Digital Transactions Authoritative, insightful and timely information for payments professionals
Steve Mott
Two years after Google’s splashy mobile-wallet debut, there are more wallets than ever, even though Google and others have stumbled. What’s wrong with current wallet strategies, and what kind of future do digital wallets have?
If things go according to unofficial reports, the readers of this article will witness at least three new initiatives or launches of mobile payments and wallets this month. Each will herald, in some fashion, that mobile transacting has finally come of age.
But in the streets, consumers and merchants say they’re still waiting for mobile innovation to solve real problems and add new value before they jump on board.
The prospects for mobile transacting, of course, weren’t so sober two years ago, when the first barrage of mobile-wallet announcements hit the market and more than a billion dollars in market-development funding ensued. Since then, several business models have gone askew, and fragmentation and chaos have reigned. We now see some 140 mostly startup companies claiming to have the ideal mobile wallet for transacting at the point of sale.
The mobile-wallet wars kicked off in May 2011, when Google Inc.—leaving erstwhile partner PayPal Inc. at the altar—launched its near-field communication (NFC)-based wallet with a splashy multimedia show.
Since early this year—with just handfuls of transactions to show for its massive investments—Google has pivoted away from payments-based, merchant-subsidized NFC deployment to an online-integration model that embeds payments and focuses more narrowly on its hooks to mobile advertising.
The result is that Google, the most powerful of all the new digital players in the industry, has largely abandoned transacting at POS with mobile handsets.
Not Ready To Play
Now, three major players seek to capture the payments world’s attention with expected announcements of substantial rollouts. The question is whether the October announcements constitute a new second generation of capabilities—Mobile Wallets 2.0—or simply another new at-bat for a nascent industry that still has a hard time connecting with buyers and sellers.
Isis, the consortium of multiple wireless carriers that’s invested more than $250 million over the past five years in a dogged effort to get into the mobile-payments space, has already announced a national rollout for later this year.
Reportedly, the rollout will include a marquee national sandwich chain. But, as was the case with most merchants involved in Mobile Wallets 1.0, the chain is not committing exclusively to Isis for the rollout, despite offers of a considerable subsidy.
Moreover, the Isis rollout is said to be the culmination of successful pilots in Austin, Texas, and Salt Lake City, announced with great fanfare more than a year ago. Today, as Isis readies a national rollout that proclaims the mobile future is here, there is ample feet-on-the-street evidence that consumers and merchants in its pilot markets are not ready to play yet, and questions abound about the support of its partners, and its commitment to the troubled NFC technology platform.
And, after two years of secretive incubation and development, MCX, the mobile-wallet initiative owned by big-box merchants, is said to be readying an announcement of its QR (Quick Response, two-dimensional bar code) payment platform and plans to field a pilot rollout. It is possible it will announce the pilot this month.
MCX has been closely watched because it starts out with nearly four dozen of the nation’s largest merchants investing in and adopting its wallet, reportedly with some period of mobile exclusivity at POS.
MCX begins with the fundamental premise that plastic card payments are broken—at least in terms of high fees for merchants—so the explicit business model has been to craft a widely accepted mobile wallet with merchant-friendly payment types.
Consumers, however, don’t generally regard anything broken about paying with plastic. And with prospects of still-lower debit card rates looming with “Durbin 2.0” (following a federal court’s July rejection of the Federal Reserve’s implementation of the original 2010 Durbin Amendment mandates for lower debit fees and more competitive transaction-routing options for merchants), many are wondering to what degree low-fee payments will prove to be a sustaining value proposition.
The Magic Business Model
Meanwhile, a number of banks and merchants—seemingly unimpressed with the offerings of Visa Inc. (Visa’s V.me wallet is positioned for online use mainly) and MasterCard Inc. (supporting a do-it-yourself white-label wallet strategy)—have concluded they need to craft their own offerings. They hope to control the customer experience, protect the valuable transaction data, and tap the mobile-marketing commission upside themselves.
They are busy developing and testing their own wallets, and cobbling together independent value propositions.
The leading provider in this “do-it-yourself” segment is Boston-based Paydiant Inc. This startup, which is completing another new round of funding, offers a number of interesting nuances:
– PCI-exonerating barcodes stand in for payment credentials; they can exist on the handset, or be generated by the POS; and Paydiant has effectively done integration plumbing in a large number of POS systems.
– Bank issuers are compelled to offer card-present interchange rates, rather than the higher card-not-present rates Visa and MasterCard mandate for anything other than NFC in so-called card-emulation mode.
