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DT, September 2016

What’s the Matter With Wallets?
September 1, 2016

By John Stewart

With a few exceptions, mobile wallets have so far held scant allure for consumers. Why is that, and what could change it?

Most mobile-wallet managers don’t like to talk about it, but their products have a consumer problem—in that people who have the necessary smart phones just aren’t all that into using mobile payments. Many haven’t even loaded the app, and fewer still are steady users.

To be sure, what the payments industry calls “adoption,” the percentage of people picking up the app, is on a slow but steady rise. And certain store-branded apps, like that of Starbucks, are fabulously successful, particularly by current standards.

But payments players concede too many consumers are still resistant to the whole idea of mobile payments, and far fewer have adopted the apps than many had projected just a year or two ago. In a striking moment of frankness during an earnings call in July, Apple Inc. chief executive Tim Cook referred to “astronomical growth” for Apple Pay, but in the same breath conceded the “base” of users is “very small.”

Indeed, in its latest mobile financial-services survey, the Federal Reserve found that 74% of consumers wouldn’t use a mobile wallet even if all of their reservations were overcome.

It’s a salesman’s nightmare.

Even in the face of competition from archrival JPMorgan Chase & Co., which will roll out its Chase Pay wallet later this year, Bank of America Corp. is determined to stay on the sidelines.

“The road to mobile wallets is fairly littered with a variety of wallets that have proven an inability to demonstrate any meaningful value proposition for a customer,” BofA’s David Godsman, head of emerging payments and commerce, told The Wall Street Journal this summer.

He didn’t name names, but the casualty list so far includes Softcard and Suretap (box), both backed by wireless networks, as well as CurrentC, offered by 40 of the nation’s most prominent retailers through a joint venture called Merchant Customer Exchange LLC (“Merchant Pay,” December). One of those retailers is Wal-Mart Stores Inc., which now offers its own wallet, Walmart Pay.

CurrentC hasn’t been officially declared dead, but MCX has stopped its pilot in Columbus, Ohio, and refrained from setting any date for a rollout.

So, what’s the matter with mobile wallets, and can the problems be fixed?

‘Bogged Down’

A good place to start is with the wallet experience itself. The bar here is pretty low these days with the national rollout of EMV, which features a clunky, time-consuming process involving insertion of a chip card into a point-of-sale device. By contrast with this, the lightning-quick response of wallets, just about all of which rely on either near-field communication or barcodes, should come as a great relief.

But it turns out that even the most celebrated of wallets can fizzle at the point of sale. This writer recently stood behind an Apple Pay user at a Staples checkout who finally defaulted to a credit card when the app simply failed to link to the terminal. Yet, he said, it had worked for him just fine earlier at that checkout.

It can be easy to underestimate how such inconsistency grates on consumers. “What tends to happen with mobile is, if your first or second experience is not solid, you tend to abandon it,” says Jon Squire, chief executive and founder of CardFree Inc., a 3-year-old developer of merchant payment and loyalty apps.

Even if the technology works perfectly, it isn’t much good for the user if the store doesn’t have the gear to accept the wallet. As it is, wallets like Apple Pay and Android Pay rely on a sophisticated, close-range radio technology that so far few stores have switched on.

“We’ve totally drunk the NFC Kool-Aid,” said Steve Klebe, head of business development for Android Pay, during a presentation last month in the exhibit hall at a POS technology show in Dallas.

But for now the spotty availability of NFC has frustrated users of NFC wallets. “The merchant availability is not there. People tell us, ‘We tried it and stopped using it,’” says Leon Majors, a senior vice president at Phoenix Marketing International, a Rhinebeck, N.Y.-based research firm that canvasses consumers about payments usage.

That could change over the coming years if more merchants switch on the NFC capability latent in their EMV terminals. Many have been reluctant to do that because adding contactless requires a separate series of EMV certifications, and many merchants are ensnarled as it is in backed-up certification queues for standard-issue contact-EMV gear.

