The world's foremost payment processing company Visa (NYSE: V) has joined hands with Bank of America (NYSE: BAC) to start a trial of contactless payment system using smartphones.

The partnership comes just days after the trio of AT&T (NYSE: T), Verizon, and T-Mobile announced their partnership to explore contactless payment technology through smartphones. They had roped in Discover Financial Services (NYSE: DFS) and Barclays Plc to test the technology on a pilot basis in Atlanta.

Visa, in conjunction with BofA, will run the trial from September through the end of the year in the New York area.

The contactless payment technology uses radio-frequency identification (RFID) whereby an embedded chip or an antenna allows consumers to wave their card or smartphone over a scanner at the point of sale.

Currently traditional players like Visa and MasterCard (NYSE: MA) have been facing challenge from the likes of PayPal, IP Commerce, and Amazon who are creating general purpose software platforms which will be opened for application developers by exposing APIs.

These platforms sit over a grid of rails -- or a network that connects various players who facilitate payments like point of sale machines, banks and clearing and settlement houses. Imagine if someone comes up with an innovation that is as simple as a software program that helps small businesses accept payment in multiple ways and integrate these payments into basic accounting software. However, to accomplish this application developers will have to write an elaborate code to tap the underlying rails.

Currently groups like PayPal and Apple are involved in doing this dirty work of elaborate coding. They make these codes available to application developers later on, thus ushering in a whole new world of applications for online and contactless payments.

It was in such a changing scenario that PayPal launched a feature like Bump that allows iPhone users to tap the phones to trigger funds transfer. Visa's foray in this sector was long overdue.

Visa's business model revolves around charging a percentage of the merchant discount for the network it provides. However, as the devices get connected through Wifi to the web newer applications will make it possible for vendors to bypass this rail.

Currently smartphone-based contactless payment is still tied to specific merchants or financial institutions but newer technologies will enable the MicroSD card to be used like a "mobile wallet" similar to PayPal, which could bypass Visa's network.

Such advancement makes it imperative for Visa to launch its own open-source platform or maintain proprietary control over its network and develop value added services to compete with third-party application developers.

With contactless payment, Visa is targeting the strategy of adding new features to its network to compete with the likes of Verizon, AT&T, and T-Mobile. Visa collaborated with Device Fidelity to combine its contactless payment technology Visa payWave and In2Pay technology to transform a mobile phone with a microSD memory slot into a mobile contactless payment device. It also announced this feature for the iPhone.

Even as competition for payment platforms increases from non-traditional sectors, Visa's foray is a step in the right direction.

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