Despite occasional predictions that 2016 would be the year of digital wallets, that doesn’t seem to have been the case in the United States. As of March 2016, just 3.5 percent of eligible transactions — which include only those made by a consumer with the appropriate phone to a vendor with a compatible POS system — were made via Apple Pay, the digital wallet player that’s been in the U.S. market for the longest. Compare this to the United Kingdom, where one in 10 transactions are contactless, or Australia, where 53 percent of people pay with a contactless card or digital wallet at least once per week.
But first, some backstory: A digital wallet is simply a third-party mobile or web app that connects to a payment card and facilitates secure purchases. In many cases, it takes the form of a mobile phone app, and works by holding a phone to a contactless payment terminal. Technically, even PayPal is a digital wallet, albeit a more traditional one; it uses stored funds or a connected account to complete online transactions, adding a layer of security between the purchaser and the merchant. Unlike credit card transaction fees, which vary in amount but are standardized across networks in terms of who pays for what, digital wallets take on a variety of revenue models, and no standard fee structure has been established across the available options. In the long shadow of PayPal, upwards of 100 mobile wallets have launched in the U.S. alone, by giants of technology such as Apple, Samsung, and Google, as well as by smaller upstarts.
Adoption — and reporting on said adoption — varies for these major players, too. One data source reports the percentage of people who have tried Apple Pay to have risen from less than 10 in late 2014 to close to 25 in recent months. Regular users, on the other hand, are reported to be closer to 5 percent. A different survey in 2015 found that about one in five, or 20 percent, of eligible users had tried Apple Pay at least once. This same survey found close to 14 percent of Android and Samsung users to have tried the mobile wallets on their phones — and that only a small percentage of that used the services regularly.
Some might argue that it’s only a matter of time before mobile wallets become the new standard. But before that, as we inch toward ubiquitous digital wallet usage, the two unavoidable questions then become which companies are actually succeeding — and which digital wallet can devise a revenue model that leads to long-term sustainability.
A digital wallet walks into a (store)…
As if payments weren’t already complicated enough, digital wallets add another layer of intermediaries to the payment flow — and each wallet is slightly different. Here’s how.
Whether an Apple Pay transaction occurs in a store, an app, or online, the transaction flow described here remains the same, with the Apple device simply adding an additional layer between the card and the merchant. But a number of added security steps ensure that the card details are protected. Apple works with users’ banks to verify the card upon setup, but after that, Apple does not pass card details between its own and the banks’ servers. Apple also doesn’t store any individual card information on their servers. The card network then assigns a Device Account Number (DAN) and a “key used to generate dynamic security codes unique to each transaction,” according to Apple. Apple Pay uses the latest standards for tokenized transactions as determined by EMV, and given the security measures Apple takes, these transactions carry a similar amount of risk as those made with a chip card (that is very little, or at least much less than those made with a magnetic stripe card).
As for Apple Pay’s effect on transaction fees, the same interchange, card network, and merchant acquirer fees apply as would in a card transaction. In addition, Apple has managed to negotiate a fee structure with banks that others have not. Banks signed on to the platform pay Apple a fee for each transaction, reported to be 0.15 percent for credit cards and $0.50 for debit card transactions. When Apple Pay launched in 2014, 83 percent of U.S. card issuers were on board; At the time of writing, customers of more than 1,500 banks and credit unions can use Apple Pay. While this is an extra expense banks take on, they do so in the hope that the simplicity of Apple Pay makes transacting so much easier — particularly in the context of e-commerce — that transaction volume will go up significantly enough to account for the new fees. That said, these contracts are typically three years long, and other market changes (discussed in more detail below) may leave Apple unable to continue charging these fees in the future.
Android Pay is Google’s second attempt at a mobile wallet, as Google Wallet has pivoted to focus on peer-to-peer payments. As with Apple Pay, the merchant acquirer, card network, and card issuer infrastructure — and therefore fees — are the same in an Android Pay transaction as they would be for a credit and debit card transactions. It’s been reported that Android Pay also uses tokenization to hide actual card information from merchants — although, unlike Apple and Samsung wallets, Android Pay does not store information in a secure element, meaning that information, while tokenized, could theoretically be accessed by another app on a device.