– Bank issuers so far are agreeing to include merchant-based payment options (e.g., private-label cards, prepaid, etc.) in their mobile wallets—letting the consumer decide which payment option to use.
– The payment function merely facilitates the overall mobile-transacting experience; mobile marketing (e.g., offers, loyalty, discounts, etc.) and shopping functionality provide the real value-added substance.
Paydiant has robust banking pilots going in a number of locations (for example, Wilmington and Newark, Del., with Barclaycard, Cincinnati with Fifth Third, and Charlotte with Bank of America), and significantly, grass-roots merchant build-outs with Harris Teeter, H.E.B., and several others in-process.
This is no mean feat, and those efforts—as some observers expect—will likely be revealed at the end of this month or early next. Indeed, the Harris Teeter deployment was announced in August.
Minuscule Use
Square Inc., whose rapid assimilation of micro-merchant card acceptance has spawned a host of competitors, now appears to be shifting its focus to mainstream card processing. It hopes to give life to its business model and its aspirations to turn paying at POS into a transcendent marketing experience.
Consumers using the PayWithSquare wallet remain in short supply, but a number of large merchants are now in deep discussions about making it their core processor in the wake of a Starbucks Corp. deal to use it for non-store card payments.
PayPal, which scrambled back into the mobile wallet-at-POS market two years ago after being jilted by Google, smartly abandoned the NFC platform in favor of less technology-heavy tweaks at the POS (such as mobile-phone numbers with PINs and special-purpose mag-stripe cards), and opportunistic partnerships (Discover, Alliance Data Systems, Mercury Payments, and Micros) to jump-start merchant adoption.
But consumer use at the nearly 20 national merchant chains outfitted with PayPal-accepting POS terminals is admittedly minuscule, and this early market leader is now focused on supporting consumer applications that drive real consumer (and merchant) value—like the “line-busting” application it built for Jamba Juice and rolled out in a new wallet release last month.
And the breathless wait for what, if anything, Apple Inc. will do with mobile payments since acquiring several NFC and financial-services patents, has ended—for now. Apple’s Passbook is a container-based approach to a mobile wallet, providing a number of consumer convenience-based applications (including the ability to make payments on quick-throughput subways and transit systems, another offering directly competitive to Google). The biometric identifier announced in Apple’s latest iPhone is simply a better way to authenticate.
Perhaps the most interesting prospective mobile-wallet development effort derives from merchant processing fast-grower Braintree, which enables its retailers to invoke cloud-based mobile-wallet functionality to make payments and redeem offers.
Speculation from Silicon Valley has Braintree lobbying hard to get Facebook Inc. to embrace its mobile wallet for potential use by the social network site’s 1 billion users, and there is persistent talk of a hook-up with PayPal.
Giant ‘Head Fake’
So, what went wrong with Mobile Wallets 1.0? With the benefit of hindsight, probably the biggest impediment to adoption was its reliance on NFC.
Two years ago, everyone in the legacy payments business expected that this technology would be the natural successor to mag-stripe swipes with plastic cards. Today, NFC is viewed by many as just one of several technologies (QR/barcodes, cloud-based apps, virtual wallets, to name some) that will compete for mobile transacting.
What changed? First came a dawning realization of the many shortcomings stemming from and surrounding NFC, some of which are related to the effort to implement the Europay-MasterCard-Visa (EMV) chip card standard in the U.S. Among these deficiencies are:
– Reliance on carrier-controlled computer chips in handsets (called secure elements) that would leave encrypted payment-account credentials exclusively in the control of AT&T, Verizon, and T-Mobile.
– Carriers’ proposal (through Isis) to charge banks $4 to $5 per loaded account per year, via a consumer-unfriendly digital-loading experience; except for banks receiving substantial financial incentives (from Isis), this requirement has proved to be a non-starter for the banking world.
– Imposition of the “card-emulation” mode for NFC (and EMV) by Visa and MasterCard, which dumbs down the ability of the computer chip to pass encrypted payment credentials beyond the POS terminal; the card’s payment-account number (PAN) and expiration date get decrypted into the clear at POS to minimize processor-upgrade changes, but this invites online fraud from intercepted credentials and perpetuates the much-reviled Payment Card Industry data-security standard compliance requirements.
– Availability of card-present rates from Visa and MasterCard only for the card-emulation mode, effectively creating penalties (card-not-present rate premiums and liabilities) for rival mobile-payment modes that enable new players to contend for payment handling.
– Illogical plans from Visa and MasterCard to push deployment of EMV dumbed-down in card-emulation mode—without compliance with the Durbin Amendment’s mandate that merchants have a choice of at least two unaffiliated networks for debit cards; this has contributed to a growing view from merchants—and some bank issuers—that EMV is just a giant “head fake” to get chip-based terminalization paid for to usher in NFC.
