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Mobile Wallet Building Blocks Slowly Take Shape
Emerging technology promises to overhaul the payment process, but first it must overcome myriad technical and logistical obstacles.
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You are waiting to check out at a coffee shop, grocery store, or home improvement store. The person on line in front of you waves her phone at the register and walks out with her purchase. No cash, no card—she simply waves her phone. What you have just witnessed is the next big change in payment systems—mobile wallets.

Mobile wallets add one more function to smartphones: They make them a virtual debit card, and allow a person's money to travel with his phone. Market researchers paint a very rosy picture for adoption. Allied Market Research projects that the worldwide market will double from more than $16 billion in 2013 to $32 billion in 2014 and reach $5,200 billion in 2020, reflecting a growth rate of approximately 100 percent over seven years. Such lofty projections have garnered attention from such well-established, industry-leading suppliers as Apple, AT&T, Google, MasterCard, PayPal, and Verizon, all of which are jockeying to become mobile wallet market leaders.

But there is a very dark lining around this silver cloud. At the moment, the mobile payment infrastructure is more blueprints and wish lists than available products. A variety of technical and business models have emerged that do not mesh with one another. A great deal of work and further experimenting are needed before these systems are commonly used. In the short term, the technology promises to increase the workload for harried contact center agents, but in several years, mobile wallets are expected to streamline the payment process and offer consumers a simple way to make purchases.

Appealing to a Variety of Audiences

The idea of adding mobile commerce functions to smartphones appeals to a number of constituencies for different reasons.

Consumers benefit by gaining simplicity. Rather than carry a handful of credit and debit cards as well as cash, they only need one payment method.

With mobile wallets, financial assets are stored on a device that many consumers have grown attached to. A PayPal survey found that smartphones are second only to keys on the list of items people will not leave home without. In fact, many consumers already go out without cash or credit cards. In a second PayPal survey, more than two-thirds of Americans (68 percent) said they have been unable to pay for something because they did not have funds with them, and nearly one in three Americans (30 percent) frequently find themselves without access to needed cash.

Smartphone manufacturers also have something to gain. They find themselves in a highly competitive marketplace and are constantly looking for new ways to differentiate their systems and expand their customer base. "The phone vendors are aggressively developing mobile wallet features," says Christian Lunoe, senior client service analyst at comScore. Apple and Google are busy putting the pieces in place for not only the phones, but for the payment infrastructure as well.

More Personalized Shopping Experiences

Retailers have also jumped on the mobile wallet bandwagon. With mobile wallets, they gain another way to reach consumers and increase sales. While online or at the store, customers are able to make spur-of-the-moment purchases because they have quick and easy access to money. Also, merchants can provide customers with more personalized promotional programs. They can target groups of individuals in different areas for different products or use coupons to spur binge buying.

The smartphone love affair extends to younger consumers, the groups that marketing executives aggressively target. Consumers in this demographic are much less likely to carry cash or use credit cards than their parents and grandparents are, do not follow set payment processes, and think mobile devices are cool. If retailers want to harvest this segment, they need to offer mobile payment options.

But these solutions face many hurdles, starting with an infrastructure build-out, which is complex and requires the interconnection of a number of elements. Indeed, the work is so cumbersome that Square Inc., a high-profile mobile payments start-up that at one time had a $5 billion market valuation, is now struggling to stay afloat (see "Back to Square One").

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