Adoption Problems Plague Digital Wallets

With published reports stating that 1 billion smartphones have already been sold worldwide, retailers are eyeing digital wallets as a way to complete mobile transactions.

Unlike traditional m-commerce, when a purchaser enters his credit card information either through a mobile app or via a mobile site, digital wallets make use of technologies such as near-field communications (NFC). A mobile phone designed to work with NFC radio frequencies can enable a "contactless" payment in-store. Using this technology, MasterCard's PayPass, for example, enables a "tap-and-go" transaction at the point of sale (POS) through contactless readers. Similar to PayPass, Google has its own digital wallet, Google Wallet, which lets consumers virtually store their credit and debit account information in one place.

While still in its infancy, the market for digital wallets could reach $90 billion by 2017, up from $12.8 billion in 2012, representing a compound annual growth rate of 48 percent, according to Forrester Research.

However, before benefiting from this emerging market, merchants must overcome significant hurdles, according to Denee Carrington, a Forrester analyst and author of the report "U.S. Mobile Payments Forecast."

For starters, merchants must abide by the standards imposed by the U.S. Europay, MasterCard, Visa (EMV) smartcard payment system. This is an internationally accepted standard that enables chip cards, POS terminals, and automated teller machines to securely authenticate credit and debit card transactions. The benefits are even greater since EMV payments also incorporate personal identification numbers to ensure that a mobile payment transaction was completed by the person who owns the mobile device.

Already, 22 countries, including many in Europe, as well as Mexico, Brazil, and Japan, have accepted EMV technology, according to the Smart Card Alliance. The United States, however, lags behind. One of the main reasons, according to MasterCard Advisors, could be the convenience factor. U.S. merchants have gotten used to the current electronic payment infrastructure that has been in place for 30 years because it does "meet basic payment needs and maintains fraud at acceptable levels."

But because EMV paves the way for mobile transactions through chip-based technology, it will become an immediate priority for retailers in the years to come. Those merchants that fail to upgrade over the next couple of years could find themselves footing a majority of the bill, as opposed to the payment processor, should a fraudulent credit card transaction occur.

While merchants are not yet switching out their POS platforms to solely accommodate digital wallets, it would be a logical accompaniment to an EMV migration, as some analysts point out. "As long as they're doing a technology refresh, [merchants that] haven't upgraded to EMV…could incorporate capabilities like near-field communications, contactless readers, and rich graphical displays that would allow consumers to choose from a variety of payment instruments," observes Aaron McPherson, director of IDC's Financial Insights' Payments and Security Practice.

Retailers will also have to raise consumer awareness of digital wallets. While consumers might have heard of PayPal, Google Wallet, ISIS, V.me by Visa, and MasterCard PayPass Wallet, they don't necessarily know what each of the payment technologies accomplishes, according to "Digital Wallet Road Map 2013," a mobile payment report by comScore. The study indicates that only 12 percent of consumers have used digital wallets other than PayPal. Of the 72 percent of respondents who were aware of PayPal's digital wallet, only 48 percent had used it.

"When we looked at future intent and presented people with a list of items that would increase their likelihood to use a digital wallet, security was number one and cost savings was next on the list," explains Andrea Jacobs, leader of comScore's Payments Practice. If a retailer provided a coupon or reward for local savings, 35 percent of people said it would increase their likelihood to use a digital wallet.

But as McPherson maintains, "hooking it all together on the back end and actually making the [rewards] offers will be a much trickier proposition because it's not so much a technology issue as it is a business and complexity issue." Rewards and loyalty will have a significant bearing on the payment methods that consumers choose. For instance, if a customer links his Citi Rewards card to a Google Wallet, and Citi offers rewards for usage, the vendors have to figure out if the rewards credits will appear in Google Wallet or in Citi&'s mobile app, McPherson says.

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