A Brief History of 
Mobile Wallets

A look at the expansion and inevitable contraction of the future of payments

By Ed McKinley and Josephine Rossi

What’s happening these days with mobile wallets brings to mind the Big Bang theory. Scientists tell us that all the matter in the universe is speeding outward from a momentous explosion that occurred 14 billion years ago—and, eventually, it will all fall back inward. A somewhat similar, if less dramatic, fate is befalling the universe of mobile wallets: It has expanded rapidly but is expected to contract.

“An explosion of payment options has been ignited by the [mobile payment] market’s rapid growth to $180 billion—tripling in only three years,” according to a report by Daniel Van Dyke, an analyst at Javelin Strategy & Research. “However, from 2019 to 2021, Javelin expects the explosion will give way to an implosion, as the number of payment providers contracts.”

Despite those fireworks, the use of mobile wallets in the United States remains “de minimis,” says Eric Grover, principal at Intrepid Ventures, a strategy consultancy. Still, he describes mobile wallets as “already relevant and becoming more relevant.”

Although mobile wallet use remains a small niche, the number of consumers trying out mobile wallets for the first time continues to grow steadily, says Emmett Higdon, director of the mobile practice at Javelin. Smartphone owners who have used mobile wallets grew from 11 percent in 2013 to 21 percent in 2015, according to Javelin research. But the firm’s studies indicate repeat usage has declined from 3.7 transactions per user per month in 2013 to 3.5 in 2014 and 3.0 in 2015.

Mobile wallet adoption remained surprisingly flat during a six-month period ending early this year, according to a report released in March by First Annapolis Consulting. By January 2017, some 75 percent of Americans who own a smartphone and have a bank account had made a mobile payment in the past year, but that percentage had barely changed from the 74 percent who had done so by June 2016. What consumers paid for with their mobile wallet transactions didn’t change much, either. Among those who made mobile wallet payments by January 2017, 58 percent had done so to pay a bill, compared with 54 percent in June 2016. Fifty-three percent had used a mobile wallet to make a purchase in an app or online in the past year by January 2017, down slightly from 55 percent in June 2016, the study shows.

Mobile wallets tend to fall into five categories, although industry observers agree that the lines between categories can blur. Tech companies like Apple and Samsung provide general-purpose horizontal wallets; retailers have banded together in efforts like Merchant Customer Exchange’s (MCX) recently failed CurrentC; individual retailers offer proprietary wallets à la private label credit cards; financial institutions have introduced their own offerings; and wireless carriers have joined forces to enter the fray.

The First Annapolis study similarly breaks down wallets into three categories: the “Pays” (i.e. Samsung Pay, Android Pay, and Apple Pay); merchant wallets, such as those offered by Starbucks, Walmart, and Dunkin’ Donuts; and wallets from issuers such as Wells Fargo, Chase, and Capital One.

Grover describes the mobile wallet “flavors.” An open mobile wallet works somewhat like a physical leather wallet, functioning as a container that holds payment products (e.g., Visa and Mastercard accounts) and operating by the rules of those card networks. Closed mobile wallets can be general-purpose (e.g., PayPal) or they can be proprietary (e.g., Walmart Pay), enabling stores to take private-label retailing online. Closed mobile wallets can have their own rules, he notes.

Predictably, heavily smartphone-oriented younger consumers have shown themselves willing to try mobile wallets; however, a number of older Americans have tried out the technology, too. The First Annapolis researchers found that more than one third of those age 65 or older have made a mobile payment recently.

“This wasn’t a segment of the population that we had captured in earlier research studies—the presumption being that mobile payments were mostly a Millennial phenomenon,” says Melissa Fox, senior manager at First Annapolis. “Activity is certainly concentrated among younger consumers, but I was surprised how high the penetration levels were among older participants.”

Origins and Expansion

The history of mobile wallets begins in July 2008, when Apple started an app store and opened it to third-party developers, says Russ Jones, an analyst at Glenbrook Partners. The opening gave just about everyone the opportunity to develop an app that held payment data, he says.

It also led to a period lasting until about 2011 when the industry was “up for grabs,” as uncertainty reigned about how the early mobile wallets would communicate payments data, Jones says. But the questions didn’t end there. “The back-and-forth in the industry was about what a mobile wallet was, how many wallets did you need, how many wallets would there be, and would they all be on your phone at the same time,” he says.

