How Apple killed the digital wallet

By Rick Oglesby, senior research analyst, Double Diamond Payments Research

After years of watching quietly while Bling Nation, Google, Isis/Softcard, PayPal and others tried and failed to popularize the digital wallet, Apple finally launched its product in October. What’s the impact? The concept of the digital wallet is now dead, and it’s been replaced by the physical-digital wallet.

The traditional leather wallet is a storage mechanism for consumers’ cash, credit, debit and loyalty cards and coupons. The first generation digital wallet, starting in the late 1990s with PayPal and eBay, was a software solution that provided convenient way to store cards for repeat online purchases.

Once the iPhone came about and mobile commerce began to take hold, Apple extended this model to iTunes, and Google followed with Google Play, both providing a software solution for repeat online purchase via the mobile device. Braintree and Stripe extended this even further, capturing the in-app and mobile transactions that took place outside of iTunes and Google Play.

Mobile network operators (MNOs) sought to take the digital wallet concept offline by storing payment credentials within the only part of the mobile device that the MNOs could control — the SIM card, and transmitting the credential to payment terminals via a near field communications (NFC) radio. This introduction of hardware componentry into the payments game created a tug-of-war between the haves (those that had influence over hardware components) versus the have-nots (those who did not have influence over mobile hardware).

The have-nots, lead by Starbucks, PayPal, and MCX sought to store payment credentials in the cloud and execute payments with barcode, Bluetooth, Wi-Fi or other transmission protocols that could be executed with software-only solutions, while the haves argued that payment transactions could be executed smoothly only by securely storing payment credentials directly in on-device hardware. Google stood between the haves and the have nots, storing payment credentials in the cloud to avoid dependence on the MNOs’ SIM cards, but adopting hardware-based NFC as the method for transmitting credentials to point of sale devices.

In October, Apple ended the tug-of-war. Apple incorporated its mobile wallet solution directly into its operating system, and simultaneously incorporated a SIM-independent (and therefore MNO-independent) secure memory chip, an NFC radio, and a fingerprint reader.

Apple Pay is a hardware/operating system combination designed to facilitate transactions everywhere the device goes. The operating system is the only be-everywhere alternative that can seamlessly interact with every application, every website and every bit or byte that crosses the mobile device.

By embedding the wallet into the device’s hardware Apple ensured that the next generation wallet will not be a software application, rather it will be as much a physical wallet as your current leather wallet is today. It is a fundamental and physical part of the device itself.

The physical nature of the wallet ensures that only Apple can manage it by way of its control over the operating system and the physical components of the device. Having this control ensures that the consumer, the device and the wallet act as a unified entity. The consumer buys the device, the wallet is part of the device and the wallet is how you transact via the device. Apple is the only player today that can provide this service across every device interaction. This means that Apple has a massive advantage in providing payment services that are executed with or within the device, and the universal control across the wallet components means that Apple can create a consumer experience that others cannot match.

On an Android device, only the operating system owner can provide a competitive solution. Google and Microsoft, and perhaps Amazon and/or others that truly fork android and control hardware are the only ones that can provide a similar solution.

So, we are left with the death of the digital wallet concept and only the physical wallet survives, but in a mobile form. What does this mean? It means that banks can pretty much give up on their plans to launch their own wallets, they will need to partner with the operating system owners, or go home.


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