Acquiring: Isis’s Promising U-Turn

Peter Lucas

The creature of the nation’s biggest wireless carriers dumped its payments-network strategy a year ago, and now things are looking up for its mobile wallet. The key difference: an emphasis on offers and rewards.

It won’t be long before the eyes of the payment industry focus on Salt Lake City, Utah, and Austin, Texas. Those are the two pilot cities where the much-ballyhooed Isis digital wallet will debut later this summer.

But while Isis busies itself with signing merchants and gearing up promotion in those two towns, the real intrigue is whether its decision to reverse course and become a platform for card issuers and loyalty-application developers, as opposed to a direct competitor to the payment networks, was the right choice.

Isis’s stunning about-face came last May, only months after its formation as a consortium by wireless carriers Verizon Wireless, AT&T Mobility, and T-Mobile USA.

The company announced that instead of developing its own branded mobile-payments service and recruiting merchants to compete with the existing payments networks, as originally planned, it would partner with Visa Inc., MasterCard Inc., Discover Financial Services, and American Express Co. to offer a digital wallet based on near-field communication (NFC) technology.

Isis’s new strategy appeared to be an admission that it could not compete directly against the payment-network heavyweights. Discover, after all, was the last company to successfully create its own branded payment network, although it called on bank card merchant acquirers to lend a big hand in bringing its network to near parity with the Visa and MasterCard networks (“Discover at 25,” December 2011).

What the payments market was slow to grasp about Isis’s change of plans was that it had instead chosen to reposition itself as an open platform for application developers. What looked like a strategic retreat was in fact a bold bid to seize control of the burgeoning digital-wallet market.

Wallets Within Wallets

After years of fits and starts by digital-wallet providers, payment experts are convinced the path to success lies in the wallet’s ability to deliver loyalty and rewards applications to consumers. Payments are merely a building block. Loyalty and rewards programs, on the other hand, are the heart and soul of the wallet because they enable merchants and card issuers to communicate one-to-one with consumers.

Merchants and issuers can electronically push coupons, promotions, and loyalty points through the wallet that consumers can redeem simply by waving their phone in front of a point-of-sale terminal. And through location-based services, marketers can deliver their offers just when they are most useful—when the consumer is in front of the product.

Whoever controls the delivery mechanism for loyalty apps through the wallet wields tremendous influence over the merchant relationship. Lucrative revenue streams can flow from merchants eager to pay a premium to develop intimate marketing relationships with consumers through the wallet. That’s an enticing prospect for the wireless carriers behind Isis as they look to evolve from being just data pipelines.

“Loyalty and rewards programs are essential elements of the digital wallet because they enrich the merchant/consumer relationship, which creates a compelling value proposition,” says Paul Coppinger, president of Scottsdale, Ariz.-based Apriva Inc., which began testing a digital wallet earlier this year. “Payments alone are not a compelling value proposition.”

The most logical path for developing loyalty and rewards applications is to offer the developer community an open platform. To developers, an open platform is a blank canvas that gives them more creative freedom to produce apps that solve merchants’ marketing problems and appeal to consumers.

“Application developers are the ones that will make the ecosystem of our wallet thrive,” says Jim Stapleton, chief sales officer for Isis. “Our wallet opens the door for software developers to create applications specific to a merchant’s or card issuer’s needs. Application development is not a void we intend to fill.”

What this approach can lead to is the placement of wallets within wallets.

The openness of Isis’s platform has already caught the attention of one app developer, SparkBase Inc., a Cleveland-based loyalty marketing company. SparkBase, which has rolled out Paycloud, a mobile wallet for iPhones and Android smart phones, in Cleveland, Columbus, Ohio, and Jacksonville, Fla., plans to make its wallet compatible with Isis.

“We are building out integration to Isis,” says Doug Hardman, chief executive of SparkBase. “An open network platform is good for Isis, because it makes it easier to integrate to and develop apps on their platform. That’s the key to future success in [software-as-a-service]-based payments.”

Platform interoperability opens the door for companies like SparkBase to bring its merchants into Isis’s network with little or no change to their POS and back-office IT configurations. “In markets where we overlap we can place our app in the Isis wallet and immediately connect our merchants to its network,” say Hardman.

SparkBases’s Paycloud wallet uses Zoosh, a form of NFC technology that relies on ultrasonic signals to submit payment information. Users tap their phone on a $50 countertop sensor, which then routes the payment information held in their mobile wallet to the appropriate payment system.

‘More Personal’

An open platform also means merchants will have ownership of the data they gather from their loyalty apps. As more and more consumers shop using their smart phone, merchants of all sizes are looking to enhance the mobile-shopping experience and interact more intimately with customers via their phones. Achieving that goal requires data, and lots of it, about a customer’s product preferences and shopping habits.

To provide merchants with these insights, the Isis wallet allows merchants to electronically track acceptance and redemption of offers they push to consumers through the wallet, including the day and time the offer was redeemed. Merchants can leverage the information to craft highly personalized promotions intended to increase a customer’s purchase frequency and average spend per purchase.

“Merchants are already using personalization engines on their e-commerce sites to suggest products,” says Stapleton. “We are simply moving personalization into the digital wallet.”

Card issuers, too, will be able to take advantage of the one-to-one marketing capabilities of the Isis wallet. Each credit or debit card entered in to the wallet is electronically linked back to the issuer through a widget that enables consumers to check their balance and review recent purchases and other account data in real time.

This link to the cardholder gives card issuers a direct marketing channel for pushing out new products, or joint promotions with merchants in the Isis network, to cardholders based on their purchase activity.

“Issuers will have control over the data they receive and can use it to deepen the relationship between themselves, their customers, and their merchant customers,” says Stapleton. “It’s a more personal form of communication.”

