The Great Digital Wallet Technology Race

So, where are we with the much-ballyhooed digital wallets?

If there’s an overriding theme to this technology space, it’s disagreement. For starters, there’s little consensus on what actually constitutes a digital wallet. Features vary from wallet to wallet and there’s no dominant brand in this field. In fact, many of the biggest players are completely unknown to the average consumer.

Secondly, in the technology arena there’s a split – maybe more like a chasm – between Near-Field Communications (NFC) and Cloud-based applications. NFC offers contactless communication between a consumer’s device and a merchant’s Point of Sale terminal, or between consumers. Familiar examples of this technology at work are Visa payWave and MasterCard MasterPass. If you’ve used this technology – or if you’ve seen the terminals in stores – you’ve seen NFC in action.

While NFC operates via a chip embedded in the consumer’s device, Cloud apps store information in the “Cloud,” or distributed computer over a network, bypassing NFC altogether. So, which product is superior? The best answer right now is probably, “It depends.” NFC advocates love their technology because it houses the consumer’s information on the device and it’s secure. It operates with a tap, instead of requiring users to wait for an app to open. Proponents say NFC’s geolocation features are more accurate and therefore more useful.

In a recent report, Juniper Research estimated that some 50 million NFC-enabled handsets are now being used in the U.S. and Canada. That number is expected to rise to 86 million this year and then increase to 239 million by 2017. With the notable exception of Apple, most phone manufacturers are now including NFC in their new smartphones. Of the native NFC handsets in use in North America, Juniper estimates that only 3% are being used for payments this year. Next year, that number is expected to rise to 13% and to 50% by 2017.

But that will require retailers to adopt NFC-enabled point-of-sale (POS) terminals. Some insiders expect retailers’ NFC capability to increase as merchants update terminals to accommodate EMV cards that utilize computer chip-and-PIN technology. That assumption is based on the belief that merchants will install terminals that work with both technologies. But due to cost and other issues, changes in the payments arena are historically slow.

So, while NFC definitely shows potential, its growth is not meteoric at this point.

Cloudy View

On the Cloud-based side, the challenges are slightly different yet the results are similar. To get a clear picture of how Cloud-based wallets work, let’s use PayPal’s mobile app as an example. PayPal’s promotional video promises a soft-focus world where parents pay their kids allowances via phone, shoppers scan in their own purchases and initiate payment and everything works in digital harmony.

In reality, merchant adoption has been slow, even though major outlets such as OfficeMax and Home Depot are on board. This wallet doesn’t require NFC, but it does require that both the sender and recipient use PayPal – and therein lies the difficulty.

To promote its use, PayPal is backing its digital wallet product with a complementary free business app and card reader called PayPal Here. It’s an attractive product for small-business owners, but it’s still being established.

Bottom line: PayPal’s wallet app and the handful of other wallet products are good products. If you can find a place to use them, they’re actually functional and fun. But the overall experience still falls short of expectation. If it’s possible to conduct a credit or debit card transaction virtually anywhere in less than five seconds, the nascent usability of digital wallets simply can’t compete, at least not yet.

There are other barriers to popular acceptance in the digital wallet space. One has to do with who will profit from digital wallet transactions.

So far, payment cards that are used in digital wallet transactions still earn interchange income for card issuers. But if you look at the lineup of brands behind some of the leading digital wallet products, you’ll see that there’s a potential for disintermediation, or removal of intermediaries in a supply chain. For instance, Isis – a joint venture between wireless phone providers Verizon, AT&T and T-Mobile – may ultimately leave card issuers out of the payment loop altogether.

Big players are investing in this space. But what’s interesting is that even big, innovative companies aren’t necessarily making significant headway in their quest to be top-line players in the market. Google Wallet, for instance, has had an up-and-down launch.

Apple Wild Card

Mobile technology icon Apple remains a wild card in this field. The company has conspicuously left NFC out of its iPhone 5s, leaving industry speculators to wonder about Apple’s game plan. With millions of iPhone users already in play, coupled with the potential for an embedded app and the trust of its constituency, Apple could conceivably take over the digital wallet market in one fell swoop.

Even without a fully functioning wallet product, Apple is making inroads. Passbook, Apple’s current digital wallet offering, comes preloaded on every iPhone. While it doesn’t allow users to carry and deploy credit and debit cards for payment, Passbook does enable storage and usage of proprietary gift cards from participating merchants. CashStar, the company that makes the digital gift cards used in Passbook, reported in USA Today that “millions of dollars” in gift cards have been added to Passbook since it debuted in fall 2012.

Security-concerned consumers who aren’t ready to load their credit and debit card information into a digital wallet apparently are comfortable loading limited-value gift cards into Passbook. As users become accustomed to using Passbook for non-threatening transactions, they may be warming up for a full-blown iPhone wallet when it’s available.

Though Apple is nearly always a player to watch, big brands aren’t the only factor to consider. For all the infighting and fragmentation that’s going on in the digital wallet arena right now, a pioneering product such as Square with the right technology could certainly appear out of nowhere and win the day. There’s no dominant digital wallet player and no dominant market acceptance – at least not yet.

When will digital wallets become mainstream? It’s anyone’s guess. As we saw in the “vicious circle” of NFC rejection, several factors have to line up for real adoption to take place:

  • Ensuring security. Of all the concerns that consumers now have about digital wallets, security is at the top of the list.
  • Use of smartphones. The majority of cellphone users now have smartphones so that’s a big plus for digital wallets.
  • Merchant availability, which is currently spotty at best.
  • Technological congruity. Right now, too many disparate systems are in play that don’t add up to a common experience.
  • Real brands, which enable consumers to know what’s out there and what to expect. Not there yet.

Ms. Smith is senior technology and innovation manager for Rancho Cucamonga, Calif.-based CO-OP Financial Services. She can be reached at [email protected].