Illustration: Sarah Habershon for the Guardian
On 29 April, the end of cash will come a little bit closer. The major high street banks are launching Paym, which will let you pay the window cleaner, sort out a restaurant bill or pay back that fiver you borrowed at lunch, simply by pressing a few buttons on your mobile phone. For many, it will signal the death of the cheque – and is yet another nail in the coffin of high street bank branches.
Paym is backed by most of the major banks, including Lloyds, Barclays and HSBC, though not, initially, RBS/NatWest (they join later this year), and will let you send and receive payments directly to a current account using just a mobile phone number.
There will be no need to ask for the other person's sort code or account number, or tell them your own. Want to pay £15 to the cleaner? Then just enter their mobile phone number, confirm their name, check the amount and press "send".
Or let's say you have paid £20 for two tickets to the cinema tonight for you and your partner. He or she can now give you a tenner by selecting your number from their contacts book in their phone, and pressing "send". Never again will they be able to say, "Sorry, I haven't got any cash on me, I'll pay you later."
The banks reckon that by 2018 we will have made one billion payments using Paym (pronounced "pay 'em") with nine out of 10 of us using the system. Below we explain in more detail precisely how it works.
But it is just the start of a revolution that over the next few years will see millions of us ditch conventional debit cards, credit cards, loyalty cards – and for Londoners their Oyster cards – in favour of using our mobile phones for almost every aspect of our finances.
The carrot for customers is ease and simplicity – no more having to open up computers and type in 16-digit card numbers, or using sort codes and account numbers to make payments.
But behind the scenes a titanic battle is being waged between the traditional banks and card companies such as Visa, the mobile phone giants, PayPal, and social media sites such as Facebook, as to who will, in the future, manage all our financial relationships – and harvest the ultra-valuable data that comes with this.
The next stage in the battle will be in the middle of 2015, when EE, Vodafone and O2 launch "Weve". This is their bid to get you to replace your debit card, Oyster card and loyalty cards with a new-style chip embedded in a range of new phones. Initially, the idea is that you will use your phone instead of your debit card when you are in the queue at Marks & Spencer, Pret A Manger or any retailer that accepts "wave and pay".
Instead of placing your debit card on the reader at the counter, you'll tap your phone, and the payment (currently a maximum of £20) will instantly leave your current account and pop into the retailer's. Weve says there will be no difference between the chip you see on your debit card and the one that will be in your phone.
Mobile phones may even replace Oyster cards across London's transport network, and on other bus and tram systems in Britain's cities. This week it was revealed Transport for London is upgrading the readers at entry barriers to the tube network which will allow them to accept "suitable payment applications on mobile phones".
Already, London buses accept contactless cards to pay fares, and from 6 July they will no longer take cash, so the direction of travel, so to speak, is clear. Many commuters will welcome never again having to "top up" their Oyster card, because their phone will be directly connected to their current account and payment will go through automatically.
But Weve is more than just a payments system – it's going to be the way phone companies will be able to sell, sell, sell as we walk down the high street, once they know where and how we are spending our money.
In a test last year, Weve worked with Tesco to send text messages to a target group of 25- 34-year-old females who were within walking distance of its store, offering a £5 discount voucher. Nearly 40,000 responded and used it to shop in the store. Weve is now working with other major brands to allow them to "geo-locate" potential customers as they pass near their shops and send them deals and offers to seduce them inside – turning the science-fiction film Minority Report into reality. Weve says phone users will be free to opt out of the advertising if they wish.
But do customers really want to use their mobiles to buy a coffee or get them out of their handbag to swish through tube barriers? Ginni Arnold, spokeswoman for Weve, says: "Only this week I was in a lunchtime queue at Eat (a coffee and sandwich chain) and all but two people were on their phones or had them in their hands."
She reckons consumers will find it more convenient to use their phone to make a payment than to fumble around looking for their wallet and getting out a debit card. What's more, the numerous plastic loyalty cards such as Boots Advantage bulging out of people's wallets and purses could be discarded, as loyalty points are automatically added to the phone when payments are made.
The third wave of the revolution is likely to be something called "Zapp". If you think of Paym as the way to use your phone to make a person-to-person payment, and Weve as the "tap and go" payment system, Zapp is likely to be the way we will be able to use our smartphone to make payments for anything in a shop or over the internet.
It's a new app that is working with major banks, led by HSBC and Nationwide, and retailers (WH Smith and McDonald's have signed up already) that from this autumn will allow shoppers to pay at the till with their phone. Its proponents believe it will allow us all to leave our wallets at home.
