Digital Wallets - It's about Ecosystems
By Mark Horbal, CIO/CTO, SpringBIG
Mark Horbal, CIO/CTO, SpringBIG
Digital Wallets and Mobile Payment systems are here to stay. What is not obvious is who will surface as the leader, although we can certainly see who some of the players are. Where there are players, there are also winners and losers, and the latter are not just in this space but also elsewhere.
This is a story of a rapidly changing ecosystem that has been stable for a long time. When we look at the history of how consumers paid for things that they bought, it has been cash and personal checks for a long time, with a few exceptions. Then, there were two disruptive changes:
• The first major shakeup occurred in the mid 1960s when VISA and MasterCard made their debut. Their entry into the payment ecosystem allowed greater freedom of spending and in many cases a more convenient payment method for the consumer
• Second disruption–the Digital Wallet. It charges the consumer’s credit or checking account on the back-end, while confirming to the merchant that the transaction has been paid for.
Well, let’s talk about this for a bit–is the advent of digital payments so significant? If so, why is its acceptance so slow? Why are we not seeing a deluge of interoperating mobile payment devices, systems, users and retailers?
The answer is that mobile payment and digital wallets are causing a shakeup in the payment space. To best understand why their adoption is so disruptive, let’s look at this phenomenon through the eyes of the major players. They include Retailers, Consumers, Banks and Credit Card Companies, E-commerce companies, Advertisers and Content Providers, POS manufacturers and Loyalty Companies.
In order to succeed and gain greatest adoption, Digital Wallet providers must recognize the importance of all these players and build an ecosystem with value for each. Those providers that are able to build these ecosystems quickly will succeed. Others will fail.
The potential stakeholders in the mobile payment space are analyzing this closely, right now. The two success factors are value and speed with which these platforms are built and adopted. These two factors are also related greater value will accelerate adoption. If adoption is fast, late entrants will either become irrelevant or pay with diminished market share.
Let’s look at the ecosystem from the individual perspectives of the players.
It is the consumers’ adoption of the mobile platforms that will ultimately make them successful! So where is the value for the consumer?
• Clearly, adoption drives more adoption. Consumers will embrace Digital Wallet technologies that allow them to use their mobile device to pay in more places.
• Ease of use–mobile payment should be no more difficult than standard things that we do with our smart phones, like reading an email or checking the weather.
• Free. There can be no cost to the consumer for the service.
• Convenience. When the consumer is in a store, he wants access to everything related in just one place. This includes, coupons, offers, gift cards, loyalty rewards and anything else that may lower the price that he has to pay for his purchase
• Modern cryptographic techniques provide additional security for both the consumer and the retailer, mutually authenticating them.
Retailers are waiting for a clear mobile payment leader not to squander their CAPEX investment on POS integrations with a technology that ultimately fails. They would be bolder if we had strong Digital Wallet standards or at least on obvious leader. Here are the factors that a retailer might consider. On the positive side:
• Enhanced security with new authentication options to reduce credit card fraud.
• Potential reduction in cost of checkout personnel and POS equipment, since Digital Wallets may make self-checkout easier.
• Greater convenience for the customer and therefore greater customer engagement. The consumer will prefer retailers who allow him to integrate coupons, rewards and other promotions right in his Digital Wallet.
On the negative side:
• Investment in POS infrastructure, operations and training required for mobile payment is significant. Retailers will wait until the ROI is compelling or competition forces their hand.
• Proliferation of mobile payment options could actually drive the retailers’ costs up by lowering the percentage of cash transactions, therefore increasing their fees associated with credit card processing.
Companies in this space are in the best position. They are both likely to reap the advantages of Digital Wallet adoption, notably including the significant security and authentication features, without the large CAPEX required for brick-andmortar retailers. Their integrations are software only.
CREDIT CARD ISSUERS
Card issuers are watching the emerging mobile payment industry with a keen eye. There is little risk here for them and a lot of opportunity. The number of mobile payment transactions, at self service points of sale will increase their revenue from the fees charged. It’s clear that Digital Wallets will find their application in vending, parking meters, mass transit ticketing and other places.
IS CASH DEAD?
An interesting prospect is that pervasive adoption of mobile payment options provides card issuers an opportunity to incentivize the consumer to use their mobile devices instead of cash. Unthinkable? Perhaps not the consumer gets rewards and the bank gets more processing fees from merchants.
So why are we not seeing a tidal wave of Digital Wallets?
It’s a bit like Sumo wrestlers circling each other:
• Retailers continue to evaluate the risk of making the wrong technology choice. If they guess incorrectly, the technology may become obsolete.
• Consumers don’t want to be early adopters if their chosen Digital Wallet is only useful in a few stores or chains.
Mobile payment providers will likely have to break the stalemate by introducing a solution with a compelling case for retailers low risk of adoption and a promise of hordes of consumers with their Android or iOS Digital Wallets at their doorsteps.
Once retailers make the commitment, they will inevitably drive adoption by consumers with special incentives for consumers, including rebates, credits or coupons available only via the Digital Wallet channel.
ADDITIONAL PLAYERS IN THE DIGITAL WALLET SPACE
• Loyalty providers will benefit from the integrations and APIs that are likely to become available. For them, the ability to bypass traditional POS integrations is a significant win; both by reducing the barrier to entry ability to provide more agile and responsive loyalty solutions.
• Credit card processors and ISOs will see attrition in volume and therefore fees, as the volume of credit card transactions is gradually diverted from their traditional channels.
• Credit card terminal manufactures will see this attrition as well.
• POS companies are actively preparing new flexible offerings with support for mobile payments and plug-ins. This lowers the risk for retailers, who are more likely to invest in new mobile payment capable POS systems.
Most of the companies at risk of revenue loss resulting from mobile payment adoption are making adjustments with new products and services, in order to insure their relevance in the new space. Evolve or perish.