As consumer spending increasingly moves to online, so too do payments, with digital wallets becoming embedded in the payments culture with the aim of making online transactions both convenient and secure. 

Many in the payments industry have long imagined a world without leather wallets or the plastic cards inside them. And now that vision is becoming a reality as numerous digital wallets are being rolled out to consumers. Visa and MasterCard are rolling out their digital wallets this year, a significant step in transforming how consumers shop and pay, adding to the proliferation of options already out there. 

“It is an emerging space and solutions are being launched every day,” says Zilvinas Bareisis, a senior analyst at financial consultancy Celent. Among these solutions are those where the wallet is stored in the cloud and can be accessed from a mobile device, or wallets where the payment credentials are stored on the phone itself. 

Choose your wallet

Rick Oglesby, a senior analyst at financial advisory Aite Group, points to the wide variety of solutions available. These include bank wallets that focus on mobile banking capabilities, reward-focused programmes, or wallets tied to specific retailers. “There will be many different types of wallets to choose from, particularly in the beginning when providers are all experimenting to find winning combinations,” says Mr Oglesby. 

Aside from wallets designed for phones to be used in the physical world at the point of sale, there are digital wallets being used to make e-commerce more convenient. They are the virtual equivalent of a traditional leather wallet and act as a repository for a consumer’s various cards. Name, address and card details can be stored in the cloud and accessed from any device, whether it is a desktop, tablet or smartphone. This kind of wallet would be familiar to online shoppers on Amazon, which allows them to select one of their payment cards from a list, choose the correct shipping address and check out. But if they go to another retailer, they have to enter their credentials all over again.

Jorn Lambert, group executive of digital convergence at MasterCard Worldwide, argues that consumers are uneasy about the proliferation of solutions and having their credentials stored in many places. “Security and convenience are top of mind,” says Mr Lambert. In the physical world, MasterCard has achieved this process over a number of decades as the payment credentials are represented on a plastic card and can be accepted at most retailers. “We feel we need to provide the same solution to consumers in the digital space,” says Mr Lambert. 

This year, MasterCard’s MasterPass and Visa’s V.me are being rolled out to avoid this so that customers can store their card details and check out at any online retailer that carries the MasterPass or V.me button. 

Consumer convenience

Mr Bareisis explains that these solutions address the inconvenience of typing in card numbers every time they shop with a new retailer online, a process that is even more cumbersome on a smartphone. “It is also attractive to merchants,” says Mr Bareisis, as it minimises the dropouts at the final checkout stage so the conversion rate to a sale is higher. 

MasterPass was launched in February 2013 with the solution being rolled out in Australia and Canada. The US and UK will follow suit later this year. Likewise, Visa is in the process of rolling out its V.me solution. It was launched in 2012 and Visa announced that it had been adopted by more than 50 financial institutions. In Europe, the V.me digital wallet is scheduled to be rolled out across the UK, Spain and France this year. 

“We’ve seen incredible interest from our retail partners and member banks and it is clear that they see the potential [of V.me] to offer a simplified payment experience that’s optimised for use on smartphones and tablets,” says Anne Head, vice-president of Visa Europe. “V.me by Visa is offered to consumers through their banks: that's a unique and important point. We know from our research that that's what people want: not another independent service, but a trusted addition to the portfolio of payment options available from their issuing bank.”  

Card bypass

There are other solutions that have been launched this year that make it easier for consumers to shop online without entering their card details every time they pay a new merchant. One such solution is MyBank, launched in March 2013 by EBA Clearing, the pan-European payment infrastructure. It enables consumers across Europe to pay online retailers via online and mobile banking.

MyBank is not a digital wallet, because it does not house card details in a digital repository, and it bypasses the need for cards altogether. The MyBank option means that the checkout button takes the consumer to their online banking platform. Rather than entering their bank details with numerous retailers and those who they pay their bills to, the payment can come straight from their bank account with the same security as an online banking payment.

John Broxis, a director at EBA Clearing, points out that with other payment solutions – whether it is a payment card or digital wallet – the funds eventually come from the bank account anyway. He explains that consumers do not have to subscribe to the MyBank solution as they use the existing passwords from their online banking platform. The core online and mobile apps of the banks are already using a secure infrastructure so the MyBank solution does not need a massive hardware rollout, he says. 

“We are not marketing this to merchants and consumers,” says Mr Broxis, explaining that the solution is being targeted at banks, which will offer the solution to their individual and merchant customers. “We set it up as something that the banking industry can use to promote online payments,” he says. The solution is licensed to the banks and it is up to the banks to decide upon a fee structure for the solution, explains Mr Broxis. 

The MyBank solution is built using an online banking infrastructure that already exists. Other providers have likewise sought to leverage existing infrastructure to fulfil a certain need. PayPal, for example, has built a model where it functions as a layer over the existing payment infrastructure of bank-to-bank payments and card payments. It revolutionised e-commerce by allowing buyers and sellers to transact via the PayPal button, even though the funds were originating from a bank account or a payment card. 

Competitive issues

While it has been the darling of the e-commerce world, PayPal’s venture into point-of-sale payments in the physical world has met with resistance from the incumbent card networks. Bill Carcache and Tulu Yunus wrote in a Nomura report: “The incumbents will do everything in their power to prevent PayPal from riding on their rails without extracting a toll.” 

From June 2013, MasterCard will be introducing an access fee for staged digital wallet operators, which act as a repository for other cards. The fee will apply to payments in the US funded by MasterCard credit cards. 

Staged wallets such as PayPal store other card details and the transaction is a two-stage process. Mr Bareisis explains that a consumer may select their MasterCard credit card and then pay through the PayPal button. PayPal settles the transaction with the merchant and then separately behaves as a merchant with the card issuer. Via the MasterCard network, the card issuer pays PayPal and then the card issuer presents the consumer with a bill.

