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DIGITAL WALLETS: Crossing the chasm between online and offline payments E-mail


Despite an increasing online-offline convergence in retailing, there is still a chasm between online and offline payments which today's digital wallets are struggling to cross, according to Celent. It remains a challenge to use secure element-based payment credentials online and cloud-based credentials at the physical point of sale, although various solutions to bridge the divide are emerging.


"Banks should think twice before going down the path of launching their own branded independent wallets," says Zilvina Bareisis, , senior analyst with Celent's Banking Group. "For some, it might make sense, but many others will likely be better off focusing on making their payment credentials available and ‘top of wallet' in the wallets already out in the market, as well as enhancing and extending their mobile banking platforms with value-added services, including payments."


Key findings of Celent's recent report include:


It is difficult to think of a more hyped-up and hotly debated topic today in financial services than wallets. The debates start with the name. Some refer to them as "digital wallets," and others as "e-wallets," while others use "mobile wallets". Some are backing solutions with NFC and secure element inside the phone, while others believe the future is in the cloud or a combination of both approaches.


What everyone in the industry does seem to agree on is that: (1) It's not about payments, it's about commerce; and (2) technology itself is less important. What really matters is the value each proposition creates to consumers and merchants. Consumers want quality products and services, want to save time and money when shopping, and want personalized and seamless experiences. Merchants are interested in technologies which can help them deliver that.


Many are also talking about "online-offline convergence" in commerce, which is reshaping the retailing landscape. Consumers are increasingly using their mobile phones when shopping to read product reviews, compare prices, and sometimes order online, leaving the physical shop empty-handed. Equally, they might order something online, but go and pick it up from a local store.


Most wallets have a vision of becoming universal solutions for the converged commerce. However, today there is still a chasm between online and offline payments which today's digital wallets are struggling to cross. For example, PayPal, a leader online, is working hard to get to the physical POS, while card networks, such as Visa and MasterCard, are using their strength in the physical world to develop digital wallets and are looking to find ways to bring those wallets back to the retail POS.


There are two dominant approaches available today for different scenarios. The physical POS world is dominated by plastic cards and the emerging mobile equivalent of payment credentials residing inside the phone and sent to the POS via NFC at the time of a transaction. On the other hand, the online world is dominated by cloud-based wallets such as PayPal or the card credentials either stored by individual merchants or entered manually by customers, which is rather inconvenient to do, particularly on mobile devices. It remains a challenge today to use secure element-based payment credentials online and cloud-based credentials at the physical POS, although various solutions to bridge the divide are emerging and are discussed in this report.


Celent does not share the view of those who think that there will be "one wallet to rule them all." If anything, the mobile phone itself might become such a "wallet," with consumers using multiple apps to shop and pay with payment credentials stored in multiple places. After all, even the mobile phone itself may not be the ultimate payment device. With cards having such a stronghold on the market today, chips getting smaller and other technologies, such as biometrics, maturing rapidly, the mobile phone itself might be only one of many ways we will pay in the future, alongside cards, chip-enabled jewelry, or simply by touching a fingerprint scanner.


In today's fragmented world of digital wallets, Celent's advice to the banks would be to think twice before going down the path of launching their own branded independent wallets and adding to the mix of competing wallets. Some banks might be successful in doing so, but many others are likely to be better off by:


Ensuring their payment credentials are available with the wallets most likely to win in the market. Even with the cloud-based wallets, where the banks have seemingly less control, this often means taking a proactive stance and partnering with the wallet providers to make sure the banks get their say on important issues, such as branding, data, and overall customer relationships. Supporting traditional scheme wallets, such as Visa's V.me and MasterCard's PayPass Wallet, should be a no brainer decision for most banks, but other specific market segment leaders, such as, for example, Isis or Google in the United States would also merit consideration. However, banks should be more cautious when dealing with third-party cloud-based digital wallets that allow funding sources other than a bank-issued card, such as direct debit from a bank account, or those that extend credit for the transaction.


Developing strategies to ensure their payment credentials are at the top of digital wallets. Some third party cloud-based wallets, e.g., Wallaby Financial, are designed to offer explicit comparisons and advice to help customers choose a particular card for any given transaction. Real time card-linked offers and real time insight into the potential total cost of the transaction, particularly for larger purchases which might include financing, would be just two examples of capabilities banks might have to develop to compete effectively in the new world.


Enhancing and extending mobile banking platforms with rich value-added services, including payment propositions, such as P2P or access to card-based and other payment credentials.


Executed well, mobile can offer revenue generating opportunities, something that is becoming increasingly difficult for many retail banks to find these days.




[This article was posted on December 12, 2012, on the website of ABA Banking Journal, www.ababj.com.]
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