From the blog Digital Wallets and Contactless Payments

In the last year, have you used a form of digital wallet or contactless payment?  Do those phrases cause distrust or confusion? If you are like most US consumers, you probably haven’t fully adopted the concept, but that may be changing.  As a business owner, do you need to be watching these trends?  We think so.  The landscape is changing – here’s what you need to know.

Digital wallets are an electronic version of a physical wallet: software applications that securely store payment information from either a debit/credit card, bank account, or a financial account tied to the digital wallet vendor.  Consumers make purchases by opening the app on their smartphone, smartwatch, or other wearable tech, and holding the device over the payment reader instead of presenting a physical card.  Digital wallets function by utilizing near field communication (NFC) technology enabled in the POS system.  NFC technology can also be embedded in a credit card itself, allowing cardholders to make payments with a tap rather than swiping or inserting the card into an EMV reader.  Digital wallets and contactless cards aim to facilitate quicker checkout times, reduce labor, increase consumer impulse purchase tendencies, and enhance security by tokenizing the payment data; thus, reducing fraud / chargeback risk.

US consumers are reluctant adopters of these new payment methods.  Contactless credit cards have been available since 2005¹, while forecasters have predicted a wave of mobile payments adoption for several years that has yet to materialize.  Historically, US consumers have cited security concerns and a lack of businesses capable of accepting these types of payments as reasons to avoid using them.  But this line of thought may be changing.  Digital wallets are in fact more secure than a traditional wallet.  A password or biometric is required to gain access to the application, and digital wallets utilize advanced tokenization and encryption techniques to protect cardholder data as the transaction occurs.  At the same time, according to a recent TSYS study, consumers are losing confidence in traditional credit/debit card security due to the number of high level breaches in recent years.  Almost all of the EMV capable POS terminals deployed over the last five years were equipped with NFC technology, so most businesses around the country are ready to accept contactless payments, whether they know it or not.   

Worldwide, the number of e-wallet users is expected to jump by 30% and total 2.1 billion in the next three years².  Other countries have been much more enthusiastic than Americans to embrace mobile payments technology.  In China, a company called Alipay now dominates the payments market with over 900 million users³.  Rather than utilizing NFC technology, Alipay relies on QR/barcode scanners to complete a transaction.  Merchants collect money by scanning the code displayed on the customer’s Alipay wallet app.  The bar code identifies the owner of the wallet, and this code is auto-refreshed every minute to protect the owner’s identity.  The QR/barcode technology does not require the Alipay wallet app to have an internet connection.      

Back in the United States, there are many mobile wallet apps vying to gain hold of the market.  Apple Pay, Google Pay, and Samsung Pay are some of the top players at the moment, while certain major retailers, including Starbucks, Walmart, and Target have issued their own digital payment software.  These companies will incentivize consumer adoption through rewards and loyalty programs.  When customers use a retailer’s mobile payment platform, the retailer gets a line of sight into customer data to help customize promotions and offers.       

While most commonly associated with retail transactions, digital wallets can also be utilized to make ecommerce payments.  In these cases, the digital wallet is integrated with the website payment page itself.  For example, consumers can utilize Google Pay on sites like Fandango to purchase movie tickets.  Similarly, Home Depot’s website allows shoppers to checkout through PayPal.  Consumers should expect similar strategies to incentivize usage on this front as well.             

Currently, digital wallet solutions in the US are built on top of the existing financial system.  Yet there is a real risk of this shifting in the near future, as some of these applications are designed to cut banks out of the loop entirely.  Digital wallet vendors can offer their own financial accounts not tied to a traditional bank account or a bank’s debit cards.  This could have a significant impact on bank fee income.  Banks should be prepared to negotiate with digital platform owners to add brand identifiers to the software or develop mobile payments capability themselves.  Businesses should verify if their POS systems can support these technologies and upgrade them if needed.  Visa CEO Alfred Kelly indicated Visa expects to issue up to 100 million contactless cards in 2019⁴.  Almost half of the world’s population now has access to a smart phone⁵.  And the payments landscape is evolving.  




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