What's in your wallet? Likely several credit and debits cards, with the ones you use most at the top of the stack. Companies like MasterCard, Visa and American Express spend millions of dollars a year to muscle into that position. Yet, those cards may soon become irrelevant. There's a new battle brewing, one for the "top" of the smartphone. Below we explain the evolution of the digital wallet and the beginning of the transformation from a cash-based society to one where currency lives in a digital form, in the devices we carry with us wherever we go.
(What's In Your Mobile Wallet is an ongoing series on ReadWriteWeb, click here to read other installments)
The Smartphone as Wallet
PayPal has become a very successful business over the last decade linking transaction information to goods on the Internet. Apple, Google and Amazon along with payment processors have also created methods for consumers to easily store payment information on the Internet and make easy transactions.
Up until recently, this battle was almost solely about what and how purchases could be conducted on the Internet. Included in that were digital goods such as music, movies, applications or books or physical goods such as products available in eBay and Amazon’s online stores. Either way, consumers were not leaving their homes or offices for retail outlets.
In the physical world, consumer behavior has not changed much in decades. Cash is still the dominant form of payment in physical locations; MasterCard estimated in 2011 that neariy 85% of all transactions were made with hard currency. The remainder was made using cards or checks drawn directly from bank accounts.
We are in the nascent stages of a major change in this scenario, brought on by the two most fundamental innovations to hit the mainstream consumer since the advent of the Web: mobile and cloud computing.
Everywhere we turn, we see disruptive effects of the mobile/cloud tag team. Enterprises are forced to change the way they handle their information, the music and media industries have been fundamentally transformed and the ways people communicate are changing. While these are dramatic shifts, none reach as deeply into daily life as the coming change in the the ways money moves from one person to another.
Research firm Forrester defines a digital wallet as, “A digital service -– accessed via the Web or a mobile application -– that authorizes payment transactions from one or more payment sources and facilitates other commerce-related features such as offers, coupons, loyalty rewards, electronic receipts and product information.”
Through mobile devices and the cloud, transactions can take on new meaning in people’s lives. Wallets will no longer be leather books bulging out of the pockets of their jeans. They will be contained within smartphones, and the information that was once held in a magnetic strip on a plastic card will be in a chip within the phone or accessible through an Internet connection to the cloud. Mobile wallets, a relatively new concept that has evolved out of the online digital wallet, will bridge the gap between what people buy in their homes through their computers and how they interact with goods and services in the real world. Instead of looking for the top-of-wallet plastic card at the point of sale, consumers will look to their smartphones for the transaction method that gives them the most value.
A Solution Without a Problem?
A mobile wallet consists of how payment information is stored, how that information is transferred from the consumer to the point of sale, how the transaction data is collected and then acted upon by the wallet provider, the consumer and the business. Sound complicated? It is not. Everything a mobile wallet does is a centralized version of what consumers do every day.
On a smartphone, payment information can be stored in one of two basic ways. The first is in the device itself, the second is in the cloud. Payment information in the device is located in a chip, usually isolated from the rest of hardware components. Payments are executed through a “tap” of the smartphone to a payments terminal through a technology called near field communication (NFC). Cloud (non-NFC) based payments are made through different interactions such as scanning QR or UPC codes. Information is transferred from a database, through the phone, to the point of sale.
This notion of using a smartphone to pay has been criticized by many people (including us at ReadWriteWeb) as adding no value. There has been a lot of hype about NFC for the last couple years, but there is really no discernible argument that can validate that a tap is easier or more valuable than swiping a card. This is the crux of the argument against mobile payments: The transformation taking place is not necessary. For NFC in particular, it has been called a solution without a problem.
The same goes for other benefits provided by mobile wallets. Coupons can be found in the Sunday paper, loyalty programs are as simple as a paper hole puncher at a register. The functions involved with a mobile wallet have longstanding parallels that have nothing to do with smartphones.
Transformation, Not Revolution
Revolutionary technology begets transformative change. For instance, look at the music industry. The revolutionary technology was the ability to easily create digital audio that could easily be stored on a particular device. The transformation was how music was organized, going from compact disc to MP3. Industries were built around that transformation leading to services like Apple’s iTunes. Later, revolutionary technology such as wireless standards Wi-Fi and 3G allowed stored files to be streamed from the cloud. In each case, the transformation was seeded within a revolutionary technology that made what came before antiquated.
From a broad perspective, that is what is happening with money. Powerful mobile computers and ubiquitous cloud technology are the revolution. The technology and financial industries are rushing to create new transformative opportunities those revolutions allow. Hence, the race to capture the wallets of consumers.
Everybody wants a slice of the pie. Google’s much-hyped Wallet product is centered on NFC, loyalty and offers. PayPal wants to be everything to everyone and feels it has the power to move laterally in the industry. The mobile carriers in the U.S. (AT&T, Verizon and T-Mobile) have a wallet app called Isis coming this year. The payments processors such as MasterCard have their own mobile wallets. The goal is to create two-way value that goes beyond the transaction.
The value of the mobile wallet is the digital transformation of monetary and transaction data. When a consumer makes a purchase on a smartphone, the retailer knows who that person is, the mobile wallet provider gets information about what was bought when and where and by whom and the consumer gets the value of electronic receipts and the ability to receive coupons, offers and loyalty rewards. In this, the mobile wallet providers hold the greatest potential for influence out of the whole ecosystem. The entity that controls the information that goes in and out of the wallet is the biggest beneficiary of the transformation of how the changing nature of transactions.
That brings us back to the original point. The battle for the top of the smartphone is a transformation that will leave legacy players such as banks and payment processors left on the outside looking in. As the transformation progresses (a process influenced by many other factors such as infrastructure and technology standards), new players will become identified in the minds of consumers as central to the payment experience. Companies like Boston-based LevelUp, Des Moines-based Dwolla, Google Wallet, PayPal, Square and others will become central to the act of buying an item; banks and credit card companies will be relegated to providing the pipes that payment data travels through.
The winners of the mobile payment wars will be the companies that make it easiest for consumers and retailers to use smartphones for payment while also adding the most value. Ultimately, the smartphone will be the wallet. Apps that meet the requirements of simple, ubiquitous and useful will replace plastic cards at the top of that wallet.