Mobile wallets: It’s a matter of trust
The retailer breaches we have seen over the past year (e.g., Target, Home Depot, Michaels) have had a devastating impact on consumer trust in credit.
A recent survey by CreditCards.com found that 48 percent of cardholders were more likely to pay with cash this holiday season because of these security breaches. The good news for mobile wallets is that they are more secure than physical credit cards, leveraging technologies such as tokenization and fingerprint authentication to reduce the chance of fraud. Nevertheless, mobile wallets suffer from a crisis of confidence. According to the 2013 PWC mobile wallet survey, 79 percent of consumers are concerned that someone might be able to steal their information when it is sent wirelessly.
One of the most critical success factors for mobile wallets will be to regain a user’s trust. Unfortunately, over the past few months, we have seen several news stories from mobile wallet providers doing just the opposite. Consider a few of these stories, only since October:
October 8: AT&T (Softcard member) is fined $105 million for “cramming” extra charges on phone bills
October 10: Kmart (Merchant Customer Exchange member) discloses a data breach at its POS
October 22: Apple Pay glitch results in double duplicate charges for some Bank of America customers
October 29: CurrentC (Merchant Customer Exchange wallet) announces its email database is hacked
These breaches of consumer trust have the potential to reshape the landscape of mobile payments and have important implications for how mobile wallet providers go to market.
- Network-based schemes will be advantaged over ACH. Consumers have grown to trust that, no matter what happens, their credit or debit card issuer will protect them. When there is a fraudulent charge on a credit card, the first call consumers make is to their financial institution. As the perceived likelihood of fraud goes up, the value of that protection becomes even more important. That is likely why MCX recently said that their new wallet, CurrentC, may actually include credit cards, a sharp reversal of its original position that it would only support ACH and store cards. After all, who would be willing to turn over their unprotected, personal bank account information to a group of merchants who had previously lost their credit card data?
- “Trusted brands” will be better positioned. Consumers need to be able to trust that a wallet provider is going to protect their data. The winner here is clearly consumers’ primary financial institution. Through all of the data breaches over the past year, financial institutions have been the ones to notify consumers and ensure them that they would be covered. As a result, issuers have a definitive advantage in the mobile wallet war. Of those consumers surveyed by PWC, 50 percent agreed that their financial institutions were the most trusted entity to manage their mobile wallet (vs. only 3 percent for mobile device OS providers and mobile carriers).
- In-person sales channels will be vital to achieve broad adoption. Early tech adopters may be willing to download wallets from an app store and load their credit cards, but the vast majority of consumers will need convincing to get them over their concerns. The reality is that mobile wallets are, for the most part, much more secure than plastic. However, that reality is not easy to communicate to skeptical consumers in a banner ad. There are several in-person channels that could be leveraged to deliver those messages including carrier stores, consumer electronics stores, bank branches and merchant point of sales.
- Higher incentives will likely be required to drive adoption. Consumers may try a mobile wallet for the novelty, but ultimately consumers use it because they believe it will save them money. Starbucks drove adoption by tying mobile payments to its loyalty program. The PWC results were clear: 78 percent of consumers believed that the benefit of a mobile wallet was to save money (versus 57 percent who believe it is more convenient). As the perceived risk associated with mobile wallets increases, the benefits for using it must also increase. Target provides a good lesson for the industry. In the wake of its breach, Target had to increase the REDcard offers to drive adoption. According to John Mulligan, Target’s Chief Financial Officer, “When we make an offer, the application rate for our credit card has largely recovered to pre-breach levels.”
Obviously we can all hope that there will be no future breaches. Unfortunately, breaches are like cockroaches in restaurants – you can spray all you can, but inevitably there will be some hiding in the crevasses (even in the best restaurants). The new mobile wallet technologies are the best chance the industry has to stop these infestations, but consumers will have to get beyond the fear of the unknown. A few players, or combination of players, have the potential to do just that and reshape the industry.