During that time, the payments industry was leaning toward storing transaction data in smartphones while the rest of the world was enthusiastically embracing storage in the cloud, according to Jones. Players who owned handsets thought the data should reside there, those who owned the SIM cards wanted data to live there, and those who controlled neither the handset nor the SIM card tended to believe the cloud should store the data, he explains.

The first working demonstration of how the technology could converge came in May of 2011 with the introduction of the Google Wallet. Google had aligned partners who thought the smartphone should contain the data. It was under the control of the wireless carrier, and the wallet was an app on the phone that Google developed. Bank participation was limited. “So they were off to the races with that,” Jones adds.

The Google offering proved mobile wallets could work, but its system was flawed because it was based on a laundry list of requirements that few consumers could fulfill, Jones explains. First, users had to have the right device—one of only a few that contained near-field communication (NFC) chips at the time. They also had to have the right Android operating system and a data plan with Sprint. They had to have a card that not only came from one of just a couple of participating issuers but also had been designated for use in the mobile wallet, he says.

Not surprisingly, the planets seldom aligned in just the right way to enable Google Wallet. And further complications ensued, Jones explains: “When you walked into a store, you had to unlock your phone and unlock the app. Now, we would laugh at that with simple biometric identification.”

Other missteps have occurred, too. “The graveyard of mobile wallets is filled with some high-profile names,” Grover observes, citing the demise of Softcard, which was backed by wireless providers AT&T Mobility, T-Mobile, and Verizon. Similar ventures by wireless companies in Canada, France, and the United Kingdom also failed, notes Jones. “In every country, carriers thought they could band together and control the mobile wallet,” he says. “That belief turned out to be wrong.”

Another ill-fated mobile wallet, called CurrentC, was the product of MCX, a group comprising some of the nation’s largest and most powerful retailers. MCX backers included 7-Eleven, Best Buy, CVS, Lowe’s, Target, and other big names. Those and other mobile wallets died young despite having financial angels with virtually unlimited resources because they couldn’t reach critical mass, says Grover.

Besides simply wanting control of a mobile wallet, the retailers in MCX had a burning desire to bypass the fees that card brands levy upon transactions, Higdon notes. But substituting a direct connection between the point of sale (POS) and the consumer’s checking account presents the problem of persuading every entity involved, including banks, to cooperate, he maintains. That challenge may have helped kill off CurrentC, he suggests.

Throughout the years, some problems worked themselves out. In the early days, debate raged over what entities would control payments data used in them—the wireless carriers or the banks, Jones recalls. Instead, the operating systems took ownership of the payments information, which makes it difficult for app providers to have a competitive position, he notes. “That turned out to be the real surprise,” Jones says. Meanwhile, other surprises have unfolded. In one example, the industry has moved from using actual payments data to employing tokens. In another example, biometrics are taking precedence over personal identification numbers to unlock wallets.

Those choices took hold, and the resulting model for mobile wallets has been embraced by card networks around the world and could become an “adoption ramp,” Jones says. Meanwhile, merchants almost everywhere are becoming increasingly likely to have the capability to accept mobile payments because they’re obtaining EMV-compatible equipment that nearly always takes mobile transactions, too, he notes.

Apple Pay, for example, was launched in October of 2014 with 220,000 merchant locations in the United States, and it now claims 2.2 million for an increase by a factor of 10, according to Jones. And while merchants have been gaining mobile capability, consumers have been replacing aging smartphones with new models that can make mobile payments, Jones explains. The Apple product line has become mobile-capable, and Android is approaching that point, he maintains.

The January First Annapolis study found Apple Pay to have the highest activation and usage rates among compatible devices when compared to Android Pay and Samsung Pay. The data isn’t unexpected considering the wallet has had “an 11-month head start” in the market. However, the researchers were surprised by its 34 percent penetration rate since its launch more than two years ago. “Although maybe not as high as many initially anticipated, I think that’s surprisingly high when you think about how relatively short a timeframe that is,” says Fox.

Stabilization

At least one company has already succeeded with a mobile wallet in the United States. PayPal leads the U.S. mobile wallet competition and has been the first to achieve critical mass, according to Grover.

