Digital Wallet Race Is Far From Over

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Payments players with digital wallet aspirations — including Visa, MasterCard, Google, PayPal, Apple and Isis — are all vying for customers' virtual pocket books in a race to truly electronic transactions. Yet none have had much luck, so far.

There have been delays in launches (e.g. Isis's delays on launching in its two pilot cities); changes in the way at least one major, digital wallet innovator processes its transactions (think: Google Wallet); and, most importantly, a lack of features appealing enough to spur widespread adoption.

"Mobile wallets have been around for a while, and even for us, in the industry, we are only just starting to adopt these technologies," says Philip Philliou, a payments consultant. "I don't think anyone is far ahead in terms of disruption. We are still early on."

That means the digital wallet ideal — one where a consumer's phone completely substitutes the leather in his pocket — is seemingly in the distant future.

Still, the industry has been making baby steps.

Apple is the biggest and most successful proponent of digital commerce so far with its de-facto mobile wallet Passbook, says Philiou. Behind the tech giant's win is the reach of its iPhone, which has millions of users.

"I just started interacting with it, and now I use it for travel every week," Philliou says, adding that it provides utility that others have not.

Some of the other attempts at a digital wallet have been solely used for online purchases, says Matthew Harris, a managing director of Bain Capital Ventures.

He says wallets that rely on physical transactions at the counter haven't had as much consumer adoption.

"You have to split [digital wallets] between digital card present [at the counter] and card not present [used solely for ecommerce]," says Harris, adding that he puts Google Wallet and American Express' digital wallet Serve into a different class than those that operate purely online. "At this point, no one is having success with digital wallets at the point of sale."

He points to Braintree's summertime acquisition of Venmo, which recently yielded the e-commerce facilitator's "one-click" mobile shopping system.

The method gives users the chance to enter their payment information once, and then shop online with more than 4,000 participating internet sellers.

"So the key to what makes a digital wallet, from my perspective, is being multi-merchant and the Braintree, Venmo solution" does that, says Harris.

Indeed, incumbents seem to be playing catch-up to non-traditional players that have been aggressively laying the groundwork for the eventual mobile wallet war.

For instance, PayPal is leveraging Discover's payment network in order to push further into the real world. eBay's e-commerce arm announced its plans this fall and is soon to extend its brand of digital payments to all the retailers that accept Discover's cards. People can, of course, fund their PayPal accounts with multiple different payment options. And, for the first time, merchants are creating digital rewards cards that can be redeemed through a customer's smartphone. Starbucks is leading a pack of retailers that are now making plans to create a digital-wallet-driven payments network that could eventually work with issuing banks.

That doesn't mean the card networks are just sitting back.

Recently, Samsung and Visa said they are working together to develop a brand of contactless mobile payments that will work on Samsung phones.

The plan, announced in February, is to make Visa's PayWave mobile app a standard on Samsung's NFC-enabled smartphones.

There are inherent problems, though, for the payment networks as they enact their mobile wallet strategies, says Brian Riley, a senior research director in the retail banking and cards practice at CEB Towergroup.

"It's kind of sacrilegious putting a Visa card in your MasterCard wallet," he says. "But because they're afraid of losing the market... they are hedging their bets."

No doubt, there is a ton of money to be made.

In an interview last year with American Banker, Dan Schulman, Amex's group president of enterprise growth, said advertisers pay Google 80 cents to 85 cents per click. If Google could show that a click resulted in a direct sale, then the payment would jump to $8. The problem for Google is that 70 percent of its clicks result in an offline sale, which can't be tracked.

"The reason that Google wants to move in with Google Wallet is not because they want to move into payments ... What they really want is the data from that transaction," he said during the interview.

Part of the reason for the mobile wallet's failure to launch has been its reliance on the participation of others. The future of digital commerce at the counter depends on merchant upgrades to their point of sale systems, as well as added hardware (perhaps NFC-enabled smartphones) for regular people.

That tacked on top of the fact that there aren't a lot of reasons to use a digital wallet make it hard for analysts and others to buy the concept.

Part of that is the fact that the old way of attracting customers through rewards simply doesn't work in the new, digital landscape, says Riley.

"My debit card comes out for my daily purchases, my credit card comes out for things I can't afford," he says. "At what point are you really giving a value add to this service" with a digital wallet.

Riley adds that no individual wallet is currently giving people enough incentive to go through the trouble of adopting a mobile wallet.

"No one has proven a viable model where it's making money," he says. "It has a cool factor, but it hasn't proven that it's going to get around the issue of interchange: Am I ultimately going to have to pay for a wallet? If so, I really don't want one."

And until there is widespread acceptance of a single, or multiple, mobile payment platforms, mobile wallets are just enhancements of online banking, says Jim Marous, a senior vice president of corporate development at digital direct marketing agency New Control, and author of the Bank Marketing Strategy blog.

"Yes, we have remote deposit capture and recently mobile bill payments, but people will not replace their wallets with their phone until everything can be done on their mobile device," he says. "Bottom line, true mobile wallets will be a non-starter until the payment piece is in place and uniform."

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