Chapter 4

Chapter Four: Digital Wallets

Digital wallets are the battleground of mobile commerce.

It’s not really hard to understand why.

percent of purchases made onlineFirst, most payment volume happens today at the physical point of sale. In fact, according to the latest US Commerce Department statistics (Q2 2013), 95% of all transactions happen at a brick and mortar retailer. That stat has crept up slowly over the last couple of years. The implication, of course, is that if you are an innovator with a mobile payments/mobile commerce ambition, you immediately aim your sights where the shoppers are shopping – and that is the physical point of sale environment. And, since shoppers at the physical point of sale use plastic cards today, the shift to mobile payments requires that they be given something new, different and digital to enable that shopping experience.

Enter the digital wallet.

Mobile Commerce EcosystemsSecond, as this graphic depicts, the digital wallet is where the payments, mobile and commerce ecosystems all intersect. Yes, it’s what enables payment via the mobile at any point of sale – physical or virtual – but it’s also what makes it easier for offers, promotions, coupons and loyalty/membership programs to be aggregated and redeemed at those points of sale. In short, it is the digital repository that aggregates many of the things that consumers carry around in their physical wallets today and/or find valuable to access when shopping. Since the digital wallet is the nexus of the new mobile-enabled shopping experience, everyone who even remotely touches the mobile, payments or commerce ecosystem wants to have the digital wallet that consumers use.

Now, to be fair, there’s currently great debate and confusion over just what constitutes a digital wallet. At one extreme, some consider any mobile app that has a payment method associated with it to be a digital wallet, e.g. the Starbucks mobile app. At the other, some believe that a digital wallet will only reach its true potential when it can literally replace everything that might occupy a leather wallet today, including identification, drivers licenses and the like. Others characterize it as an abstract concept in which the mobile device, in essence, becomes the digital repository that organizes all mobile apps that are related to commerce, have been downloaded by the consumer and have payment types registered to them. The reality is that a digital wallet is a concept that’s still evolving, and quite possibly will end up nothing like we envision or describe it today. It’s hard to imagine, given the power and possibilities that mobile devices deliver, that “the” digital wallet of the future is something that simply looks like a digital version of the physical wallet we carry around today. At the moment, it’s probably fair to say that most people describe a digital wallet as something that aggregates multiple methods of payment, offers, promotions and loyalty programs into a single digital “container” that makes it easy for consumers to interact with merchants at a physical or virtual point of sale and enables new shopping experiences.

Whatever the ultimate digital wallet ends up looking like and whatever your definition, there’s one important distinction that’s worth mentioning. Consumers don’t pay merchants – physical or virtual merchants – with a digital wallet. Rather they pay with the payment type that happens to be stored in that wallet. The digital wallet is simply a way to access that payment method and present it securely to the merchant at a physical or virtual point of sale. It’s simply a container or access device, not the payment method itself. This subtle but important distinction will become more relevant when we discuss the various technologies that enable mobile payment.

The Digital Wallet Obsession

Irrespective of the disagreement over the definition of a digital wallet, there’s general agreement on one thing: the digital wallet is the centerpiece of the new digital shopping experience. And, payments and financial services providers are vying for the consumer attention in much the same way that Louis Vuitton or Prada or Coach or Gucci do to get consumers to buy their logo’d wallets. They want their brands front and center whenever consumers reach into those wallets and make a purchase. In the physical wallet world, since consumers are likely to have only one wallet – or at least the same one for a while – and they can be expensive to buy, the stakes are high. Since payments providers today think of digital wallets as the digital version of a leather wallet, they too believe that consumers will have only one wallet and want consumers to choose their brand. But unlike the physical wallet world, digital wallets are free, at least so far, so the expense associated with having one becomes the effort expended to load cards and offers and other related items into that wallet. That tends to be time consuming since it requires assembling the physical inventory of everything that needs to be digitized –payment types, offers and loyalty artifacts, promotional coupons, etc. So, once that’s done for one digital wallet, it seems unlikely that consumers will invest the time and to do the same thing across multiple digital wallets. This, of course, assumes that the digital wallet is a digitized version of a leather wallet. On that score, the jury’s still out. More on this topic later in the chapter.

