Wallet wars: mobile payment systems fight for critical mass

Believers in the power of mobile devices to transform financial services will tell you that consumers always leave home with three things: their keys, their mobile phone and their wallet. If they had to leave one of these behind, it would most likely be their wallet. One day, however, consumers will be able to leave their physical wallet behind forever – when its contents are transferred to their mobile phone, and a number of players are battling it out for their version of the mobile wallet to be the one that gains critical mass.

The competition is not so much a war of wallets, says Sirpa Nordlund, executive director of industry association Mobey Forum, because many of the mobile wallets are not on the market yet. “It is a war of ecosystems,” she says.

Mung Ki Woo, MasterCard’s group executive of mobile, does not see it as a war but rather as healthy competition. He characterises the current stage of development as one of the digitisation of payments and commerce.

Mobile wallets have the potential to change both payments and shopping. They are the means by which consumers can store all their information that is typically found in a physical wallet – payment cards, identification, loyalty cards and coupons – in a digital form that is accessible from their mobile phone. A number of well-known internet and technology brands – among them Google, PayPal, Apple and Microsoft – as well as payment networks, banks and mobile operators, are all working on ways to become the hub for this data.

“They are all trying to be the preferred repository,” says Charles Golvin, principal analyst at Forrester Research, an independent technology and market research company.

Early entrants

The launch in September 2011 of Google Wallet was a landmark in the process of transferring the physical wallet to the phone. Users of Google Wallet load a digital version of their payment cards into the wallet and, using near field communication (NFC) technology, tap their phone against a terminal to pay for goods. Google’s pilot was a collaboration between industry parties: the payment network (MasterCard’s PayPass), the card issuer (Citi), mobile carrier (Sprint), the handset manufacturer (Samsung) and the trusted service manager, which transfers the account information onto the phone (First Data).

So far, Google Wallet has not expanded to gain any critical mass, and has entered a competitive landscape where many options are being developed. For example, Isis – a US-based joint venture of mobile operators – has been working towards gaining support for its ecosystem. Microsoft’s Windows Phone 8, which is expected to be released in the third quarter of 2012, will also offer a mobile wallet.

Meanwhile, Apple has given a preview of its next mobile operating system – iOS 6 – which is expected to be released around the same time as Microsoft's offering. Its Passbook application – a hub for tickets, boarding passes, coupons and loyalty cards – has caught the imagination of observers who believe that this is Apple’s first step into mobile payments. As yet, Passbook does not have payment functionality, and speculation is rife over when – or if – Apple will ever put NFC technology into its iPhone. Apple’s next move remains to be seen, but its advantage – along with the other upstarts in this field – is that it already has a loyal customer base of millions who use their devices and transact in its iTunes store.

Next steps

According to Rick Oglesby, senior analyst at business technology research firm Aite Group, companies such as Apple and Microsoft are looking to leverage the mobile device as a promotional tool. These companies already have data on their users’ behaviour, which is what they are looking for, and Google has been able to successfully monetise this through its advertising model.

“With the mobile device, there is [an additional] step [in terms of] what you are looking for right now, and also where you are,” says Mr Oglesby. In practice this could mean a Google user arrives in a new area and wants a coffee. On their phone they conduct a Google search for ‘coffee’, and the results are tailored to the user's location. One café in the search results might offer a free muffin with a coffee, so the user accepts the offer and heads there, using Google Maps. On arrival, the user orders the coffee, pays for it using the mobile wallet and taps their phone against the payment terminal, which automatically recognises the promotional offer, redeems it, and then sends an electronic receipt to the hub in the user's phone.

Using these principles of leveraging data to enhance the user experience, there is the potential for companies such as Amazon and Facebook to also transform the nature of mobile commerce and payments. However, such companies are focused on extending their presence in the whole chain of the commerce process, and not necessarily on the nuts and bolts of processing secure payments.

Traditional payment networks such as Visa and MasterCard have been formulating their strategy to fit into this landscape of new options, players and ecosystems. Mr Woo at MasterCard says that the company’s strategic position is to power payment services, integrating the MasterCard payment network into the consumer experience. “We are ready to work with all the different players,” he says.

Similarly, Visa has been forming a number of partnerships to ensure that mobile transactions travel along its payment rails. It has also developed V.Me, an online wallet that can be accessed via a smartphone, tablet or computer. Users can load digital versions of their payment cards into the wallet – even those from other networks – and can pay online from their V.Me account. This digital wallet is currently being rolled out, and rival MasterCard recently announced its digital wallet, PayPass Wallet Services.

PayPal challenge

Visa and MasterCard are being challenged in their efforts – both as a payments network and provider of digital wallets – by PayPal. PayPal’s wallet is not technically a mobile wallet as it is stored in the cloud – a virtual platform – and can be accessed from any device, including smartphones. Mr Oglesby at Aite Group explains that PayPal stores the card account numbers in the cloud, and when a transaction takes place it is done based on identifying the individual to the PayPal account, rather than processing the individual card numbers.

Not being hindered by its legacy systems, PayPal is in an interesting position to create a new payments infrastructure. “Sometimes starting from scratch is better, especially if the pre-existing framework is 30 years old,” says Mr Oglesby.

PayPal, which has its origins as an online payments network, has now made a bid for its payments to be accepted in the physical world. Mary Monahan, executive vice-president and research director at Javelin Strategy & Research, points out that PayPal can already be accepted at US home improvement store Home Depot without the need for NFC-enabled merchant terminals.

