Digital Wallets Beyond the Money

“It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new system. For the initiator has the enmity of all who would profit by the preservation of the old institutions and merely lukewarm defenders in those who would gain by the new ones.” – Machiavelli’s, “The Prince”

For those seeking to play a role in the incipient mobile wallet space – from carriers to software companies to hardware manufacturers – take note of Machiavelli’s counsel to royals in Europe on the dangers of creating new orders. Visa, MasterCard, American Express, and Discover represent those wanting to “preserve” existing business models. Carriers, Internet companies, and a plethora of others want to take money away from the incumbents. But before either goes to battle against the other, a few matters must be addressed first:

  • Retailers must be convinced to play ball with any changes to existing processes.
  • New ecosystems and processes must be created and secured in the digital world.
  • Of course, let us not forget the ultimate user, the consumer.

The first challenge involves retailers. From the big boys like Target and Walmart to the small fries like a neighborhood dry cleaner, transaction fees related to mobile wallets represent significant costs for retailers. For decades, retailers have sought to lower their transaction fees. Enter the promise of mobile wallets – finally, a way for retailers to lower their costs, or so they thought. However, that hasn’t been the case for some time. To date, no one is giving retailers a break on transaction fees. Whether it is ISIS, Google Wallet, Amazon, or PayPal, the fees are just being passed on to the retailers. That is not what retailers expected, and why many are just sitting it out right now.

Compounding the problem for retailers is the need to upgrade their POS (point of sales) systems or back-end infrastructure to support NFC (near-field communication) or cloud-based solutions. Google, for one, offers to subsidize the cost of these upgrades, but at the expense of sharing customer data, something retailers are reluctant to do. Who is going to lay out this capital expense for the promise of mobile wallets, as opposed to a firm commitment of a lower transaction fee?

The second challenge for mobile wallet entrants is the layers of complexity involved in creating a cohesive mobile payments ecosystem. For both the cloud and the NFC space, creating a comprehensive ecosystem is not a simple endeavor. When one examines what it takes to create a mobile wallet network, as many as nine moving parts must be cobbled together to support a payment from a mobile device to a retailer. Then there is the trust factor, convincing businesses and consumers alike that their digital money and information is safe in a digital wallet. The more complex the ecosystem, the more potential for a weak link somewhere in the chain.

Lastly, and perhaps the most pressing challenge, is that of consumer behavior. While getting rid of the Costanza wallet may be good for your back, swiping a card is pretty frictionless, so many consumers don’t currently see the benefit of waving a phone over a POS or opening an app on the phone to complete a transaction. Moreover, people want to know exactly what they are getting if they do use a mobile wallet. Right now, there isn’t a consistent user experience. Today, one retailer might have tap and pay, another may display coupons upon tapping, and yet another may pose a challenge question like asking for one’s PIN.

These challenges are not insurmountable. Industry players in the NFC and cloud space must win over the retailers by lowering transaction fees, creating an ecosystem broad enough to cover as many consumers as possible yet tight enough to be considered safe and trustworthy, and convincing consumers that it indeed is to their benefit to use a phone as a wallet. Otherwise – and unfortunately for the mobile wallet industry – Machiavelli’s premonition may come to pass.

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