There is another important consideration. In a digital wallet, the payments cards themselves are more or less invisible. They are not colorful pieces of logo’d plastic inserted in little slots that are a tangible reminder of the issuer’s and network’s brand each and every time a purchase is made. Instead, they are presented as a string of digitized numbers and most likely referenced with the network brand (e.g. MasterCard, Visa, American Express, Discover) and not the issuer brand (e.g. Chase, Bank of America, Citi,) alongside those numbers. Even though some wallets do emulate a small thumbnail of the physical card next to the numbers, most simply present a fairly stark and standardized-looking set of numbers and expiration dates.

So, now you know why digital wallets matter so much. Given the standardized and non-branded way in which payment methods are presented and the fact that consumers will have only one wallet, the prevailing wisdom is that unless you are the service provider who “issues” the digital wallet, you don’t get any of the branding benefit from being part of one. The fear factor is relatively high on the part of the issuers, given their concerns that out of sight means out of mind. The relationship that issuers have with consumers in the virtual world is significantly different than what they experience in the physical world, and one that issuers contend is seriously compromised.

The Digital Wallet Technologies

One of the biggest bones of contention in the digital wallet space is the technology that enables digital wallets and physical point of sale systems to communicate. The physical point of sale ecosystem today accommodates a mag stripe (US) or chip-and-PIN (Europe/Asia) environment; no standard exists to enable payment via mobile at the physical point of sale today anywhere in the world. As a result, there are a number of ways in which innovators are using technology to facilitate payment using a mobile device.

Carrier Billing
This method of payment basically adds purchases made to the mobile operator’s bill, assuming that the operator has an existing relationship with the consumer. This option is used mostly for the purchase of digital goods given the low-value nature of the transaction and is not used to make purchases at physical stores. Since mobile operators do not have banking licenses, they are not able to extend credit to subscribers, nor would they want to be in the position of having to manage that risk which limits the application of this method of payment.

QR and Bar Codes
QR CodesQR codes (also known as 2D bar codes or Quick Response bar codes) are the square bar codes that power many cloud-based advertising and payment apps. They were invented in 1994 and designed to replace traditional bar codes as a more convenient way to transmit information via a mobile phone and enable an action, including triggering a payment transaction. Traditional bar codes, on the other hand, are just numbers that have to first query a database and then be translated into something meaningful to complete a transaction of any kind. For instance, scanning products at the grocery store uses traditional bar codes that query an inventory list of products and call up the price for item to the point of sale system that the cashier is using. QR codes have any and all relevant information embedded in the bar code itself. Part of their appeal is that they can be used by any smartphone handset and operating system and enablement at the point of sale requires only the purchase of a low cost scanner and a minimal software upgrade. As a result, QR codes have been embraced by mobile payments, advertising and marketing innovators to bridge the gap between the mobile phone and the point of sale environment, including embedding social media and geo-location information into the bar codes to enable a real time experience and leveraging cloud-based systems to tokenize and protect cardholder data when a transaction is triggered.

As a result of their ease of use and “ubquity” across smartphone handsets, QR codes have powered a number of successful mobile payment experiences. The most “famous” of these is Starbucks, which has the distinction of enabling the most mobile payments physical point of sale transactions – currently reported as 10% of total sales. QR codes also enable the underlying payments transactions for other emerging alternatives including, Square, LevelUp and even some of PayPal’s mobile payments applications. MCX, the merchant coalition that will launch its own mobile payments network in the next year or so, is reported to have settled on a QR code payments technology to launch.

One of the other things that QR codes enable is mobile offers and promotions. Given the rise in the level of interest in mobile couponing on the part of retailers and consumers, and the high redemption rates of such coupons (10% on average versus 1% for paper coupons), Apple launched its Passbook platform in order to aggregate loyalty, promotions, offers and other QR code-enabled applications. It is currently the largest (and only) such platform that makes it easy for consumers to assemble and access easily the variety of things that have QR codes associated with them – boarding passes, tickets, mobile coupons, loyalty cards, etc. Many have speculated that Passbook is Apple’s “toe in the water” for mobile payments using QR code technology.

