Cash Isn’t King in the Mobile Wallet
For those of you who question whether moving some coupons and a few thin credit cards from your wallet to your smartphone offers a whole lot in the way of convenience, consider this: Starbucks processed 26 million mobile payments in the year after it launched its payments app. By this spring, that number spiked to 42 million.
The mobile wallet is coming, and could be closer than you think.
Consumers already accustomed to paying bills online and using plastic instead of cash are increasingly using smartphones to buy goods and services both online and in the physical world.
These mobile payments, coupons and loyalty programs are the first steps in a predicted move toward a cashless society where paper money is a rarity and smartphones will be the dominant form of conducting transactions.
Wireless operators are looking to corner the potentially lucrative market by leveraging their control over handset distribution to promote their favored NFC mobile wallet, one that allows them to generate revenue through marketing deals and by selling space on the app to financial institutions.
There are some major hurdles, however. Most subscribers are completely unfamiliar with NFC, while payment terminals compatible with NFC are still few and far between, and consumers are already starting to adopt other types of mobile payments that don't require special equipment.
With an eye on avoiding fragmentation and getting a jump on the still-nascent mobile wallet market, AT&T, Verizon Wireless and T-Mobile USA banded together on a three-way joint venture for NFC-based payments, dubbed Isis.
If successful, the initiative the operators announced in November 2010 could allow them to gain a foothold in a potential growth market after losing out to over-the-top (OTT) services in areas like mobile video.
By getting into the market at this early stage, operators can "provide another form of payment that doesn't go over the top and that they can control the quality of service,” says James Brehm, senior strategist with Compass Intelligence.
It’s a strategy that will become increasingly important as the market becomes saturated and carriers find it more difficult to generate organic growth through new subscriber additions.
“They’re really worried that this is going to be a huge money maker and they’re going to get cut out of the loop,” says Michael Nicholas, chief strategy officer at Roundarch Isobar, a digital marketing agency that has played a lead role in several NFC-based projects. “They want to get a new revenue stream going.”
Isis won't make money off the transaction itself, where existing payment networks already have a dominant hold. Instead, the company plans to generate revenue from advertising and fees charged to banks to place cards in the mobile wallet.
This may appear to be a circuitous path to return on investment, but some estimate the potential market for marketing in mobile wallets is much larger than the market for payments themselves.
"The payment transaction value chain is very efficient today. There's no more money to be eked out of that," says Placecast CEO Alistair Goodman. Placecast makes a white label mobile wallet app that can be used by companies like wireless operators or retailers for a house-brand payments service.
Goodman says the market opportunity in payment processing alone is considerably smaller than that for the potential advertising revenue that could be gleaned from mobile wallets.
"If you look at all the additional services that can be brought into a wallet - loyalty offers, deals, consumer services - that's about a $400 billion to $500 billion opportunity, much larger than the opportunity in mobile payments alone," he says.
Isis has some distinct advantages: The initiative’s operator parents can use their control over handset distribution to ensure their millions of customers buy NFC phones with the Isis mobile wallet. It’s also setting up a system that can give financial institutions the reassurance that transactions conducted by smartphone will be secure. Lastly, Isis has already lined up cards from Chase, CapitalOne, American Express and Barclays for its wallet, as its transactions are supported by major payment networks Visa, MasterCard, American Express and Discover.
“Banks create and ship plastic. They don’t create and ship phones,” Isis Marketing Director Jaymee Johnson says.
Isis’ goal is to put all the pieces in place, from point-of-sale terminals to smartphones to provisioning systems, so that “when we get out of the gate we have the breadth of the ecosystem that’s necessary to make this a reality,” Johnson says. “It’s really creating that successful combination, that cocktail, that’s going to sort the winners from losers in the growth of this industry.”
It's been almost two years since Isis was first announced and its first live trials in Salt Lake City and Austin, Texas are only now set to get off the ground. Scaling Isis to additional cities won’t require the same lengthy lead time as its first two trial markets, Johnson says.
Johnson explains the pace of progress has been slowed down by the complexity of creating a new business and an entire ecosystem from scratch. The company is tasked with both setting up the back-end systems to process payments, rolling out compatible handsets and convincing hundreds of local merchants to install NFC-capable point-of-sale systems.
“You’re having a multitude of handsets available across multiple operators running different operating systems interfacing with banks… and then you’re making sure that works at hundreds of merchant locations within the market,” Johnson says. “It’s actually a pretty daunting effort to pull off.”
Michael Goo, vice president of strategic development and investments at T-Mobile, says Isis will be a “natural extension” of the company’s offerings and expressed confidence it will be a success.
“We believe the market is there and ready, and consumers will be ready for the right experience,” he says.
