the health care changes. Verizon spokesman Peter Thonis said the company had no comment.

Also on Friday, Reps. Henry Waxman, D-Calif., and Bart Stupak, D-Mich., said they are asking the CEOs of Caterpillar, Verizon, Deere and others to testify at an April 21 House subcommittee hearing on claims that the health care law could hurt their ability to provide health insurance to workers.

Shares in AT&T, which is based in Dallas, climbed 9 cents to close Friday at $26.24.

AT and T Setting Sights On 'Telehealth' Industry

from NJ.com

The doctor will see you now. Or at least in the few seconds it takes AT&T to relay your vital signs over its broadband network.

The telecommunications giant has big plans to establish a foothold in the "telehealth" industry, an emerging field that links patients and physicians across the country via video and medical-information technology.

"These days, everybody is talking about medical care: Who gets it? Who pays for it? Who decides?" said Robert Miller, executive director of technical research at AT&T and a 40-year veteran at the company’s Florham Park research labs. "But few people are working on a technology solution that would lower costs and make medical care better at the same time."

AT&T scientists have spent the past year working on prototypes of products aimed at the home health care market. The idea is to make everyday household items "part of the network cloud," said Miller, holding up a pair of fuzzy bedroom slippers. They look perfectly ordinary, but they are actually one of many telehealth products in the pipeline at AT&T.

Called "smart slippers," they have pressure sensors embedded in their soles to transmit foot movement data over AT&T’s network. If something is amiss in an elderly patient’s gait, the device will alert a doctor via e-mail or text message, possibly preventing a fall and a costly trip to the emergency room, Miller said.

Such products would represent the next step in what is called "remote medical care." Sales in that sector and other telehealth services are expected to exceed $1.8 billion by 2013, up from just $77 million in 1995, according to a PricewaterhouseCoopers report.

With that much money at stake, AT&T, Verizon and medical device manufacturers such as Cisco are aggressively entering the rapidly developing market. But analysts say they must first convince all health care players — insurers, employers, doctors and patients — to get on board.

One the biggest roadblocks to growth could be limited reimbursement from Medicare and the general fee-for-service health care system, said Zachary Bujnoch, an analyst at the research firm Frost & Sullivan.

Representatives from AT&T’s business unit said it is too early to disclose the cost of upcoming telehealth products and services, but Bujnoch said costs can run up to $100 per month, per patient.

"This is virgin territory in the health care industry when you ask how we are going to pay for it," he said, adding that telehealth’s current market penetration is in the single digits. "Everyone is groping blindly in the dark to figure out what business models are going to work."

But telehealth’s potential is enormous, Bujnoch said, especially as large firms like AT&T invest heavily in research and development. Last spring, Intel and General Electric Healthcare announced they would jointly commit $250 million to develop wireless products to connect patients to physicians. And Verizon announced last month it has partnered with Cisco to deliver an audio and video consultation service that lets doctors interact with patients in real time.

Telehealth’s biggest advantage, proponents say, is its tremendous cost-saving potential. Remote patient monitoring alone can generate between 20 percent to 40 percent in savings, said Chris Wasden, managing director of health industry strategy and innovation at PricewaterhouseCoopers.

"Ironically, the United States is late to the party here," said Wasden, explaining that telehealth is much more common in developing countries such as India, where cell phones enable people to receive health care in remote areas that once lacked access to modern medicine. "They’ve already developed the ability to deliver mobile health care to their people, but we’re behind the times on that."

$6 BILLION INFUSION

AT&T’s push into the market comes as the Obama administration and Congress seek to overhaul the country’s health care system — partly by wiring hospitals, doctors and patients to reduce medical errors and duplication of services. As part of the effort, the federal government is putting at least $6 billion into various telehealth programs.

"The government is saying, ‘You have to go digital,'" said Tom Gregorio, chief information officer at Newark Beth Israel Medical Center, a 673-bed facility that also provides medical services to seven assisted-living centers in the Newark area.