Google wasn’t as lucky as Apple in setting up fee arrangements with banks. In between Apple Pay and Android Pay launching, Visa and Mastercard standardizedtheir tokenization services. This change made the identity verification and better security enabled by tokenization free, thus preventing digital wallet companies (including Google) from charging for this service. When Apple set up its contracts, on the other hand, tokenization was a unique bargaining chip that they used to convince banks that it was worth paying to be on the Apple Pay platform. Google may offer coupons, rewards, and loyalty programs in partnership with card issuers and retailers (in fact, it looks like they have already started) — meaning revenue from Android Pay would come from advertising and other marketing agreements, rather than from the banks.
Samsung Pay uses a unique technology to allow its payments to be accepted anywhere a credit card can be swiped — not just in stores with near field communication (NFC) sales terminals. Using Magnetic Secure Transmission, high-end Samsung devices “shoot” out the same magnetic code that magnetic stripe readers receive when a card is swiped. Like Apple Pay, Samsung also uses tokenization and stores information where it can’t be accessed by other phone apps.
Launching to the public nearly a year after Apple Pay, Samsung also missed out on being able to charge banks transaction fees for purchases with their wallet — but executives say this wasn’t their strategy in the first place. Rather, the company is hoping that Samsung Pay helps drive sales of their high-end devices — because people “just love it more.”
While a number of digital wallet attempts have quietly faded away, Chase Pay is newer to the space and uses different technology to facilitate online and in-store payments. For in-store transactions, Chase Pay customers show the cashier a QR code on their phone, which the cashier then scans. Some critics think the extra steps of unlocking the phone, opening an app, displaying the the QR code, and having the code scanned are enough to challenge consumer adoption of the technology — but it’s too early to tell, as Chase Pay has so far only launched for online purchases and at a limited number of retail partners, including Starbucks.
Online, Chase Pay simply entails a button that retailers can add to checkout options, enabling the purchaser to log into his or her Chase account to authorize the purchase. While Chase Pay doesn’t work for accounts with other banks, Chase points out that one in every two American households is a Chase customer, meaning the potential market is plenty large.
In terms of security, Chase Pay uses tokenized DANs that are unique to each Chase account a user holds — but that stay the same across devices. This is distinct from the DANs used by Apple Pay, which change across devices. Chase Pay does not tokenize each individual payment, meaning that the DAN used for purchases from two different retailers is the same. These methods involve fewer encryption and other data securitization steps than those used by Apple Pay, and it makes sense that Apple, not being a card issuer, would want to offload security onto the issuers; this mitigates the risks associated with being a conduit of sensitive information. On the other hand, Chase is a card issuer, and therefore already has many fraud and risk mitigation tactics in place to protect their account holders — and the bank itself. In addition, because Chase Pay doesn’t involve transmitting sensitive user information between parties, there are fewer opportunities for these details to be uncovered by a hacker.
While the consumer experience on Chase Pay isn’t as seamless as on other platforms, the pricing structure may be attractive enough to incent retailer adoption. By partnering with Visa to license its own transaction processing network, called ChaseNet, Chase Pay can charge retailers a fixed price, with zero network, fraud liability, or processing fees. Of the digital wallets covered here, Chase Pay is the only one to actually affect transaction processing, essentially acting as the acquirer, the card network, and the card issuer — and therefore having control over transaction fees. Given that retailers are always looking for ways to reduce their spend on these types of fees, Chase Pay may gain traction over the coming years — but much remains to be seen.
No winner… yet
Digital wallets have taken on a number of forms over past few years, and while many industry insiders have heralded the importance of mobile, no one player has fully captured the market.
Returning to the original question of who’s winning the digital wallet, the evidence suggests that “winning” could take many forms: Apple, for example, locked down bank fees for their wallet transactions (at least temporarily), whereas Chase has used their digital wallet as an entrance into innovation within transaction processing. And it’s not clear if one category of digital wallet will ultimately surpass others; everyone from device manufacturers to banks themselves seem to be in the throes of crafting or refining their digital wallet strategies. What is clear, though, is that digital wallets are still very much in their early years, with seamless user experience, a high degree of security, and zero cost to users being the tenets upon which these products are built.
This article was originally published on Fin, the online magazine that illuminates the complexities of finance, the technology that powers it, and what the future holds.