But following PayPal’s example won’t be easy. Mobile payments don’t unlock new spending that previously didn’t exist, according to Jones. “You’re not buying more milk because you’re going to pay with a mobile phone,” he notes. Consumers who use mobile wallets are simply replacing payments formerly made with cards, he says.

Merchants may not gain that much from mobile wallets, and consumers likewise see little upside. Mobile wallets do little to reduce friction at the physical POS; thus, it’s difficult to make a case for using them there, Grover says. However, mobile wallets decrease friction a little for online purchases, which justifies their use for those transactions, he maintains.

While mobile wallets usually don’t solve any consumer problems or meet any consumer needs, Grover suggests a few compelling cases are emerging for using them. When a consumer puts payment information into an Uber app, for example, that results in something akin to a mobile wallet and goes a long way toward facilitating ride-hailing services, he explains.

And retailers are converting some of their shoppers to mobile wallet users by plying them with loyalty rewards, discounts, special offers, engagement campaigns, and functions like pay-ahead. (See related article on page 22.) “That’s the real struggle for all of the wallet providers,” Higdon says. “How do we make this something that becomes sticky?”

When it comes to retailers that do a good job with loyalty and mobile wallets, one only need mention Starbucks, Grover contends. In a few years, the coffee chain may be processing 50 percent of its sales on its mobile app, according to published reports.

Still, general-purpose wallets have provided few incentives to woo consumers away from their plastic cards, Grover points out. Samsung Pay has an advantage over competitors because of its capacity to trick card readers into thinking they’re reading a mag stripe, he notes.

To make the job of convincing Americans to use mobile wallets even harder, a large majority of consumers have already made up their minds about the technology—either for it or against. Seventy percent of consumers have formed a hard-and-fast opinion of mobile wallets, and “that figure is relatively constant across age segments,” according to the First Annapolis study. In fact, nearly one third of respondents don’t own and are not interested in mobile wallets, which Fox says “speaks to the perceived benefits of mobile payments relative to traditional card payments, and how long it takes for consumer payment behaviors and preferences to shift.

“Consumer payment preferences are often driven by habit, and it takes a long time to change those habits and preferences on a large scale. It’s not something that happens overnight,” she continues. “It’s also worth noting that nearly one third of respondents have not yet made up their mind—they haven’t used a mobile wallet, but they find the idea of a mobile wallet at least somewhat attractive.”

Whoever’s using mobile wallets, the question remains: What technology will ultimately prevail at the point of sale to engage with mobile wallets? Should NFC, Quick Response (QR) codes, or Bluetooth take precedence? “A mix of all of the above,” says Grover. NFC seems to lead the competition now, but that doesn’t preclude QR codes, which Alipay uses, he says. PayPal served as the “early evangelist of Bluetooth, but that’s on the back burner,” he notes. Payments companies should prepare to accept any technology instead of picking one, he cautions.

Mobile wallets will reach the tipping point that leads to mass acceptance only when consumers and retailers have no doubt the transaction will work seamlessly, Grover says. “Where you have uncertainty, there may be growth, but it will be limited,” he states. “We’re nowhere close to that certainty.” But that will change. “Being able to pay anywhere, anytime, worldwide is a big deal, and most of that is simply extending existing systems,” he says.

Fox acknowledges “growth may be slower than many people originally forecasted.” But she says that the “shift to mobile payments is, in some ways, inevitable—not as a universal replacement of existing card technology, but as another option that many consumers will want to have available.”

What does the future hold? “The distinctions we make between physical point of sale, e-commerce, and mobile commerce will blur, and the digital wallets will play a part in that—but we have a long way to go,” Grover suggests. For example, a consumer could select merchandise in the store and pay for it at the merchant’s website. “Is that e-commerce?” he asks rhetorically. In another example, the pricing difference between e-commerce, mobile commerce, and the point of sale could disappear if tokenization and biometrics result in comparable fraud rates, he says.

After all, use of mobile wallets and the number of companies offering them have to keep expanding until the field becomes crowded enough to fall back inward. “A cull is inevitable because users are becoming increasingly confused by choice overload,” Van Dyke says, noting that consumers are navigating dozens of mobile wallets that will soon increase to hundreds. Though many mobile wallets will fail to make the cut, the survivors will prosper, he predicts. TT

Ed McKinley is a contributing writer for Transaction Trends. Reach him at [email protected]. Josephine Rossi is editor. Reach her at [email protected].