Announcing the King of Digital Wallets

By Steven Heller - September 7, 2012 | Tickers: DFS, EBAY, GOOG, MCD, WMT | 0 Comments

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The death of credit cards is a bunch of hoopla.  There is no need to shred your cards now that they have the capacity to be stored digitally.  People may be able to eliminate the need to carry around a wallet.  But in replace of the wallet comes a power charger.  Otherwise, “my wallet is out of batteries” will become the catchphrase of the future.  The tides are suggesting a potential shift in the way consumers behave and which pocket they access their wallet from.  Today we will examine the facts to see if there is an established leader in the digital wallet war. 

First Things First
With a digital wallet, all your currency based articles can be stored in one place, either a smartphone or online.  You’ll still have to find a place to keep your ID and health insurance card.  If you use your credit card, you still get a bill at the end of the month.  Not much will change, except that you may be “tapping” instead of swiping two pieces of plastic together.  How exciting!    

Many digital wallets utilize Near Field Communication – NFC for short.  The technology allows for data to be transmitted over a distance of less than a few centimeters.  Whatever information that is being broadcasted will essentially be in direct contact with your smartphone, making it inherently secure.  In theory, that should keep things safer.  But the skeptics will be skeptics.  Eavesdropping, data corruption, and transmitting viruses are all cited as major threats.  It’s just like the analog-old-days when there was a threat of getting your wallet lost, stolen, or corrupted.  But now it’s digital.  And for some reason, that’s scarier.    

What’s the Point?
The hype-cloud around the digital wallet killing credit cards is misleading.  What’s really at stake is the amount of cost savings it will pass on to large-footprint retailers.  Consider this: for every 5 seconds Wal-Mart (NYSE: WMT) saves in the average checkout time, it directly saves $60 million in wages that year.  That’s $12 million per second!  If digital wallets can make lines shorter and reduce average checkout times, this is going to be a huge business.  It’s why McDonalds (NYSE: MCD) is trialing PayPal’s (NASDAQ: EBAY) self-checkout service in France.  Should this 30-store test bear fruit by reducing cashier wait times, imagine the cost savings across 30,000 plus stores.               

What’s the Play?
This is still an emerging industry with many big name players fighting over budding market share.  Aside from PayPal, you also have Google (NASDAQ: GOOG), Visa, Mastercard, American Express, and Square all fighting for a place in speedier checkout lines.    

PayPal has the lead for a number of reasons. 

1. They offer the most versatile solution because their platform doesn’t require a smartphone to initiate transactions.  At checkout, all you need is a mobile phone number and a customized pin number, making it effortless to pay.  Home Depot brought this experience into nearly 2,000 locations after testing this concept in just 5 stores over a two month period.  They must have seen an improvement in checkout times or an increased usage of self-checkout for them to expand so quickly.  Home Depot didn’t have to invest and install new hardware, making PayPal a lower barrier of entry than competitors.  
    
2. If/when smartphones replace our wallet; PayPal’s app is available for Android, iPhone, and Blackberry.  You can already pay with your smartphone at 15 big-name retailers including Abercrombie & Fitch, Barnes & Noble, Jamba Juice, JC Penny, Foot Locker, and Office Depot.        
3. PayPal has over 110 million active users to leverage, putting them way ahead of the curve.  Google for instance, has to get users to sign up, where PayPal, has to get existing users to activate.  And Google Wallet only works for a select group of NFC Android smartphones.  At last check, the count remained at 5 phones and a tablet – not really a dominating position.  On top of that, retailers must have the correct NFC infrastructure in place for Google Wallet to work. 
4. Recent partnership with Discover Financial (NYSE: DFS) opens the floodgates to 7 million more offline locations.  Under the agreement, PayPal can be used where Discover is accepted and Discover will receive a cut from the transaction.  In theory, this should increase Discover’s volume, but it may be at the expense of existing cardholders who now opt for PayPal instead.  In this light, Discover can be viewed as the crazy guy in the room who embraces the future of higher-speed checkouts.  Management has seen where the future is headed, giving them an early arrival to the party.  For this reason, I think the risk may be worth the reward, given how attractive Discover shares are currently valued.    
5. PayPal is more secure because no financial information is shared when a transaction occurs.  Everything goes through their wallet, acting as an added buffer for security enthusiasts.  Google mitigates NFC security issues by offering the same sort of solution.  The difference is that PayPal doesn’t currently utilize NFC, giving them the edge. 
6. It’s efficient.  If retailers accept PayPal, they’ve effectively accepted all forms of electronic payment.

Bottom Line
Retailers are going to drive the process because it saves them money.  Who is the most versatile for this calling?  It’s PayPal.  They are making key partnerships, already have a large active user base, and their approach doesn’t require new hardware.  Unless someone makes an even speedier solution that relies on fewer employees, PayPal is the name to beat.  Should NFC become a trusted part of our everyday lives, you can bet PayPal will update their existing apps to support the technology.  In the end, credit cards will not die, they’ll evolve.  The payment networks who fail to keep up can expect a future that doesn’t shine as bright.   

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