NFC
NFC, the acronym for Near Field Communication, is a technology that enables the wireless transmission of data from one hardware device to another at a short range (typically 10 centimeters). In order for this to work, both devices have to have NFC chips and antennas. NFC has been touted by its enthusiasts as the most secure way of transmitting payment information because payment data is encrypted and stored in a secure element in an NFC-enabled phone. The secure element can be in a SIM card, embedded in the phone itself via a chip or in a secure digital (SD) memory card. In all cases, the data is protected by cryptography and a trusted third party, known as a Trusted Service Manager (TSM) that manages the secure transmission of payment credentials throughout the payments process.

In order for NFC to work, it requires the active collaboration of a number of parties in the mobile and payments ecosystems: issuers, mobile operators, networks, and merchants, as well the TSMs. For an NFC transaction to happen, the issuer must provision the consumer’s payment account information to the phone and send the payment account information to a TSM. The TSM – who has possession of the secure payments credentials – delivers the consumer’s payment account information wirelessly through the mobile network to the secure element in the mobile phone. The consumer then uses her phone as a virtual payment card at merchants who accept NFC payments, provided that their issuer’s payment credentials have been incorporated into the mobile phone.

NFC’s biggest drawback is the lack of NFC-enabled handsets and POS terminals in the US and in many parts of the world. Presently, only 3.3% of all handsets worldwide are NFC-enabled, and fewer than 3% of POS devices in the US are NFC enabled; even fewer have been actually turned on by the merchant. Outside of the US, the story is slightly different, with countries like Poland, the UK and France having a relatively high penetration of NFC terminals. But, for NFC to work for payment, as mentioned, issuers have to provision their payment specs to the consumer’s phone and merchant terminals, and to enable loyalty and other value-added commerce applications, additional integration must be done. Merchants have not perceived the cost/benefit payoff of NFC payments to be sufficient for them to want to make the investment, particularly since it is not at all clear that NFC will emerge as the mobile payments/commerce standard worldwide. Further, in the developing markets where point of sale infrastructure is absent, it is hard to imagine that installing NFC terminals just to bring NFC technology to the point of sale is a viable option.

Cloud-based solutions
There are a number of other solutions that are being trialed that involve using the mobile device to communicate with the physical point of sale system using online, cloud-based methods. For example, PayPal is experimenting with something called “empty hands” that involves a consumer typing in her mobile phone number and PIN at the physical point of sale to initiate a transaction. Other solutions enable checkout online (in a store or outside of a store) as is done now with proof of payment via a redemption code or confirmation that is received on the consumer’s phone and shown to the merchant. The use cases for this include order online and pickup in store, or self-checkout on the phone while in the store.

The Digital Wallet Warriors

As mentioned, just about everyone and anyone who is in payments today has digital wallet ambitions – that is, to become the digital container for all things related to the consumer/retail shopping experience. Listed below are a few of the more notable providers (in alphabetical order).

Payment Networks
Discover made a decision to forgo the launch of its own wallet and instead use its network to catalyze others with digital wallet ambition, enabling acceptance via their rails at their 8+ million merchants. Their PayPal/Discover partnership announcement in August of 2012 was intended to expedite the acceptance of PayPal as a method of payment at the merchants’ point of sale.

MasterCard, along with one of its biggest issuers, was one of the early innovators of digital wallets using NFC technologies. In fact, the MasterCard/Citi card was the first to align with Google Wallet in 2011 as a result of having launched a number of NFC-digital payments pilots in 2007-2008. MasterCard PayPass, launched in 2012 as a digital wallet intended for use at the physical point of sale at merchants that accepted NFC payments and with consumers who had an NFC-enabled phone. PayPass version 2.0 launched in 2013 as MasterPass and included a number of changes and enhancements. First, it was designed for use both on and offline, and so began to emphasize the merits of creating a digital wallet for use online, since only a few physical merchants have NFC capabilities. Offline, MasterPass still requires an NFC-enabled merchant and handset. MasterPass is also payment-brand agnostic, and accepts all payment types, including Visa, MasterCard, American Express, and third party payment types such as PayPal, etc. Presently, MasterPass is accepted at 700,000 locations worldwide. In addition to payment, MasterPass aggregates and organizes coupons, offers and other promotions, which requires that NFC merchant terminals be additionally configured to support their loyalty and offers spec.

