The Digital Wallet War is Heating Up [UPDATED]

| Analysis

The war for your digital wallet is just starting to heat up. Here’s a summary of the current systems, how they work, how Apple may or may not fit in and the prospects for the future.

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1. Google Wallet. Google Wallet is a virtual wallet that stores your credit card information in Google’s cloud, so the cards are available anywhere to an Android smartphone. You can use Google Wallet online or at a store location. In a store, it uses Near Field Communications (NFC) to connect to an NFC terminal so you can authorize payment to, say, a merchant or restaurant. Online it’s similar to PayPal. If the merchant has a “Buy with Google” logo, you can sign into your Google Wallet account and authorize payment.

Google WalletGoogle Wallet works where MasterCard PayPass is accepted, but you can also use Visa, MasterCard, American Express, or Discover in conjunction with the app. It’s supported by a handfull of merchants, and only in selected locations with different levels of support. Just a few examples are American Eagle Outfitters, Banana Republic, The Container Store, CVS Pharmacy, Foot Locker, Macy’s Office Max. Old Navy, Radio Shack and Sports Authority. Here is Google’s full list.

This system uses an indirect method of secure payment for most cards. As the company describes it: “The credit and debit cards you store in Google Wallet are safely encrypted on secure servers in a secure location. When you pay in-store, Google actually pays the merchant, and then processes the transaction with your selected credit or debit card. So neither the merchant nor the Android operating system ever gets your real payment card information.”

Google Wallet is protected with a personal PIN, and it also allows you to remotely disable payments from your Android phone if you lose it. Your credit (or debit) cards are unaffected, but they can’t be accessed or authorized from that device.

The nice thing about Google Wallet is that it’s not just a protocol or a budding infrastructure for transactions. Rather, it’s a working, end to end solution with participating merchants so that you can make payments, today, from your Android phone.

2. Merchant Customer Exchange (MCX). Launched on August 13, 2012, MCX is a consortium of big merchants that plans to jointly develop a mobile payments network to compete with Google Wallet. The effort is in a very early stage, and members include Wal-Mart, Target, Best Buy, Sears, and Lowes. These merchants hope to leverage existing relationships with customers, and their thinking is that they know more about their customers than anyone else, including Google. But whether they know more about system security and smartphone technology is yet to be determined.

MCXAccording to the website, “Development of the mobile application is underway, with an initial focus on a flexible solution that will offer merchants a customizable platform with the features and functionality needed to best meet consumers’ needs. The application will be available through virtually any smartphone.” One might infer that “flexible” solution means that merchants will be able to offer specials, coupons, loyalty cards, etc.

The search for a CEO is underway, so it may be sometime before this project achieves technical maturity.

3. The Isis Mobile Wallet. Isis is another smartphone based app that allows you to “tap your phone” to make a payment via NFC. The cards that are currently supported are from American Express, Capital One and Chase. The backers are AT&T, Deutsche Telecom, T-Mobile USA, and Verizon.

IsisIsis works a lot like Google Wallet. No credit card numbers are exposed at purchase time, you can remotely lock the Isis account if the phone is lost and the Isis account on your smartphone is password protected.

Trials are just starting in Salt Lake City, UT and Austin, TX, and here is a link to the merchant partners. Notables include: Aéropostale, The Coca-Cola Company, Champs Sports, Dillard’s, Foot Locker, Jamba Juice and Macy’s. Due to the nature of the backers, it’s likely that an Isis app wil be available for all the phones those carriers sell, and that bodes well for Apple, Android, Windows Phone, etc. In fact, a representative of Isis contacted me and said that, “Additionally, Isis has announced HTC, LG, Motorola Mobility, RIM, Samsung Mobile and Sony Ericsson will introduce NFC-enabled mobile devices that implement Isis’ NFC and technology standards. For consumers who have or purchase a smartphone that is not NFC-enabled, including the iPhone, Isis is working with DeviceFidelity to add NFC functionality to the device.”  Here is the site for new press releases.

4. Square/Starbucks. This partnership isn’t really a generalized mobile payments system for your smartphone. Rather, Starbucks will team with Square this fall to handle its own credit card transactions. Eventually, according to the New York Times, “customers will be able to order a grande vanilla latte and charge it to their credit cards simply by saying their names.”

In a rather imaginative system, that doesn’t depend on NFC, the eventual goal is to recognize that a registered customer has entered a particular Starbucks via GPS. The customer’s name and photo will appear on the cash register screen. When the customer announces his/her name, the payment transaction from the smartphone is completed without the customer needing to even take the smartphone out of pocket or purse.