A health care bill before the Senate would cut Medicare plans reimbursement for patients readmitted to hospitals up to 30 days after they were discharged. If the bill passes, Gregorio said he must find a way to curb the readmission rate at his hospital — or absorb the cost of those returning patients. Despite its uncertain cost structure, telehealth could be a solution, he said.

"Making sure that a patient isn’t readmitted — that alone is a positive return on investment," he said.

Despite telehealth’s potential, there are relatively few specific examples of how changes in the system might improve patient outcomes and reduce costs. At AT&T, Miller said the prototypes have not yet been thoroughly tested, though plans for a pilot program are under way.

A focus of those pilot programs should be to ensure that the technology is easy-to-use and reliable, Bujnoch said, since errors caused by remote medical monitoring devices could create unnecessary health care costs of their own.

"If it’s going to go off every three hours, who cares?" he said. "And that’s where they have to do the clinical studies and the research to prove that kind of stuff."

Maintaining a patient’s privacy is also a big concern as more telehealth products and services emerge, said Tim Keough, president of the New Jersey Health Information Management Association. At the very least, data should be encrypted as it moves across a service provider’s network, he added.

Miller said AT&T is using guidelines established under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as its standard while developing its telehealth portfolio, though the rule doesn’t specifically address telehealth services.

Gregorio said some doctors are also leery of telehealth, due to lack of solid evidence of a return on investment. But if the federal government succeeds in its push for health care reform, Gregorio said it would "create a revolution associated with physicians having to adopt technology that they have been rejecting for a very long time."

The hardest party to convince will be private insurers, said Bujnoch, whose agenda isn’t always in sync with those of providers and patients.

For example, Horizon Blue Cross Blue Shield of New Jersey, the state’s largest insurer, does not cover telehealth services, but the company said it is receptive to emerging technologies.

"I like to think we are progressive on these things," said Stan Harris, a pediatrician and senior medical director at Horizon. "But AT&T needs to show us that patients wearing those slippers had fewer accidents. We need clinical trials and other research objectives to prove the technology."

Miller is hopeful that AT&T’s products will eventually be covered by Medicare. He said proliferation of telehealth is inevitable as populations live longer and the demand for cost-efficient home care rises.

"A lot of people, including myself, never feel that we’re going to get sick, get old or need health care monitoring," said Miller. "The statistics are inescapable and eventually we will."

In Shake-Up, AT&T Gives Wireless Chief Broader Role

AT&T Inc. is reorganizing its management, putting wireless chief Ralph de la Vega in charge of all consumer offerings as the telecommunications giant tries to better coordinate marketing of landline, mobile services, and VOIP phone services in the face of stiff competition.

The management realignment is part of the continuing efforts at AT&T and rival Verizon Communications Inc. to link broadband, TV and mobile services more closely. Both companies are trying to license content for all platforms, and both have plans to sell ads across all "three screens."

The changes, confirmed by an AT&T spokesman, would organize the company into four divisions -- consumer, business, infrastructure and diversified businesses. Mr. de la Vega would retain his role as chief executive of the company's wireless unit, but that would be folded into a broader consumer markets division with responsibility over landline phone, Internet and TV service.

AT&T's moves could help the company come up with creative bundles of cellphone and Internet services that cable companies can't match. "The biggest impact of the reorganization will be on the cable companies, because they'll face a more unified consumer offering from AT&T," said Roger Entner, a telecom analyst at Nielsen IAG.

Cable providers have been gaining market share in the high-speed Internet market as phone companies' digital subscriber line, or DSL, services struggle to keep pace with faster cable broadband connections.

Meanwhile, Ronald Spears, who has served as group president of a unit focused on sales to large enterprises, will lead the new business unit.

John Stankey, who has been group president of telecom operations, will become chief executive of the infrastructure division. Ray Wilkins will remain CEO of the diversified businesses unit.

By: Amole Sharma
Wall Street Journal; October 1, 2008