Serve from American Express was launched in 2011 as a “a digital payment and commerce platform that gives consumers a new way to spend, send and receive money with services that go beyond the existing global payment networks.” Serve leverages the Revolution Money digital infrastructure that it acquired for $350 million in 2010. Presently, its use in the market is as a prepaid product, with a physical card and digital “wallet.” It originally included an offers platform that operated similarly to a daily deal format, but has since discontinued that program. It’s gotten very little traction in the marketplace, although market statistics related to active users are not published.

V.me is Visa’s digital wallet. It initially launched 2012 as a digital wallet for use at the physical point of sale. It combined payment, loyalty and offers, also using an NFC technology platform. It leverages the PlaySpan digital wallet infrastructure, a company that Visa acquired in 2011. PlaySpan enabled the creation of digital wallets and enabled payment in an online gaming environment. V.me has shifted its focus over the last year to enabling the population of digital wallets and for gaining acceptance of those digital wallets at online merchants. It’s live at 35 merchants, including PacSun and Overstock.com, and claims to have an additional 240 merchants in its pipeline. Its distribution strategy is to have its issuers popularize the V.me wallet within its consumer base, and as of July 2013 has signed agreements with over 50 of its issuers, covering an estimated 55 million consumers.

Alternative Networks

Google Wallet is the search giant’s foray into the commerce world. Google Wallet launched as a consumer-facing product for use at the physical point of sale in 2011. Its payment/loyalty/offers wallet technology platform is based on NFC technology and can only be used at physical merchants that have NFC. Its adoption on the consumer side has been limited by several things. Since the three large operators in the US – AT&T, T-Mobile and Verizon Wireless – all invested in creating their own mobile payments network, Isis, they have not supported Google Wallet. That left Google with Sprint, the smallest of the US mobile operators, only one handset manufacturers to start, and therefore, a small base of potential subscribers to leverage. Although Google Wallet is compatible with existing NFC terminals for payments, in order to enable its loyalty and offers spec, merchants have to incorporate a different and Google-specific spec into their merchant POS equipment. Google Wallet claims 10 million wallet users, with most of those users originating from the Google apps store, Play. (In order to purchase something on Google Play, one has to create a Google Wallet account.) Google Wallet’s programs around physical point of sale adoption have been shut down given lack of merchant and consumer acceptance, and alternatives for online use (e.g. as a payment platform for ads on Google Hangouts, in a P2P environment via Gmail) are now being explored.

Isis is the mobile payments experiment run by the three largest mobile operators in the US – AT&T, T-Mobile and Verizon Wireless who have invested more than $500 million in it so far. It “opened for business” in 2010 after receiving an initial funding of $100 million from all three operators. Its vision is as a payment/offers/loyalty platform operating as an NFC-enabled solution at the physical point of sale. Its 2012 market launch in two cities – Austin and Salt Lake City – was much delayed and included a small number of merchants, Coca Cola vending machines and the city’s transit system given the lack of NFC-enabled merchant terminals in those locations. Although the company reports repeat usage on the part of customers that use it, they do not report the number of active or total users it has. It has said that it will launch nationally in late 2013.

MCX is the mobile only payment solution conceived and operated by merchants. Currently at 46 merchants including Staples, Kohls, Macys, Walmart, Dunkin’ Donuts, Gap, and CVS, and representing almost a trillion in consumer spending, MCX will utilize a bar code technology at the point of sale tied to a proprietary payment method that MCX will make available to users. MCX was conceived by merchants as a low-cost alternative to the existing payments schemes and one in which they get to control the shopping and payment experience of their customers as well as the data that comes out of that experience. In July of 2012, it named its CEO, a veteran mobile payments executive from Barclays, who will oversee the development and implementation of its go to market solution. A launch date has not been made public.

