With the world going mobile it’s only natural that our money is turning digital, too. Smartphones have officially become the dominant device for Internet usage. By 2020 it is estimated there will be 2.6 billion connected smartphones in use globally – and so ecommerce’s next big push will take place on handheld screens instead of on desktop computers.
The development of secure, all-in-one digital or mobile wallets are seen as the key to pushing mobile commerce into a commonplace habit for consumers. By combining banking and credit card payment info, personal data, transaction records and more into one digital location, and making transfer of relevant information fast and easy, digital wallet providers like Google Wallet and Apple Pay are winning over new users.
A 2016 study found that in North America and Europe combined, online sales initiated by mobile devices grew 58 percent between 2014 and 2015, compared to just 3 percent for desktop-initiated commerce. And while billions of dollars in transactions take place on mobile payment platforms every day, there is still huge room for growth. A 2015 Gallup study found only 13 percent of U.S. adults have a digital wallet app on their smartphone, with 76 percent of them hardly using it in the last 30 days.
That means that both developers and merchants have lots of opportunity to win over consumers and make them loyal mobile wallet users. For app and hardware developers it’s vital to find ways to make the payment process easy and more rewarding on both ends to increase adoption. And merchants need to be aggressive and open-minded in offering customers various options for utilizing mobile wallets, and integrating those methods seamlessly into their payment process.
The ultimate goal of a digital wallet is to easily, instantly and securely move money around without having to rely on cash or plastic. Simply put, they can make your traditional leather wallet or pocketbook largely unnecessary by also allowing users to store info from loyalty and membership cards, plane and movie tickets and emergency info digitally.
This happens in a number of ways. The most common is through apps on a smartphone that can process a transaction simply by tapping the phone against a payment terminal.
This makes checking out at retail locations fast and easy by using apps – Apple Pay or Google Wallet are two major players – that can link to credit card or bank accounts. Users preload all their relevant information into the wallet app or platform once, then they’re off to the races and able to conduct all their purchases digitally.
Digital wallet technology also allows us to conduct person-to-person transfers via PayPal, Venmo and other payment apps, and enables the optical payment options used at Starbucks and Walmart. The services frequently charge a transaction fee of 1 percent or less on each purchase, with the end recipient or seller most often having to cover the expense, though practices and parameters for the fees vary greatly.
There are a number of different terms – e-wallet, mobile wallets, P2P payments – that are frequently used in relation to the digital wallet payment structure. This can create some confusion to newcomers, but the basic principle of digital wallets is to move payments to the smartphone and digital space.
Mobile payments trace back 20 years to a group of Coca Cola vending machines in Helsinki that allowed customers to make their purchase via text message. PayPal was founded the following year, and its purchase by eBay in 2002 – a bargain at $1.5 billion – went a long way to making that payment system an almost ubiquitous component of ecommerce transactions all over the world.
The growth of mobile wallet use has tracked very closely with advancements in hardware and security technology since those early days, suggesting that consumers have a pent-up desire to rely less on physical forms of payment. From movie tickets’ availability on mobile phones in 1999 to major consumer brands like Domino’s Pizza getting into the game in 2001, it’s no wonder that nearly 100 million people worldwide had made a purchase using their mobile phone as of 2003.
Apple’s iPhone debut in 2007 was another watershed moment in mobile technology because even if the phone itself wasn’t geared toward mobile wallet usage, the rich app environment it created made users more comfortable with digital exchanges and transactions. Google Wallet’s launch in 2011 was the first major all-in-one mobile wallet, and Apple’s Passbook followed suit in 2012 – with Apple Pay coming soon after. With Samsung Pay appearing in 2015, there are now major brand mobile wallet options for large swaths of the mobile phone market.
It’s tempting to predict that eventually all mobile wallet platforms will converge into a universal system, but such a development would require complex mergers and partnerships that are almost impossible to forecast. What is certain is that widespread Internet access, improving hardware and technology, and growing adoption by merchants is driving an explosion in mobile wallet usage that shows no sign of slowing down.