For those who believe that mobile devices will transform payments, the PayPal solution goes one step further: a user can leave home without their phone and wallet. At the checkout, the PayPal account holder simply enters their mobile phone number, which is linked to their digital wallet in the cloud and their passcode, the transaction is processed and the receipt is sent to the digital wallet. PayPal has signed agreements with terminal manufacturers such as Verifone so that its payments can be accepted at the physical point of sale.

While PayPal’s cloud-based wallet enables payments at the point of sale without the need for a phone, many players have been focused on NFC payments at retailers, an infrastructure that requires many years of partnership and collaboration to build. The industry has long been plagued with a chicken-and-egg problem: consumers will not use the contactless payments or NFC-enabled phones if there are not merchant terminals to accept the payments, and merchants will not upgrade their terminals if consumers do not have the NFC-enabled phones.

Ms Monahan says that the ultimate end game for the mobile wallet players is putting a payments capability in the mobile device itself. There has been a divide with mobile wallets, explains Mr Oglesby, about how to store a customer’s data. He outlines the two different ways – storing the payment data directly on the phone, or putting it in the cloud – and adds that typically mobile carriers have focused on putting the data on a secure element in the phone itself, as their business model is based on extracting value out of the use of the physical handset.

Natural evolution

Visa and MasterCard have so far focused their efforts on card-emulation techniques, which involves tapping an NFC-enabled phone against a terminal in the same way a contactless card would be used. Both companies have largely focused their mobile wallet efforts on NFC, which they argue is part of a natural evolution of the electronic payments industry, and not because they are burdened by legacy card-based systems.

Mr Woo at MasterCard explains that retailers’ point-of-sale terminals go through a natural upgrade cycle, and the next stage is to introduce terminals that accept NFC payments. This is an obvioius evolution, he says, that has seen the payments industry progress from manual credit card imprinters to swipe machines to NFC and mobile payments at the point of sale. “What we are saying is do not reinvent the wheel,” he says.

Ms Nordlund at bank-led industry association Mobey Forum shares this sentiment. She says that the development of the payments industry and its regulations have been complex and so it is better to use existing payment regulation and standards.

Sandra Alzetta, Visa Europe’s senior vice-president of mobile, explains that the focus on NFC is a way for the payments network to evolve easily. “NFC is as painless as possible from the retailers’ side,” she says, explaining that the card-emulation strategy has been the easiest way to get the new payment form adopted. “Any change is a big deal for retailers,” she says, adding: “Looking to the future, we cannot take a step back in security. We need to make sure what we are doing with mobile has at least the same level of security [as is in place with cards].”

The focus on NFC and payments at the point of sale is, according to Mr Woo, because “proximity payments are the end game". He says: "As human beings, we spend the majority of our lives in the physical world,” adding that although more thought typically goes into online purchases, statistics show that the majority of spending still occurs in the physical world. “The proximity world is at least 10 times bigger,” he says.

Mr Woo makes the comparison with the publishing industry – which is moving to e-books – and says that with the digitisation process, there is an increase in consumption. With such an increase, there are ample opportunities for the many players that are trying to establish themselves with their mobile wallet solution.

Mobile offerings

As well as non-payments brands, there are other challenges to the mobile wallet industry in the form of mobile operators. One such example is O2, which launched a wallet in the UK in April. The mobile operator trialled its service in a village in Wales, which does not have an ATM, and its peer-to-peer money transfer presents a compelling reason for people to change their payment behaviour instead of planning their next trip to the nearest ATM. Also, it shows the potential market for mobile wallets in replacing cash with mobile payments.

Aside from transferring money to any UK mobile phone number, the O2 Wallet also allows customers to digitise their existing debit and credit cards into the wallet. Added to this, says James Le Brocq, managing director at O2 Money, are exclusive offers that O2 customers are already familiar with through its Priority Moments programme.

When asked to comment on the numerous mobile wallet solutions that are currently being developed, Mr Le Brocq says that this is typical for a nascent industry. He points to the various watershed moments in the development of the mobile wallet industry, such as Orange’s Quick Tap payments, which enabled contactless NFC payments with a mobile phone, and Apple’s showcasing of Passbook. “The opportunities are coming alive for consumers,” says Mr Le Brocq.

“Consumers do not have much interest in payments. They want to do things in their everyday lives conveniently: travel to work, buy lunch, buy a gift,” says Mr Le Brocq, adding that this attitude will be crucial in determining which solutions will gain critical mass and be widely adopted.

Still space for banks

Many observers believe that this process of evolution does not mean that banks will be displaced. Mr Le Brocq, for example, has no expectation that consumers are going to give up their relationship with their card issuers. And while upstarts such as Google and Apple are making a play with their version of the wallet, banks are also creating their own hubs.

Many banks have also proven to be innovative in mobile, such as Barclays in the UK, which recently launched its Pingit peer-to-peer mobile payments service. How widely this will be used remains to be seen, but the bank has signalled its intention to be an innovator in the field.

On the question of where banks fit in the patchwork of mobile wallet ecosystems, Ms Alzetta at Visa Europe says: “The banks that will succeed will be the ones that take mobile seriously.”

While there are numerous non-bank competitors in the mobile wallet industry, banks still have a crucial role to play and there is opportunity for them to be part of the evolution of the industry, rather than watching it from the sidelines. Banks will remain the custodians of consumer deposits, the issuers of credit, but they have to decide whether to provide accounts that load into another player’s wallet, or be brave and create a repository of their own.

The arena of mobile wallets is changing rapidly, with announcements being reported almost daily, and the competitive landscape of the industry could look very different a few years from now. Many observers say that the industry can expect to see some interesting partnerships take shape as the players all pursue their goal of pushing consumers to leave their physical wallets behind forever.