– A growing belief from some sectors of the marketplace that the card brands will benefit from proprietary hooks to their value-added services (for example, mobile offers) in the two-way NFC mode—eliminating the benefit of the level playing field that EMV was supposed to provide at POS.
Google’s Miscalculations
A second key factor sucking the air out of Mobile Wallets 1.0 was the expectation that business models for mobile transacting could be driven mostly by payment fees. This amounted to an expectation that high interchange rates and the fee structures of the legacy mag-stripe card would persist, allowing everyone to live off merchant funding.
This, to say the least, was a miscalculation. Google provides a good example. Its original NFC wallet included a Citibank credit card facility with a prepaid-account option. No takeup. So then came Google wallet 1.5, which fashioned a complex “staged transaction” where the merchant performed a virtual MasterCard-branded card-present transaction, but Google conducted the mobile-processing component in the background at card-not-present premiums—a big investment by Google in trying to get and resell the transaction data.
Google also planned to issue its own cards for payment from the $200 million it invested in prepaid provider TXvia in late 2012. No longer.
Today, consumers can integrate online-wallet payments via an embedded connection with Google Checkout (discontinued this year as a standalone merchant utility).
Another example of high-fee expectations is Isis. This project, ironically, actually started out in partnership with Barclaycard and Discover with plans to introduce a decoupled debit card offering. This is where the settlement of the transaction is completed via a low-cost automated clearing house payment rather than via the expensive Visa and MasterCard rails. But Isis jettisoned this innovation in favor of full-fee card-payment options from Chase, BofA, Capital One, and American Express.
Thus far, only Chase and AmEx (which gets Serve account signups from the carrier setups of handsets with secure elements, and serves as the prepaid option in the Isis wallet) have signed on for the national rollout. Both apparently entertain limited expectations for actual consumer adoption and use.
Some MCX merchants have indicated that they are developing a kind of decoupled-debit facility via their private-label interconnection with Fidelity National Information Services Inc.’s NYCE network—prospectively priced at about 4 cents per debit card transaction (with a 2-cent “interchange-fee equivalent” stipend to issuers), as well as other possible re-crafted payment types—including a shared private-label credit card facility.
But many merchants are leery of trying to limit consumer payment choices, and fear losing sales if consumers can’t use their favorite payment vehicle.
One of the more aggressive innovators in digital-wallet payments is American Express with its Serve platform. Serve (also deployed in the Wal-Mart-Bluebird manifestation) continues to make headway with more merchant-friendly payment fees, but it’s the consumer-friendly aspect (e.g., Bluebird provides most core banking functions with a single, upfront cost of just $5) that might provide the biggest adoption breakthroughs.
Further, payments are getting transparently embedded in a number of digital/mobile applications—pretty much reducing them to mere commodities. Yelp, Groupon, and OnTable are examples of this trend.
So Mobile Wallets 2.0 is much less about payments driving the business than about the new value-added functionality, such as marketing benefits, that are expected to fuel merchant (and consumer) adoption.
A good example of the justification for this optimism comes from AmEx’s own head of the Enterprise Growth Group, Dan Schulman, who notes that rationalizing inefficient “broadcast” marketing expenses can be worth four to five times what payment fees cost.
Coveted Largesse
The third key factor in Mobile Wallets 1.0’s limited success was the growing realization among both merchants and banks that mobile processing exposes customer data to the mobile provider—namely payment accounts, loyalty/offer information, and, most important, what the consumer buys (SKUs).
Google clearly is mounting an all-out assault on capturing and monetizing this data, and has said that mobile-advertising markets could be four-to-six times larger than the $100 billion online-advertising market (half in the U.S.) that it now has built.
Banks and merchants quickly awakened to the dangers not only of losing control of these data (and potentially losing customers because of privacy invasions), but also losing a chance to make new revenue from commissions on placing incremental sales through optimized mobile technology.
Mobile technology can not only improve incrementality of sales (more spend, new customers, new products purchased), but can also provide both the opportunity for higher incentives to consumers to alter their purchasing choices and welcome relief for merchants from having to shoulder the cost of these incentives alone.
How? Consumer product manufacturers weigh in with additional funding for discounts when they get a chance to follow-up with consumers for subsequent transacting.
This largesse—which could be 10-to-20 times the amount of payment fees—is coveted by all parties, and fiercely protected (on the merchant side, in no small part, by education about the issue by MCX).
