Can paper or plastic hold up in a world where money is increasingly becoming more digital?
Think about it - the more we transact online, the less the need for physical representations of currency becomes. Technology and convenience have always played a huge role in how we perceive and interact with our money.
In 1959, a technology called MICR made it so cheques could be read by machines and automated, and soon cheques became more convenient than cash. Cheques were the dominate form of non-cash transactions, that is until the late 80s, early 90s when debit cards hit the mainstream and made handling money even more convenient. 30 something years later, and we could very well be witnessing another shift in how we handle our money.
In 2012, a friend of mine returned from a business trip to Kenya and couldn’t stop talking about M-Pesa. It was a new kind of payment gateway that worked on any phone that had SMS capabilities. In today's terms, it was and still is a mobile wallet of sorts.
M-Pesa was widely popular and apparently everyone in Kenya was using it to pay for everything. Even small corner shops and open-air market merchants were accepting it. “It’s going to take over the world” my friend told me.
While the M-Pesa revolution didn’t happen, we’re moving towards a future where we won’t need our wallets anymore and we’ll use our smartphones to pay for everything, regardless of the location.
In September 2014, Apple announced Apple Pay and a year later the company had signed up more than a million shops. Months later, both Samsung (Samsung Pay) and Google (Android Pay) announced their own planned entries into the mobile wallet game.
1.5 years later it’s easy to assume based on relatively low usage data of mobile wallets that they’re not going to change the world. But that couldn’t be further from the truth.
Thanks to technical changes happening in the payments ecosystem, mobile wallets are poised to take over the world in a big way soon. Are you ready for it?
What Is a Mobile Wallet?
Instead of traditional ways of using cash, cheque, or credit and debit cards, mobile wallets are smartphone apps that store your credit/debit and/or loyalty and prepaid cards to pay for goods and services. For consumers, this means a faster checkout experiences in their shopping.
Although mobile wallets have gained a lot of attention recently, thanks to large players like Apple, Google and Samsung getting into the mobile payments game, the idea itself is not new.
Aforementioned M-Pesa has been going strong since 2007 and continues to thrive today. It’s a great example of reverse-adaptation - when countries at the bottom of the developmental ladder skip certain technologies and go straight for the cutting edge stuff and thus leaving more developed countries to play catch-up. Another great example of this is access to the internet - less connected countries are skipping wired connections altogether and going straight to mobile-only access.
While mobile payments have been adopted around the world in different ways, when I’m talking about mobile wallets and mobile payments in this article, I’m talking specifically about apps that run on your smartphone and are connected with your loyalty and/or debit and credit cards.
Whatever technical implementation is used, for the system to work you will need (for now at least) two things:
- A mobile wallet app on your smartphone
- A retailer who accepts your preferred mobile wallet
The Key Players
The ecosystem of mobile wallets is wide and there are a number of apps that all have the same basic goal - make payments faster, easier and wallet-less.
Broadly, mobile wallets can be divided into two bigger groups:
- Single-purpose wallets
- Multi-purpose wallets
The former includes branded apps from companies like Starbucks, Subway, Burger King, Walmart and others. Those apps usually combine coupons, loyalty cards, gift cards, online ordering and more from one brand into one app.
The wallet functionality comes from their ability to pay for orders in the app and also in-store. But they only work in-store where those brands are located. That, of course, doesn’t mean that they’re not successful, Starbucks says that 20% of all their in-store transactions in US are done with the app.
And the latter group of mobile wallets includes solutions from the big three (Apple, Samsung, Google), PayPal and others. These examples are truly “wallets” as they aim to contain all of your coupons and loyalty, gift, credit and debit cards into one app, making your actual wallet obsolete (provided that you can use their app to pay everywhere you go).
Even if you have the app installed and setup correctly, it doesn’t mean that you can actually use it everywhere though. That’s partly because of technology (more on that under “How It Works”) and partly because some retailers are actively blocking and disabling mobile payments while they work on their own version of it.
Back in 2012 a consortium of merchants such as 7-Eleven, Lowe’s, Target, Best Buy, Walmart and others came together to create a new company called Merchant Customer Exchange (MCX) with the stated aim of developing a merchant-owned mobile payment system to be called CurrentC. Reasoning behind it was high credit-card processing fees that they wanted to avoid.
Although MCX had a lead time of several years to come out with a working product before Apple and others entered the market, to this day they have not managed it and started limited trial only in September 2015.
Thanks to this and the fact that several of the original merchants who formed MCX have either started supporting other mobile payment solutions or come out with their own solution like Walmart, it’s hard to see how CurrentC can have any meaningful impact.
How Mobile Wallets Work
Image via Walmart
When it comes to actually using mobile wallets, there are a couple of different implementations to choose, depending on which provider you’re working with.
The big three (Apple, Google, Samsung) all use NFC (near-field communication) technology for making payments. It works by simply tapping your phone on NFC enabled payment terminals. And both your phone and the terminal must be NFC ready, otherwise, no dice.
The only wallet that claims to work everywhere, no matter if the terminal has NFC, is Samsung. That’s because the company uses special sensors and technology on their newest Galaxy line of smartphones that emulate a magnetic stripe that you get on credit and debit cards – enabling it to work with all terminals. You have to see it in action to really understand it:
Apart from NFC, QR codes (those small squares that look like 8-bit graphics) or barcodes are also popular. They work by the user either taking a picture with a wallet app of QR/barcodes on the back of product packaging, or by showing the picture of one to a cashier. The benefit of QR codes is that they truly work everywhere, as they only require the ability to either recognize or show a picture from the merchant, no new equipment is required.
