Defining the mobile wallet: what it is, why it matters

1Executive Summary

The upcoming showdown between Google Wallet and soon-to-be competitor Isis is just one of many interesting story lines that will take hold this year as companies ratchet up their mobile wallet offerings. But with all the new products from a variety of players there comes a potentially confusing year as the phrase “mobile wallet” gets thrown around repeatedly.

The term itself is being applied to a wide array of products: mobile wallets enabled with NFC technology and short-range radio technology and cloud-based payments systems that can trigger transactions with a phone number or even a face. And these products come courtesy of a range of players: traditional credit card companies, banks, cell phone carriers, OS makers, retailers, established payments companies and rising startups alike. Each of these has its own definition of the term in question, but the point is that “mobile wallet” isn’t just about payments. It can be a place where we store loyalty and gift cards, too, and perhaps even our license and identity at some point in the future.

With that in mind, let’s examine the term within each category of approach. This is not an exhaustive list by any means. Rather, it is meant to give a sense of the ideas at work in the real world and who is behind them.

Hardware-based (NFC)

Google Wallet. Google got out of the gate first, launching Google Wallet in September with partners Citibank, MasterCard, First Data and Sprint. The wallet utilizes an NFC chip and allows users of NFC-equipped Android phones to tap their phone at a point-of-sale terminal to pay using a preloaded card or MasterCard account. The wallet has been limited to just a couple of devices, and it works only at terminals that can process MasterCard PayPass transactions. McDonalds, 7-Eleven, Best Buy and Rite-Aid are examples of such places. Users can load up certain loyalty cards and attach coupons and offers obtained through Google Offers.

To succeed, Google needs to ensure it can get its wallet on more phones. The project, however, appears to be running into some interference from the carriers, so Google may need to wait for Isis to get under way before it can start to compete on a more level playing field.

Isis. Isis, a joint venture between Verizon, AT&T and T-Mobile, is positioned to be the main NFC competition to Google Wallet. It will operate in a similar fashion: by leveraging NFC to facilitate tap-and-go payments using a phone. The service is expected to launch this summer in Austin, Texas, and Salt Lake City before rolling out further across the country. Isis has won the support of the major credit card companies and also most of the top smartphone hardware manufacturers. The venture has a lot to prove, but it has struck a lot of the right agreements. However, banks are being asked to rent space for their cards in the Isis wallet, and it remains to be seen if they will jump on board.

Software- and cloud-based

PayPal. PayPal reported $4 billion in mobile payments last year. Now it is preparing to go big with a nationwide in-store payments system that will leverage its mobile app but will not require it at checkout. Instead, PayPal will enable payments through a prepaid card or, more interestingly, through the entry of users’ mobile phone number, which is tied to their PayPal account.

This opens up a lot of opportunities, because it doesn’t require users to have NFC-equipped phones or merchants to have NFC-enabled point-of-sale terminals. The more I hear about PayPal, the more I think it could be a big winner in the mobile wallet sweepstakes, because it has a pretty elegant solution that doesn’t require hardware and provides a full set of assets for consumers and merchants.

Square. Square is known for its mobile payments dongle, which merchants are using to accept payments. But the company is also pursuing an intriguing mobile wallet solution called Card Case that allows consumers to pay without using a card. When merchants use a Square app on the iPad, they can recognize users before they walk into their store through opt-in geofencing. After users order, merchants can complete a transaction by confirming their face using the Square app. Like PayPal, it allows people to offer up a form of authentication to begin a transaction. The Card Case app, which connects to users’ credit or debit cards, allows people to browse nearby stores, receive offers and get receipts. Card Case is still not widely used by many merchants, but it is a stunning glimpse into what the future of money might look like.

Dwolla. Dwolla, based in Des Moines, Iowa, is an example of a cloud-based wallet, but it is not tied to a credit card network. It connects directly to users’ bank accounts and allows people to pay with no fees for transactions under $10 or a 25-cent fee for transactions larger than $10. The service handles the transaction and does not expose any financial data to the merchant. Dwolla just set up a new Instant feature that will loan users up to $500 per month instantly as long as they pay it back within 30 days.

Dwolla currently has more than 70,000 users, and several thousand merchants use the system as well. It may seem like a smaller player, but it has a disruptive model that appeals to many merchants who use it. But it still has to get mainstream attention, which is going to be a challenge.

Financial institutions

Visa. As the largest credit card company, Visa is poised to win with other wallet initiatives that tap its network such as Google Wallet or Isis. But it is moving ahead with V.me, its own wallet product, which will start as an online payments tool that allows people to pay with a user name and password. It will eventually expand to include NFC payments so users can pay similarly to how they do with Google Wallet and Isis. V.me users will be able to fund their account through Visa and other credit cards.

The product is expected to launch this year. It is unclear how unique V.me will be, but with Visa’s brand name and its growing list of assets — including Authorize.Net, Cybersource, Fundamo and PlaySpan — it can bring a lot of tools for online and offline payments.