“As long as we’re bogged down in the EMV-certification logjam, it doesn’t look like we’ll see a big change in terms of contactless,” notes Randy Vanderhoof, executive director of the Smart Card Alliance, a Princeton Junction, N.J.-based trade group for companies involved in EMV and related technology.

‘That Level of Hubris’

One technology that might make a difference is the stripped-down EMV process Visa and the other card networks have introduced to streamline EMV transactions and speed up checkouts.

Visa calls it Quick Chip, and it works by dispensing with a number of steps involved in the EMV protocol but rarely seen in U.S. transactions. Bypassing these routines also shrinks the list of test scripts required for contactless certification, experts say.

Also, not all wallets rely on NFC. The upcoming Chase Pay app, for example, is expected to use the barcode readers widely deployed in U.S stores. And Samsung Pay’s signal advantage is its ability to work with magnetic-stripe terminals as well as NFC readers.

That capability depends on technology called magnetic secure transmission, developed by LoopPay Inc., a startup Samsung acquired early in 2015. “We don’t have to wait until enough merchants have adopted NFC to change consumer habits,” says Will Graylin, formerly LoopPay’s chief executive and now global co-general manager for Samsung Pay.

But Graylin concedes Samsung Pay has “a long way to go” to spread awareness among consumers and cashiers that the wallet will work with any POS device. “We don’t have that level of hubris,” he says, that assumes that “if we build it, they will use it.”

‘Being a Fanboy’

Even if wallet apps worked perfectly every time and were usable at nearly all locations, users would likely need some incentives to use them. And that’s also missing in all too many cases. “We haven’t seen anything that cracks the nut on value-add,” says Laurence Cooke, founder and chief executive of nanoPay Corp., whose platform combines loyalty and payments.

Value-add can mean offers delivered to your phone while you’re standing in front of the merchandise. It can also mean order-ahead capability, a feature shops like Starbucks have launched with great success on their proprietary apps.

Without these features, some say, people tire of mobile wallets, viewing them as simply high-tech payment devices with little more utility than a plastic card. “If it’s not a comprehensive commerce play, with order-ahead, offers, and a full-branded experience, why do I want to use that brand of wallet other than being a fanboy?” asks CardFree’s Squire.

To be sure, some wallets have “cracked the nut,” or appear to be well on their way. Products like the Starbucks app and Venmo, PayPal Holdings Inc.’s sizzling peer-to-peer payments app that is now enabling in-app payments to merchants, have established wide popularity with consumers.

And PayPal itself, with its 188 million active accounts, may be headed for a second try at the point of sale following a deal it struck this summer to access Visa’s tokenization engine. An earlier POS effort by PayPal fizzled when the massive processor First Data Corp. blocked access to merchants it served, but even that obstacle has been removed by a recent agreement between the companies.

A Delicate Balance

Meanwhile, mobile’s share of online sales through browsers and in-app transactions continues to climb. Javelin Strategy & Research projects 49% of all U.S. e-commerce sales will be consummated through mobile devices by 2020, up from 29% last year.

Apple may be paying attention. Later this year, Apple Pay will become available on the company’s Safari browser, adding to its in-app and in-store capabilities.

Also, much hope resides in emerging apps sponsored by merchants—MCX aside. Probably the most prominent example is Wal-Mart’s Walmart Pay wallet, which the retailing giant finished rolling out to all its 4,612 stores in all 50 states this summer as part of its shopping app.

Consumers, argues nanoPay’s Cooke, are more receptive to offers coming through a merchant-branded wallet, one of the lessons Wal-Mart may learn from its participation in the CurrentC experiment. “It’s more intuitive you’d use a Wal-Mart [app] in Wal-Mart,” he says, in preference to, say, Apple Pay.

