Two weeks ago, I walked into Starbucks and ordered a black coffee – not because I wanted to have an unimaginably awkward enlightening conversation about race relations with the barista, but because Starbucks’ mobile payment system fascinates me, and Dunkin’ Donuts was too far away.
During the company’s earnings call on January 22, CEO Howard Schultz told investors that 13 million customers use Starbucks’ mobile apps, they complete over 7 million mobile transactions per week, and they represent 16 percent of total revenue. That’s impressive.
However, Starbucks’ success reminds me of AOL, Netscape, and Napster in the early days of the Internet. Their digital “wallet” has the trappings of an early technology champion that will fall prey to companies that think bigger and execute later. A world with one mobile payment app per company would be unfeasible and inconvenient for consumers, no matter how many Frappuccino’s they guzzle per week. Don’t believe for a second that Apple, Google, Samsung, PayPal, Alibaba and the other Wallet Warriors will tolerate a payment ecosystem in which every major company processes its own transactions.
They all want a cut. Just look at the acquisitions in 2015. Samsung picked up LoopPay, the “most accepted mobile wallet on the planet.” PayPal snatched Paydiant, a white label platform for mobile payments, loyalty, offers and more. Google nabbed SoftCard (formerly and tragically “Isis”), an NFC mobile wallet that will be discontinued and integrated into Google Wallet.
Welcome to Wallet Wars. The fight to dominate the payments galaxy is just beginning. Predicting a winner at this point is like predicting that Google would dominate search when middle school teachers were still telling students to use Ask Jeeves. However, we can still examine how this war will change the payment ecosystem. The three key pieces – the emerging tech ‘solar systems’, the rebranding of finance, and the future invisibility of payments – are already apparent. It’s time to connect these pieces.
The Amazon Model and New Tech Empires
Ask an entrepreneur why Amazon took a chance on Fire Phone and consequently hemorrhaged $170 million in Q3 2014 alone, and you’ll hear that Amazon wanted to “dominate consumer mindshare.” You could say the same about all the major tech companies that have transformed into holding companies. Google.com is a search engine – Google Inc. is a holding company. Facebook.com is a social network – Facebook, Inc. is a holding company. They are all creating their own solar systems where consumers and businesses can get everything they need and blissfully ignore the rest of the galaxy. To do this effectively, you need your own payment system.
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As long as companies are dependent on the credit card ecosystem, they are doomed to lose roughly 2 percent of every transaction to the Visa-MasterCard-tel. This is why Wal-Mart’s Merchant Customer Exchange (MCX) gave Apple Pay the bird and started CurrentC, its own mobile payment service. Why pay Apple (or credit card companies) when you don’t need to? If you have enough customers and the budget to build a bomb-proof mobile wallet, it pays to win back that 2 percent.
The difference between the tech companies and Starbucks is that tech players will not settle with dominating payments in their own solar system. They’re all confident they can innovate – or acquire – more effectively than their peers. The Wallet Wars are all about maximizing the number of people who use your wallet and maximizing the number of transactions it processes.
The Rebranding of Finance
Credit and bank cards are the staple of our current payment system – they are somewhere between the 2,700 year-old payment technology we still use (a.k.a. coins) and new mobile wallets we’re testing. Consumers would love to stop entering credit card numbers with every online purchase, but the airline miles, cashback, and services are worth it. Credit cards appear in the major digital wallets, but increasingly, they operate behind the scenes. Particularly for millennials, who will adopt digital wallets as they enter their prime spending years, the credit cards will become invisible. The payment ecosystem will undergo a rebranding.
To understand this point, visualize the payment process on Amazon. When you check out for the first time, you create an account and you enter credit cards, debit cards, bank accounts, or Amazon Store Cards. Maybe you register for Prime to get the 2-day shipping and streaming service. Then, you rely on one-click ordering, which hides the credit card branding. Ditto with PayPal – once you enter your bank or credit card info, you stop seeing it. In your mind, you bought with PayPal, not your Visa Sapphire Preferred.
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So with enough mobile wallet adoption, especially among millennials who claim to hate the banks, the credit card-tel will lose center stage. Visa, MasterCard, Chase, and Bank of America could launch their own mobile wallets. They could even achieve technological parity with the tech companies if they make the right acquisition. However, once Apple, Google, Amazon, etc. start offering credit card-style perks without the application process, brutal APRs, and harsh penalties, why would a millennial want the card? Right now, Visa and MasterCard rule because they are accepted everywhere. We don’t have long to wait before digital wallets are as widely accepted.
Would You Just Tell Us Who Wins?
Nope, no one can name the winner of the Wallet Wars. Right now, we’re watching the AOLs, Netscapes, and Napsters of the mobile payment revolution duke it out. They may start the fire, but someone else is likely to grab the torch. It will all come down to adoption, security, and “invisibility.”
Adoption is the foremost challenge because if you can’t sell consumers and businesses on a wallet, you’re doomed. I consider 2015 payment technology’s “college experimentation” year because consumers are still willing to try everything out. Swiping with Apple Pay or Samsung Pay is a novelty. They’re not real wallet replacements yet – you still need to carry your driver’s license, health insurance card, etc. – but they have to start building the user base. The ease of the payment system and the availability of merchants that accept it will influence whether consumers stick or churn. This is one reason Apple Pay can play “frenemies” with the credit card companies they probably hope to usurp one day. Right now, Apple needs their reach.
Security fiascos will end several digital wallets. When so many options exist, why trust your cards with the guys who can’t protect them? During its beta run in October, CurrentC was breached, but the hackers only stole email addresses. If a wallet loses credit card information, consumers will leave in droves.
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The winning wallets will do to commerce what Uber has done to transportation: They will make payments feel “invisible.” Once you give Uber credit card info, you’re done. Besides booking and riding in a car, you take no additional action to complete a transaction. The best digital wallets will figure out how to do that in all brick-and-mortar and digital environments. No wallet is close.
The Most Invisible Wallet Wins
The rise of tech solar systems is the source of the digital wallet revolution. The rebranding of the financial ecosystem will consummate it. The most invisible wallet will win the wars.
No one needs to control the whole galaxy just yet. The wallet warriors are going to find users among existing customers that already connect and consume on their platform.
In the meantime, all the business that aren’t in the Wallet Wars would do best to stay above the fray. Don’t spend millions changing your POS system just to accommodate one mobile wallet. It could be gone in a year. NFC is all the rage, but someone will inevitably improve upon it. No API isn’t going to solve the conflict.
So the Wallet Wars are all about adoption and not screwing up, to put it simply. You just have to get people using your payment system in your own ecosystem, like Starbucks has. Maybe Schultz has plans to go SaaS and sell mobile payment tech to other companies … but I doubt it. Their system will begin to look too niche – it will need to integrate with one of the wallet warriors. Like with Star Wars, you can count on a lot of sequels. In the Wallet Wars though, the characters will only get better. May the Force be with them all.
Ralph Dangelmaier is CEO of BlueSnap.