A Wealth of Wallets

The surging popularity of the smart phone has revived the digital wallet, and now Google, Visa, AmEx, the wireless carriers, and a wide assortment of other providers are jockeying for dominance in this nascent business.

By Peter Lucas

Still trying to make sense of the digital-wallet landscape? You\'re not alone.

Despite the many flavors of wallet to be announced in the past year from the likes of Google Inc., Visa Inc., American Express Co., and newcomer IsisÑmost of which have partnered with card issuers, payment processors, wireless carriers, mobile handset, and NFC chip makersÑwho holds the winning strategy is no clearer.

At the same time, established wallet players like PayPal Inc. and Amazon.com enjoy an early lead as the market begins to sort out how to translate online success into the mobile world. Though mum about its plans, Apple Inc. for example boasts fully 225 million iTunes accounts, more than double the number of active PayPal accounts.

If anything, the beehive of activity suggests that many of the players vested in wallet technology are hedging their bets because of the unknowns surrounding consumer adoption, a common strategy when it comes to new, competing forms of payment.

Besides figuring out which wallet provider has the inside track, other crucial unknowns surrounding digital wallets include whether NFC (near-field communication)-based or cloud-based wallets will prevail and questions about wallet security.

These and other lingering questions have prompted the payment companies to strike deals with multiple wallet providers to ensure their place in the wallet that ultimately prevails.

ÔMultiple StrategiesÕ

Visa, however, has gone one better, creating a proprietary cloud-based digital wallet called V.me. The wallet will initially be released later this year for use online, with plans to eventually extend it to the physical point of sale using NFC-enabled phones.

While Visa has been playing both ends of the wallet game, Isis, a consortium formed a year ago by wireless carriers Verizon Wireless, AT&T Mobility, and T-Mobile USA, has been busy working on a revised plan.

IsisÕs original strategy was to develop its own NFC-based mobile-payments service and recruit merchants to compete with the existing payments networks. Its carrier backers signed on Discover Financial Services to provide a network and Barclaycard to issue consumer payment credentials.

But last spring, it abruptly changed course, announcing it would welcome all the major payment brands in its wallet, including not just Discover but also Visa, MasterCard, and American Express. Isis attributed the about-face to an internal decision to be a wallet system that works with multiple networks. The consortium said it has no plans to issue Isis-branded products.

Isis also licensed wallet technology from Oak Brook, Ill.-based C-Sam Inc., a pioneer in mobile-transaction technology. The agreement, signed last August, allows Isis to use the C-Sam platform for developing applications within the wallet that enable payments, rewards, coupons, tickets, transit, and other services.

ÒMobile wallets are at the Model T stage of development, so itÕs too early to know how any wallet strategy will play out,Ó says David W. Schropfer, a partner and chief analyst for mobile commerce at The Luciano Group, a Red Bank, N.J.-based consulting firm. ÒIt could be years before a clear winner emerges, and thatÕs why many of the players involved, especially the payments companies, are getting behind multiple strategies.Ó

Competitive Skirmishes

Perhaps the most telling example of how far wallet providers are willing to go to ensure a winning strategy came last month. Verizon Wireless said it will not include Google Wallet on the NFC-enabled Samsung Galaxy Nexus 4G smart phone, which runs GoogleÕs own Android operating system. The news, which caught the marketplace by surprise, emerged just days before Verizon was to make the phone available to its subscribers.

Until then, Google had been counting on the carrier, the countryÕs largest by subscriber count, to make its wallet a standard application on the phone. VerizonÕs decision to pull the rug out from under Google left Sprint as the only wireless carrier supporting Google Wallet.

Google rolled out its wallet in September and only two months later folded its struggling, 5-year-old Checkout online-payment service into it. The wallet enables payments through a PayPass Citi MasterCard and a virtual Google prepaid card that consumers can fund using any major credit card. Consumers with a PayPass Citi MasterCard can add it to Google Wallet over the air using a provisioning service from First Data Corp.

When Google Wallet launched, SprintÕs Nexus 4G smart phone was the only NFC-enabled smart phone on the market. GoogleÕs other early advantage was that MasterCardÕs PayPass contactless network delivers a ready-made merchant base of 144,000 locations in the United States.

DespiteÕs VerizonÕs claim that it had concerns about Google WalletÕs architecture, the move was largely seen as defensive. By blocking Google Wallet, Verizon can slow its adoption while buying time for Isis, which awaits its rollout in Salt Lake City, Utah, and Austin, Texas this summer. Isis plans a national rollout for 2013.

ÒIsisÕs wallet was not even out the door at the time, so why would anyone think Verizon would want to help give Google a leg up in the market,Ó says Mark Beccue, senior analyst for Oyster Bay, N.Y.-based ABI Research.

