Near-field communications (NFC) mobile wallet services certainly look cool enough: Instead of reaching for their wallets at the cash register, consumers charge purchases to a credit card by tapping a smartphone
Although the most obvious revenue opportunity in mobile wallet services may be collecting on transaction fees, it's not the opportunity with the most long-term profitability, according to analysts and at least one carrier. Mobile wallet services will be lucrative for providers that generate new revenue streams by using their positions as intermediaries in retail transactions as a selling point with merchants and advertisers.
Sprint-Nextel Corp. has partnered with Google and Citi MasterCard to introduce a mobile wallet service this summer on the Nexus S 4G. Sprint doesn't expect to raise average revenue per user (ARPU) on the backs of merchants or subscribers alone, according to Brian Smith, director of product management and development at Sprint.
"Sprint gets value from two pieces: First and foremost, [we are] providing a service that meets a customer need and provider value," Smith said. "Secondly, we look at ways we can monetize the experience—not by scraping money from the merchants, but by adding value to the ecosystems through relevant loyalty programs, enhanced offers and rewards."
We [will] look at ways we can monetize the experience—not by scraping money from the merchants, but by adding value to the ecosystems through relevant loyalty programs, enhanced offers and rewards.
Director of Product Management and Development, Sprint-Nextel Corp
The most interesting aspect of NFC mobile wallet services for carriers "isn't the wallet part," according to telecom consultant Tom Nolle, president of CIMI Corp. What's more important is what business opportunities they enable, he said.
"[The value is in] the fact that by taking a more flexible device and using it as a promissory conveyance, I have the potential—not the guarantee—to influence the buyer at a new and previously unattainable portion of the retail food chain, which is when they've got their money in their hand and they're about to commit," Nolle said. "The money and opportunity really lies in the substitution of a smart device for a dumb credit card and the influence that a smart device can exert over a dumb credit card."
A carrier could interrupt a retail transaction with a notification informing the subscriber that a discount retailer sells the same product at a lower price, Nolle said. That discount retailer would, of course, pay the carrier for these interruptions.
"Having a mobile wallet [service] is building the infrastructure for doing a whole lot of other potentially neat things—not to mention the fact that it's probably a fairly lucrative revenue stream," said Mike Jude, program manager at Stratecast, a division of Frost & Sullivan. "As soon as you insinuate yourself [into a retail transaction], you're seeing what they're buying and all of a sudden you could offer a coupon service."
Verizon Wireless, AT&T and T-Mobile USA formed their own NFC mobile wallet consortium, Isis, with Discover last year to build their own mobile commerce network, but has been mum on details regarding specific merchants and advertisers. The Wall Street Journal recently reported that the consortium was scaling back its plans to process transactions itself and instead work with Visa and MasterCard. Isis later told Mobile Commerce Daily the story had mischaracterized its decision to recruit more partners.
Security, privacy questions still plague NFC mobile wallet services
As fruitful of an opportunity as NFC mobile wallet services is, it comes with a very big, sticky catch: Depending on how carriers proceed, they could open themselves up to significant privacy, security and liability issues.
In the hypothetical case of the discount retailer that intercepts an NFC-enabled purchase at another store, that merchant may not be happy about losing customers and block the service, Nolle said. Merchants may be violating consumer privacy if they can "see" what credit and loyalty cards are inside a subscriber's mobile wallet, he said.
Much like credit card companies contended with the security issues around radio-frequency identification (RFID), carriers and their partners must prevent enterprising hackers from lifting credit card information from nearby smartphones, both Nolle and Jude said.
"If you have a digital wallet, can you digitally have your pocket picked? That's… the question that has to be answered, and if it can't be answered satisfactorily, there's going to be regulatory intervention," Nolle said. "It's all the other stuff that makes [an NFC mobile wallet service] valuable, but it's all the other stuff that creates the risk."
Sprint's Smith referred questions about Google Wallet's security to Google's FAQ for its technology, adding that Sprint has worked "very closely with Google to ensure the industry's best security practices are in place."
Do mobile wallet services turn carriers into banks?
By serving as a conduit for credit card transactions, do carriers become de facto banking institutions or credit card companies subject to new regulatory requirements? Not necessarily, as long as carriers distance themselves from processing the actual transaction or issuing credit.
"Sprint does not become a credit issuer. We do not believe it is the carrier's role to insert itself into the merchant transaction," Smith said. "We believe in developer enablement and allowing the customer to choose which wallet they want to use."
Verizon recently announced a mobile wallet partnership with Payfone, which uses an alternative to NFC mobile wallet services. Payfone sells its software to retailers, enabling subscribers to purchase goods online using their phone number as an identifier—saving consumers the hassle of repeatedly entering their credit card information on tiny smartphone screens to make online purchases. Payfone's software associates the phone number with a credit card or bank account the subscriber has elected to use, according to Payfone CEO Rodger Desai.
Up to $25 can be charged to a Verizon subscriber's monthly phone bill; once a purchase exceeds that monthly limit, Payfone's software automatically routes the transaction to the credit card or bank account on file, Desai said. Verizon chose to cap its credit limit at $25, but other carriers have pushed it as high as $100, he said.
"It's just a matter of the risk they're willing to take," Desai said.
That puts Verizon dangerously close to being a credit card company, according to Stratecast's Jude.
"If you're charging it to your phone bill, then Verizon is literally a banker because they're extending credit to you to complete that transaction," Jude said. "That actually establishes a liability aspect to the entire transaction."
However, Verizon's low credit limit and the apparent absence of interest rates probably leave it in the clear, Nolle said. It's likely that carriers will take more of "a backstage role" to minimize risk, he said.
"[Carriers generally] have a low internal rate of return, so they can make an investment with a lower ROI and it'll be profitable ... even with a smaller piece of the pie," Nolle said.
Let us know what you think about the story; email: Jessica Scarpati, News Writer.