PayPal, the payment services arm of eBay, created its first digital wallet in 1998. At the time, a digital wallet was a declining balance account that was stored online and used for online purchases. The term has come to have a much different meaning today, fueled by burgeoning near field communication (NFC) technologies that will soon be taking the retail world by storm.
The modern digital wallet is a smartphone application that allows payments to be deducted from stored accounts simply by placing the phone in front of a transponder at the retail point of sale (POS). NFC technologies stored on the phone interface with the POS terminals to initiate the transaction.
NFC technology is currently limited and isn't likely to reach wide-scale adoption in 2012, but by 2015 is expected to become a standard feature on smartphones, according to Parks Associates, a research and consulting firm specializing in emerging consumer technologies.
Parks Associates reports that almost 50 percent of U.S. smartphone owners today find NFC-enabled mobile wallet applications appealing. "The convenience of eWallet solutions, specifically for eliminating the need to carry multiple or any credit cards, is driving the majority of consumer interest," says Harry Wang, director of mobile research at Parks Associates.
And as consumers respond to the convenience of the mobile wallet for making payments, NFC will see "broad adoption, driven by convenience and merchant incentives," Wang says.
For retailers, the benefits of offering NFC-enabled mobile payments are many. "NFC will enable faster checkout and more convenient use of promotional coupons," Wang adds. "Payment networks such as Visa or MasterCard will also provide some incentive to the merchants in the form of faster settlement and maybe discounts on transaction fees."
These factors will create a commerce opportunity of more than $800 billion in 2015 and boost business for retailers, financial institutions, and mobile carriers.
Already several industry heavyweights, including Amazon.com and eBay, have reported robust mobile commerce growth in 2011. Siemens recently announced a new walletXpress mobile payment platform. Google last May launched Google Wallet, which it says could also be used to store information on other cards, including driver's licenses, healthcare insurance cards, and frequent flier and loyalty reward cards. Even credit card companies like Visa and mobile service providers AT&&T, T-Mobile, and Verizon have joined the mobile wallet craze.
IMS Research estimates that 35 million NFC-enabled phones shipped in 2011 and expects the number to climb to 80 million this year. Most leading handset manufacturers, including Samsung, RIM, Nokia, and HTC, have launched NFC-enabled phones in the past year. Apple is the main holdout.
"We are witnessing a groundswell of activities," Wang says. "Each deal signals serious interest to build scale and technology advantage over competing solutions."
"The mobile payment space will become less fragmented over time," said Jennifer Kent, a Parks Associates research analyst, in a statement. "All major players are planning for a converged payments future, where one digital wallet can be used across all product categories. Consumers will gravitate toward a single, trusted provider, so development of a reliable wallet with diverse capabilities is crucial."
Some of those other capabilities in the retail space could include delivery of product information or mobile coupons, Wang adds.