SAN FRANCISCO (MarketWatch) — With the holiday shopping season in full swing, there are signs that mobile devices have become a force driving the e-commerce market, changing how people go about paying for goods, not only online but in traditional retail stores as well.
Evidence of that can be found in recent data from IBM Corp. (US:IBM), which showed that mobile devices accounted for 16.3% of all U.S. online sales on Black Friday, up from 9.6% on the same day a year ago.
IBM also said that on Cyber Monday, mobile devices were responsible for almost 13% of all purchases online, nearly double that on the same day in 2011.
“Not only are consumers spending more online this year, but smartphones and tablets are becoming an incremental driver of [online sales] growth,” wrote Robert W. Baird analyst Colin Sebastian in a report this week, where he estimated that mobile devices drove about half the growth in e-commerce over the Black Friday weekend.
But just as when e-commerce first came on the scene in the mid-1990s, the rise in mobile devices has come with its own set of questions about using a smartphone as a digital wallet to pay for things. Back at the dawn of online shopping, for instance, people were initially skeptical about putting their credit-card numbers into their computers and hoping that Amazon.com Inc.(US:AMZN) and other merchants wouldn’t steal their personal information.
Here are five things industry officials say consumers should educate themselves about when it comes to mobile payments and digital wallets:
1. Just what is a digital wallet?
A digital wallet is both a concept and a reality, and something that is becoming more and more associated with smartphones and mobile devices.
EBay Inc.’s (US:EBAY) PayPal is probably the best-known example of a digital wallet. You set up an account for free, enter you credit card billing information, and are pretty much done.
Your data is stored so that when you purchase something and you select your digital wallet for payment, you don’t have to re-enter your credit card number, address or any other necessary information to complete your purchase.
If you are paying with your mobile device, this can be as simple as holding up your smartphone to a digital reader at a merchant’s cash register.
EBay said the volume of mobile payments processed by PayPal on Cyber Monday increased nearly three times over the same day a year ago.
“For the average consumer, the digital wallet is about solving the problems of inconvenience,” said David Talach, vice president of industry engagement for VeriFone Systems Inc. (US:PAY), one of the biggest electronic-payments processing companies. “The main challenge is that all these digital wallets try to be everywhere, but they aren’t accepted everywhere. It’ll take some time to grow.”
And Talach’s point about the limited acceptance for certain digital wallets gets at another issue affecting the use of the technology….
2. PayPal vs. Google vs. Visa vs. …
There are a lot of options for digital wallets, and not every wallet is accepted everywhere. Because of this, choosing might just depend on familiarity with a name — and convenience of where the wallet can be used.
“Nobody’s going to adopt anything that’s not going to solve a problem in an existing way,” said Anuj Nayar, a PayPal spokesman. “Right now, everybody’s looking at technology and not what it’s doing to make my life better. It should be about technology to make the consumer’s life easier.”
Some of the leading digital-wallet providers are:
— PayPal, with its ties to eBay and other online retailers, has recently added deals for its digital wallet to be used at Home Depot (US:HD) stores, and is in the process of expanding its usage to wherever Discover (US:DFS) cards are accepted at offline retailers.
— There’s also Google (US:GOOG) Wallet, which lets users store credit cards, gift card information and other data on their Android-based mobile phones in order to pay for things at merchants who use MasterCard’s PayPass and Visa’s payWave systems by tapping their phones on a terminal at the time of payment.
— Earlier in November, Visa (US:V) staked its claim to the digital-wallet marketplace as it expanded its V.me service to include 53 more banks and 23 merchants, such as 1-800-Flowers.com(US:FLWS) and jewelry company Blue Nile Inc. (US:NILE)
— Mobile-phone network operators AT&T (US:T), T-Mobile USA and Verizon (US:VZ) founded Isis, a digital wallet that stores credit, debit and loyalty card information. Currently, Isis only accepts payment cards from American Express (US:AXP), Capital One and J.P. Morgan Chase (US:JPM)and the service is only available in Austin, Texas and Salt Lake City.
