This is a true story.  It happened a couple of weeks ago when my dog took my wallet from my desk and proceeded to chew my credit cards to pieces.  It appears that he wasn't interested in the cash (which was found strewn across the floor) or my driver's licence (lucky).  I needed to replace three Visa cards and the leather wallet of course.  This took almost two weeks to resolve and the entire episode got me thinking about the "Smartphone as wallet" that is one of our central investment themes.

The physical wallet is an interesting piece of technology (or lack thereof).  It holds physical world representations of our digital financial life.  Plastic cards (with mag stripes and chips in some instances) and paper currency.  These devices are our access points to get cash out ATMs and make purchases with either debit or credit.  In my case, I carry five bank issued cards (credit, debit, multi-currency and corporate vs. personal cards).  Many of us also carry myriad other cards for loyalty points, gift cards or pre-paid cards (Startbucks for example).  In every case, these analogs are used to effect a digital transaction.  Because, let's face it, our bank accounts are digital - when was the last time you visited your cash in the vault of your local branch.  Furthermore, there are no built-in "smarts" with cash and plastic cards.  Your wallet can't tell you when your balance is running low or your credit card balance is running high. In my case, physical damage caused my grief - a worse situation is loss or theft.  The physical wallet is the equivalent of a feature (dumb) phone when compared to a Smartphone.

Now, before I make the case for replacing the physical wallet with a virtual wallet on a Smartphone, I will give credit to today's wallet for being very easy to use, very energy efficient (no batteries required), always on and available (except if you try to insert a mangled card into a reader) and somewhat fashionable (depending on your tastes).

Is there any reason why we cannot virtualize the content of the physical wallet on a Smartphone?  I would say no.  Here is how I would do it:

1. Provide complete access to online banking on the Smartphone through a thick application.  I would like to check my balances, move funds between accounts, pay bills, and transfer money to others.  In short, I would like to do everything I can do with web online banking in a special mobile application optimized for my handset.
2. Virtualize the loyalty, gift, and pre-paid cards that out-number bank-issued cards (in my wallet at least) by a factor of four.  This requires enabling NFC (Near Field Communication) payments for these low-dollar transactions.  You will "wave" your phone instead of swiping a card. This can also have an impact on the environment by eliminating plastic waste from single-use gift cards while, at the same time, simplifying the supply chain by allowing "electronic" gifting.  You will always have your payment cards with you and there will be no guessing about the balance remaining because you will have access to this information in your virtual wallet.
3. Once this has happened, it's time to move on to credit and debit cards.  Same idea - "wave" your phone.  In fact, it can be even better because the Smartphone can serve a specific role in the multi-factor authentication process that goes beyond pin or signature.  Using the Smartphone as the payment vehicle is more secure than plastic cards (and infinitely more secure than paper currency).

In between these major steps, I would introduce alerts and proactive financial management tools to turn the Smartphone into a personal "financial" assistant that is watching over my financial affairs 24/7.  I would also add a full suite of wealth management tools and provide all the functionality of my online brokerage account.  Bottom line - I don't want to have to sit down in front of a computer to manage my financial affairs.  This is akin to needing to go into the branch to complete a transaction.  It is time to put your bank in the palm of your hand.

Last fall I got to the airport for a flight to California and immediately realized that I had forgotten my wallet at home.  I had my passport and my BlackBerry but no wallet.  For a split second I considered going through security without my wallet. Sensibility won out and I returned home to get it (good thing I generally get to the airport early).  I needed that credit card for the hotel, rental car and restaurants!

I never leave home without my BlackBerry.  Soon, I want to be able to leave my wallet behind.