Are the Best Days over for Digital Wallets?

“It’s supposed to be hard. If it were easy, everyone would do it. The hard is what makes it great”

I always wondered the origin of a phrase that everyone uses and paraphrases all the time … and now I know. Google says it was attributed to Tom Hanks’ character, Jimmie Dugan, in the 1992 movie A League of Their Own. The movie was all about the trials and tribulations of the fictionalized all-female professional baseball team in the 1940s that Dugan was coaching. Knowing how to overcome the hard stuff apparently made the ending to the movie really great.

What brought this phrase to mind in the first place was a few conversations I had last week about the “state” of digital wallets, and in particular, their role in driving the future of payments and commerce. Everyone is doing digital wallets these days because it looks easy. Very few think it’s supposed to be hard. Ten years into the using-digital-wallets-to-pay-at-the-physical-point-of-sale experiment is proving that it’s anything but easy.

That reality has led to very divergent points of view about the future of digital wallets. One view is that digital wallets are dead and should be considered the payments industry equivalent of the Edsel. The other view is supremely optimistic that if everyone just deployed [name that wallet] and threw in a few offers to get consumers excited (often associated with free Jamba Juice J) then voila, digital wallet traction is all but certain.

For those in the “digital wallets are dead” camp, I have six names, one number and one common denominator for you to consider. The names are AliPay, PayPal, LevelUp, Apple, Starbucks and Amazon, the number is twenty and the common denominator is that all six names are all real examples of how three party systems birthed via apps and the internet can actually generate momentum of digital wallets offline.

For all of you in the “it’s so easy camp” I’d refer you to the experiences of the six names, one number and one common denominator listed above as a reference point.

These six players are all examples of well utilized digital wallets with millions of active users and traction as digital methods of payment on and offline. They have traction as digital wallets online because that’s how they started – they got consumers to register a method of payment because there was a compelling reason for them to do that. In a few cases it was because those consumers wanted to buy stuff in online marketplaces securely and easily (Amazon, PayPal, AliPay, and Apple). In others, consumers were prompted by physical merchants to establish a digital wallet because there were financial and customer incentives to do that (Starbucks and LevelUp).

In all cases, and this is really important, all six were in a position to drive this behavior because they had direct access to consumers and merchants and in all but one case (Starbucks) offered those consumers a wide variety of options to engage in commerce. These players weren’t dependent upon an intermediary with control of those relationships and who also needed to be convinced to promote a particular wallet or accept one. Obviously, in some cases these six were also the merchant and/or had a parent company that owned the merchant, which made getting that stakeholder on board a slam dunk. And even though payments transactions are processed by third party processors, we all know that if merchants want to accept a particular method of payment because their consumers want to pay that way, processors will either stop blocking those transactions or risk losing that merchant to another provider. And these days, there are lots of options for merchants to choose from.

The number twenty is the number of years it took for the debit card to capture 50 percent of consumer spending in the US. The debit card was nowhere in the US from about 1976 to 1995. It languished. It scaled pretty quickly starting in the mid-1990’s as a result of Visa and the PIN Debit networks doing things to ignite usage on the consumer and merchant fronts – it wasn’t an overnight sensation. But no one would argue that the debit card is a stupid product, the Edsel of payments or disavow its benefits to merchants and consumers. Nor did anyone think that way in the years/decades that it was gaining traction. If anything, debit is the payments industry darling now given its low cost of acceptance and something that networks, issuers and merchants were literally willing to go to the mat over. But, it’s a great proof point that it is a long slog to scale and ignite new products that consumers and merchants both value – even good products. But when ignition happens, traction can be gained relatively quickly.

We really haven’t been in the digital wallet game for all that long – it’s been about a decade. But the first eight years of the digital wallet march was almost entirely focused on NFC-enabled wallets pretty much to the exclusion of everything else. The biggest impediment to NFC wasn’t that it was a digital wallet but that it was the product of a four party system that required merchants and consumers and mobile device makers and issuers to all sign on to a hardware-based solution all at the same time and for everyone to make out of pocket investments to make it work. For NFC to ignite, networks had to rely on issuers to motivate consumers to take their plastic cards and turn them into digital accounts in a network branded wallet on (probably) a new phone that they had to buy with an NFC chip in it – that wasn’t an iPhone. Since the networks and issuers never focused on creating a digital product for consumers to use to pay online, consumers had to be convinced to create a digital account with their issuer.

For consumers to want to do that, they had to have places to use those wallets on and offline. That meant networks had to make to merchants to accept those new digital products – on and offline. In the offline world, that meant convincing merchants to rip out old equipment and buy new stuff and cede control to a Trusted Service Manager. In the offline world, that meant getting in the technology queue. The job of igniting digital wallets became very complicated because the networks had to work thru others to get consumers and merchants on board.

As a result, nothing much has happened. Maybe those who say digital wallets are dead are a little battle worn from having pushed that rock up the hill for ten long years.

In the meantime, the digital wallet guys that grew up serving consumers online were doing three things simultaneously: (a) all were acquiring more consumer accounts since they had places on the internet to offer consumers to use those wallets, (b) some were signing up more online places for digital wallets to be used or making the marketplaces they operated more attractive, and (c) some were talking to physical merchants about how they could get in on the mobile/digital land grab by enabling acceptance of their wallet at their storefronts by offering new business models and a way to create a new relationship with a consumer. In those cases, the offline use of these digital wallets also didn’t require consumers to buy new phones and merchants to do a total rip and replace of terminals. Bar/QR codes enabled by cheap scanners or peripherals or other methods, like typing in of a phone number, required a software upgrade to existing terminals was how payment was initiated.

