DIGITAL WALLETS New technologies are competing to transform the way we pay
After years of dependence on tried-and-tested technology, the payments industry is on the cusp of a revolution. With attractive “digital wallet” options being unveiled by PayPal, VISA, MasterCard and others, the technology clearly has potential. Consumer adoption, however, is the true test of success. Will consumers embrace digital wallets?
Technology has made a remarkable impact on almost every aspect of our lives, and our wallets are the next big thing set to go digital.
What is a digital wallet? The University of Toronto’s ID Lab defines it as “an electronic mobile device that allows an individual to make electronic commerce transactions.”
According to a recent study by Gartner, worldwide mobile payment transactions are projected to grow by 42% annually, reaching US$617 billion and 448 million users by 2016.
But the successful adoption of digital wallets is not guaranteed. When the concept first launched, in fact, digital wallets were conceived as a method of storing various forms of e-cash. When e-cash failed to win public acceptance, mostly due to security concerns, the definition of digital wallets evolved into more of a mobile payments service.
“The real potential for digital wallets has yet to be unlocked,” said Anne Head, vice president of VISA Europe. “The challenge – and the opportunity – is in launching a wallet that’s secure, simple and well-integrated, both with today’s banking and payment services and with those that are coming down the line.”
“Wave-and-pay” wallets, which use near-field communication (NFC) technologies to enable contactless payments, pose a particular challenge. Even though a high number of contactless cards and NFC-enabled mobiles are already in circulation, their actual use has been relatively limited.
“There’s a kind of standoff occurring between consumers and merchants,” said James Sherwin-Smith, a senior manager within the payments practice at global management consultancy Oliver Wyman. “Consumers are reluctant to adopt new payments technology unless they believe it will be accepted by most merchants, and merchants are reluctant to adopt technology that has low levels of consumer usage.”
The complexity of the NFC value chain is also a barrier to the technology’s expansion. “The disappointing truth is that, despite its infancy, the NFC market is already far too complex for anyone to predict the future with any real degree of accuracy,” said Amir Tabakovic, chair of the Mobile Wallet Taskforce at Mobey Forum, a global bank-driven business association that focuses on mobile payments and banking. “It is clear that the technology holds huge commercial potential. What is less clear, however, is how all the parties will work together. Many will need to compete and cooperate simultaneously.”
Such profound levels of “coopetition” may be difficult to forge. “It’s extremely difficult for all the different stakeholders to effectively work together,” said Zilvinas Bareisis, a senior analyst at global research and advisory firm Celent. “That’s why so many companies now seem to be going it alone.”
While the battle for a share of the NFC pie continues to rage, players from outside the traditional banking market are making inroads.
Worldwide mobile payment transactions are projected to grow by 42% annually, reaching US$617 billion and 448 million users by 2016.
Take PayPal, for example. The eBay-owned giant has successfully combined payment sources that include current accounts, credit cards, coupons and gift cards into one app, giving customers the flexibility to pay how they want, when they want.
“I would argue that payments at point-of-sale alone is not a problem that needs to be solved,” PayPal President David Marcus said in a recent entry on his blog. “The real opportunity for technology is to solve deep customer needs in new ways.”
In fact, Marcus predicted that the NFC payments debate will be settled in 2013 – and not in the way bankers hope. “It’s not solving a real consumer problem and it’s not providing additional value to encourage me (or anyone else for that matter) to change my behavior.”
One company that hopes to spur real change is New York-based start-up Moven (former Movenbank), which is launching its NFC-based mobile-only banking solution in 2013. Aimed at “digital natives,” the generation that has grown up online, Moven aims to spark what it calls the “reboot of banking.”
“Moven has been designed for mobile from the ground up,” said Moven founder Brett King, author of several best-selling books on the future of retail financial services. “Customers simply attach a contactless sticker to their mobile phone and they’re away.
They can then pay for goods using their phone and see their bank account balance before and after a purchase in real time on the screen.”
