Retailers Enter the Mobile Wallet Fray
On March 2, the Wall Street Journal revealed that a group of approximately two dozen large retailers, including Wal-Mart and Target, were working together to develop a mobile wallet offering. While the retailers provided few details about their effort, the announcement alone is indicative of the increasing competition among wallet providers. On the surface, this initiative may be viewed as yet another mobile payments wallet, but the retailers likely have more significant and strategic ambitions.
The business cases for mobile wallets are often supported by “commerce” revenues, the potential earnings from enabling search, shopping, coupons, offers, etc. that may equate to 10% or more of the value of the transaction. Many third party wallet providers are seeking to capture a share of these economics by using data and analytics to match consumers with merchant offers. But what is the ultimate source of the economics associated with mobile commerce?…retailers converting their traditional advertising and promotional activities to new (and hopefully more effective) mobile campaigns. So it stands to reason that retailers seek control over how these funds are used. Additionally, retailers capture one of the most valuable sources of consumer behavior data, SKU level data, or the information regarding the specific products purchased (not just the total transaction amount at a merchant). Enabling their own wallets could provide retailers with an effective platform for leveraging this data, reducing the need to share it with third parties.
Figure 1: Leading Retailer Payment and Commerce Practices by Channel
Note: “Remote Mobile” includes enablement via app and/or mobile web. Percentages based on a First Annapolis study of the online and mobile payments capabilities of 100 leading U.S. retailers. Storage of credentials in the “Mobile at the POS” category refers to any wallet that enables storage and use of multiple payment credentials, either on the handset or in the cloud. “Accepts Alternative Payments” includes PayPal, Bill Me Later, PIN Debit, eCheck, or any mobile wallet in the “Mobile at the Physical POS” channel.
Source: 2012 Top 100 Retailer Mobile Payments & Marketing Study.
Retailers may also be seeking to gain control of the change occurring at the point of sale. The introduction of technologies like mobile POS (e.g., Square), EMV, NFC, tokenization, etc. are causing the need for significant investment. In some cases, merchants have limited input into the requirements for these new technologies and must gauge potential consumer adoption, compliance requirements, security risks, and other factors in determining when and how to upgrade their infrastructure. Retailers may view their own wallet solution as way to have stronger influence on direction of their POS roadmap. For example, in contrast to some of the leading NFC-focused initiatives, they might consider a cloud-based, tokenized, wallet solution as a way to support a long-term vision of a thin client POS supported by line-busting mobile acceptance devices. To be sure, retailers will still need to adopt standards such as EMV as well as support innovative mobile applications that gain favor with consumers, but perhaps, over the long term, a wallet application will provide a platform for furthering merchant driven POS enhancements.
Last, retailers may see an opportunity to gain greater control over their acceptance cost dynamics. Merchants are emboldened by the outcome of the Durbin amendment, and are also gearing up for their lawsuit against Visa and MC related to credit interchange. Mobile introduces a potential new leverage point for retailers related to payment acceptance costs because it provides a new platform for tender steering. Similar to how, for example, private label cards have been used as vehicles to obtain exclusive discounts or financing terms, mobile has the potential to easily tie retailers’ mobile promotions and offers to the use of their preferred payment products. And mobile will make it easy for consumers to carry and access tender types provided by many different merchants and issuers, obviating the need to carry a number of different plastics.
Despite these benefits, building a compelling wallet solution is a significant endeavor. The technology has not matured, consumers are concerned about security, and current solutions have not yet demonstrated a significant improvement over paper and plastic payments. Additionally, the retailers, who are inherently competitive with one another, face the challenge of aligning a significant enough coalition to generate critical mass, not just to build the solution, but also to test, deploy, and promote it. As current initiatives from Google, Isis, and PayPal are demonstrating, wallet launches require a significant, multi-year investment. Retailers also do not control an obvious wallet distribution channel, mobile device sales. Given the speed at which mobile is evolving, individual retailers may break ranks to invest in their own solutions or align with third party wallets, weakening the value proposition for a retailer consortium wallet. But perhaps a multi-retailer wallet does not need a long-term critical mass of retailers to be successful. In the near term, this initiative could provide retailers with leverage in their relationships with MNOs, networks, and commerce services providers to develop more merchant-friendly value propositions or business terms. Whatever the case, the retailer announcement only further complicates the view of what the winning mobile wallets will be and how important access to and control over data is in this effort.
The following chart from the 2012 Top 100 Retailer Mobile Payments & Marketing Study provides a perspective on the mobile initiatives that major merchants are already pursuing.
For more information, please contact Paul Grill, Partner specializing in Mobile Commerce & Alternative Payments, firstname.lastname@example.org
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