If the system catches on with Starbuck customers, then Square would be in a better position to propose it to other merchants. However, there will be lots of other competition.

5. PayPal. Meanwhile, PayPal has announced a partnership with Discover. In this system, merchants who are in the Discover payment network will be able to be paid via Paypal accounts. Details at this point are sketchy and the system won’t launch until 2013. The one advantage is that no new terminals will be required that use a new payment technology.

6. V.me is a online payments system developed by Visa and is currently in beta trials in the U.S. The online service will require access through a browser (but it could be on a smartphone) and uses a new payment technology being developed by Visa.

You’ll be able to store one or more of your Visa, MasterCard, American Express, or Discover cards in a V.me account. For online merchants that accept V.me, for example, Pacsun.com, Buy.com, you enter your email address and a password to complete the transaction. A Visa spokesperson told me, ” We are focusing V.me first on the immediate opportunity in both eCommerce and mCommerce. V.me addresses what consumers are looking for today which is the ability to seamlessly shop online without having to enter in card information or shipping and billing details.” Trials are also planned for later this year in the UK, Spain and France.

For the future, V.me is planning mobile payments using a mobile phone when NFC and POS terminals become mainstream.

It’s a Mad, Mad World

These mobile payment systems are just getting off the ground — with the exception of Google Wallet which works now at a few selected merchants. There will be severe competition for the profits from mobile revenues, and the competing technologies will likely meet with unanticipated problems or resistance from customers. Technologies like this usually go through the trough of disillusionment before they mature and succeed.

In addition to the tactical details of competing in-store transaction systems, there is also the issue of competition that will confuse and annoy customers. For example, it doesn’t appear that Google Wallet will come to iOS. As a result, banks, telecom companies, and merchants are in a much better position to work out the requisite details. On the other hand, a system from smartphone makers, because of the competing interests, would generate discord. This could explain why Apple hasn’t jumped in with “Apple Wallet,” (other than its iOS 6 Passbook).

Digital WalletAlso, recent security breaches by online companies have made customers concerned about the security of these systems. They often look very good at first by the designers — until the Black Hats figure out how to exploit the system and the customers. For example, according to the Wall Street Journal “A recent survey of 2,000 consumers found that 60 percent of respondents were concerned that mobile payments could jeopardize their financial or personal security.” That’s from Market Strategies International, a consulting firm in Livonia, Mich.

Again, according to the New York Times, Bill Maurer, director of the Institute for Money, Technology and Financial Inclusion at the University of California, Irvine recently said, “Anyone who’s going to break the mobile payments barrier in the U.S. has to overcome the resistance to try anything new when everything we have works really, really well, even cash, which is very convenient.”

It will probably be a few years before all this shakes out as customers decide what technologies they like and have proven convenient, all-embracing and secure. Plus, merchants will be confronted with a many new, possibly expensive transaction systems that might topple the best laid plans of the backers.

Many more newer ventures may come and go before the technology matures. Considering how things have gone in the past, there may never be a common standard, but rather a top two or three that come to dominate. There is an enormous number of companies and interests involved, and companies that actually make the handsets, by virtue of their specific and conflicting interests, may not be guaranteed a winning spot.

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[UPDATE Aug 28: clarifications on the current sate of V.me were added.]

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Comments

Rick Allen

Hi John

Another well thought out article.  I think you left one point out.  There is another thing to consider.  Balancing security with ease of use.  I have parents in the 80’s and they don’t like phones and this would seem way to complicated to them.  Also I am a little disturbed at the privacy aspects of the Square solution you posed above.  We are giving away more and more information about our lives just so that someone can make a few extra dollars?

Joao Rostli

“the mobile payments barrier in the U.S. has to overcome the resistance to try anything new when everything we have works really, really well”
NFC is about contactless payments. Fast and small (small as securety) payments, without pin. Lets find the queues at peak hours!
NFC is/can be added to your credit-card, outside the US not everybody walks around with a cc, but everybody seems to have a mobile phone, also in 3e-world countries.
Wallet 7; Sprint? Some info leaked in June.
Last week; Mastercard overview shows 5 approved handsets for ISIS. approved handsets for ISIS

MobiSquad

We are excited to be a part of the Isis Mobile Wallet. Look for great things to come with mobile payments in the next few months!

TimmyH

You also need to consider the Merchant terminals. If any of these systems requires merchants to swap out existing terminals more than simply a standard upgrade cycle then that is a big barrier. As I understand it the Loyalty programs from Google and ISIS require this as the terminal needs to be running more sophisticated software.

jonny rocket

no thanks!  i will resist this as long as i can.  i am a cash man and want to remain that way, thank you.

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