The Great Mobile Wallet Technology Race

Credit Union Management’s Inside Marketing column runs the third Thursday of the month.

Mobile wallets, at this juncture, seem to be the great unknown of the financial services industry.They strike many as a technology of the future but, in fact, mobile wallets are among us now, and their use is growing slowly and steadily.

If there’s an overriding theme to this technology space, it’s disagreement. There is, for starters, little consensus on what actually constitutes a mobile wallet. Features vary from wallet to wallet. There’s also no dominant brand in this field. And many of the biggest players are completely unknown to the average consumer. The current mobile wallet experience is uneven at best.

Consequently, ambivalence tends to dominate the state of technology that drives mobile wallets. What is the state of the art in mobile wallet technology? Who are the players to watch? What kind of experiences are consumers having with the available products?

As credit union marketers, you need to keep up-to-date on the latest trends in this fast-changing, and increasingly important area.

NFC vs. Cloud

In the technology arena, a split – maybe more like a chasm – exists between near-field communications and cloud-based applications.

NFC offers contactless communication between a consumer’s device and a merchant’s POS terminal, or between consumers. Familiar examples of this technology at work are Visa payWave and MasterCard Paypass. If you’ve used this technology – or if you’ve seen the terminals in stores – you’ve seen NFC in action.

On the other side of this debate are cloud-based apps. Where NFC operates via a chip embedded in the consumer’s device, cloud apps store information in the “Cloud,” bypassing NFC altogether.

Which product is superior? The best answer is probably, “It depends.” NFC advocates love their technology. Because it houses the consumer’s information on the device, it’s secure. It operates with a tap, instead of requiring users to wait for an app to open. Proponents say NFC’s geolocation features are more accurate – and therefore more useful.

What’s the downside? Despite its potential for “cool,” NFC isn’t being used as widely as one might expect. But it has potential. In its report, “NFC Mobile Payments Market Update – Business Models and Forecasts 2012-2017,” Juniper Research estimates there are some 50 million NFC-enabled handsets now in use in the U.S. and Canada.

By 2014, that number is projected to rise to 86 million and then move to 239 million by 2017. With the notable exception of Apple, most phone manufacturers are now including NFC in their new smartphones.

NFC Usage Could Heat Up

Of the native NFC handsets in use in North America, Juniper estimates that only 3 percent are being used for payments this year. Next year, that number is expected to rise to 12.9 percent. And by 2017, we could see just over 50 percent using their NFC-enabled phones to make payments.

But that will require retailers to adopt NFC-enabled POS terminals. Some insiders expect retailers’ NFC capability to increase as merchants update terminals to accommodate EMV cards that utilize computer chip-and-PIN technology. That assumption is based on the belief that merchants will install terminals that work with both technologies. But due to cost and other issues, changes in the payments arena are historically slow.

Additionally, Apple’s decision so far not to include an NFC chipset in its iPhones has had a quelling effect. However, according to reports, Apple has filed a patent application this year that details an NFC-based technology that lets users send “gifts” from the iTunes store to one another on their phones.

So begins a vicious cycle: Low retailer participation and the exclusion of iPhones results in fewer NFC-based products and campaigns, which means lower visibility and less consumer adoption. NFC still shows potential, but its growth is not meteoric at this point.

The Cloud

On the cloud-based side, the challenges are slightly different. Yet, the results are similar. To get a clear picture of how cloud-based wallets work, let’s use PayPal’s mobile app as an example. PayPal’s promotional video promises a soft-focus world where parents pay their kids’ allowances via phone, shoppers scan in their own purchases and initiate payment, and everything works in digital harmony.

But in reality, the nearest recognizable merchant I could find via the app that would accept my PayPal wallet was a horseback riding stable 12 miles away. This wallet doesn’t require NFC, but it does require that both the sender and recipient use PayPal – and even with PayPal’s considerable reach, that can still add up to a spotty experience.

To promote its use, PayPal is backing its mobile wallet product with a complementary free business app and card reader called PayPal Here. It’s an attractive product for small-business owners, but it’s still getting established.

