Digital Wallets . . . Can I get one that matches my shoes?
Daniel Northway, Executive Vice President / Chief Financial Officer, Scott Valley Bank
Lately, I’ve read several news items about digital wallets and mobile payments developments. I’ll admit that I may be more attuned to this topic than most, but even a casual observer probably has noticed the recent surge in articles about new ways to pay for goods or services with your phone.
There’s the Isis Mobile Wallet, a joint venture of AT&T, Verizon, and T-Mobile, which recently announced that American Express (Amex) would participate in the service. MasterCard on Monday announced its PayPass Wallet. Visa announced the production rollout of its V.me mobile wallet in Europe this fall.
The current hot topic is “near field communications”, also known by its acronym NFC (not to be confused with anything football-related). The idea is that you wave your NFC device over a receiver or tap the receiver in order to effect a payment for something like your daily latte. NFC technology is not new, but only relatively recently has the capability been built into smartphones. Availability in North America and Europe is still fairly limited, but wireless carriers and payment processors are trying to build demand. Smartphone maker Samsung announced this week that it has teamed up with Visa on a new NFC-capable device for the 2012 Olympic Games in London. The device will be given to all Samsung- and Visa-sponsored athletes and will be loaded with Visa’s payWave app, enabling the holder to make contactless payments at select merchants throughout the city.
The mobile payments world is in a state of extreme foment right now. Many players in the payment processing and telecom sectors see the increased market penetration of smartphones, coupled with greater acceptance of electronic payments by the public, and conclude that there will be significant riches to be made by the companies who win the race to combine the two. The result is a free-for-all as companies scramble to back many horses in the hope that one of them turns out to be the eventual winner.
The flood of investment and rush to form joint ventures has led to more uneasy and conflicting alliances than you can find in a Game of Thrones episode. For example, with the Isis announcement about Amex participation, all three major card providers now support Isis, even though each of them has their own competing mobile app. MasterCard’s PayPass has many merchants and banks lined up to participate in the service, but no phone makers or wireless carriers. Google Wallet is a joint venture between Google, MasterCard, and Sprint, but currently does not work on any other wireless carrier and only is available on certain Samsung devices. Samsung, as noted above, is working with Visa on a product that will compete with Google Wallet. Naturally, this leads to confusion and uncertainty for consumers and merchants alike, which slows adoption rates.
While there is common desire to be able to use the smartphone as an access channel for making payments, there are two other key obstacles to widespread adoption in addition to the uncertainty discussed above.
Security concerns need to be addressed.
Merchants will need to invest in new technology to handle mobile transactions.
Consumers fear that losing a smartphone with a digital wallet app would mean exposing one’s entire financial world to ID theft. In reality, such a loss would probably expose you to no more risk than if one had lost one’s physical wallet. The difference is that we are accustomed to the idea of what it takes to replace a lost physical wallet, but we do not yet have a sense for how much of a pain it would be to replace a lost digital wallet. Disposing of that fear will simply take some time.
A greater fear is that NFC technology has not yet established itself as being hack-resistant. We all remember the news last year about card skimmers at Bay Area Lucky’s stores, and we suspect that NFC transactions might be similarly susceptible to electronic eavesdropping or other hacks. The same goes for the apps on the smartphones – we know it is only a matter of time before some industrious hacker figures out how to break into them and possibly steal our data. Within a few months of the introduction of Google Wallet, a program called Wallet Cracker surfaced which, in limited circumstances, enabled a hacker to obtain the PIN of a digital wallet account remotely. The program took advantage of open administrator rights on the smartphone, not a flaw in Google Wallet, but the average consumer may not care about that distinction.
I think, however, that the biggest obstacle to widespread adoption is merchant resistance. Small businesses and large businesses alike are reluctant to spend the money necessary to upgrade their Point of Sale (POS) terminals, particularly in a down economy. Most will be prodded by the payment processors to do so, using the same techniques they used to move merchants away from carbon paper imprints (e.g., processing cost incentives, fraud liability disincentives). In addition, new card technology called “chip and PIN” is coming to the U.S. this year. This technology is more secure than the magnetic stripe currently found on the back of cards, but will require new POS terminals to read the chip. Merchants who are already facing upgrades for chip and PIN will probably bite the bullet and incorporate contactless NFC terminals into their upgrade plans.
The key for big retailers isn’t making payments faster or easier – mobile payments do that, but that’s not enough to justify the implementation cost. The Holy Grail for retailers is customer data. Big merchants want a mobile payments system that can tell them what their customers are buying, send targeted offers (i.e., advertising) based on their customer’s buying patterns, and bring customers into the stores more often while increasing their average ticket. Transacting the payment in a way that is more convenient for the customer and the sales clerk is just an added bonus.
Target reportedly is looking into developing its own system for mobile payments for those very reasons. Starbucks has had a mobile app out for about 16 months now, enabling iPhone users to load a pre-paid card onto their device for use in Starbucks stores. The device displays a barcode that can be read by scanners in the stores. (Technically, this is not a NFC transaction, but the idea is similar – the phone is the access channel.) Reportedly, Starbucks has processed over 40 million transactions with the app since its rollout in January 2011. Customers apparently like the app, judging by the number of transactions reported, and they appreciate features like being able to track their rewards points with each transaction.
Mobile payment capability from a digital wallet on a smartphone is coming. It is just a question of when and in what form. Payment processors, wireless carriers, and big retailers are throwing huge sums of money into developing the capability, and in a couple of years most new phones will have it in some form whether you want it and use it or not. The consumer will probably have a range of feature functionality to consider, from bare-bones payment capability to apps that tie in to loyalty rewards programs and send you coupons when you walk into a participating store. Regulators, as usual, will be bringing up the rear. This is not necessarily a bad thing – government rightly should hesitate to impose regulations that might restrict innovation in a developing market. Clearly, however, there are privacy and security issues that can be identified now. It will be interesting to see how those aspects of digital wallets evolve.