Sprint’s Outsider Approach
Isis has its doubters, and one of them is Sprint.
Sprint was involved early on in the joint venture but dropped out while Isis still had plans for its own payments network, says Kevin McGinnis, vice president of product platforms and services at Sprint.
Sprint thought establishing the new Isis brand in the marketplace seemed like an expensive proposition, requiring a massive marketing spend, and preferred to go with a more open approach that allowed the technology to take its own course, McGinnis says.
As McGinnis sees it, mobile payments come at the intersection of four major ecosystems with very large players: financial institutions, merchants and retailers, the wireless industry and online players like Google and PayPal.
“They’re all converging on one little piece of that Venn diagram. To step in there and create a whole new brand and something entirely different that would resonate with the consumer seemed like an uphill battle to us,” McGinnis says. “Why not let those brands that already have those relationships extend those relationships in mobile?”
McGinnis compares it to Discover’s attempt to go up against MasterCard and Visa.
“It wasn’t about establishing a new payments rail,” he says. “It was about the marketing dollars they had to spend to get consumers to change their behavior.”
Still, Sprint's own efforts in the mobile wallet space haven't exactly been a resounding success. The operator is banking on Google Wallet, but the NFC-based service is only available on a handful of phones that are only sold through Sprint and its Virgin Mobile prepaid brand. AT&T, Verizon Wireless and T-Mobile do not support Google Wallet, favoring instead their homemade Isis service.
Then there’s the fact that only two cards – Google’s own prepaid card and CitiBank’s prepaid card – are offered as payment mechanisms through Google Wallet, and there are only a limited number of NFC point-of-sale terminals compatible with the service.
To sum up Google Wallet’s disadvantages: Consumers can only access Google Wallet on a small number of smartphones offered through a single provider, they are limited as to what pieces of plastic go in the wallet, and they can only use the service on the small number of NFC-capable payment terminals available at retailers. It’s not exactly a service with low barriers to entry.
“The experience needs to be modified a bit,” McGinnis says. Google Wallet is too limited to allow users to leave their wallets at home, one of the key drivers for consumer adoption. “Chances are you’ll probably still have to carry plastic with you.”
Perhaps more worrisome than the logistical issues are security flaws in Google Wallet discovered by hackers earlier this year. Google quickly came out with a fix for the issue, but the incident raised concerns about potential vulnerabilities in the platform.
Isis, for its part, says the security of its platform will serve as a key differentiator against competing services.
While the big four battle over NFC-based smartphone wallets, consumers are already using a number of existing mobile payment solutions that don’t need NFC, from Square’s iPhone dongle to PayPal’s PayPass app.
Nicholas of Roundarch Isobar says that its these types of widely available services that are the real threat to operators' mobile wallet plans.
"Everyone's tripping each other up and going slowly. The people who aren't going slowly are Square, LevelUp, Amazon," he says. "They're ignoring all the other wallets that aren't NFC, and probably at their own peril."
He points to what he calls "thin cloud wallets" like Apple's Passbook, which doesn't yet have full payments functionality but keeps coupons and loyalty cards in a single spot, the same as you'd expect from a physical wallet.
Nicholas argues the barriers to entry are just too high for consumers who don't even understand the concept of NFC, much less the idea of paying for groceries with their phones. Getting consumers accustomed to mobile wallets is the necessary first step to driving later adoption of NFC, he says.
"It's important to do the wallet first and the NFC technology later," he says.
And indeed, some international markets there have already seen widespread adoption of mobile banking solutions that don’t require NFC. Just look at M-Pesa, a SMS-based mobile banking service that has been widely adopted in Kenya. Users can deposit, withdraw and transfer money on a feature phone, no NFC required.
Africa aside, it does appear that NFC will eventually become common in the United States.
Mung Ki Woo, MasterCard’s global head of mobile, explains that the retail industry is in the midst of major upgrades to new payment terminals with EMV technology, short for Europay, MasterCard and VISA, a new standard that is more secure than current transactions that use a magnetic stripe to transfer information.
Woo expects the vast majority of the new EMV terminals set to be installed over the coming years will also support NFC, making access to contactless payments more widespread.
“We expect that the majority will be both NFC and EMV capable,” he says. Woo estimates the number of NFC payment terminals currently in the United States number around 200,000, about half the number of the 455,000 deployed worldwide. That’s just a fraction of the 8 million U.S. merchants that accept plastic.
“That number will increase, especially as the United States migrates to EMV,” he says.
The lack of NFC-capable payment terminals may not be a barrier to operators’ mobile wallet plans for very long, but it’s still too early for the wireless industry to claim victory. Remember – hardly any U.S. consumers have yet to start using mobile wallets, much less turn to NFC-based solutions as their technology of choice.