Why U.S. Mobile Wallet Interest is Uneven

US mobile wallets lack strong value proposition Despite growing sharply off of a low base in recent years, consumer adoption of mobile wallets in the U.S. has developed at a much slower pace than most industry experts would have predicted. According to MasterCard, nearly 85% of payment transactions globally are still made with cash, creating a significant growth opportunity for digital payment providers. Mobile wallets are a subset of this addressable market, which we define as payments made by consumers at a physical point of sale using a mobile device. There have been numerous constituencies that have invested heavily in recent years in mobile payment technologies. Among them are established and upstart technology companies, banks, payment networks, retailers, and wireless phone carriers. A primary driver behind this investment is the transaction data generated via a mobile device, which can provide highly valuable insights on consumers’ buying habits and preferences to merchants who can then better target customers with relevant and timely offers to drive sales. Digital payments can also help governments reduce illegal activities that involve cash payments and/or tax evasion. An October 2015 report by eMarketer projects in-store mobile payments to reach over $27B in the U.S. in 2016, up over 200% from the prior year. That said, this figure still represents a quite modest 0.58% of the estimated $4.65 trillion of in-store retail sales for 2016. The slow adoption trend seems to mirror that of the U.S. retail sector, where despite mid-teen annual growth over a number of years, online sales still represented only approximately 8% of total retail sales in 2016 according to the U.S. Census Bureau. Why have mobile wallets thus far failed to garner mass adoption by U.S. consumers? In Fitch’s view, the three primary hurdles preventing more widespread adoption of mobile wallets are the lack of compelling value propositions, an overcrowded market and cyber risk aversion. The vast majority of mobile wallets have thus far been unable to offer an effective value proposition to consumers in the form of checkout speed and/or financial incentives such as merchandise discounts. Likewise, there does not appear to be a tangible financial benefit for merchants relative to the costs of accepting card-based payments, such as interchange fees and point of sale terminal installations. Meanwhile, the launch of numerous mobile wallets into the marketplace has created added confusion for consumers as it relates to acceptance of the various wallets at the checkout line. Lastly, Fitch believes that users are concerned with potential security risks of maintaining their card account information within their mobile device, although providers have made significant efforts to address these concerns by touting their enhanced security features such as tokenization. Some examples of challenges mobile wallets have faced to date include:

• Apple Pay, which was launched in October 2014, was expected to catalyze the adoption of in-store mobile payments given its marketing and brand strength, loyal customer base, and ability to unify other participants in the payments ecosystem. However, adoption has been lower than expected thus far. According to a quarterly survey conducted by PYMNTS.com and InfoScout, only 4.5% of respondents used Apple Pay for a transaction in October 2016, with usage remaining in a fairly narrow range of 4%-6% since Apple Pay’s launch.

• The Merchant Customer Exchange (MCX), a consortium of some of the largest U.S. retailers including Walmart and BestBuy, terminated its development of a mobile payments solution/application (CurrrentC) earlier this year.

• Softcard, a near-field communication-based mobile payments application developed by the largest wireless phone networks including Verizon and AT&T, was sold and folded into Google Wallet in 2015 and was later discontinued.  Google itself has also encountered challenges in its initial foray into mobile payments with its Google Wallet app, although the company appears to be having more success with the launch of Android Pay.

Ironically, among the most successful mobile wallets launched in recent years has been Starbucks’, which appears to have overcome the aforementioned adoption hurdles with 25% of its U.S. sales transactions in its most recent quarter came via mobile payments. Specifically, Starbucks’ mobile payment app adds value to the customer experience by reducing customers’ time spent waiting in line by allowing them to order/pay before entering the store, and also provides electronic storage for the reward points they earn for each purchase. Further, customer usage is encouraged and incentivized by Starbucks and cyber security concerns are reduced given the payment app is limited to Starbucks stores. Fitch believes markets outside of the U.S. are better positioned for mobile wallet adoption, particularly in emerging markets in Asia and Africa where cash, rather than credit cards, remains the dominant form of payment. In this regard, mobile wallet adoption does not have to overcome the established payment infrastructure and relative convenience of cards exhibited in the U.S. and other developed countries. A case in point is Apple Pay, where despite launching first in the U.S., the majority of Apple Pay’s transactions now come from non-U.S. markets. Conclusion The bottom line is that while growth in mobile wallet adoption within the U.S. has been robust in recent years, it comes off of a fairly low base and continues to lag adoption in many other countries. In order to accelerate the adoption of mobile wallets and create a sea change in payments, Fitch believes that banks and financial technology companies need to invest more toward improving the value proposition for both consumers and merchants. By Michael Taiano