Microsoft Wallet's Base Is Larger than You Think

Who is Microsoft Wallet for? With just 1.6% of the U.S. smartphone market as of January, it's unlikely that even Microsoft believes Windows Phone users are a huge untapped audience for mobile payments.

As with Apple Pay and Android Pay, Microsoft Wallet is certain to creep off the phone into other channels. And Microsoft Wallet can strike paydirt in the company's substantial home video gaming audience.

As Windows Phone sales are dropping, Xbox sales are rising, as are the people spending money on the company's Xbox Live service for online gaming. Xbox Live had 48 million users coming off the 2015 holiday season, a 30% increase over the prior year. All of these users need some way to get money onto their gaming consoles to purchase from the growing catalog of Xbox games.

"In our digital stores today, whether it’s Xbox, Office or the Windows Store, our customers enjoy the ease of signing in with a Microsoft account and having their secured payment information on hand to quickly and more safely purchase products," Microsoft's director of payments, Will White, wrote in a blog post announcing the limited release of Microsoft Wallet. "Our customers have asked us to extend similar experiences to their phones."

Microsoft Wallet is available for Windows Insiders on Windows 10 mobile devices, starting in the U.S. with its Lumia 950, 950 XL and 650, Microsoft announced Tuesday. The service is launching in partnership with MasterCard's Digital Enablement Service, which powers digital payment security technology such as tokenization. Microsoft did not immediately return a request for comment Tuesday afternoon.

The audience for Xbox overlaps the underbanked audience, including young adults, who might not have a credit or debit card. To allow them to purchase digital goods, Microsoft — and rival gaming companies Sony and Nintendo — sell stored-value cards that can be redeemed on their digital storefronts and directly through gaming consoles.

As of the 2013 launch of the Xbox One console, Microsoft enabled a QR Code system to allow users to redeem prepaid funds through the console's camera in a process that mirrors that of many QR code-based mobile wallets. Xbox purchases were additionally part of the software giant's early foray into virtual currency through a collaboration with Bitcoin merchant services provider BitPay.

Nintendo's Wii U already has an NFC reader built into the gamepad of its Wii U console, and consumers in Japan have been able to use contactless Suica fare cards to purchase games since July 2014. This month, Microsoft announced two upcoming revisions to its Xbox One console, giving it the opportunity to add NFC or other types of payment hardware in the process.

Microsoft is also working to unify its various computing platforms Microsoft. In addition to marketing Windows 10 as both a desktop and mobile operating system, the company's Play Anywhere program — announced last week — allows users to purchase a game once on either the Windows 10 or Xbox platform and play it in both places. This program further merges Microsoft's audiences — and their wallets.

In the broader population, contactless mobile payments adoption has lagged, and the market is looking for any venue that can be a gateway. Starbucks has been successful, but whether that success is transferrable to partners remains to be seen. Vending machines, which are already reliant on self-service, are also seen as an option to bring consumers to the technology.

Microsoft first included mobile payments capabilities in the Windows Phone 8 operating system released in 2012. The Microsoft Wallet concept has been developing ever since.

Microsoft's mention of of its Xbox franchise indicates that it knows it has a substantial built-in base of potential mobile wallet users, said Richard Crone, a payments consultant, adding mobile payments will be beneficial for Microsoft mobile phones, but more important for Microsoft Surface tablets and laptops, providing a new commerce connection for the company.

"Mobile payments is table stakes for all device manufacturers," Crone said, adding retaining payment credentials in the cloud as part of the customer profile opens up new service and revenue-generating opportunity for Microsoft. "What the camera, Bluetooth and fingerprint authentication are to devices now, so will be mobile payments."