Recent posts and articles in social media have posed the question: Who will win the “Mobile Wallet Wars”?
Challengers include Google Wallet, Square, PayPal, VISA, ISIS, MasterCard, etc. Ironically many of these services are US based which reflects the often one-eyed, myopic, US-centric, the-world-revolves-around-my-solution attitude in these debates.
Mobile wallets mean very different things to different people, giving rise to confusion and miss-information on this topic. Broad-brush and overlapping references across multiple markets each with differing technology, solutions, contexts and applications, create unrealistic expectations for users. About the only thing in common is that a mobile phone is involved in the transaction.
Because both readers and contributors to this debate are part of a global community across this range of very different markets, we thought we would take an opportunity to outline the differences between the respective mobile wallet models and approaches.
Mobile wallets have existed for many years before they appeared in the US. What may not be evident is that the original concept of a mobile wallet has it’s origins in emerging markets where they use a vastly different architecture to those in the current “wallet wars” debate. For examples of some early and very successful mobile wallets see M-PESA in Kenya or Globe GCASH and SMART Money in the Philippines. To this day these mobile wallets still provide greater relative value to end users than their respective counterpart mobile wallets in the developed world.
To assist with the definition, lets first explore the idea of a wallet and the origin of the term mobile wallet. Most people understand what a wallet is – According to Wikipedia, a wallet, or billfold, is a small, flat case that is used to carry personal items such as cash, credit cards, identification documents (driver’s license, identification card, club card, etc.), photographs, gift cards, business cards and other paper or laminated cards. Wallets are generally made of leather or fabrics, and they are usually pocket-sized and foldable.
The “western” or “developed“ market perspective of a mobile wallet seems to have followed the classic definition above in that a mobile wallet is an electronic container which stores one or a range of different payment instruments i.e. credit/debit cards linked to some form of bank account. Critically also, solutions in this market are usually bank-led.
Some mobile wallets include multiple payment instruments while others exclusively allow only one instrument. Physically the mobile wallet can take a variety of forms either by incorporating the physical payment instrument within the handset itself via an embedded secure element (balance physically stored on the mobile handset), a form of proximity solution such as NFC, preloaded account credentials or some form of remote link to the payment instrument itself. Due to their complexity, these services are usually only possible via a Smartphone device.
A user makes a “payment” from the mobile wallet by using an embedded or downloadable APP or via some form of embedded functionality within the mobile phone that may include the ability to select a particular payment instrument. Payments are often restricted to Point Of Sale purchases only. Furthermore, some solutions require collaboration between banks, mobile networks and/or mobile handset manufacturers to function. This can reduce the addressable market size and is a contributing factor to slow take-up in some cases.
The (permitted) use of only one payment instrument or bank e.g. one particular brand of credit card or bank, is a strategic approach often used to leverage take-up by the mobile wallet operator to force all transactions through one service or provider. Other models have a more open approach and allow the user to select from multiple card instruments or products. Under this model, the physical balance for each payment instrument still held by the respective payment institution that manages the payment, which in 99% of cases is a usually bank or financial institution.
Also under this mobile wallet model, the mobile phone serves as an extension or new channel linked to an existing payment mechanism. The physical transaction is usually still switched via the card instrument or associated payment institution. The mobile wallet in this context therefore sits on top of existing and established bank payment infrastructure. While this may provide a level of increased convenience to end users such as reduced payment “friction” etc, it still uses and relies upon existing banking payment infrastructure to function.
The value presented to the end user with this approach is still unclear as the payment is still performed via their existing payment institution (or account) only the channel (device) is different. In most cases, the payment can still be performed via other (traditional) methods so unless the mobile wallet payment method is mandated, users need to be motivated to change their current payment behavior. It is not yet clear if increased convenience alone will be enough of a driver for any one solution to win the “Mobile Wallet War” in this case.
In emerging markets however, mobile wallets often represent the only form of electronic payment available, which means the relative value proposition to the user is often far far greater.
In emerging markets, most mobile wallets operate using a completely different and arguably far simpler model. Because of the extremely low number of personal bank accounts in emerging markets, they usually operate independently of banks or financial institutions. This factor has also given rise to the term the “unbanked” – accounting for approximately 5 billion people in the world.
In these markets, mobile wallet payment platforms usually managed by mobile network operators directly. Consequently they are not reliant upon or constrained by legacy banking architectures and instead are built using current, modern day, cloud based, real-time payment switching platforms.
Funds are loaded into and withdrawn from the mobile wallet via a network of retail agents. In some cases where partnerships with banks are available, funds can also be withdrawn via ATM networks.
One feature of mobile wallets in emerging markets is that they almost exclusively only allow a single “payment instrument” – namely the mobile money service provided by the mobile network operator on which the mobile phone operates.
Emerging market mobile wallet payment services offer the same core features offered by their counterparts in developed markets; account balance, paying another person (p2p), and bill payment. Fundamentally and more crucially however, they do not require a Smartphone to operate. Because they do not require the exposure of credit/debit card credentials, payments can be made via ubiquitous technologies including USSD and SMS, available on all mobile networks and supported by all makes and model of mobile phone. The addressable market size for these services is therefore far greater than solutions available via smartphone based alternatives.
It is somewhat ironic in that mobile wallets in emerging markets are able to provide almost the same level of core payment functionality as their Smartphone-based cousins but at a fraction of the cost to the user and service operator.
Critics of emerging market mobile wallets often cite the fact that user interfaces are “clunky” compared to those of a smartphone but in these cases it is basic function and utility that is more important to the user.
What is also often overlooked in emerging markets is that the positive social impact of these mobile wallets is enormous. They have more benefit than bank-led solutions, operate more efficiently and satisfy the majority of needs of users in their respective markets. The benefits they provide to their respective communities far outpace the benefits to society than their counterpart mobile wallets in the developed world provide.
It is likely that we will continue to see a sharp division in terms of the architecture, payment models and range of services between mobile wallets in developed versus emerging markets. It is important therefore that the distinction between these two models is clear in their respective market context as the debate continues.
As to the question of who will win the “wallet wars”, it will depend entirely on which battlefield the war is being waged. The battlefields of the developed and emerging markets are vastly different as are the solutions competing for market share. We will probably have multiple winners – and losers.