PayPal is the digital wallet player of longest standing, launching in March 2000 as a way to pay for things purchased on the then nascent world wide web. The acquisition of PayPal by eBay in October of 2002 ignited PayPal and vice versa. PayPal enabled transactions between unknown parties to happen without the seller seeing the buyer’s payment credentials and the notion of using an online “container” that enabled payment via a securely stored payment type was born. Today, PayPal accounts are accepted at a variety of merchants off of eBay and were said to be responsible for 16.5 % of all online transactions in the US in 2009 (the last time that this statistic was publicly reported). PayPal announced its ambitions to become an “omnichannel” payments player in 2011 and began to focus intensely on acceptance at the physical point of sale. Its partnership with Discover in August of 2012 was designed to accelerate acceptance at Discover’s 8+ million merchants and follows a number of strategic acquisitions by PayPal to enable a variety of commerce-related activities including price checking, inventory availability, location-based advertising, check-in, offers and rewards. Reports suggest that PayPal is on track for acceptance at 2 million physical merchants at the end of 2012, well above the 250,000 physical merchants today which include Barnes & Noble and Office Depot. Through PayPal Here, its solution to enable merchant acceptance on mobile devices, PayPal is able to serve small merchants, and enable PayPal acceptance via mobile devices (smartphones and tablets). EBay reported in its Q2 2013 earnings announcement that it has 135 million active users.

Square created the mobile acceptance category with a device by the same name in 2010. At that time, its innovation was as much about enabling small/micro merchants to get a merchant account as it was about turning the mobile device into a point of sale terminal. It has since spawned a number of competitors all over the world and evolved into a platform that provides integrated tablet-based point of sale systems and a consumer wallet, PayWithSquare, that enable a more personalized consumer/merchant shopping experience. Square’s ambition, from the start, has always been to create a consumer/merchant network for the small “Main Street” merchant, using its digital wallet not only to facilitate payment, but commerce across its network of local merchants. It uses “geo-fencing” to enable cashiers to identify customers with the PayWithSquare wallet before they reach the checkout counter, enabling a more personal merchant/customer experience. Its deal with Starbucks in 2012 was a way for them to leverage Starbucks’ 7,000+ locations to acquire customers, as well as to enlist merchants in the proximity of those Starbucks to install Square Register, its integrated point of sale system. Square reports 40,000 merchants on its platform.

White Label Providers

Paydiant is a cloud-based white label mobile wallet platform that enables financial institutions and merchants to create their own branded digital wallets. It is technology platform-agnostic and can enable both bar code and NFC payments along with offers and rewards. It works with existing payment infrastructure and across all existing smartphone handsets and operating systems. Cardholder data is stored in the cloud and in a PCI-compliant environment. Paydiant recently closed a deal with PULSE to distribute its platform to its merchant and FI customer base. Paydiant is a venture-backed company based in Boston that was formed in 2011.

Venmo Touch is a mobile wallet that allows users to store payment credentials for use across a variety of online merchants that are part of its parent company, Braintree’s, processing platform. Venmo started life as a P2P mobile payments application and was acquired by Braintree in 2012. Venmo Touch has recently expanded outside of the Braintree platform to integrate its services with banks and credit card issuers. Its first deployment is with mobile banking platform, Simple. This partnership links the Venmo Touch wallet directly with the Visa debit card that Simple issues to every banking customer, eliminating the need to register other payment credentials with the debit card and enabling payment at merchants with a single click.

Newbies

Clinkle was founded in 2011 by a Stanford University student as a text-based peer-to-peer payments platform. It made news in 2013 when it received $25 million in funding from some of Silicon Valley’s storied VCs and corporate investors to scale its physical point of sale payments platform. The underlying technology, and that which has investors intrigued, is its use of audio signals to exchange payment information between the user’s phone and existing merchant point of sale terminal. Although it is reported that Clinkle works with existing point of sale infrastructure, it will clearly require some sort of software integration in order to accept the Clinkle payment credentials. Its ignition strategy appears to take a page out of Facebook’s launch strategy: it will launch on college campuses once demand has been established as determined by the size of the waiting list for the service. It will then “light up” on and off campus merchants and offer the Clinkle app to students to download. Its business model appears to take small cuts from merchants who accept Clinkle coupons. A launch date has not been disclosed.

