Payments Views


The Mobile Wallet Wars of 2014

Our clients are starting to ask us who we think is going to win the mobile wallet war in 2014. Questions like: What’s happening with the Isis rollout? What’s the next likely step in the evolution of the Google Wallet? Is PayPal’s In-Store initiative getting any consumer adoption?

All of these questions are predicated on an assumption that it’s going to be a multi-merchant, general-purpose mobile/digital wallet that is going to win. Seems that’s a given. The only question is which one? But I’m not so sure the mobile payments revolution is far enough along to accept that assumption as fait accompli.

Let’s look at where we are today. By far the biggest success story in mobile payments is the Starbucks app, which the company claims is now used for over 10% of all the transactions in Starbucks stores. Based on recent figures, the app is currently powering over 4 million purchase transactions a week, double what Starbucks was seeing just 12 months ago. We also love what we’re seeing with the Chipotle app, the Five Guys app, the Jamba Juice app, the Apple Store app, etc.

What all these apps have in common is they embed payment into the broader customer-facing experience. Not a generic customer experience, but one that is tailored to each merchant’s individual strategy for customer engagement. The point of each app isn’t payments, it’s commerce – merchant-specific commerce. In other words, engagement and convenience leading to increased merchant sales and customer loyalty.

In marketing terms, this is best thought of as category competition not product competition. It’s not about the MasterPass wallet versus the Isis wallet as products so much as it is about multi-merchant wallets versus merchant apps as categories. If I had to pick the winner between those two today, I would give the nod to the merchant app category.

When I mention this to people in the payments industry, the general reaction is to completely dismiss merchant apps as an obvious short-term solution that will eventually fade away. They generally puff out their chests and draw parallels to open-loop cards versus closed-loop cards. “Consumers no more want dozens of merchant apps on their phone, than they want dozens of store cards in their wallet.” They believe it’s inevitable, and just a matter of time, until the multi-merchant, general-purpose wallet comes to dominate. Sometimes they hedge their bet and say maybe it won’t be a single general purpose wallet, “Maybe consumers will have two or three wallets on their phone.”

Still, they make a good point in that general-purpose cards did ultimately prevail over private label cards. But there are plenty of examples where that same “general purpose” thinking has failed spectacularly. Here are two:

  • Banking Bill Pay – The banking industry thought that consumers would want to review and pay all their bills through a single, bank-controlled bill pay portal. It turned out that consumers preferred to pay their bills individually, one-by-one, at the biller’s website. While bank-based bill pay is sort of successful, what we know as “biller direct” has emerged as the dominant model.
  • Federated Login – Online technology providers have long thought that consumers don’t want to manage all the individual passwords required to transparently move site-to-site online. Consumer surveys even show as much. This was the premise behind the original Microsoft Passport. Remember that? Today what’s emerging is the increasing use of Google and Facebook credentials to move across sites on the web. While federated login is established and considered successful, studies show that consumers still use 5 to 10 unique passwords a day to login to various sites. Multi-site federated login is hardly the de facto model.

Without exploring the underlying reasons, I think it’s fair to say the less general purpose solution dominates. Maybe this speaks to the market friction that has to be overcome to reach the “optimal” general purpose solution when an easier “good enough” point solution will suffice.

I’m not sure the same thing won’t happen with mobile wallets and merchant apps. While the payments industry is running in circles trying to figure out the tap-and-pay challenge—which is a genuinely hard problem—merchants are deploying their own apps using the established card-on-file model. Any merchant can use this model and deploy mobile apps today, consumers understand it, and it’s available now.

And while enabling card-on-file payments in a merchant apps might not be optimal from a payments “industry” perspective, the model is expedient—and lets the merchant get on with delivering the best possible mobile features that the merchant thinks will delight its customers, drive repeat visits, and ultimately increase sales.

But what merchant wants her app to buried on the fourth screen of a customer’s phone? That’s why the other development we are watching closely is mobile-based geofencing. This is the technology that brings the relevant merchant app to the foreground when a mobile device enters a store or a specific location. As this becomes more sophisticated with Bluetooth Low Energy (BLE) and the emerging “beacon” solutions, it really won’t matter how many dozens of merchant apps are on a phone. The one that needs to be in the foreground will be, regardless whether it was currently running or not. When I’m at Best Buy, the Best Buy app will be front and center. Pretty exciting stuff.

