I first discussed the steadily increasing interest in the mobile wallet in this blog. The leading card and TSM manufacturers have now gone so far as to say that the battle has been won in favour of the NFC-based payment application, the very heart of the mobile wallet. While this would be nice, we have not gotten quite that far yet. Instead, I would argue that some actors are now ready to gather the troops and prepare for battle. Let’s take a look at the German market as an example, where the Achilles heel of every payment application is retailer acceptance.
In my experience, retailer acceptance is the issue that is underestimated most in terms of mobile payments. Surprisingly, most providers of new payment applications firmly believe that, once they have developed a nice new payment app, retailers and service providers will automatically accept it as a method of payment. In fact, anyone who has tried to pay by card in a taxi in Germany will be quickly disabused of this notion. Every cashless payment method involves additional costs, process optimisations and administrative expenses for retailers and service providers. Solid arguments therefore have to be put forward to win these retailers over to the new payment method. The key point is that the end customer will only start to use the method regularly and actively request services from the retailer once the new payment method has been implemented amongst a critical mass of other retailers. Otherwise, the customer will forget about it after their third unsuccessful attempt to use it. This is the classic ‘chicken and egg’ problem. Niche applications represent an exception in this regard, where paying with cash or the established cashless methods, such as cards, is not possible.
Now, let’s examine the mobile wallet and project ourselves forward to spring 2013, when the first commercial solutions are expected on the German market. Some early adopters will certainly want to pay with their freshly purchased mobile wallets using contactless NFC technology. According to Paypass Locator, Munich, with its one million inhabitants, currently has an impressive 31 acceptance points (as of October 2012). So, anyone who wants to buy a book, a bottle of perfume or pay for a pizza will not be able to do much with the mobile wallet for the time being. And they will probably forget about it pretty quickly too. The failed introduction of the bank-driven electronic purse system GeldKarte should serve as a cautionary tale and provide the necessary lessons for similar future projects.
The transition to NFC in commerce will happen, as terminal manufacturers have announced that future generations of terminals will be fitted with NFC as standard. However, according to standard replacement cycles, it will take another 3-5 years for there to be a sufficient number of terminals to ensure across-the-board acceptance amongst retailers. And it has yet to be seen whether the commercial sector will provide NFC technology with the support it needs. As things currently stand, only cards from major credit card companies, which are expensive for retailers, are NFC-capable, whilst the relatively cost-effective debit cards from German banks are not. This raises the question: will astute merchants be willing to support contactless payment if it encroaches on cash payments and the more cost-effective card payments, not to mention further reducing the already diminished profit margins in the retail sector? Possible solutions to these challenges do exist. Unfortunately, I have yet to see anything convincing in the strategies put forward by future wallet providers. And so, this leaves us with the disconcerting prospect that the first mobile wallets, at least in Germany, will fall well below expectations and fail to meet their potential.