Google has had other problems with its fledgling wallet. Citi remains the only bank to sign up, while several other major U.S. financial institutions are lining up behind Isis, according to reporting by NFC Times, an online industry publication. Also, the executive in charge of Google Wallet at Citi, Dickson Chu, left the bank in November to join social network Living Social, creating at least a temporary management void.

Still, Beccue does not expect Google Wallet to wither and die. VerizonÕs move, for example, simply means Google will not have as clear a path to getting its wallet into the hands of consumers as the online search giant had hoped, he says.

Wallet As ÔPortalÕ

WhatÕs made the push for dominance in digital wallets so fierce is the money that can be made from control of the wallet. Although the digital wallet is a payment device, the real money lies not in using it to facilitate transactions, but in allowing merchants to deliver coupons, promotions, loyalty points and other offers that help forge closer ties with consumers.

E-wallets on smart phones can store all manner of media besides payment credentials, enabling coupons and the like to be automatically redeemed when users wave their phones in front of an NFC reader.

Merchants are expected to pay a premium to wallet providers for this capability because it will drive incremental sales. ThatÕs why non-bank wallet providers such as Google, which has been pursuing opportunities to diversify its Web-dominated revenue stream since going public in 2004, are so eager to get a piece of the action.

The wireless carriers, meanwhile, see the wallet as way to keep their business from devolving into that of providing a commodity data pipeline. They also see a path to increasing revenues.

ÒMaking the wallet a portal that accesses coupons, rewards, and other value-added services [is] where wallet providers are going to make money,Ó says Schropfer.

Incremental Sales

Indeed, payment experts agree that simply loading credit cards onto a mobile phone for use at the point of sale will not excite consumers and merchants enough to move market share. Exhibit A, they say, is the lukewarm reception of contactless cards and terminals that exchange transaction data by tapping the card on the terminal.

ÒTap-and-pay is not going to be the long-term driving force behind the wallet, because it does not add much more value than swipe-and-pay,Ó says Farhan Ahmad, global head, prepaid and mobile at Discover. ÒItÕs the enriched commerce experience that the wallet facilitates that ultimately will drive its success.Ó

The explosive growth of smart phones and the ways merchants are leveraging the technology to interact with consumers via marketing campaigns have opened the door for the digital wallet.

Storing electronic coupons and rewards points in the wallet that can be redeemed at the point of sale is a natural first step. The total redemption value of mobile coupons is projected to exceed $43 billion globally by 2016, up from a predicted $5.4 billion in redeemed value in 2011, according to Juniper Research.

What has wallet providers so intrigued about electronic coupons is that they can be downloaded directly to a consumerÕs phone while sheÕs standing at the checkout counter or be sent outside the store. U.S. consumers typically have 12 to 15 loyalty relationships that can easily be moved in to the mobile wallet, according to Isis, which has agreements with seven smart-phone manufacturers to introduce NFC-enabled mobile devices.

Merchants can leverage those relationships to create coupons and offers based on customer behavior or to boost sales of specific merchandise, such as deep discounts on overstocks or seasonal inventory. Coupons and special offers can also be viewed and then stored in the wallet when consumers use their phone to scan QR codes or smart posters embedded with NFC chips.

ÒCoupons can even have pre-programmed defaults, such as automatic redemption the next time the consumer shops at the merchant,Ó says Paul Coppinger, president of Scottsdale, Ariz.-based Apriva, which plans to test a digital wallet in 2012. ÒThe idea is to use applications in the wallet to create a richer marketing experience between the merchant and consumer.Ó

Merchants can also cross reference the customerÕs identification codes in the wallet against their database at the point of sale to automatically determine whether the consumer is enrolled in their loyalty program. If the consumer is enrolled, points can be uploaded to the wallet or redeemed.

Consumers not enrolled can be offered an inducement to sign up, such as 100 bonus points, and be immediately enrolled by capturing the identification codes inside their wallet.

The business model wallet providers are expected to use to charge for this capability is similar to one used by Groupon Inc., the Chicago-based daily-deal phenomenon. Merchants would be charged a flat fee or a percentage for each incremental transaction generated by the marketing capabilities of the wallet.

ÒWhen the merchant gets an incremental sale that comes from redemption of a mobile coupon we can get a percentage of that sale that is higher than the typical interchange [because it is a value-added transaction],Ó Coppinger adds. ÒDelivering incremental sales is the value.Ó

Scarcity of Terminals

What makes the seamless and instantaneous exchange of information between the wallet and the POS terminal possible is the NFC chip in the phone.

NFC is a wireless technology that enables consumers to make purchases by tapping a mobile device against a payment terminal. This allows the terminal to access the consumerÕs payment credentials stored on the chip.

While the card companies prefer to use NFC as the technology behind the wallet because they have built the supporting infrastructure with contactless networks, it has shortcomings. The most glaring is the scarcity of NFC-enabled phones. This is a big reason why many wallets are scheduled to debut later this year, when more NFC-enabled devices are expected to hit the market.