I’m not suggesting that it has to be either mobile wallets OR merchants apps in a winner-take-all sense. The two can co-exist. And if you think about it, this is no different than the general-purpose department store and the specialty retailer co-existing at the same shopping mall. You remember department stores, right? They are the general purpose thing you walk through on your way to your favorite specialty retailer.

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Eric Haller
Eric Haller
6 years ago

No Kool Aid drinking here. This may the best mobile wallet piece I’ve read in the past 24 months. Clear, pragmatic observations and conclusions. Thnx for sharing your thoughts!

Jim Donahue
Jim Donahue
6 years ago

Mobile Payments/Wallets are pie in the sky solutions in search of a problem.

Consumers want the Banking/Payments industry to get on the same page for safer use of credit and debit cards such as EMV or another form of encryption to make using them safer.

Consumers want same day ACH. Banks can send optical images of checks to bounce your check the same day and have stacked overdraft fees but consumers get their deposits based on some 30 year old rules?

Those are real problems in search of real solutions.

Noam Naveh
Noam Naveh
6 years ago

Fantastic Article, Thanks!

User experience is the only way to win this war. But in my view the real – and hidden – barrier to good user experience is fraud. This tough nut is much easier to solve in single-merchant-known-user situations than in a generic wallet.

My bet is on the big players with lots of user data like Google, Facebook and to some extent PayPal. They have a better chance because they may have ‘critical mass’ of user information, deep enough pockets to afford a lot of fraud losses until they get things right, and the ability to buy and integrate innovation from the outside.

Alexander Peschkoff
Alexander Peschkoff
6 years ago

Good article. The missing piece – phone to POS interface. Options are limited (NFC, QR, BLE, sound, “bump”, light). Considering that contactless EMV *is* coming to the US, guess what interface is likely to prevail…

As for merchant apps and CoF – tokenization will have some impact on that. Also, CoF means CNP (and fraud liability) – not something that merchants are excited about…

Andy Miller
6 years ago

Good item.

I notice you don’t mention Passbook or Apple. I know Passbook is not a wallet – yet – but it has the potential to solve one of the biggest problems of existing wallets. Namely, existing wallets involve too many steps in order to make a payment. Its often much simpler to use a contactless card, or arguably even sticking a card in a reader.

The advantage a Passbook enhanced system would have is that when you walk into the store the device interfaces with the stores system. This could allow payment by entering your passcode lock and scanning a QR code or entering a transaction number and nothing more. And lets not forget that Apple not only has cards registered for virtually all Apple device holders but a good number of others also via iTunes.

If a wallet has at its heart geo-location and mobile services it also allows the retailer to bring other services into play. There is the much over-hyped special offers as one. What about finding items though? How often is it you can’t find anyone to ask where something is or if the store stocks it?

PayPal is going some way down this route but will never be able to give quite the same immediate access and use that a wallet engineered in place by the device designer can.

The problem I see with NFC is why would using your phone for this purpose be advantageous to using a card? Whilst it is marginally easier to dig a phone from your pocket or handbag/purse than a card from a wallet in your pocket or bag what other steps would then be required?

Ketharaman Swaminathan (GTM360 Marketing Solutions)

I agree with your view that the point about each merchant-specific mobile wallet app is commerce and not payments. If you take Starbucks App for instance, it’s primarily a loyalty app that incidentally supports payment.

6 years ago

Great post. Thanks!

The example “Federated Login” is not understood. Is it suggested that it failed (e.g. Microsoft passport) or succeeded (e.g. Google ID/ Facebook ID)? To me, both sound like Federated Login, aren’t they?

Drew McCaskill
Drew McCaskill
6 years ago

I agree totally. We’re asking the wrong people the wrong questions. Ask the consumers. Engagement and brand relevance will drive mobile commerce. They happen together. We’ll all grow old waiting on a one-size fits all app. Merchants who take control of their mobile destiny will win.

David True
6 years ago

Adding my voice in assent. Legacy thinking clouds the minds of legacy players and newer players (Google, Isis) economic models are based on all-in-one wallets.

What do the all lack? A compelling value for consumers and merchants.

Merchant-driven wallets by definition solve the latter, and evidence (what you cited) shows they’ve been to only ones to solve the former.

And as you noted, technology can solve the “too many apps” problem.

Watch MCX, watch what comes of Passbooks & Apple.

Great piece for interesting times.