Bottom line: PayPal’s wallet app and the handful of other wallet products aren’t bad products. If you can find a place to use them, they’re actually functional and fun. But the overall experience still falls short of expectation. If it’s possible to conduct a credit or debit card transaction virtually anywhere in less than five seconds, the nascent usability of mobile wallets simply can’t compete, at least not yet.

Jockeying for Relevance

There are other barriers to popular acceptance in the mobile wallet space, and one has to do with who will profit from mobile wallet transactions.

So far, payment cards that are used in mobile wallet transactions still earn interchange income for card issuers. But if you look at the lineup of brands behind some of the leading mobile wallet products, you’ll see there’s a potential for disintermediation (removal of intermediaries in a supply chain).

MCX – a mobile wallet backed by Wal-Mart, Target and a complement of other retailers – may be a player for an increased share of interchange fees. And Isis – a joint venture between wireless phone providers Verizon, AT&T and T-Mobile – may ultimately leave card issuers out of the payment loop altogether.

Big players are investing in this space. But what’s interesting is that even big, innovative companies aren’t necessarily making significant headway in their quest to be top-line players in the market. Several months ago, Google Wallet was the product to watch. Lately, the trade press has been all but proclaiming its death.

Mobile technology icon Apple remains a wild card in this field. The company has conspicuously left NFC out of its iPhone 5s, leaving industry speculators to wonder what the game plan is. As previously mentioned, Apple has filed for a patent on a digital wallet product, the details of which are still vague. With millions of iPhone users already in play, the potential for an embedded app, and the trust of its constituency, Apple could conceivably take over the mobile wallet market in one fell swoop.

Even without a fully functioning wallet product, Apple is making inroads. Passbook, Apple’s current mobile wallet offering, comes preloaded on every iPhone. While it doesn’t allow users to carry and deploy credit and debit cards for payment, Passbook does enable storage and usage of proprietary gift cards from participating merchants. CashStar, the company that makes the digital gift cards used in Passbook, reported in USA Today that “millions of dollars” in gift cards have been added to Passbook since it debuted in fall 2012.

Security-concerned consumers who aren’t ready to load their credit and debit card information into a mobile wallet apparently are comfortable loading limited-value gift cards into Passbook. As users become accustomed to using Passbook for non-threatening transactions, they may be warming up for a full-blown iPhone wallet when it’s available.

Though Apple is nearly always a player to watch, big brands aren’t the only factor to consider. For all the infighting and fragmentation that’s going on in mobile wallets right now, an upstart such as Square with the right technology could certainly appear out of nowhere and win the day. There’s no dominant player and no dominant market acceptance – at least not yet.

The Trajectory of Growth

Still, this is a growing market. Although the U.S. lags behind the Far East, China, Africa and the Middle East, mobile wallet usage is up – and it’s on the rise. In its report, “Mobile Money Transfer & Remittances – Business Models & Monetisation Opportunities 2011-2016,” Juniper Research expected the average number of active mobile wallet users making domestic transfers in the U.S. and Canada to more than double between 2011 and 2013 – going from 2.3 million to 5.4 million. By 2016, that number was projected to nearly double again – to 9.4 million.

But when will mobile wallets become mainstream? It’s anyone’s guess. As we saw in the “vicious circle” of NFC rejection, several factors have to line up for real adoption to take place:

• Ensuring security – of all the concerns that consumers now have about mobile wallets, security is at the top of the list.
• Use of smartphones – which is already widespread and growing. The majority of cell phone users now have smartphones.
• Merchant availability – currently spotty at best.
• Technological congruity – too many disparate systems in play that don’t add up to a common experience.
• Real brands – allowing consumers to know what’s out there and what to expect.

For mobile wallets to reach their true potential, everything depends on consumer acceptance, future demand, and critical mass. The potential is there. But for now, mobile wallets are still in launch mode.

Amanda Smith is senior technology and innovation manager for CUES Supplier member CO-OP Financial Services. She can be reached at Amanda.smith@co-opfs.org and 800-782-9042, ext. 1222.