— Merchant Customer Exchange, or MCX, is a digital-wallet application currently under development, but with the backing of several major merchants and retailers, including Wal-Mart Stores Inc. (US:WMT) , 7-Eleven Inc. and Target Corp. (US:TGT).
The terms NFC refers to “near field communication,” a set of technology standards that allow smartphones and other devices to communicate, via radio waves, by touching each other or getting very close together.
If you have used an Android-based smartphone with Google Wallet to pay for something, then you have used NFC. The technology is an outgrowth of RFID standards that transmit information between devices in short bursts, and only when the devices are being used to complete a transaction.
The technology, which rivals that of traditional bar-code readers, is seen as having a set of pros and cons, even as it becomes a more pervasive means by which people can use their mobile devices to complete their purchases.
One of the main issues with NFC is that it isn’t used everywhere.
“NFC’s been bandied about so much that it’s practically become part of the vernacular,” said Tom Nawara, vice president of solutions and innovations at Acquity Group, a digital-services and e-commerce branding consultancy.
“For all of its hype, there are a couple of Catch-22 items here,” Nawara said. “It requires a lot of parties to agree on using it, and one is the end consumer. On the opposite side is the merchant, for whom it takes a significant investment in hardware to make this work.”
Jerry Irvine, chief information officer of IT consulting company Prescient Solutions, said one of the benefits for merchants with NFC-standard payment systems is that “it gives them the ability to offer an easy way to pay without having to invest in a proprietary device.
Still, Irvine said, “I wouldn’t do it [use a smartphone to pay] without the NFC chip.”
4. Security matters
Irvine said that with digital wallets and mobile payment systems still in the relatively early stage of adoption, “these are going to be used across many mobile devices, which are the most vulnerable platforms in the computing world.”
“Once people have physical access to a device, getting data is easy,” Irvine said. “Depending on how they [mobile devices] communicate with each other, there is a great ability to steal data.”
But Irvine said that at the end of the day, there is no foolproof way to ensure that someone’s personal information is 100% secure at all times on their smartphone.
Irvine says the risks are similar to that of a person’s data being stolen from a magnetic strip off of a credit card, and suggests that people use just one, small-limit credit card for their digital-wallet transactions.
“When it comes to security, there is the benefit of leveraging a lot of technology that already exists,” said John Sims, president of Sybase 365, the mobile services division of SAP AG (US:SAP). “There are multi-step authentication schemes and encryption. If my mobile device has become my wallet and I lose it, I can do a remote wipe of it and know the data is still secure.”
5. Loyalty and convenience will make a difference
“We’ve got the gift-card graveyard in our wallets, and it’s a problem,” said David Stone, chief executive of CashStar, a company that provides platforms for retailers to digitize their gift cards. CashStar’s clients have included Starbucks Corp. (US:SBUX) and Groupon Inc. (US:GRPN)
Stone is referring to the situation whereby a person carries around multiple gift cards in their wallet that they have likely forgotten about. The digital wallet offers the potential to keep gift cards as digital items, thus clearing out all the space that half-used plastic cards use up in a traditional wallet.
“There’s no question that people don’t want to schlep around a stack of plastic gift or loyalty cards,” Stone said. “When you take the gift card and turn it into something digital, you no longer have to carry all that extra stuff with you.”
Among the advantages of having gift and loyalty cards in a digital wallet is the potential to reward customers’ loyalty with instant deals as soon as their smartphones are recognized when they place an order or enter a store.
Starbucks, for example, offers a mobile deal for reward members that gives them a free coffee for every 12 drinks they purchase.It’s the digital-wallet version of a frequent customer stamp or punch card.
“Imagine walking into a Best Buy, and the staff member knows what you bought a year ago,” Stone said. “They can suggest other things, and it shows they care about me and my business.”
In Stone’s opinion, integrating gift and loyalty cards into digital wallets can act as a catalyst for increasing people’s use of mobile payments, allowing them to get comfortable with the new way of paying for things without having to worry about the technology behind the digital wallet.
“People don’t care about the systems,” Stone said. “For your customers to care, it has to solve two problems: It’s got to work and be really convenient.”