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From TwitPay to Square, startups are rewriting the meaning of 'money'

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New generation of startups enables micropayments, new credit-card transaction channels.

Transfer money over Twitter? Who would have thought?

Someone did, as a matter of fact. A service launched in 2008, TwitPay, enables user to make social media payments, pioneering micropayments such as "socially visible" online donations over social networks -- or to pay for downloadable content.

We all know how our society has evolved from paper to electronic or plastic currency over the past three decades. For most, if not 98% of our transactions, we don't even see a dead president's picture.

And in the early 2000s, companies such as PayPal helped many make the leap to convertible, Internet-based currency. Even Second Life has its own virtual currency, Linden dollars, that can be converted to real value in the outside world.

Now, as Daniel Roth reports in Wired, prepare for a new wave of virtual currency -- one that could potentially rock the foundations of the traditional banking and financial services world. He cites the work of "hundreds of engineers and entrepreneurs who are attacking the payment ecosystem, seeking out ways small and large to tear down the stronghold the banks and credit card companies have built."

For example, Square, founded by Twitter co-creator Jack Dorsey, is the creator of a small attachable device that enables users to accept credit card payments through their smartphones or computers. Another startup, Obopay, enables users to transfer money to one another via phones with nothing more than a PIN. Amazon.com and Google are making their shopping cart technology widely available to etailers, which enable direct transfers of funds, versus relying on credit-card companies, Roth observes.

Javelin Strategy and Research estimates that currently, about 20% of all online transactions now take place over these alternative payment systems, a number that may grow to 30% within the next three years, Roth says. A recent move by PayPal may help accelerate this trend. In November, he observes, with the online payment service making its code available to anyone with an idea for virtual value transfer.

Of course, the end of the banking system as we knew it has been heralded many times. In the late 1990s, pundits were predicting the imminent demise of banks to Internet-linked services provided through Microsoft Money and Intuit Quicken. The banks survived by building their own Web channels and adding value-added services -- and even expanding services within brick-and-mortar branches. (The banks, of course, almost did themselves in as a result of the subprime mortgage lending binge, but that's another story.)

Still, the emerging Internet, containerized transaction model is worth sitting up and taking notice. We're moving to a virtualized system of value for many of our transactions. The old saying for investigators and journalists may be "follow the money," but in this case, the money is following the technology.

UPDATE: The big boys are apparently getting into the game. CashEdge Inc. just announced that more than 100 financial institutions are adding POPmoney to their customer offerings. All are preparing to launch the email and mobile person-to-person payments (P2P) service by the end of Q2 2010. According to CashEdge, "POPmoney is the first email and mobile person-to-person payments service for financial institutions that allows bank customers to send an electronic payment directly from their online or mobile banking service, by simply using the recipient's email address, mobile phone number or bank account information. POPmoney includes support for text messaging, WAP and downloadable mobile applications, enabling financial institutions to extend their P2P functionality to mobile phones."

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Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure