Alex Washburn / WIRED
Apple Pay is up and running and digital wallets are back in the limelight. Are merchants, consumers, and the market ready for mass adoption of digital wallets? Google Wallet’s poor early uptake comes to mind four years after its launch in 2011. We believe a combination of factors – part structural, part user experience – will drive the next and larger cycle in digital wallet adoption. Apple Pay will be a key enabler, it will neither be alone nor, the necessary winner.
The mobile wallet space has been fragmented without a clear leader. By this time next year we will have our leaders in place. Payment systems and currencies are either universal or limited, this has been true as long as records have been written down, carved into rock or told of around the campfire. The more limited the usability, the less likely a digital wallet is to keep users engaged as infrastructure catches up with entrenched payment methods. Past brushes with digital wallet greatness have withered on the cloud as insecure, less than seamless alternatives to boring analogue cash and plastic cards. Lack of a universal technology standard, disparate interests of stakeholders, and poor user experience, have severely limited adoption and growth. Apple Pay has begun to change this, quickly, given the short and still limited rollout of the service. Google’s recent moves with SoftCard from AT&T, T-Mobile and Verizon and Samsung’s purchase of Loop Pay suggest the future is arriving fast.
Fortunately for the industry, a perfect confluence of contextual realities has formed to allow rapid evolution of wide spread digital wallets adoption. The secular facts on the ground are: near-ubiquitous presence of NFC (Near Field Communications) POS terminals; October 2015 deadline for retailers to upgrade to Europay Mastercard and Visa (EMV) enabled POS terminals; and several massive hacks costing merchants and banks millions while driving up interest in newer, safer, payment. New fears, financial institution desire to take information out of the seemingly vulnerable clutches of merchants and new EMV POS terminals are all constructive/compatible with NFC technology. Lastly, the introduction of Apple Pay- offering secure, seamless experience with Apple’s allure- has focused the markets and teased out rapid responses from cellular providers, Google, Samsung and other market players.
The biggest hurdle for digital wallets has been the lack of NFC-enabled terminals. We are 4 long years into Google Wallet, and nearly half a year into Apple Pay and there are only about 220,000 live contactless merchant locations out of about 8 million U.S. card-accepting locations. Further, many NFC locations are vending machines. It is expensive for retailers to upgrade their hardware and the consumer has not been demanding change. There is always a self re-enforcing cycle. Either, consumers demand and drive change through adoption or merchants build it and everyone hopes that they come. The retailers blinked, not necessarily by choice. In the U.S., retailers want data on browsers and shoppers, feel the hot breath of ecommerce on their necks and need to transition to EMV. Millions of merchants must move to EMV – a chip and PIN technology vs. magnetic stripe on a card – by October 2015 card networks will pass risk of fraudulent charges to retailers who haven’t adopted the new standard. The vast majority of chip-card-reading terminals being deployed are equipped with NFC chips, which work with EMV terminals and support contactless payment. NFC digital wallets will work with the majority of new terminals being rolled out this year.
Security and user experience are the key deliverables from digital wallets. While Google Wallet and others had security built in, Apple Pay has taken it to the next level with tokenization of card numbers, Touch ID fingerprint biometrics, and on-device storage. None of this involves new or difficult to replicate software, hardware, or integration. Apple has appealed, very successfully, to banks and credit unions by not claiming user data – like Google – and by assuming the liability and removing the merchant as a fraud breach point in the payment chain. Apple Pay has appealed to banks, credit unions, and consumers by offering a simple, fast and private way to pay. This is important because one of the factors holding back Google Wallet and Softcard has been scant issuer support. Apple is working with 11 credit card issuers that it says represent 83% of U.S. charge volume, including Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., and American Express.
The oft projected and repeatedly announced digital wallet future is emerging. Apple Pay has jumped out to an early lead and breathed new life and urgency into this space. Google has already struck a new partnership with SoftCard and Samsung has purchased LoopPay. We expect the dominant hardware firms in the globe straddling smart phone business, the duopoly leaders in mobile operating systems and the largest financial institutions and cellular carriers will articulate and dominate next generation payments in short order. We are confident this is the beginning of the end of the battle for digital wallet dominance and not another end of the beginning.
Max Wolff, an economist and strategist, is managing partner of Manhattan Venture Partners.
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