NFC-enabled phones are projected to reach 494 million units by 2015, according to Cambridge, Mass.-based Pyramid Research.

ÒThe tipping point for mainstream adoption of a product occurs when it represents 16% to 17% of the market,Ó adds ABIÕs Beccue.

But even if a cornucopia of NFC devices hit the market, a potential stumbling block for NFC-based wallets is terminal deployment by merchants. While large merchants looking to be on the cutting edge of wallet technology are likely to be early adopters, most mid-size and small merchants adopt new terminal technology based on replacement cycles.

That means it could take years, perhaps even more than a decade, for the technology to fully penetrate the merchant community.

ÒWith NFC the challenge is getting the terminals in place,Ó acknowledges Mario Shiliashki, senior vice president and group head for emerging payments at MasterCard. ÒBut we are taking steps to spur merchant interest in the technology by promoting the value of the technology.Ó

One reason Isis chose Salt Lake City for the initial rollout is that it has a large base of merchants with NFC terminals, including the local transit authority, according to Jaymee Johnson, head of marketing for Isis. Austin was selected because merchants there indicated a willingness to adopt the technology, he adds.

Payments 2.0

Still, not every player with skin in the digital-wallet game sees the dominance of NFC technology as a foregone conclusion. ÒGetting NFC onto phones and terminals into merchant hands in a cost-effective manner is a potential issue,Ó says DiscoverÕs Ahmad. ÒThatÕs one reason we are looking at cloud-based wallets that store the secure element on a secure server.Ó

The secure element refers to a chip inside the phone that can securely store payment credentials and other media. This chip can be the phoneÕs SIM card, for example, or simply another embedded piece of silicon. The wireless carriers prefer the former solution. Banks, and for that matter, Google, prefer the latter.

So-called cloud-based NFC, pursued by players such as AmEx and PayPal (box), moves the secure element out of the device and onto a server farm. Providers have started to explore this option due to concerns that an NFC chip could be hacked if the phone is lost or stolen.

While flowing encrypted data in and out of a cloud-based wallet is considered far more secure, this solution requires users to launch a wallet application on the phone to communicate with the merchantÕs POS terminal. That could be too slow and clumsy for the checkout lane.

Despite the differing technological approaches to digital wallets, payment experts believe NFC-based and cloud-based wallets will co-exist on the same handset, at least until the market shakes out. Consumers could use the NFC wallet in-store and the cloud-based wallet to shop online.

Meanwhile, expect wallet providers to keep jockeying for position by adding new technology partners that can enhance the walletÕs value to both merchants and consumers. Doing so will not only help the wallet go mainstream, but change the way consumers think about payments.

ÒPayments are evolving beyond the act of paying into a much broader form of commerce,Ó says Rick Oglesby, a senior analyst with Boston-based Aite Group. ÒIf wallets take off as expected, weÕll see a rapid transformation of the payments landscape beyond its current state.Ó

[SIDEBAR]Can Wallets Rev up Person-to-Person Payments?

Person-to-person payments may be taking a back seat to the hype surrounding electronic coupons and rewards delivered to, and redeemed through, digital wallets, but they should not be overlooked as a value-added feature of the wallet.

While the stumbling block to P2P payments remains consumersÕ unwillingness to pay a fee to underwrite the cost of the transaction, some payment companies are bullish on the P2P concept. American Express Co., for example, is looking to leverage its Serve mobile-payments platform to enable P2P payments between digital wallets.

AmEx foresees the day when cloud-based wallets can initiate the movement of money to other wallets. Serve already enables P2P payments via e-mail. Users enter the recipientÕs e-mail address into their Serve account and the amount to be transferred. To accept funds, recipients click a button in the e-mail or register to be a Serve accountholder.

ÒThe wallet is really a commerce platform and moving money between individuals is part of that platform,Ó says Peter Lurie, senior vice president, enterprise growth for AmEx.

To illustrate his point, Lurie uses the example of a consumer who lists a pair of skis for sale on her Facebook page and includes a Serve widget to enable purchase.

Other forms of P2P payment include an application in the digital wallet that, when launched, allows consumers to enter the amount to be paid and initiate the exchange of funds by tapping their phone against another NFC-enabled phone. The money is deposited in the recipientÕs digital wallet. PayPal Inc. launched such a feature in November, making it part of its new Android app (ÒTrends & Tactics,Ó December 2011).

ÒAs a standalone product, P2P payment does not offer enough value to make the digital wallet fly, but banks see it as a defensive play against PayPal, which has its own digital wallet,Ó says Rick Oglesby, a senior analyst with Boston-based Aite Group.

While making P2P payments a standard part of the digital wallet requires overcoming consumer objections to pay for it, it is a hurdle that can be cleared. ÒThe industry has overcome consumer objections to paying for value-added features before and it will figure out how to do so with P2P,Ó says Farhan Ahmad, global head, prepaid and mobile, for Discover Financial Services.