LevelUp is included in the digital wallets section because of the hybrid nature of its mobile payments platform. LevelUp started life as a single merchant loyalty platform that enabled payment. Loyalty was incented by having the merchant provide “cash back” on subsequent purchases once a particular dollar threshold of spend had been reached at that merchant. LevelUp’s business model is to take a percentage of that “cash back” amount. LevelUp uses bar code technology to enable payment at the merchant point of sale once a user has downloaded its payment application and registered a payment credential. LevelUp is focused on the food services and convenience store sectors and can be enabled at the merchant one of two ways: as a standalone system or integrated mobile point of sale systems (LevelUp is integrated with 9 of the 10 largest providers to the food services sector). It also offers its wallet as a white label platform. Once a user has a LevelUp wallet, they can use the wallet at any participating LevelUp merchant. LevelUp reports more than 1 million active users and 250,000 merchants using its mobile payments platform.

Yelp is a reviews and recommendations platform for local merchants, aggregating about one million merchants across 26 geographies and more than 994,000 consumers. Its announcement in July of 2013 of the launch of Yelp Platform, will create a digital Yelp wallet that will enable users to purchase from merchants on the Yelp platform. Details are vague, but it is anticipated that its “digital wallet” will enable online payment and in-store redemption across all Yelp merchants.

The Digital Wallet Wildcard

Depending on where you sit in the mobile payments and commerce ecosystem, Apple is either your best friend and potential ignition catalyst or your worst nightmare. With its 575 million iTunes accounts worldwide (almost 50 times as many as Google Wallet!), app store, penetration of the high income/high spending demographic and consumer love affair, Apple is a formidable force in mobile payments and commerce.

To be fair, Apple is in the mobile payments game today – and profiting from it. They have a digital wallet, iTunes, and people use it to buy digital goods and things from the Apple store – on and offline. Their iPhones, iPads and iTouch devices also drive a tremendous amount of mobile commerce consumer spend, as quantified by purchases made on the internet using their branded devices. Current stats suggest that 80% of all purchases made using mobile devices initiate using the iOS system, including 53% on tablets.

On the mobile acceptance side, Apple is a force simply by having devices that merchants want to use as point of sale devices. It was the iPhone that ignited Square and the mobile point of sale (mPOS) “dongle” craze that has vastly expanded the number of merchants at which consumers can use their existing plastic cards. It is estimated that in 2012, there were 9.5 million mPOS merchants and there will be 38 million by 2017. Further, iPads are being transformed into integrated point of sale systems that merchants are using as replacements for and/or complements to their existing point of sale equipment, including top tier merchants. Some top tier merchants, e.g. Nordstrom, have announced that they will completely abandon traditional point of sale terminals and use tablets exclusively in their stores.

But, it was the introduction of the Apple Passbook in 2012 that caused the industry to sit up and take notice. As mentioned, it is a digital repository for bar-code enabled coupons, tickets, boarding passes and loyalty artifacts and offers those who Pass-enable its coupons and offers to gain valuable information about the user and her redemption experiences. Since it launched its Apple Pass API, numerous merchants have Pass-enabled their various applications in order to be part of the Passbook app. Merchants that have done so report favorable traction and usage. For example, Sephora has had more than 375k of its reward cards linked to Passbook and reports increased usage as a result of having its coupons Pass-enabled. CashStar, an issuer of digital gift cards, reports 250 retail partners with Pass-enabled gift cards and a 30% redemption rate of gift cards that are stored in Passbook. American Airlines reports that it delivers 20,000 boarding passes each day thru Passbook and attributes more than 1 million incremental downloads of boarding passes to Passbook.

Apple hasn’t payment-enabled its Passbook artifacts yet but clearly has been training consumers on how to use digital assets in support of the commerce experience. It made news when it rejected NFC – which wasn’t that surprising given Apple’s distaste for ceding control to any other ecosystem player. Adopting NFC would require that it partner with a mobile operator and a TSM, Apple is unlikely to want to do unless NFC becomes the standard at the physical point of sale and they have no other alternative.

The Digital Wallet Business Model

The business model that underpins digital wallets today will be nothing like it will look in the future.