American Express. Last year American Express launched its own payments tool called Serve, which began as a PayPal rival. The tool has integrated with PayFone for carrier billing and has gotten support from Sprint and Verizon. The next play will eventually be to take Serve into physical stores, which is something American Express intends to pursue in the near future.

The company hasn’t said what technologies it will rely on, though it is looking at 2-D bar codes and potentially NFC down the road. American Express also has a strong brand name, and it has a lot of experience with loyalty and providing deals to members, which should be an asset.

MasterCard. MasterCard is a big backer of Google Wallet, but it has its own mobile payments app in the works too. QkR, which started its first trials in Australia at the end of January, allows people to interact and initiate payments via QR codes, NFC tags and other technologies. For instance, users can tap on an NFC tag at a restaurant with their phone to view a menu, order and pay using their QkR app. The Australian trial just began, but it should lead to a lot more deployments soon. I am not sure how serious MasterCard wants to be with its own application, but it is a good way to be on the edge with technology and ensure that MasterCard is in the mix.

Banks. Banks such as Bank of America, Wells Fargo, Chase and Citibank are in a position to be big players with mobile wallet apps. They have a strong relationship with consumers, who trust them with their financial data. MFoundry announced late last year that it would enable banking customers who use mFoundry to create banking apps to enable NFC payments through the same apps, turning them into mobile wallets. The banks could also pursue their own initiatives or be instrumental in helping Isis, Google Wallet or other products get off the ground. It just depends on how much they want to partner or build their own wallet solutions.

QR-code-based

Starbucks. Starbucks has been the most successful business to launch its own wallet, which can store gift cards and can be refilled through credit or debit cards. Users present their app at checkout and employees are able to scan a QR code created by the app. Starbucks said users loaded $500 million into the accounts in December alone and conducted more than 26 million mobile transactions last year. Starbucks said it will start enabling NFC payments in the UK this year, which should lead to wider NFC support in the future. Starbucks’ wallet may be limited to Starbucks stores, but it will be interesting to see if other retailers will join the payments system if Starbucks allows it.

LevelUp. LevelUp, the daily-deals offshoot of location-based service SCVNGR, added its own payments system inside its mobile app last year, allowing people to connect a credit or debit card to the app. Merchants can offer a discount for a new or loyal user and process a transaction by scanning a QR code produced by the LevelUp app using a mobile device. It is available in only eight markets (Atlanta, Boston, Chicago, New York, Philadelphia, San Diego, San Francisco and Seattle), but it has plans to go national and user reviews seem to be pretty high.

Receipts

Wallets aren’t just for paying. For many people, that’s where they store receipts. Lemon.com’s mobile app allows people to take a picture of their receipt and makes the information taggable and searchable. That allows people to see where they are spending their money. Users can check out their receipt information on the mobile app or online as well.

Wild cards

It is still too early to say what kind of impact Apple and Facebook could have in mobile payments, but they are well positioned to launch mobile wallets. Apple has more credit card numbers than anyone else, thanks to iTunes accounts, and it could leverage NFC or less-hardware-intensive solutions to enable physical payments in the store. The updated Apple Store app already allows people to scan products in the store and pay for them using their iTunes account. As is the case with Apple, you never know when it will come up with a new product, but with many observers expecting the iPhone 5 to support NFC, this year might be when Apple moves ahead with a big mobile wallet product.

Facebook has built up a sizable payments business tied largely to social games, which are required to use Facebook Credits. But further out, Facebook could try to take Credits into the real world with its app, which could be used to pay with participating merchants. Facebook would have to reduce its 30 percent cut on Credits, but if it did, it might be able to create a simple wallet offering that leverages Facebook’s ubiquity and large community. It is a bit of a stretch, but it could be one way that the company looks to diversify its revenue sources and also capitalize on its user base.

It is going to get messy this year for mobile wallets, and there is going to be a lot of confusion for merchants and consumers. In the early going, I think the game will favor wallets that don’t rely on extra hardware like NFC chips. Though the market for NFC will grow a lot this year, the technology is not going to be universal right away. Retailers will likely have an easier time implementing something like PayPal’s in-store solution. But later on, as these wallets mature, the winners will be the ones that are the most elegant and provide the best value for consumers and merchants, giving them a valid reason to forgo cash and credit cards. For consumers, they will need to get better and more personalized deals and other services. And merchants will want something that gives them not only fast transactions but more importantly a lot of good data, effective ways to manage their relationship with consumers, and ultimately tools to connect offline sales with online stores, outreach and marketing. I think consumers and merchants may experiment early on, but ultimately, they are going to want to settle on a few favorites. Some of these wallet products will get consolidated or will need to collaborate, which could help solve some of the confusion for consumers and merchants. But for now, we are going to be inundated with more and more mobile wallets. Get used to it.

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