Partner Voices: The Time of the Merchant Wallet Has Arrived

In 2014, I wrote here in TechCrunch that there were three trends that would finally drive real market scale for mobile payments: services adjacent to the transaction, broad usage of cards on file, and improved security. There have been many developments since that article published, including the launch of the three device-pay initiatives, but in my view the single most important development for mobile payments is the emergence of the merchant-centric wallet. Only with these wallets can consumers and merchants fully realize the potential of the three trends mentioned above. As the data is showing, these two stakeholders, who determine adoption in retail payments, are quickly embracing merchant-centric wallets.

Starbucks was the first successful example, but today there are several merchants changing consumer behavior at checkout in physical stores.

Why Are Merchants Doing This?
Digital commerce — i.e., that which takes place in digital channels, such as online, mobile, etc. — has significant advantages for merchants. Amazon.com’s rapidly increasing retail market share, and parallel anemic growth of traditional brick-and-mortar retailers, are evidence of this advantage. In the digital realm, merchants have complete or nearly complete visibility into the consumer’s shopping journey — discover, compare, select, pay — and can use those data points to turn visitors into buyers via engagement and loyalty tools. The startup community is fully aware of this opportunity. CB Insights recently published an infographic that included 133 private companies “Transforming Brick-and-Mortar Retail” via digital tools.

A merchant-centric wallet is an ideal vehicle to bring some of these digital tools into the in-store environment. In other words, a unified digital container (in the form of an app) that brings together engagement, loyalty and payments could deliver for brick-and-mortar retailers a comparable level of visibility into the shopping journey that online merchants enjoy. Digitizing the universally tattered, delaminating keychain loyalty cards that consumers use in drug stores and supermarkets to access discounts and rewards would create a powerful conversion tool for merchants. The opportunity is exponential for enterprise retailers, which have spent billions developing engagement and loyalty programs (read retailer coupons, manufacturer coupons, location-based services, etc.).

For a retailer, trying to realize this vision using a third-party wallet has proven to be impossible. This is where another trend comes into play: the increasing use of cards on file. Allowing customers to keep a payment method saved in a merchant’s app has improved the monetization of in-store engagement, pushing average basket size up and transaction costs down.

How Would Consumer Behavior Change?
When I first heard about this “vision” years ago, I was quick to say that it didn’t make sense to have many apps on my phone — essentially, one for every merchant. However, the reality is that I’m not going to download all of them, just the ones I care about. And those would be the ones for which I want to access discounts and be rewarded for my loyalty. Today, I don’t mind the coexistence of these merchant apps on my phone, as the potential downside of downloading them is far outstripped by the benefits I can receive: discounts, rewards, speed at checkout, etc. Furthermore, increased security delivered by the combination of tokens and fingerprint identification further strengthens my desire to adopt them.

As Starbucks has demonstrated with its mobile payments app, the brand and operating system of the mobile device isn’t even a consideration when paying. I just know I want to be rewarded for going to Starbucks and not another coffee place. I know the app delivers that engagement in a reliable way, and so I’m happy to digitally engage the merchant throughout the coffee-buying process.

But let’s be clear, this isn’t a realistic objective for all merchants. In fact, it’s not even an aspiration for most. The opportunity to fully capitalize on the mobile payment trend is limited to large merchants and retailers with recognized brands, those that enjoy a loyal following of customers. My own prediction is that no more than 150 merchants in the U.S., and less than 500 worldwide, will successfully deploy their own branded wallets in the next five years. If this prediction proves true, it will leave ample space in the market for one or two of the device-pay wallets to reach meaningful scale with smaller merchants.

I’m tempted to end this article with “time will tell,” but as I read the announcements coming from large merchants on both sides of the Atlantic and reflect on their frequency, I do believe that this “train already left the station.” I believe we will only see this trend accelerate and finally witness mobile payments at scale in the near term.