Today, the business model is pretty similar to what exists in the plastic card world, transaction fees on purchases made via the digital wallet, with one big difference. Digital wallet transactions are all considered card not present, which assesses a much higher fee to the merchant on those transactions. Critics of this fee structure say that digital wallet transactions are, in many ways, more secure than the traditional card present transactions since they typically involve a consumer being present at the point of sale and typically typing in a PIN to activate the wallet and initiate the payment transaction. The mobile devices also support multi-factor authentication and even a layer of device-specific forensics to prove that the person making the transaction is really who and where they say they are, reducing both the potential for fraud but the cost of the transaction. Pressure is mounting on the card networks to revisit their current card not present schedule for digital wallet transactions.

The digital wallet, however, also offers a number of opportunities for providers to create a new business model tied to transacting that is tied to incremental sales to a merchant. Digital wallets provide service providers with the opportunity to serve offers to consumers based on their location, shopping habits and preferences. They can assist consumers in building shopping lists and remind them of sales, offers and expiring coupons. They can make recommendations based on prior purchases and help build wish lists of items for future alerts when they happen to go on sale. They can help consumers discover new brands by providing incentives to try those new brands or even insert an incentive for consumers to try a new payment method for a purchase being contemplated by offering an additional incentive if they take that option. And, all of this can happen in real time, leveraging the data that service providers acquire as part of the consumer’s buying and transacting experience.

The opportunities to build a new business model based on the digital wallet’s ability to influence buying behaviors is interesting and exciting. As regulatory pressures mount on traditional “interchange” pricing, using these data to monetize transactions at merchants based on sales driven to them via these promotions seems a likely alternative for digital wallet “issuers” to consider. Using these data, digital wallet providers can not only influence buying behavior, they can even influence payment method usage within the wallet.

The Stickiest of Digital Wallet Wickets: Merchant Acceptance

Digital wallets are only as useful as the payments they can enable at any point of sale. And, the complexity of getting merchant acceptance is not to be underestimated. A digital wallet must enable the aggregation and use of multiple payment types for different networks and issuers (an AmEx Business Platinum, Citizens Bank MasterCard, Wells Fargo Visa Credit Card and BofA Visa Debit Card, for example). It must also enable payment of those cards at the merchant’s physical and virtual points of sale, aggregate the various loyalty, incentive and other coupon-type offers that are tagged to that consumer and help consumers manage things like loyalty status and benefits received or pending, as well as payments transaction history and billing activities. That requires massive integration at the physical point of sale with a number of back end systems that requires time and costs money, and in the case of NFC requires the wholesale replacement of existing terminals. Merchants accept the fact that mobile is the future of how they will interact with their consumers, but the lack of technology standards and the possibility that they will have to support multiple standards for multiple digital wallet providers until a standard emerges and the market consolidates further complicates their appetite for moving quickly in any given direction. The complexity of changing the point of sale environment is why you see many more mobile commerce (e.g. coupons, offers and promotions) solutions than mobile payments solutions emerging. It is far easier for a merchant to digitize coupons and offers than payment.

So that is the digital wallet puzzle to solve for. Merchants will remain disinterested until they perceive that enough consumers will show up at their doorsteps enabled to pay with a digital wallet solution. Consumers, of course, won’t do that until they perceive enough value in using a digital wallet to go through the trouble of creating one. Until that happens, merchants will be hard-pressed to incur the time and cost to reconfigure their physical point of sale environments and retrain their cashiers and staff, particularly in the absence of a technology standard that gives them the reassurance that once they do, they won’t have to redo everything a year or two later.

One final point from the consumer’s perch: the competition for digital wallets, today at least, isn’t one digital wallet versus another, it’s for the plastic cards that they use for payments today, which works really well for them. Most digital wallet efforts to date have focused on getting consumers to substitute a phone for a card at the physical point of sale which doesn’t solve an existing problem or present them with a new opportunity that “surprises and delights” them. For digital wallets to reach their potential and drive the consumer adoption that will get the merchants to pay attention, the mobile experience has to be less about paying and more about buying.

And, that is what we will turn to next.