In the developing world, payment via a user’s mobile device offers an important advantage by providing access to financial services for the unbanked. One such initiative is M-Pesa in Kenya, which allows users with a national ID card or passport to deposit, withdraw, and transfer money with a mobile device. M-Pesa grew to 17 million customers in just six years, almost 50% of the Kenyan population. In fact, M-Pesa moves enough money through its mobile-based simple “current account” to equal 25% of Kenya’s annual Gross Domestic Product (GDP). Kenya’s traditional banks can’t get close to such levels of financial inclusion for the unbanked.
Despite such competition from non-traditional payments companies, established heavyweights like VISA and MasterCard are fighting back. For example, VISA has launched a new service called V.me, which lets customers check out online without re-entering their payment and shipping information for each transaction.
“THE REAL POTENTIAL FOR DIGITAL WALLETS HAS YET TO BE UNLOCKED.”VICE PRESIDENT OF VISA EUROPE
“The key words here are speed and convenience,” VISA’s Head said. “V.me is designed as a multi-channel payment service that will work on all platforms. This is particularly crucial as around 20% of all website visits are now via a phone or tablet. As people turn more often to mobile devices as their primary form of Internet access, the payment experience has to be as easy and fast as it is in any other medium.”
MasterCard, meanwhile, has launched its PayPass digital wallet network. PayPass allows users to store their credit card information on their smartphones, tablets or laptop devices, across all operating platforms, and make purchases online or in stores. American Airlines and US bookstore chain Barnes & Noble have been among the first merchants to incorporate the PayPass checkout button onto their websites. American Airlines has also integrated PayPass into its mobile app, with a goal of enabling speedy booking and boarding.
Elsewhere, MasterCard has set up a joint venture called Wanda with Telefónica, a Spanish telecoms firm, which aims to boost mobile payments across Latin America. Wanda has been successfully launched in Argentina, Peru and Mexico and has more than 200,000 customers. Mastercard and Telefónica are expected to offer similar services in Brazil in April 2013.
Meanwhile, China’s main mobile operator, China Unicom, is partnering with China Merchants Bank to launch a mobile wallet service in Shanghai for NFC-enabled phones. This will make Shanghai the first city to adopt the mobile payment system before it is introduced to the rest of the country.
Japan Credit Bureau (JCB) is planning a one-month trial of a new mobile wallet platform ahead of a rollout to national and international customers in late 2013. The JCB Mobile Wallet handles payments, loyalty programs, discounts and other special offers.
All this comes as the European Commission has given the green light to Weve, a joint venture formed by UK wireless operators Vodafone, O2 and Everything Everywhere. Highlighting the shift of power from financial services firms to telecom companies, the venture aims to create a single mobile wallet platform hosting cards, coupons and transactional information on cell phone SIM cards. Banks, credit card issuers, retailers, transit companies and other telcos can rent space on the SIM under a subscription model.
Despite all this jockeying for position, the question remains: Will consumers embrace it?
“Global digital wallet payments continue to show robust growth, especially in more mature markets,” said Patrick Desmarès, CEO of EFMA, the global forum for financial services executives. “It is now the job of banks, telcos and retailers to ensure that they are collaborating effectively to deliver a winning solution.”
ADDRESSING CUSTOMER CONCERNS
As security breaches continue to make headlines, customers may be apprehensive about adopting digital wallet technologies. So what do proponents say?
Research from Gartner shows that 27% of global consumers already have been hit by credit card fraud over the past five years.
“No payment solution has a chance of being successful in the market long term unless it is essentially secure,” said Zilvinas Bareisis, a senior analyst at global research and advisory firm Celent. “However, there is no such thing as ‘perfect security’ and it’s usually a balance between security and usability.”
Should consumers be concerned that banks, merchants or governments might be swiping off more than just their payment information when they use digital wallet solutions?
“Privacy is, of course, a growing concern, but less related to payments specifically,” Bareisis said. “I would expect that no provider hoping to establish its payment solution long term would be collecting any customer information beyond what’s required to make a payment transaction without explicit customer approval.”