Mobile wallet transactions take place through a variety of communication protocols but the dominant forms are near-field communication (NFC), optical/QR codes and text-based communication. The widespread adoption of NFC technology has made digital wallet transactions far more frictionless because a user can complete their transaction in a retail environment by simply touching or holding their smartphone close to the payment terminal.
NFC is akin to Bluetooth technology because it transmits information via radio waves in part using RFID technology and electromagnetic induction. This lets devices within a close distance – typically less than two inches – communicate and transfer the needed information.
As noted earlier, optical payment technology has been the “weapon of choice” used by Starbucks to convert their customers into mobile payments users and becoming a leading force in the transition to digital transactions. By allowing customers to place an order via their mobile app in addition to paying via optical scans, the coffee and snacks seller has seen such high adoption that stores have had to adjust their operations to handle the increased order flow.
Text-based transactions have become a central part of commerce in developing nations where residents don’t have easy access to banks. In fact, many developing economies have effectively “skipped” relying on paper currency as a major driver of their economy because mobile payment and banking are far easier and more accessible methods to enable commerce.
Blockchain technology – which underpins cryptocurrencies like Bitcoin – can also play a role in digital wallets by completely anonymizing currency and transaction information to add even more security. Payment apps based on blockchain allow users to transfer money completely independent of banks and other intermediaries and the fees they tack onto transactions. Personal data can also be utilized and protected via blockchain and put to use in digital wallets for authentication requirements, like knowing if a customer is old enough to vote, buy alcohol, or rent a car.
User concerns over the security of their information and transaction details remain one of the biggest impediments to wider consumer use of mobile wallet technology, with some surveys finding that fewer than one-quarter of consumers have confidence that mobile wallets can provide adequate security. The numbers are better among active users of mobile wallets, suggesting that trust in the technology grows through routine usage and demonstration of a system’s security features.
The principal method for encrypting information comes from tokenization technology that creates a unique code for each transaction to protect user data. This process replaces bank or credit card information stored on the mobile wallet with an encrypted key that creates dynamic codes. This way, the merchant never sees a customer’s personal data since they get a token that can only be unlocked by the payment network. On the user end, purchases are verified via a thumbprint or PIN code.
The token process is important on both sides because it protects user data and provides a level of trust in the technology while also removing enough liability for merchants and app developers to allow them to pursue widespread development and adoption.
Security methods have to take into consideration the need to reduce friction in the payment process, which restricts adoption and increases incidences of customers abandoning purchases prior to completion. With one-click or one-tap buying seen as the ideal in simplicity for mobile wallet usage, security features need to be as “baked in” to the technology, to remove steps and make the process easy and intuitive for the user.
The old business school adage of the “hockey stick” growth curve – slow adoption early, leading to a huge jump in usage and market penetration – appears to be very much applicable to the digital wallets and mobile payments sector.
Overall adoption has been slow, with many retailers offering limited or no standard equipment to enable mobile transactions, but the continuing adoption of chip readers at checkout stations has started a movement towards updated payment terminal technology. This bodes well for increased access for mobile payment capabilities and growth in usage.
Another hurdle for digital wallet adoption has been a reluctance by consumers to switch from well-entrenched payment methods, though mobile payment programs that include loyalty features and add-ons are proven to help drive usage.
There is certainly potential for banks, retailers and payment platforms such as PayPal and Venmo to create all-in-one solutions where a user can make deposits, transfer money into dedicated spending accounts, and make purchases through the same app or device. Such combined options would appeal to millennials and younger consumers who are twice as likely to have used a mobile wallet, with a recent study showing 16 percent of the general population had used a mobile wallet compared to 33 percent of “late millennials” and 36 percent of “early millennials.”
That bodes well for the future of the sector, with growth forecasts for the U.S. and beyond predicting transformational levels of adoption in the coming years.
A recent study by Fiserv found that U.S. in-store mobile payments are expected to grow from $75 billion in 2016 to $503 billion by 2020, for an annual compounded growth rate of 80 percent.
And globally, a 2017 study from Juniper Research showed mobile payments were expected to grow by 32 percent this year, to a total of more than $1.35 trillion.