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The Digital Skeptic: Apple Saw Truth About Making iPhone 5 a Credit Card

NEW YORK ( MainStreet) -- While Apple (AAPL - Get Report) skipped actual mobile payments in its Wednesday rollout of the iPhone 5, smartphone makers such as Google (GOOG - Get Report) and Samsung are workin' it hard to have their gear play the role of credit cards. Apps such as Google Wallet and other near-field communications technologies are sneaking into phones including the Galaxy S III and HTC EVO as well as several BlackBerry (RIMM) devices.

The ridiculously thin and fast iPhone 5 boasts a blazingly powerful processor that supports an upgraded iOS 6 with Passbook, a centralized coupon and ticket service, improved Siri voice control for commerce apps and business-oriented mapping features.

It's easy to see the dollars phone makers lust after. Electronically brokered transactions, a la Visa (V - Get Report), MasterCard (MA - Get Report) or bank transfers grossed up to a simply massive $34 trillion last year. That according to National Automated Clearinghouse Association, the industry trade group for the business of moving money via networks.

To put that in perspective: It's the gross domestic product of the U.S. roughly twice over.

The total take for electronics transfer can vary, but prices are steep. Banks levy double-digit fees for funds transfer, and the swipe fees, equipment costs, interchange and discount charges suck more than a few percentage points out of every MasterCard, Visa or American Express (AXP) transaction. Even new age, nominally cheap fund transaction services such as San Francisco-based Square, which allow any iPhone to accept credit cards, still charge a stiff 2.75% per transaction.

The issue is that the young turks of moving money electronically on networks know the real truth.

"The financial network is just a network," Ben Milne, the founder of Dwolla, told me recently. "Moving money on it is not as complex and expensive as those who currently move it want you to believe."

It's still a network, stupid
Milne explained to me -- patiently, I might add; this is complex stuff -- how his ultra-low-cost financial transaction services company, based in Des Moines, Iowa, bypasses something called the Automated Clearinghouse network. The ACH dates from the 1970s and is what traditional financial institutions tend to use to move money. Instead, he has adapted how the financial network's large companies themselves used to move funds internally.

And the savings for moving cash are staggering.

Dwolla takes no stiff fees and asks for no percentage cut of the action. There is no cost for equipment. In fact, there can be no costs at all. Transactions of less than $10 are free. Above that, it's 25 cents each. Not 25%. Just a flat fee of 25 cents per transaction!

Even at these dirt-low rates, Milne's Dwolla is making major wampum. As of April, it reports 100,000 users and 15,000 Dwolla-associated merchants. And when I test the system, it definitely works. The company recently locked down $5 million in funding from backers such as Union Square Ventures and A-Grade Investments. (That's the one with Ashton Kutcher's money.)

"We now have the resources to fully explore this new approach to moving money," Milne says.

A fraction of a penny for your thoughts
And here we go again, friends, looking at yet another market taking a fatal digital bullet. Dwolla is is making a heck of case that digital funds transfers on a network are just like digital music, books and legal expertise on a network -- nothing more than commodities nobody can charge much for.

So the lucrative fees smartphone makers are betting on probably will not materialize.

Which, by the way is the M.O. at Apple. Even Apple partisans such as the Apple Insider blog openly agree digital content services such as iTunes are essentially break-even affairs for Apple. That means that when iCashRegister or iMoney or whatever it winds up being called goes live, it will probably be just another digital content loss-leader to drive the sale of iPhones, iPads and iPods.

"It just is not that hard getting money from one person to another," Milne say. "It's a simple thing."
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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