Digital (and mobile) wallets—Good profit opportunities in payment transactions, but uncertain business models
Before discussing the topic of digital (and mobile) wallets, one should first agree on terms to be used, since there hasn’t been a standardized definition yet. Thus, we use the following definition in the article:
A digital wallet is a system that securely saves payment information and passwords for several payment transactions and websites. A mobile wallet additionally establishes the connection to mobile payment systems via smartphone.[1]
Approx. 20 providers of digital wallets operated in Germany in the beginning of the year 2014. However, only few (PayPal, Yapital, mpass and perhaps MyWallet) have been noticed by end consumers. They differ from each other in their “mobility” (E- / mobile commerce vs. stationary commerce) and used technology (Internet, QR code, NFC), as long as they are mobile.
The advantages of E- / mobile commerce are obvious: Security (in particular in case of unknown retailers) and convenience. In stationary commerce, it largely depends on the respective applications. Mature offers succeed in exceeding known procedures such as payments by card and cash payments in terms of speed. Regarding security, advocates of smartphones often bring forward the argument of double password protection (telephone and application password). However, the advantage compared to PIN-secured card transactions, if existing at all, can be neglected. The reimbursement options in case of fraud surely aren’t as many as in terms of credit cards. Furthermore, strong network and even stronger habituation effects prevail on the payment market. Both significantly counteract the breakthrough of new payment transactions.
However, as soon as the value promise of especially mobile wallets in the sense of retailer acceptance, quicker payment transactions, local coupons, attractive loyalty programs and/or security advantages improves, a significant shift of payment behavior towards digital wallets can be likely in the medium run.
It is also clear that only few providers will assert themselves.
However, the following comes as a surprise: issuers haven’t participated in the run yet. This is particularly astonishing, since banks have several hits on their hands compared to technology, commerce and telecommunication companies:
- Existing customer and retailer relationships
- Experience in dealing with loyalty programs (credit cards)
- Existing settlement systems
- High skills in risk management
- Basically high confidence in payment transactions
- The current account as wallet blank
New innovations with focus on cash replacement and convenience—Security underrepresented
Global innovations in payment transactions were mapped in a large-scale study of the Bank for International Settlements (BIS). Irrespective of payments by card or online / mobile payments, a clear image arose. Innovations in the cash replacement and convenience area were leading. The optimization of process lifetimes and costs as well as security were mid-table. Infrastructure optimizations and other innovations ranked last.
This image is not surprising, as the aforementioned digital wallets basically comprise all mentioned areas.
But it is interesting that the innovation efforts in terms of security in comparison to strong customer preference for this very topic are significantly underrepresented. Thus, a study of the E-Commerce Center Köln (ECC) found out that security is the most important selection criterion for online means of payment. Bundesbank states as well that security of payments by card is the most relevant selection criterion, but with an only mediocre level of fulfillment.
Therefore, it should be interesting especially for issuers to exploit this market potential.
Open transfer standards in mobile payment—Which one will prevail?
Several mobile payment initiatives have been carried out in Germany and Europe in the past years. About half of these initiatives are based on the use of NFC. A third uses QR codes or camera-based procedures. Other procedures such as geolocation, telephone number or separate accounts are hardly used. The new iBeacon procedure, which allows for a precise geolocation of smartphones in closed rooms, is becoming ever more popular.
Even if NFC is currently leading in terms of the number of new introductions, no critical acceptance amounts can be derived. Rather all market players of the payment environment have to follow a cross-technological strategy on a short- to medium-term basis. Otherwise, they completely miss out on a central market trend or back the wrong horse.
With a focus on credit cards, the calculation is fortunately simpler by means of the method of elimination. As long as one doesn’t want to equip a credit card with a camera and CR reading function, NFC is the only solution. Since acquirers and technical standards such as SEPA as well as mobile payment procedures backed the same horse, this should first be a safe bet. However, it is to be considered that NFC-enabled credit cards don’t prevent that iBeacon or other procedures or aforementioned digital and mobile wallets increasingly drive the credit card away from the point of sale.
Conclusion
Basically, most innovations can be found in the area of cash replacement and convenience (digital wallet comprises both of them). However, there hasn’t been a significant transformation wave yet. Normally, such disruptive transformations are only recognized in hindsight.
Thus, issuers should generally participate in the digital wallet run without considering the individual situation. Probably not as full-service providers, but rather as service providers in the area of settlement, risk management and perhaps branding. Furthermore, they should increasingly invest in security innovations and first rely on NFC.
Anyway, issuers should hurry up, since other market players are vigilant and have already taken the lead.
