The Economist has an excellent report on the current state of the mobile payments world, which you should read. I think the author has been a bit too ambitious in his or her attempt to summarize the latest developments in what is a hugely disruptive and very fast-growing industry in a single article, but then I guess these days there is only so much magazine real estate the Economist is willing to allot to anything that has no direct connection to the impending Greek euro exit and the subsequent financial mayhem. I can’t blame them.
Anyway, I’d like to highlight a couple of the questions, which the author attempts to answer in the article and add my own two cents. The first one is why start-ups are playing such a huge role in what looks very much like a traditional bank territory. The second one is whether consumers will use one or multiple mobile wallets (the author assumes, as I do, that the technology will eventually be universally adopted).
Why Square and not Chase?
Here is how the article addresses the first of the questions:
On the face of it, the business of facilitating payments seems a particularly unpromising one for start-ups to enter. Most transfers of money run down a few main highways that link banks to one another. They carry huge volumes of traffic and are generally strictly regulated. “They move quadrillions a day and take just a few crumbs,” says Simon Bailey, a payments expert at Logica, a consulting firm.
Yet payments turn out to be a battleground between banks and a slew of innovators trying to disrupt the market. Many of these firms have relatively humble ambitions. Some are trying to grab thimblefuls of the huge flows of money that wash around the world by concentrating on particular areas, such as cross-border payments (see article). Yet they find themselves getting ever closer to offering bank-like services without having to be banks themselves.
I would only add that banks are simply too cautious toward anything that is new and untested and even when they do decide that the potential return may be worth the risk, after all, they are way too slow to move in. And the demand for mobile payments is huge, as testified by the explosive growth of Square, Jack Dorsey’s company that was the first to enable the proverbial plumber and everyone else to accept credit cards through their phones. As the author reminds us, since it went live in October 2010, Square has signed up more than one million customers, increasing the number of credit card readers in the U.S. by a sixth. A bank could never have done what Square did.
How Many Wallets Would You Carry?
I don’t know of a single person who has more than one wallet on his- or herself at any given time. But will that be the case with mobile wallets? Here is how the Economist sees it:
Most analysts think that consumers will gravitate towards a single electronic wallet which will hold many cards. This is because there may be significant benefits to be gained from aggregating transactions and the data associated with them. For example, PayPal’s wallet will allow consumers to use various stores of value besides money when paying for goods or services. These could include coupons, loyalty points from stores and banks and air miles from airlines.
I don’t have a firm opinion on this subject. Yes, it is true that it would be far more convenient to have to deal with only one digital wallet, provided you can store in it all of your bank cards, checking accounts and any other payment products we may be using in the future. Moreover, the more m-wallets you have, the higher the risk that someone will break through your defenses and steal your account information. On the other hand, as the Economist reminds us, the digital wallet providers will try to entice users by offering them various incentives like coupons. So, provided the security issue is resolved, and considering that the second or third digital wallet will not take up any extra room in your pocket, why not sign up for them as well and collect the rewards they have to offer? After all, even though we can get by perfectly well with a single credit card, many of us use two or more, so that we can maximize our rewards (using one credit card for, say, grocery purchases and another for airfare).
Mobile payments are a growing part of our everyday life. Many of us have already used our phones to complete a payment and in the not-too-distant future all of us will be doing it every day, instead of using our plastic bank cards. That does not mean that credit and debit cards will disappear. They will not. What will happen, instead, is that bank cards will shift their form from a plastic to a digital one. For consumers, that will be more of a cosmetic change than a substantive one, although there will be some benefits, such as the added convenience and the extra rewards mentioned above. For businesses, on the other hand, the new payment technologies hold the promise of collecting much more detailed information about their customers and interacting with them on a much more personal level. Those companies that get this transition right stand to benefit enormously in the new digital payment world.
Image credit: Squareup.com.