When shoppers want to buy something, the till will generate a unique code that is immediately sent to the customer's phone. Through their banking app, the buyer will see the price of the item – and a real-time update of the balance on their current account – and then "zapp" the money across to the retailer by pressing a button on the phone. It will work in a similar way for making purchases purely online. Lloyds, Barclays and NatWest aren't yet signed up, but Zapp says it is in talks with all the major banks and hopes to sign up others soon.
Meanwhile, the social media websites and search engines aren't going to let the banks and phone companies run away with the business. Facebook – which this week announced a surge in profits and said half the world's internet population use the site – is launching a money transfer service that may be a prelude to a new payments system. It has registered an "e-money" service that will let it compete with the likes of Western Union, as well as giving users the option of storing money with the social network or buying items online.
Google, meanwhile, has a tap-and-go payments service called Google Wallet, while Apple is rumoured to be developing a mobile payments system based on iTunes accounts, which already store credit card information. It has reportedly been in talks with PayPal about a possible partnership.
PayPal is itself pressing ahead with its already established person-to-person service, and says: "For many of our customers, sending money by their mobile is nothing new."
Which one of these services will take off and dominate the new world of payments? Security is the big sticking point. What happens if your phone is stolen, or if malicious software infects the handset? Barclays, which has operated an early version of Paym through its Pingit service, says payments via Paym are protected by a passcode that only the user knows. "It won't be possible for anyone to send a payment without knowing this code. The passcode security details aren't stored on the mobile phone, and you should make sure not to write the code down or carry it with your phone." But others worry that consumers will face an unfair burden of proof if payments are made without their approval.
Zapp says if you were to lose your phone, unless someone has your access details, it will be impossible for them to make payments from it.
Trust is the other factor. The banks are counting on the fact that although customers will barely need to visit branches any longer, most people will prefer to use a service directly connected to their traditional current account provider rather than handing everything to a phone or web company.
• What is Paym?
Pronounced "pay 'em", it is a new, secure way for consumers to send and receive payments directly to each other's current accounts using just a mobile phone number. The idea is that you can transfer money to someone's bank account without having to ask them for their sort code or account number. All you need is their mobile phone number.
• How do I do it?
First, register your mobile number with your bank or building society. If you want to send money to someone's account from your mobile - provided they have also registered for Paym - you simply select their number using your contacts or enter their mobile number manually. You will be asked to check the name of the recipient before confirming the payment and pressing 'send'. After that you'll receive a confirmation that the payment has been sent.
• What phone do I need?
To receive payments, all you need is a mobile number so a basic phone is fine. But if you want to send payments to others, you need a smartphone capable of running a mobile banking app.
• Is every bank using Paym?
Not yet. While most banks go live on 29 April, NatWest, RBS, Ulster Bank, Clydesdale, Yorkshire and First Direct aren't joining until later in 2014, while Nationwide Building Society won't join until early 2015.
• Does it only work for payments in and out of UK accounts?
Yes, so far Paym is a domestic service linking only UK accounts.
• How secure is it?
The Payments Council, the body responsible for ensuring that payment services work for all those that use them in the UK, says that Paym is as secure as the mobile app it is integrated with.
"All of the banks and building societies offering Paym have had to sign up to stringent security standards," a spokesman says. "All apps have to be protected at a minimum by a passcode or password and the security customers currently use on their apps will not change when Paym is added."
As a further precaution, if a Paym user finds their mobile phone is lost or stolen and is concerned that that someone could access their account, they can ask their bank or building society to suspend service from that phone. The fact that anyone using Paym to send a payment to someone else is able to check the name of the recipient before confirming and sending the payment also protects users against accidentally sending money to the wrong person if, say, they have been given the wrong mobile number or typed in the wrong digits.
"All of the banks and building societies offering Paym have had to sign up to stringent security standards," a spokesman says. "All apps have to be protected at a minimum by a passcode or password and the security customers currently use on their apps will not change when Paym is added."
As a further precaution, if a Paym user finds their mobile phone is lost or stolen and is concerned that that someone could access their account, they can ask their bank or building society to suspend service from that phone. The fact that anyone using Paym to send a payment to someone else is able to check the name of the recipient before confirming and sending the payment also protects users against accidentally sending money to the wrong person if, say, they have been given the wrong mobile number or typed in the wrong digits.
• Is it free?
Yes, there are no charges for mobile banking apps that incorporate Paym.
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