Even as recently as 15-20 years ago, the primary things most people wouldn’t leave their house without were wallet and keys. After all, smartphones didn’t debut until about 2007. While people had cell phones and Blackberries prior to that, those only came into vogue in the late 1990s.
Flash forward to today: what are the three things you probably never leave your house without? Most people would say wallet, keys, and phone.
But here’s where it begins to get even odder: many people on business trips these days? They only leave their room with their phone. At many hotel chains now, such as Starwood, your phone becomes your room key. And at hundreds of businesses, your phone can also be your wallet.
This evolution from ‘standard wallet’ to ‘digital wallet’ happened relatively quickly. Because the rise of the digital wallet is an important aspect of how big a deal mobile has become, it’s relevant to look at the process of how we got here.
The first generation digital wallet
You can think of the first wave of digital wallets as the late 1990s. The big player in the space then was PayPal. These were essentially software solutions that provided an easy way to store cards for repeat online purchases. PayPal was such an important brand in the early days of the commercial Internet that many of its founders, the so-called PayPal Mafia, went on to become billionaires. (eBay purchased PayPal for $1.5 billion in 2002.)
The role of NFC
NFC, or Near Field Communications, is a set of standards for portable devices. It allows them to establish peer-to-peer radio communications, passing data from one device to another by touching them or putting them very close together.
NFC has been one of the driving forces of the digital wallet evolution. The first phone with NFC technology was actually released in 2006 — a Nokia — and at the time, the idea was considered game-changing.
Since then, however, there’s been a slow adoption of NFC technology as a standard-bearer for digital wallets. Only a percentage of the most popular phones come equipped with it, and oftentimes retailers have to shift their point-of-sale software in order to be compatible. In addition, per Wired, there are only about 220,000 live contactless merchant locations in the U.S. — out of 8 million vendors that accept credit cards.
The big three players in digital wallets — and “the beacon”
PayPal is still one of them. The other two are Google and Apple, although competitors are emerging at all levels. (More on that in a second.) Google, Apple, and PayPal are all exploring different options above and beyond NFC. Some of the notable ones are Wi-Fi, Bluetooth, and QR codes. Bluetooth 4.0 has been considered a strong game-shifter in the last two years. That system works with a lower-power variant so that two devices can connect when they’re in the same range. However, no point-of-sale systems need to be changed at all. There’s something called “a beacon,” which is akin to a scannable sensor. Apple, PayPal, and Square (the device you’ve probably seen on top of phones and iPads at craft fairs) all use the beacon right now. It allows for longer phone battery life (compared to NFC) and a higher bitrate for data.
Security and user experience are the keys
The reason Apple Pay has gone above Google Wallet at the highest levels of digital wallet evolution is for this reason. The key deliverables — both for consumers and issuers — are security and user experience. Apple Pay now has tokenization of card numbers, biometric (thumbprint) log-ins, and on-device storage. In the process, they’ve been able to get a solid market share on the issuer side (credit card companies), because they offer a simple and private way to pay. Per Wired, they’re working with 11 credit card issuers who represent 83% of U.S. charge volume.
U.S. shift to chip and pin technology
If you live in the U.S., you may have noticed in recent months that many vendors are asking you if your credit card has a chip. If you’ve traveled abroad, you understand a little bit how this works — but in the U.S., we’ve predominantly had magnetic stripes on the back of our credit cards for a generation. The chip technology is called EMV, and most chip-card reading terminals can work with NFC. This supports contactless payment, which means a whole host of digital wallet options are opening up as the U.S. fully transitions to chip-based credit cards.
The next wave
There are different emerging concepts out in this space: Coin, for example, is a smart wallet that uses a physical card as opposed to storing data directly on your phone. Their website proudly displays that they’ve shipped over 250,000 devices so far. Their concept is similar to Wocket, billed as the ‘smartest wallet you’ll ever own.’ Lifelock Wallet, an app that scans 1 trillion data points per day for threats to its users, is another contender. Cuallet is one of the most interesting options on the market, in part because it’s multi-currency. One of the potentially great promises of the continued evolution of digital wallets is that they might make e-currency like Bitcoin easier to pay for goods and services with. Cuallet also allows for international and domestic airtime recharge.
A final important note on the evolution of digital wallets: companies don’t just operate in the first world, but in developing economies, people need methods to pay for things. Paper money is often not a viable option because of physical security risks (i.e. robbery), so new digital wallet concepts are developing to serve those markets. CBS’ 60 Minutes did a feature this year on M-PESA, a digital wallet/mobile payments solution taking Kenya by storm. The key difference between M-PESA and more familiar U.S.-based options? You don’t need to be linked to a bank account to use M-PESA. 8 in 10 Kenyans have a smartphone, but less than 20 percent have a bank account. Hence, this solution is ideal.
We’ll continue to see more and more evolution with the digital wallet — as a function of new credit card policies and technologies, as a function of new apps competing and interacting, and even as a function of the rise of connected devices via Internet of Things. We’re only scratching the surface with how exactly people will pay for goods and services in the coming years.
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