The Digital Wallet Soon to be in Every Pocket

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Will the smartphone do for retailing what it did for photography?

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Like a recession, we never quite see a tipping point when it happens. Tech seems to alter behavior in unpredictable ways. But, in fact, tech makes it possible to form the habits we unknowingly crave. We love TV, but were walking away from the TV set. We still make calls at home, but have abandoned land lines. You used to carry a point-and-shoot camera, and you still do  but now its in your smartphone.

Googles full-throttled entry into the mobile payments space last week removed any doubt that this is the make-or-break year for the digital wallet. Google is backing a technology called Near Field Communication (NFC), which will require a new chip in smartphones. This tech has been around for a while, deployed in payment dongles and proximity credit cards, but there now seems to be critical mass for handset makers to include it in the next generation of phones. Googles Android mobile phone software powers about 1/3 of the worlds smartphones, and its growing fast. Another quarter comes form Apple, which has been mum on NFC but is expected to get on board. (Apple controls both the hardware and software for the iPhone.)
The reason the credit card hasnt changed one bit since Diners Club invented it 60 years ago (from the consumers perspective) is because it hasnt had to. It does exactly what we want, with minimal friction.

But there is room for improvement. We are prodded to carry many cards, not only to pay on credit but to take advantage of those omnipresent loyalty programs that reward us on a store-by-store basis, cluttering our wallets. Plastic is inherently insecure, because it carries all the information hackers need to clone it.

And, most of all, the card itself had become nothing more than a delivery system for e-data  only people of a certain age, or customers of some quaint car services, know that the raised numbers on a charge plate are there to make an indentation on triplicate, carbon-copy credit slips using a mechanical machine with a roller.

So, just as bundling a powerful camera in your smartphone created an explosion of serendipitous creativity  the perfect answer to the photographers Zen-like advice that the best camera is the one you have with you  putting your credit card in there is also obvious, and will be just as game changing.

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Many things that are good and possible havent coalesced because of arguments over standards or franchises or profit-sharing  look at what is still going on in Hollywood vis-a-vis the technically trivial proposition of delivering live TV over the Internet. But this will happen precisely because the digital wallet involves many entrenched players, all promoting their own interests, with certain knowledge that disrupters like Google and Apple and PayPal can eat their lunch if they do nothing.

None of which matters unless consumers are compelled to change their habits  that is, develop the new habit they didnt know they wanted.

And we could not have reached this decision point were it not for the smartphone  its not the convenience of waving a card as opposed to swiping a card that is compelling, its the prospect of living in a card-free world  as Forrest Gump would put it, one less thing. It is the prospect of extending the usefulness of that one thing you are never without to make payment choices with a single gesture: imagine an app that uses the appropriate debit or charge or credit or loyalty card based on rules youve decided in advance.

Google is the biggest and latest non-traditional entrant to the field, and its decision to get into the game might denote that things just got serious. The other 800-pound gorilla is PayPal, which immediately sued two former employees who were key in developing Google Wallet, and has been making it easier for small fries to sell small fries (and everything else) without getting tied up with expensive credit fulfillment relationships since the 90s. And Square, the brainchild of Twitter co-founder Jack Dorsey, is now processing $3 million a day for vendors (like me, even) who plug a tiny card swipe device into their iPhones or Androids.

In this game, everybody wins: People will spend more  they always do, when its easier. Starbucks has an app which uses simple barcode technology to scan in a payment. It went national in January with what is probably still the nations biggest mobile payment program. They took in $1.5 billion on Starbucks Cards in 2010, a 21% increase over the previous year, and the vast majority of their customers own smartphones. Do the math.

Google will tap into a sustainable new revenue stream, which it needs in order to diversify from their ad business, which still accounts for nearly 100% of what they make. Apple will give its legions of iTunes customers an easier way to pay for things besides music and movies. The Visas and American Expresses and Discovers will get the lions share, if they keep pace with innovation.

They only loser is that guy who never seems to have his wallet when its time to pay for that group dinner and will get you next time. You know  the one whos been texting all night, which means he is suddenly prepared to pay in full on the spot.

What do you think?

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