The Coming Battle for Your Mobile Wallet

Something interesting is going to happen in 2016. I believe, in certain markets — Europe, US, and China — we are going to have a watershed moment in mobile technology. Let me first lay some groundwork.

As I alluded to in the China Smartphone Report, the infrastructure for mobile contactless payments is coming to China in a big way, mandated by the government by the end of 2015. While this order is more focused on the distribution of physical payment cards with a secure element embedded, the card readers being deployed will include NFC, which means mobile is along for the ride. I’m hearing most of the major retailers in China are preparing to upgrade all their terminals. The challenge in China, however, is there is quite a fragmented retail environment where there are a large number of “mom and pop” retail shops in comparison to major retailers. To put this into perspective, between 2010 and 2012, the top-100 American retailers made up 57% of all consumers sales. By comparison, China’s top-100 retailers accounted for 11% of sales in 2010 and just 8% last year.

This is important to know as we think about how quickly point-of-sale terminals will be rolled out in each market. In the US, the large proportion of major retailers will drive this terminal upgrade to meet the EMV and liability shift deadline of October 2015. I firmly believe the vast number of major retailers in the US will have NFC terminals to support contactless mobile payments by this fall and the upcoming 2015 holiday season. As I spoke with several companies providing these terminals, I found there will be a substantial financial impact once liability shifts from the provider of the service that accepts credit card transactions to banks or retailers after the deadline. Many insiders in merchant services I spoke with stated their confidence that this increase in fees to take credit cards will drive the smaller mom and pop retailers to convert as well. Put all the things together and you understand why I’m confident contactless payment terminals will be nearly ubiquitous by the end of 2015 in the US.

The government mandate in China will also help drive terminals. I’ve been speaking with local Android OEMs and component providers in China and have heard they are all planning for this and including NFC in phones for the local China market for the end of 2015.

I’m anticipating the number of contactless payments occurring at local retail to have a dramatic increase this fall. One helpful way to understand the readiness of consumers to embrace this is in share of mobile commerce as a portion of total e-commerce sales. Below is a chart from my primary research on the subject:

Screen Shot 2015-06-25 at 9.54.06 AM

I use this data point to show the readiness of consumers to use their mobile device for payments. In China, 34% of Chinese smartphone owners are already comfortable using their mobile device for e-commerce. It suggests same number of consumers will be ready and willing to use their phone to also pay at local retailers via contactless payments.

Similarly in the US, where we know less than 1% of retail credit card transactions are by contactless (largely due to infrastructure and availability which will be solved by end of year), 15% of US smartphone owners participating in online shopping are doing so regularly via their mobile device. If we simply move the share of US contactless transactions from 1% to 10% it would be a dramatic market shift. In the case of the US, there will be an ecosystem ready to make this happen as my rough estimates based on the trajectory of the iPhone 6 and 6 Plus and the (likely) fall iPhone lineup could see upwards of 30% of Apple’s US iPhone installed base have NFC capabilities.

The Mobile Wallet

The opportunity and challenge now moves to the mobile wallet once the fundamental infrastructure is established for contactless mobile payments. In the US, it will be fairly straightforward with Apple Pay and Android Pay as the primary solutions. In China, things are going to get quite complicated. I’m hearing every Android OEM – Huawei, Lenovo, Xiaomi, Samsung, etc. — are all going to be pushing their own wallet solutions. Coupled with Alibaba’s Alipay and Tencent’s TenPay (both already dominant and established digital payment solutions), who will also want to compete and use their existing payment platforms to take share of physical payments as well and the environment will be quite messy. The way each of them architect their solution is also tricky since it is illegal to store credit card information in China. Hence, something like Apple’s tokenization method is already well positioned to abide by the rules in China. Each mobile wallet solution on Android will require something similar so credit cards or banking information is not stored. Alipay and Tencent already have solutions and each OEM will need something as well if they want to compete.

