The Holy Grail: The Mobile Wallet

The promise of using our mobile phones as wallets, replacing our credit cards and cash, is a promise that has yet to arrive, but now seems to be just around the corner. Some weeks ago for example, MasterCard presented a demo of Google Wallet in the US on a Sprint Nexus 4G telephone. It is not clear, however, how quickly such a system will be rolled out and how ubiquitous or universal it may become.

While in Japan, the mobile operator NTT-DoCoMo has 15 million handsets enabled with a proprietary payment system called “iD” that can be used in over a half million point of sales, in Europe, there is no comparable system yet implemented.

GFT and IESE, the internationally renowned business school in Barcelona, have recently analysed the various business and technological models which are being considered for the provision of mobile payments. What was most interesting from the study is the realization of how strongly impacted the value chain of the traditional credit card will be. While presently the credit card companies and banks profit from credit card payments, in a mobile world, the handset makers, telecommunication operators, and software vendors will also want a slice of the pie.

In particular, three models were considered:

• credits by invoice extension – in this model, the telco operators provide credit to their mobile phone users; online purchases are then able to be charged to the phone bill. Secure data is exchanged between the mobile app directly with the e-commerce shop which in turn communicates with the telco operator for clearing. This model has low barriers of entry and while it could possibly spread very quickly, it will probably remain a niche service as the added value for users is marginal.
• virtual credit cards via application – this model allows a simple way to use credit or debit cards for online purchases (think PayPal). Via a universal PIN code, the mobile app allows direct online purchases. For physical transactions in stores, a 2D barcode would provide a means to process the transaction. An example of this model is Starbucks Card Mobile App which was released in 2011 and allows users to buy coffee without cash or card. It is expected that this model will take off quickly since the barriers are entry are low and the service provides significant value to the end user.
• virtual credit cards via NFC – an app running on a device with a NFC chip provides the most secure way of paying for purchases. However, this model requires that both users (few devices currently on the market) and merchants (almost none in UK) have NFC capability. This model looks to provide the greatest functionality and usability but clearly has the greatest infrastructure hurdles to overcome. For this reason, the expectation is that it is not likely to occur in the short term as the technologies need to be stabilized and adopted. However, all the technology companies seem to be working in this direction: Google is pushing its Google Wallet collaboration with CitiBank, Apple recently hired one of the most renowned experts in NFC worldwide, and PayPal has announced a proprietary NFC peer-to-peer payment system. The use of the NFC chip to hold an electronic wallet (think Oyster card) combined with sufficient merchant coverage would really be the Holy Grail for mobile payments.

Which of these models will succeed? The most probable outcome is that they all will have some level of success. In the short term, virtual credit cards will surely find their way to the market due to the low barriers of entry. In the long term, given the right technology boost, NFC could be the future we all have been dreaming about.

Karl Rieder, Delivery Manager, GFT