Those offers, though, can hold out as much pain as benefit for cost-conscious merchants, caution some observers, who point out that merchants can’t avoid them. “If cost savings is your anchor, that doesn’t buy anything for the consumer,” says Spencer White, chief operating officer at Sionic Mobile Corp. and a former executive with Softcard. “You’ve got to offer perks and rewards, which drives up operating costs.”

In the end, how well the mobile-wallet players balance that pain and benefit is likely to play a big role in determining their fate.



Telcos Fold Their Cards in the Wallet Game

The failure last month of Suretap Wallet L.P., the Canadian mobile-payments service controlled by five telecommunications companies, raises further questions about the role, if any, telcos will play in mobile wallets.

Suretap, which shut down after barely more than a year in the market, is the latest casualty of a rapidly moving winnowing process that only last year claimed two other payments ventures controlled by mobile carriers—Softcard in the United States and Weve in the United Kingdom.

The telcos behind Suretap—Rogers Communications Inc., BCE Inc., and Telus Corp., plus Virgin and Koodoo, brands controlled by BCE and Telus—command most of the wireless market in Canada and operate retail locations where consumers can be coached on how to load and use applications on their new phones. And the mobile-wallet market is still new enough, and fluid enough, that the Suretap carriers could try again. But observers doubt they will.

“Personally, I think they’re done with it,” says Spencer White, chief operating officer at Atlanta-based Sionic Mobile Corp., and formerly an executive with AT&T Inc. and with Softcard, which was owned by AT&T, T-Mobile International AG, and Verizon Communications. “The carriers are more likely to go deep in other areas. They’re focused on [the Internet of Things] and big data.”

They’re also focused on businesses like identity management, which can enhance the security of payments and which mobile network operators are uniquely suited to deliver for a fee.

“Mobile devices are different from laptop and desktop computers,” says Almis Ledas, who was president of Suretap and is chief operating officer at Enstream, a technology joint venture of Rogers, BCE, and Telus. “Mobile companies can and do keep track of where users are and have a billing relationship with them.” Ledas estimates operators can identify the “discrete user” of a device in 60% of cases.

Ledas sees only a small impact from Suretap’s demise. “I’m not aware of any [mobile network operator] that has predicated its P&L on success in payments,” he says.

But telcos aren’t the only ones that have stumbled in this business. In June, Merchant Customer Exchange LLC, a consortium of 40 major retailers, ended a pilot for its CurrentC wallet in Columbus, Ohio, with no plans for a rollout. And general-purpose wallets from Alphabet Inc., Apple Inc., and Samsung Electronics Co. Ltd. have struggled to win consumer adoption and usage.

Apple Pay’s arrival in Canada earlier this year, though, had much to do with the demise of Suretap, experts say. Apple’s mobile-payments service has won support from five major Canadian banks, including Canadian Imperial Bank of Commerce, the only independent financial institution supporting Suretap.

“That fragmented an already small market,” says Catherine Johnston, chief executive of ACT Canada, an Ajax, Ontario-based payments association focused on chip and mobile technologies.

On top of that, the NFC-based Suretap didn’t have an immediate revenue stream. While Softcard developed a business model that depended on payments from issuers to have their cards loaded in the Softcard wallet, Suretap hoped to levy fees for matching customers with providers through its loyalty platform, Ledas says.

The wallet app had been downloaded by 180,000 users by September 2015, the last time the venture released a number, and that doesn’t count the handsets that came preloaded with the app. Ledas says no more than 100,000 had registered for the service.

While Suretap had just introduced a rewards program, it likely faced ever-rising costs. “You have to literally buy the business,” notes Aaron McPherson, an independent payments analyst. “The fact [Suretap] is getting out suggests they didn’t have the stomach to do what it takes.”

Ledas says the venture’s parents see greater opportunity in other businesses. “We felt we can focus on areas where we can make a difference, such as subscriber verification and identity-management services,” he notes. As for Suretap, he says, “We couldn’t build a vision of the future where it could recover its costs.”

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