JPMorgan Chase & Co., Capital One Financial Corp., and Barclaycard U.S. announced earlier this year they are on board with the Isis wallet. The three banks have about 100 million cards in circulation in the United States or a combined 76% share of the market, according to Stapleton.

‘A Lot of Friction’

Another feature of the Isis wallet likely to appeal to merchants is the ability to communicate directly with consumers through a service called Isis Feed.

Consumers can browse a list of merchants in Isis Feed and select which merchants they want to have deliver promotions, coupons, and other incentives or information to their wallet. Because Isis Feed is an optional program, consumers can stop receiving information from a merchant at any time.

“Being able to opt in and opt out is critical to consumers, because it gives them control over the information they receive in the wallet,” says Stapleton. “If consumers don’t feel they have control over what’s in their wallet, they will look at it like it is someone else’s marketing platform and most likely won’t embrace it.”

Merchants will also be able to leverage existing marketing channels to load offers in consumer wallets. Merchant can add quick-response (QR) codes or 2D barcodes to print coupons and e-mails that consumers can scan with their phone to upload the offer to their wallet.

With NFC phones, coupons can also be uploaded from smart tags on billboards and posters by tapping a smart phone against the tag.

“There is a lot of friction with coupons when it comes to clipping and redeeming,” says Stapleton. “This simplifies the process and makes it easier for consumers to remember the coupons they have and redeem them.”

Moving the Needle

Still, Isis’s competitors aren’t standing still. PayPal Inc. just revamped its 14-year-old digital wallet to offer a raft of new features to users, including the ability to change the funding source after the transaction. The eBay Inc. unit has snagged all of The Home Depot Inc.’s 2,000 U.S. stores and claims another 20 chains will come onboard by year’s end.

Google Inc., which beat Isis to market with a commercial mobile wallet, also stresses promotions and offers. But the online search giant has stumbled in recent months, suffering a loss of key personnel from its wallet project and an embarrassing security snafu. Google’s loss of momentum could be seen as an opportunity for Isis.

But questions remain for all the wallet players. While the NFC chip embedded in the smart phone makes wallet-based payments and promotions possible, the required point-of-sale technology remains relatively scarce. Payment experts point to repeated attempts by the card networks to persuade merchants to deploy the contactless card readers that enable NFC. Few have.

“MasterCard’s attempts to seed the market with NFC card readers yielded a gain from zero to about two percent,” says Apriva’s Coppinger. “The technology has a high life-cycle cost for merchants and the problem with subsidies is that once they expire the incentive to install is gone.”

Apriva’s Wallet is infrastructure-agnostic and works with existing magnetic-stripe payment technologies.

What’s likely to get Isis over the hump of merchant resistance to NFC is that the rewards and loyalty components of its wallet can drive incremental sales in real time.

“Merchants are going to insist on value from the wallet, not a free terminal to support it,” says Todd Ablowitz, president of Centennial, Colo.-based Double Diamond Group. “If merchants feel Isis’s wallet delivers enough value to offset the cost of interchange, they can attract enough merchants of all sizes to move the needle in their favor.”

Further greasing the wheels for merchant adoption of NFC card readers is that POS terminal makers VeriFone, Ingenico, ViVOtech, and Equinox Payments announced plans in March to integrate and support the Isis wallet. Once NFC readers are standard in POS terminals, the cost burden for merchants diminishes because adoption costs are rolled into the terminal replacement life cycle, Stapleton argues.

But even with a value proposition that drives merchant acceptance, Isis needs to get NFC-enabled smart phones in the hands of consumers. The outlook for that happening is good. NFC-enabled phones are projected to reach 250 million units or 28% of the smart-phone population, by 2015, according to Cambridge, Mass.-based Pyramid Research. Industry experts place the tipping point for mainstream adoption of a product at market share of 16% to 17%.

With the backing of major wireless carriers, Isis has a key advantage. “The wireless carriers have a history of getting new mobile-phone technology in to the market as part of product-upgrade cycles,” says Ablowitz.

Smart-phone makers HTC, LG, Motorola Mobility, RIM, Samsung Mobile, and Sony Ericsson said last September they would begin implementing Isis’s NFC and technology standards into their handsets this year.

The Coming Shakeout

Getting merchants on board, however, remains the final piece of the puzzle. Although Isis has publicly stated a goal of signing 1,000 merchants in each test city, it has only announced one, the Salt Lake City-based Utah Transit Authority. Until recently, the UTA was the nation’s only transit system that accepted general-purpose contactless cards, though such cards account for a small fraction of its fares.

Meanwhile, Isis says it is targeting such merchant categories as quick-service restaurants, drug stores, gas stations, and grocers. “We are targeting merchants that capture a large percentage of consumer’s daily spend,” says Stapleton, who adds that other merchants with NFC card readers installed can accept the Isis wallet.

As more information emerges about Isis’s new wallet strategy, payment experts say the company is increasing its odds for success. The prevailing school of thought is that, by repositioning itself as a platform for facilitating the delivery of loyalty and rewards programs, Isis has found the formula to drive merchant and consumer acceptance of digital wallets.

Even better, it avoids a potentially long and costly war with the card networks.

“Isis has created a test kitchen to demonstrate the power and value of its wallet, and as that happens, more merchants will climb on board quickly. It’s a good strategy,” says Rick Olgesby, a senior analyst with Boston-based Aite Group LLC.

If Isis’s strategy is successful, the company will not only be in on the ground floor of a lucrative new segment of the payments industry, it may well emerge as the dominant player.

“Once digital wallets take hold, there will be a shakeout among the players,” says Olgesby. “The ones that get it right from the start will be the market leaders.”