Additionally, there are apps that require you to sign-in to a location on the app in order to use it. After you’ve done that, the rest is seamless.
When you start to pay, you simply say the name of the service you’re using and the cashier will take care of the rest. An example of one that uses this system of authentication is PayPal.
And finally we have services whereby you order and pay within the app and then simply go and pick-up your order. Starbucks is an example of a company that is testing this feature out in select locations.
Looking into ease and cost of implementation from merchants standpoint, there are no clear-cut answers unfortunately.
On the NFC side of things, you need new devices that support the tech. The good news is that provided that you haven’t yet gotten now mandatory EMV chip-and-pin card terminals, you’ll need to get new ones anyway so it makes sense to get NFC support as well. In most cases, price of the terminal stays the same or at worst, the premium is ~$50. Bulk pricing brings down the price difference even more.
With other mobile payment solutions (QR codes, mobile apps, PayPal etc), you have to make sure that the software you’re using on your POS cash registers can be modified to accept those new kind of payments. In most cases it shouldn’t be a problem but it can be. With NFC there are no such problems, it’s just the card terminal itself that needs support, everything else stays the same.
The Current Usage Landscape
Graph via Statista
Looking at current usage data, it shows that as of October 2015, there were ~23 million mobile wallet users in the United States and that number is projected to triple by 2019. At the same time transaction value is projected to grow from ~$9 billion today to ~$210 billion during the same time frame, that’s more than a 23 fold increase in just 4 years!
While a projected 23 fold increase in transaction value might seem out of place, it makes a lot of sense that user growth is projected to only triple.
For one thing, there are still a lot of places that can’t accept any form of mobile payments because of lack of technology.
The good thing is that with the coming onslaught of new chip-and-pin EMV cards, you will need new payment terminals anyway so it makes sense to get new mobile wallet-ready tech.
Secondly, not all smartphones support NFC (required for Samsung -, Apple - and Android Pay). While the situation is better on the Android side of things, Apple has only supported the tech starting with iPhone 6 and 6 Plus. The good thing is that as more update their smartphones, they can at least try out the new tech.
And lastly, credit and debit card issuer banks need to step up their game. You see, having a smartphone with the needed wallet app is not enough. In order to actually use it, your home bank needs to support the service as well. Luckily, this is not a major problem as new supported banks are added almost constantly. Check here and here for examples.
What Are People Buying With Their Mobile Wallets Today?
Graph via Statista
Lightspeed Research reports that the most popular products being bought with mobile wallets are:
- Food and drink at quick service restaurants (40%)
- Convenience stores (34%)
- Large retail (31%)
- Using for paying household bills (29%)
- Telecom services (27%)
Looking at usage across the board, it’s clear that once you get hooked on using it, you’re very likely to keep using it pretty much everywhere you can.
While that was a pretty good snapshot of how users are using their mobile wallets today, what about in a couple of years?
What’s in Store for the Near Future?
Image via SlashGear
Taking a look into what the future may hold for mobile wallets, it’s clear that for the technology to go mainstream, it must be available everywhere consumers are at. It doesn’t matter if it’s a big box store or your corner shop.
Fortunately, the rise of mobile wallets coincides nicely with the move to new EMV chip-and-pin credit and debit cards which mandate a new terminal for merchants in order to use them. If you’re going to be getting a new terminals, it makes sense for a merchant to get one with NFC tech as well.
To facilitate quicker adoption of the new tech, major credit card companies set a deadline for EMV chip-and-pin cards acceptance of 1. October 2015. Which was good.
Unfortunately, the latest industry estimates show that only ~27% of merchants had switched by the deadline but as it’s now mandatory, we’ll get there eventually.
Once merchants are taken care of, that leaves ATMs which currently require a card to access. On that front, JPMorgan Chase is preparing for a cardless future by having ATMs that support cardless operations through their mobile app with a one-time pin code based system. It’s definitely a good start.
But why stop with wallets, right? When the technology (NFC) is already on our smartphones, it would make sense to use it everywhere we go, replacing everything from your office key card to your house locks.
Many people don’t use a key anymore to get into a car or to start it, so surely there must be a way to have similar systems for your house, right? Well, yes! There are companies out there that offer keyless locks that unlock with your smartphone via NFC. How cool is that?
And then finally, we arrive at the final big question of mobile wallets and NFC technology – security. It’s cool that everyone is adopting these cardless solutions in different ways and for different purposes. But it all only makes sense if it’s actually safer than the solutions that are currently in use. So, is it?
The simple answer is yes. The technology as it is today is safe enough for the use cases that are covered in this article. What makes it safe enough, is the widespread use of fingerprint scanners on smartphones that support mobile wallets.
On their own, the current scanners are plenty capable. But just in case you’re still not convinced, the new crop of fingerprint scanners are ultrasonic. Meaning that they not only look at a “picture” of your finger but they actually send an ultrasonic pulse against the finger that is placed over the scanner.
Some of this pulse is absorbed and some of it is bounced back to the sensor, depending upon the ridges, pores and other details that are unique to each fingerprint. You can’t get much safer than that.
Looking at current usage statistics for mobile wallets, it’s easy to look at the numbers and conclude that while it was a nice experiment, it hasn’t gained wide-spread adoption and thus their time is over.
My hope is that after you read this article and getting an understanding of both where the tech is now and what will be possible in the near future, you’ll conclude that the situation is much rosier that it seems. Remember, we’re only on around lap one of the marathon, there’s a lot more to come.
About The Author
Ott Niggulis is a chef/paramedic/freelance writer who focuses on marketing and CRO. Marketing is a numbers game and he loves numbers. Follow him on Twitter.