What this fundamental shift may also bring about is an opportunity for innovation in financial services. If I am not necessarily dependent on a bank or credit card to issue me a piece of plastic to make payments, then others may be able to capitalize on this opportunity with new and innovative banking and financial services. Given UnionPay’s dominance in China, I’m not sure how this plays out but, in the US market, it seems an opportunity may present itself for us to see some disruption in this area.

I’m continuing to talk with insiders at all levels on the payments, merchants, retailers, and NFC component terminals, and will share new insights as they arrive on this subject. I feel we could be on the cusp of a monumental shift when it comes to mobile payments, both as a share of physical retail and online commerce. Who controls the wallet will play a key role.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

8 thoughts on “The Coming Battle for Your Mobile Wallet”

  1. What I understand from this article are three things:
    1. Contactless payments are coming to China (secured physical payment card compatible).
    2. Mobile payment terminals will be ubiquitous in the US and China by the end of 2015, though highly fragmented.
    3. Retailers, banks, credit card companies, carriers, hardware manufacturers are all fighting for the piece of mobile payments pie.

    What I do not understand from this is how these changes benefit the end customer. I admit I am not using mobile payments just yet, since I do not see much usefulness in it.

    From the consumer prospective I think the Mobile Wallet term is a bit misleading. It is more Mobile Payments. I still need to take a wallet with me (driver license, insurance cards) even if I use mobile for the payments. What about if I travel? If I take a Visa card equipped with a secure chip with me and ATM card I know I am pretty much set everywhere in the world. What if I lose my mobile? Will my financial information still be secure and can I get a replacement right away anywhere in the world? What if there are some disputes of the transactions?

    I think that before these questions are answered, I will not be using my mobile primarily for the payments. Cutting this umbilical cord between payments and hardware and infrastructure will help to make them truly mobile.

    1. Good observations. You are correct in even though there will be ubiquity among the major retailers, there is still a conversion that is necessary to get people to use their phones for contactless vs. their traditional methods. I’m again not saying it completely replaces your wallet. We still need our IDs, and other things, so people will still carry them for the foreseeable future. But we are observing is the long arc transition to our devices to carry our mobile identity. This is a slow transaction but we are inevitably headed in this direction.

      1. What thrills my fancy though are mobile payments who draws on social impressions and players baggage.

  2. In the U.S., alas, you cannot ignore the horrible role being played by CurrentC. The backing by the big retailers isn’t being used yet anyway–it’s a lousy approach–but it’s effectively keeping most of the others away from Apple Pay and others. Target is proud of itself of adapting credit card technology that Europeans have been using universally for 15 years. China and others may move fast, but it will take a long time here.

    1. How is CurrentC (which is stupid because its intent is to benefit the merchant instead of the customer) keeping retailers away from Apple Pay, which benefits the customer? Can’t retailers see it’s THE CUSTOMER who is the source of all their income, so do what’s best for her?

  3. I think there are other parameterless on top of Mobile purchases (which itself probably depends as much on lacking local shops and wired Internet as on a Mobile preference). I’m not sure mobile purchases will be that correlated with mobile payments. On the contrary, buying via mobile because you don’t have a PC+ADSL/fiber link up, and because shops around you are backwards old things makes Mobile payments less likely ? Also
    – I was amazed way back when I was living in the US (that’s 20 yrs ago now) of how plastic was being used for insignificant amounts. From my experience, a lot of countries are cash-based for small amounts. Switching from plastic to mobile is probably a lot less friction-y than switching from cash to mobile.
    – Many countries have credit cards with chips and PINs, which make payments a lot safer than magnetic strip + signature. That’s a big reason less to switch to mobile payments.

  4. I think smaller retailers and individually owned restaurants in the US are going to be in trouble come October. I’ve talked to a couple of restaurant owners and they reported the same thing, their register vendors told them that they are all set even though these registers are swipe only. There is no awareness of the EMV requirements in October that I can see.

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