What's in Your Mobile Wallet? Not Much for U.S. Shoppers; Here's Why

While Contactless Payment Programs Thrive Elsewhere, Tech and Infrastructure Hurdles Stifle American Advancement

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NEW YORK (AdAge.com) -- The next mobile frontier will find our wallets at home and smartphones taking the lead at registers. But right now in the U.S., cellphones trumping plastic at the point of purchase is still far off.

What's taking so long? Mobile wallets have taken off in places like Japan but have been slow to develop in the U.S. primarily because of technology and infrastructure problems. No major cellphone ships with a microchip that allows for secure touch-to-pay at registers. Even with the chips, retailers would have to install readers at every point of purchase to accept those mobile payments. Major contactless payment programs, which are primarily chips on debit cards today, only have about 1 million acceptance points by now, as projected by research firm Celent.

Add to that infrastructure lag a tug of war between carriers, credit-card companies and merchants for mobile transaction fees. Carriers control security on phones -- SIM cards -- so they also expect a cut, while banks want fees for brokering transactions and merchants don't want to pay more.

"You have a perfect storm of technical and business model stagnation -- that's the challenge," said Drew Sievers, cofounder-CEO of mFoundry, a mobile financial-services provider.

Stakeholders such as Visa, Bank of America and even Apple are working to overcome tech hurdles. But before retailers pony up to install readers on their end, they might want to back up to see if consumers will be willing to give up plastic in the first place. In 2008, there were 449 million Visa or MasterCard debit cards in the U.S., according to consumer-payments authority Nilson Report. If there are 310 million Americans, that's more than one per person.

"There has been so much focus on the gee-whiz technology, but how is mobile better than the card that is already in my wallet?" asked Red Gillen, Celent's senior analyst on mobile banking and payments. "Cards are a high hurdle to clear. They work well; they offer points. How are you going to top that?"

There have been millions of debit cards with contactless chips, but there hasn't been a huge spike in stores that can accept them, Mr. Gillen added.

"In order to get that mass adoption for any payment network, you need to get the receiver and payer," said Jack Dorsey, CEO of Square, a startup that's focusing on using mobile to read plastic cards, rather than using phones for payment. "There needs to be significant benefit to do that. Pure convenience is not enough."

The incentive may be the loyalty app. A crop of check-in apps such as Shopkick, Loopt Star and Checkpoints have emerged as digital corollaries to retail reward cards. Retailers such as Best Buy and Macy's have launched app programs that incentivize shopper behavior like checking in to stores or scanning product barcodes, but no apps include rewards for purchases just yet.

"You can put a lot of information around these transactions, and I think loyalty is one of them," Mr. Dorsey said. "The coffee card is a lot easier if all the payments are electronic."

To date, Starbucks' payments app from mFoundry is widely considered the largest mobile payments initiative in the U.S., though it's only in eight stores in the coffee chain's hometown (Seattle), eight stores in Silicon Valley and in 1,000 Target caf├ęs. Starbucks is satisfied with mobile payments' performance and plans to expand, said Chuck Davidson, category manager-innovation for the Starbucks card, while declining to provide specifics.

Unlike the category in general, Starbucks has been able to sidestep the transaction fees because it controls all three arms of the purchase process. The coffee chain issues cards and accepts payments, bypassing both bank and merchant interests. Mr. Davidson said it's a way to serve customers that often leave their wallets at work when they go out for their afternoon coffee. After first launching on iPhone, the chain recently expanded to enterprise-centric BlackBerry handsets. The same model could work for daily expenditures out of refillable accounts, like those for transit systems.

Transaction data is also stored in the Starbucks app -- purchasers show barcodes on their screens to cashiers -- so the carrier is cut out, too. Target has also managed to launch mobile payments through a gift-card program, though the big-box store uses images of gift cards rather than barcodes.

Starbucks launched mobile payments last September and added in its loyalty program in March after customers specifically asked for the feature. "The No. 1 thing they asked for was mobile payment," Mr. Davidson said of the coffee chain's online community, MyStarbucksIdea.com. "No. 2 was that they wanted to track their loyalty stars: I know I got a point, but why can't I see it?"

Celent's Mr. Gillen points to McDonald's in Japan as a prime example of how loyalty programs can team up with sales. The fast-feeder sends mobile coupons to its 18 million loyalty-program members. Customers then choose either to redeem through the mobile web to get discounts or to download the offer to their phones' payment chips. With the chip option, users can pay for food out of mobile wallets -- a widespread phenomenon in Japan. Their orders get automatically sent back to the kitchen and McDonald's builds profiles about customers based on what they buy when. Say Mr. Gillen tends to redeem teriyaki-burger coupons on Saturdays; McDonald's could try to get him to come to a restaurant on a slow day with a specially tailored coupon.

"Using this technology to build a coupon just for me, that's where this is going," he said. "They don't know your name, but they know your behavior. They know that a certain customer has certain preferences, and they can try to tweak that to increase sales."

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