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The digital wallet and where it’s headed?

Amit Ashwini
April 13, 2018

Today there is an entire generation of people who do not understand the notion of balancing a checkbook. The phrase itself has turned into an anachronism. The idea of carrying money in physical wallets made of animal hide may become absurd sooner than later. Either way, the future of payments is currently in flux, and its time you re-evaluated any techno biases you may have in a market that offers you the opportunity to embrace mobile pay, cryptocurrency and many other digital money opportunities that can make your life more streamlined and less cumbersome.

Let’s begin by correcting a misconception. You might not scan your smartphone at your local coffee shop when you buy your daily cup of coffee, but when you use your mobile to send money to a friend who picked your tab the other day, you’ve used a mobile wallet. Mobile wallet basically means that you have on you some form of payment information digitally. We talk at length about how services like Uber, Ola, and Lyft have disrupted the ride-sharing and transportation sector. But when it comes down to it, a vehicle that takes you from one point to another is just that, whether it be someone’s personal vehicle or a taxi. To disrupt the space, what all these cab-sharing businesses basically did was introduce a mobile payment into the equation. Without ever having to discuss payment or take out a wallet, riders could now travel seamlessly.

What’s the landscape like now?

In the payments and mobile wallet space today, major players from Visa to Apple are investing heavily in their offerings, touting unique feature sets and partnerships to try and emerge ahead of the pack. As with most emerging tech, we see a proliferation first where many brands introduce their mobile payment options to the market, followed by a collapse. We are in the expansion stage and likely will be for another few years to come.

Consumers will ultimately drive adoption by making a choice even though merchants may have their favorites. Their choice could be based on ease of use, brand loyalty, superior marketing and more. Consumers will look elsewhere for their purchases if merchants refuse to see the importance of these different factors. More merchants will be forced into accepting and prioritizing users’ preferred methods.

There’s nothing new about loyalty programs. Be it the punch cards at your neighborhood store or the discount cards from the grocery chain, incentivizing your consumers to spend their money with you may not only get you an impulse sale but also holds the potential of gaining a lifelong loyalty. As consumers pay for your products and services differently, they give marketers new opportunities to connect with them in meaningful ways. We’ve not fully leveraged the digital wallet’s potential as marketers or consumers. Coupons, digital loyalty cards, event tickets, order delivery updates, and even reminders about loyalty card balances and coupon expiration are all native to the ecosystem of a mobile-wallet. Meaning, in addition to building a relationship with your users through a digital loyalty program, now, you can send them customized lock-screen reminders while incentivizing them to make a purchase decision, perhaps before airline miles or a discount coupon expires. With digital loyalty programs that can be stored in the mobile wallet, your users no longer need to carry a physical card they might lose or remember any account number. As person-to-person, physical interaction is fading from each industry the combination of loyalty programs and mobile payments provides a seamless way for brands to continue to interact with users. At times, the most frictionless transaction is one which does not involve people.

As digital wallets increasingly become the base point for consumer spending, it has created a problem for established players and an opportunity for startups. Major credit card and mobile payments companies like Mastercard, Discover, and Visa fear a loss of brand recognition in the future. Shoppers no longer need to hand over a physical branded credit card to a cashier anymore with the rise of digital wallets. Traditionally, physical cards reinforced a consumer’s connection to the brand with every purchase they make. With information stored digitally now, a tap of an Apple Watch and consumers can shop in a nearby store or online without having to manually input any information, or even interact enough for brand recognition apart from the Apple on their Watch to sink in. This could lead to credit card companies cozying up with technology firms. In fact, we’re already seeing enough of this happening and will continue to see this tread permeate across the industry.

Now take a closer look at Apple Pay and Samsung Pay. Unlike others, they have both hardware and OS, their wallets as a platform can deal a crippling blow to the rest. In a mobile-friendly age, where a fingerprint on your smartphone is enough to make a transaction on most e-commerce websites and applications might wipe out a considerable amount of say, PayPal’s revenue overnight since two-thirds of its revenue comes from merchant services. The top credit card firms spend huge amounts of money each year convincing consumers to adopt its credit card. But once these credit cards are subsumed within a digital wallet, they fail to see that the “usage” component is getting further out of their control, resulting in major implications on lending revenue or downstream interest. A single change in Samsung’s product design, something as basic as alphabetization maybe, can place Capital One after Bank of America, which could move more purchases in that direction. It will prove challenging to attack the first point of contact in a digital wallet space as that would require a hardware and OS wallet with a massive number of payment credentials and massive adoption. Whereas attacking the traditional credit card facility could prove equally challenging, and comparatively unprofitable at that.

So in a world where traditional banks like Wells Fargo provides the source of funds required, and a Samsung Pay controls the touch point, nothing is stopping us from automating the credit selection process. The smartest thing cloud wallets that are facing an existential issue of being caught in the middle can do is join hands with a winning digital wallet application if they're not able to acquire enough credentials alone. Working with winning app wallets like Amazon, Lyft and Uber is the only way of remaining relevant for companies like Chase, Citi, etc. that risk being abstracted into irrelevance. So what potential does this hold for startups? Well, it just got easier to address lending, the most profitable part of the stack without having to dive into the quixotic and herculean path of payments.

When the dust settles, the payments landscape will have gone from numerous players to a handful. A handful doesn’t necessarily mean all players will have been knocked out, but that some of the big players in mobile payments will be forced to merge as we’ve seen in other large industries like the airlines.

What’s holding them back?

As services and conveniences based around digital wallets expand, and security concerns are addressed, the argument against including a digital wallet to your smartphone will crumble. Yet, the adoption of digital wallets isn’t spreading as quickly as most would expect. There’s no one main reason why mobile wallets are being held back from increased consumer engagement. There rather seems to be a whole lot of small reasons. These reasons range from user’s ignorance on which shops accept which payment methods to the user’s clinging to old habits.

Apple seems primarily concerned with solving widespread merchant acceptance. By partnering with PayPal, Android Pay attempted to solve the same problem. The deal made PayPal a method of payment available on Google Play by allowing Android Pay users to link PayPal to their accounts. Walmart Pay is working on simplifying and expediting its checkout experience for its app users by allowing its users to store rewards, coupons,  gift card balances, and receipts within the app and begin the checkout process as they shop, by scanning QR codes into their mobiles. Early results of these efforts have been encouraging.

Another issue with digital wallets is that none of these wallets is a universal payment method that can be used across stores, devices, and operating systems. This is a major reason why PayPal believes it is poised to win. Another reason why adoption is slow is that several digital payments have migrated to merchants' applications. Domino's Pizza has outdone itself in the digital innovation area in recent years. Starbucks’ investment in this space is noteworthy too.

Over the past few years, the payments landscape has changed dramatically. Traditional payment firms, FinTech start-ups, retail chains and tech companies have all played a part. While all these companies want to see change take place overnight or, look forward to a payment revolution, what we're witnessing is an evolution. It is still too early to say which, if any, of the above payment methods, are bound to fail. On the other hand, none are guaranteed to succeed either. We are still in the early boom of mobile payments and wallets, and as the line between digital commerce and point-of-sale are erased, the only thing we can say for sure is that the consumer will emerge the ultimate winner in the race to make purchasing a less time-consuming, more seamless experience.

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Amit Ashwini