So, with the consumer side on board in large numbers and the need to do a costly system upgrade off the table, those conversations were made a whole lot easier. Still not easy, by any means, but these guys were able to offer something of value that merchants could leverage right away so at least they got merchants to take a meeting.

All of that said, none of that guaranteed a slam dunk either. On the merchant side, sales people still had to be trained, and merchants had to make acceptance of those new payments products a priority. But the absence of an intermediary got more balls rolling more quickly. And while those balls were in the process of gaining momentum, the digital wallet guys continued to rack up more digital accounts since consumers had places and incentives to use them on and off line – and gain valuable insights into consumers’ digital wallet expectations and usage patterns and likes and dislikes.

These players also got something else, too. They got consumers in the habit of using their digital wallets to pay for things. And since habits are really hard to break once firmly established, that became an important – and some might even say – a critical differentiator and potential barrier to entry.

All that said, I bet if you ask any one of these six how easy it’s been to get traction offline with their digital wallets, I imagine they’d have quite a chuckle with you. Their eyes are wide open to the realities of gaining scale in an ecosystem as complicated and massive as payments. They knew going in that it was going to be tricky since all of them started as newbies in payments and their survival as a business depended on having an ignition strategy to get their digital accounts adopted by consumers and merchants. But getting scale and ignition is what these guys had to master in order to survive. That’s a whole different ball of wax, as my Uncle used to say, than operating a successful platform where the slog of ignition happened decades ago.

But even where players have complete control over the merchant environment like Starbucks does – they are the only merchant to have to worry about getting on board – getting scale in the digital wallet game is still far from a given. Starbucks has seen growth in getting its existing users to drive more volume from its mobile app, but has not reported much growth in active users over the last year. (The statistic that has been reported consistently over the last year is 10 million active users.)

I think that there are three key takeaways with respect to the state of digital wallets.

One.

Digital wallets are far from dead. In fact, we’re just getting started. I don’t know that they will or should be called “wallets” but the notion of having a way to assemble payment methods in a single app that can be used in multiple stores is the future of payments and commerce. That capability will be wrapped around other goodies like offers, not necessarily discounts, and special experiences that make payment a part of but not the entire reason for wanting and using the digital wallet in the first place. Those who have had a product in market for the last couple of years have an enormous leg up in getting intelligence about how consumers want to interact with those “wallets” and what the experience should look like. I don’t think we’ve yet seen “the killer” wallet experience.

The quickest path between two points is a straight line and those who can draw that straight line between merchants and consumers have an inherent advantage in the digital wallet game. Naturally, that’s a whole lot easier if all you’re an app used at one merchant, e.g. Starbucks. But just like the general purpose credit card, the digital wallets that will ignite will do so because one “wallet” can be used by consumers across multiple merchants to engage in commerce. I predict that we’ll see lots of interesting plays emerge where those who can draw those straight lines look for ways to enable those who can’t – all wrapped a business model that makes it worthwhile for all parties, especially the consumer and the merchant.

Three.

Digital wallet “ignition” isn’t going to happen overnight. It might even take us 20 or so more years before 50 percent of spend happens via digital accounts enabled by digital devices. My colleagues at MPD and I did some work on this two years ago and that estimate is about right. Based on a bunch of assumptions about growth in GDP and shifts in population, by the time those with proclivity for mobile/digital devices gain enough spending power to wield those devices at the physical point of sale, it looked to be roughly three decades before 50 percent of spend was driven thru digital “wallets”. The few digital wallets that are gaining traction offline today – where the preponderance of spend happens – get that and are in it for the long haul – investing in strategies to methodically drive their ignition by onboarding consumers and merchants who have the ability to drive the majority of spend

When you step back and look at the payments landscape thru the lens of the transformation that digital “wallets” will deliver, I think we’re on the cusp of a big shift in the power of retail payments that will be enabled by those digital artifacts. Mobile and the internet is just as disruptive to the existing payments ecosystem as the mag stripe card and payments networks were to cash and check just 60 years ago. During that period of disruption, entirely new names emerged bearing new business models and technologies that moved willing consumers and willing merchants to a whole new way of paying and being paid.

Today’s pain points are different and all about helping merchants and consumers create relationships that drive value for the consumer and incremental spend for the merchant. This period of disruption is about moving willing consumers and willing merchants to a whole new way to buy. And just like 60 years ago, there are new players lining up to leverage new technologies and business models to help consumers and merchants make that shift.

When you look at the world in this way, it’s clear that transforming commerce is a whole lot more than just digitizing payments. The other great quote in A League of Their Own is “to achieve the incredible you have to attempt the impossible.” Digital wallets aren’t impossible to ignite, it’s just hard and takes time. So is getting to ignition in every other platform business, including all of the innovations in payments. The success stories will belong to those who get that igniting digital “wallets” was never going to be quick or easy. And, being incredible will be the reward of those with the skill to leverage their assets in a way that transforms how merchants consumers interact and the wisdom to know that probably no one, least of all their investors and shareholders, will ever be happy with how quickly it’s all happening.