Chase’s refusal to support Visa’s V.me wallet—until it negotiated its private-label deal with Visa on access to the backbone VisaNet network with direct deals with merchants—was based on its view that “V.me was a big-data play by Visa that mostly benefited Visa,” according to conversations with two merchants.
And the general lack of consumer interest in using mobile-payment mechanisms has enabled banks and merchants to buy more time in figuring out how they can benefit from mobile-marketing opportunities—including by working directly together.
New Type of Value
If the existing payment system is not broken from the consumer’s perspective (as evidenced by most consumer research not conducted by actual mobile-wallet providers, such as from a recent Federal Reserve study), then what will drive changes in consumer behavior?
The answer is not likely to be simply more standard types of coupons and discounts. The marketplace is inundated with them, and, as readily observed from demonstrations of more than four dozen mobile wallets, they are nearly identical in nature, relevance, benefit, and ability to use them.
As many of the mobile-wallet providers have discovered (most notably PayPal), the trick is how to provide new value to both the merchant and the consumer so that both parties are motivated to adopt mobile transacting.
The first and best example of this new type of value add is the line-busting application. The functionality needed is easy to describe: The consumer, anticipating a visit to a merchant that typically has long lines for service (coffee houses, juice bars, fast-food restaurants, etc.) logs into the retailer’s mobile Web site, enters an order, applies a loyalty reward, reviews an incremental offer, and—optionally—executes a pre-payment (or simply does payment upon expedited pick-up).
The benefit to the merchant is obvious: They don’t lose customers who can’t afford to wait in line, they don’t have customers annoyed from standing in line too long, and they can develop a digital profile/history of good customers.
The consumer benefits from being able to frequent the intended merchant without long waits and get exactly what’s ordered (with any extras that might be proffered in a relevant way by the merchant in the mobile session). Plus, he or she has all of the information automatically recorded and tabulated.
PayPal does this nicely with its Jamba Juice app (now generic in its latest wallet), and some big quick-service restaurant chains are experimenting with separate mobile drive-thrus to do the same thing. But smaller merchants need these services, too—and often need additional payments integration with gift cards and custom loyalty programs to boot.
Legacy POS systems and terminal providers are struggling with provisioning such rich application functionality at a price these merchants can afford. Hence the interest in PayAnywhere, Square, and other iPad-type POS providers and checkout systems that go well beyond the magnetic-stripe swipe.
Paydiant’s white-label wallet application at Harris-Teeter meets an even higher standard for mobile apps that motivate adoption and use.
Effectively, home shoppers using the HT app can plan a shopping experience and execute it using a range of utilities and interactions that the grocer provides—all via mobile (and digital) devices.
When it’s time to pick up the shopping basket, a separate pickup lane for mobile purchases is provided (and the Paydiant payment app is utilized as the preferred option, but wireless POS terminals are also available if shoppers still want to swipe cards.)
Anyone’s Opportunity
Such flexible, customizable, and integrated mobile-application functionality is clearly a big step forward, and enables the merchant to focus on unique marketing tools and value propositions—both before a shopper gets to a store as well as once they get inside.
And one size doesn’t fit all—an essential aspect for the larger retailers, but also deliverable via mobile (typically from cloud-based service offerings—which are proliferating) to smaller merchants on an economic basis as well.
The move to embedding payment functionality in mobile apps that cater to and enhance a merchant’s business-model execution while saving the consumer time, hassle, effort, and frustration seems to be the best option on the table now for getting mobile traction in the payments marketplace.
Line-busting apps are certainly a start, but the other 90%-95% of retail verticals will need their own value-added solutions as well.
The only practical way to develop these solutions at this point is to build the wallet “container” within the merchant’s app, rather than trying to make the wallet a dedicated payment app. That favors the white-label, do-it-yourself (with application programming interfaces) approach such as Paydiant’s. And, therefore, it is no surprise that MasterCard’s white-label wallet/container strategy is making sense for both banks and merchants, and might be emulated (with a de-emphasis on V.me) by Visa before long.
So, are we at the threshold of a new generation of mobile wallets, or are wallets as a payments-based paradigm dying (if not dead already)? It probably doesn’t matter. But we are at a tipping point, though, where merchants, banks, and consumers are finding ways to interact directly together to tap those incredible mobile devices and fulfill those astonishing digital lifestyles—without needing so many interlopers in the mobile food chain.
As payments become more and more transparent and commoditized, the consuming focus will be on how to build and sustain deep digital relationships. And that’s anyone’s opportunity now.
Steve Mott is principal of BetterBuyDesign, Stamford, Conn. Reach him at stevemottusa@yahoo.com.