The problem for the consumer is that the merchant is listed as ‘PayPal’ on the credit card statement and their card issuer – even though the funds came from that card for the transaction – cannot tell them the merchant. It has also caused problems with people collecting their rewards for using their cards at certain retailers. This has caused confusion for consumers and a headache for issuing banks. MasterCard has now issued rules on transparency to digital wallet operators to overcome these customer service issues. 

This is just one of the issues that arises from MasterCard and Visa cards being stored in other digital wallets. And now that there are the V.me and MasterPass repositories, which can store cards from other networks, there are other competitive issues that may arise. 

The digital wallets are free for consumers to use and in theory a consumer could use the Visa digital wallet, but all their transactions could be made from MasterCard-branded cards or vice versa. Both solutions are open for consumers to store any network branded cards in their wallet. When asked about allowing other cards in the MasterPass wallet, Mr Lambert says that it is a move that was made in recognition of consumer expectations and consumer behaviour: “It is really recognising consumer demand,” he says. 

This is a point on which Ms Head at Visa Europe agrees. When asked if allowing cards from other payment networks in the wallet causes competitive problems, Ms Head replies: “Not at all. Choice is essential: people aren't interested in a restrictive payment experience. Being able to use any card in the V.me wallet makes it an easy and comprehensive way to pay online, whichever card you want to use. Consumers using a service they trust from a bank they already have a relationship with, and they're using Visa's payment network and retailer relationships to do so. That's a great place for us to be: at the heart of the new payments ecosystem.”

Consumer awareness and usage of digital wallet offerings in the US

One wallet, many cards

Mr Oglesby says of the issue of having other cards in a wallet: “The trouble is that there is a fine line between a wallet and a payment network. The key differentiators between wallets will be in the value-added services – services other than payment – that are offered by the wallet. As the payment networks are designed to deliver payment solutions only, a wallet that wants to offer services above and beyond payment has to build out some network capabilities to support the value-added services, which in many ways means building out a parallel payment network.”  

In a world where card issuers battled to have their card at the ‘top of wallet’, now there is an additional battle, in not just having the card at the top of the digital wallet, but also having a competition between the digital wallets themselves. 

Another competitive force at work is how the digital wallets will converge in the physical space. For now they address the greater need for convenience in online shopping, but eventually with the power of smartphone technology, the wallets will be able to converge with payment solutions in the physical world. 

Of Visa and MasterCard’s digital wallets, Mr Bareisis says: “Both face challenges in bringing those wallets to the point of sale.” The challenge is how to integrate the contactless technology of Visa’s payWave and MasterCard’s PayPass into the wallet. “So far that has been the chasm that has been difficult to cross,” says Mr Bareisis. 

Ms Head says of Visa’s plans for the digital wallet: “Beyond scaling V.me, we’re also working hard to address another key trend: consumers’ desire for all of their payment experiences – online, mobile and face to face – to be available through a single platform. V.me will become the hub for our whole offer and we’re working to build in other services from the Visa portfolio, such as contactless payments at the point of sale, Visa Personal Payments and Visa Alerts. For our member banks, this will provide access to a comprehensive suite of services that will offer an easy way to benefit from the scale, security and reliability of Visa.”  

Competition for cash

With numerous other wallet solutions available, including those from LevelUp, Square and Google, there is plenty of competition in the market. When asked to comment on the competition and his competitors, Mr Lambert says: “As a company, the enemy for us is cash,” adding that as part of the structural trend towards electronic payments, the goal is to make the pie bigger and to displace cash. 

Looking at the competition in terms of V.me versus MasterPass is the wrong debate, says Mr Lambert, explaining that the real issue is the transformation of consumer behaviour. “Consumers want a richer and different user experience where the device can provide value-added services that plastic cannot,” he says.

It may not be a case of consumers choosing one wallet over another; it is likely that they will have numerous wallets. Mr Oglesby says: “Many consumers already have more than one digital wallet. [Apple] device owners have the iTunes wallet, Amazon customers are enrolled in Amazon payments, eBay customers are enrolled in PayPal, Android device owners are enrolled in Google Wallet. The Starbucks mobile payments solution only works at Starbucks. At least in the initial stages it appears very much as though consumers will have more than one wallet, not because they want lots of wallets, but because they don’t think of it as a wallet, they think of it as a way to pay at a particular merchant.”

Mr Oglesby adds that consolidating consumers to a smaller number of wallets will be a big challenge. “Keeping in mind that in a digital form, a wallet is just a bunch of electrons, it’s not physical, it doesn’t need to be carried around. Many payments companies seem to believe that the rules of leather wallets will still apply in the digital world, but that doesn’t seem to be the case.”

Mr Broxis says of the proliferation of solutions in the industry: “People are coming up with clever and sophisticated, and overly complicated solutions when they are trying to do something basic. This proliferation is a problem. Having a thousand different ways to pay is not helpful.” He adds that he expects to see consolidation of the solutions in the future. 

Looking to the future of the digital wallet industry, Mr Lambert at MasterCard makes the distinction between acceptance and distribution. “On the acceptance side, there will be only a few players,” he says, as it is not practical for a merchant to support 50 different checkout buttons, nor can a mobile screen with limited space display these easily. On the issuing side or the distribution side, Mr Lambert says he sees proliferation as a good thing and wants to foster healthy competition.

With the proliferation of wallets, Mr Bareisis’s view is that consumers will use a number of wallets. “There won’t be one winner to take them all,” he says. For now, the numerous combinations of how consumers can shop and pay with their mobile is a sign of a nascent, yet dynamic, industry that is evolving quickly. 

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