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Consumers to put digital wallets before credit cards: Forrester

While NFC-enabled payments are expected to increase over the next few years, hardware-agnostic wallets that are not NFC-enabled face fewer hurdles and therefore will be adopted more quickly, according to a new report from Forrester.

In the report, “Why the Digital Wallet Wars Matter,” Forrester finds that 30 percent of mobile phone owners are open to in-store mobile payments but that the number jumps to 50 percent among smartphone owners. The use of mobile for in-store or proximity payments will grow as consumer adoption of smartphones increases because payments will be a natural extension of mobile activities users are already engaged in, such as comparing prices, looking up product information and scanning bar codes.

“Over the next three to four years, NFC-enabled handsets will reach critical mass, that is 15-25 percent of consumers will have handsets that are enabled for NFC,” said Denee Carrington, New York-based senior analyst at Forrester Research.

“Also over the next three years, the United States payments ecosystem will migrate from mag strip to EMV which will require retailers to upgrade their POS systems,” she said. “As they do, most will also be equipped to support NFC contactless payments – including mobile digital wallets.

“However, NFC is not the only option. We are already seeing a growing number of NFC-independent digital wallet solutions in the market that are relatively quick and no or low cost for consumers and merchants to adopt which will spur trial and usage. These solutions provide additional value to merchants such as integrated and customizable loyalty programs, business analytics, and lower cost payment processing.”

Value-added services
The non-NFC solutions expected to gain include the use of bar codes to authenticate a payment or delivering cloud-based payments. The leaders here include PayPal, LevelUp, Square and Starbucks.

NFC-based mobile payments solutions from Google, Isis, Microsoft could see a boost over the next three to five years as more NFC-enabled handsets enter the market. Most new smartphones will be NFC-enabled by next year and 2016, more than a quarter of U.S. consumers will own an NFC-enabled handset, according to Forrester.

However, Forrester expects unattended points of sale such as vending machines, parking and transit to offer greater opportunities than in-store payments in the near future.

Additionally, Forrester expects most merchants will wait for evidence of a clear business case for NFC-based mobile payments before making the investment to enable NFC payments on upgraded terminals.

Driving adoption for mobile digital wallets will require the addition of significant value throughout the purchase journey.

Since traditional card payments do not provide any significant hurdles to use, the real promise of digital wallets lies not in replacing traditional payments alone but in their ability to deliver value-added services such as integrated coupons and offers, enhanced product information, open payment that is accessible from multiple channels and loyalty rewards

The winners in the digital wallet wars will be more convenient than the process of using a traditional credit card plus offering at least one other commerce feature such as loyalty rewards in a single transaction. Additionally, the most successful digital wallets will figure out how to deliver contextual relevance through the use of customer data.

Controlling the purchasing experience
One of the challenges facing digital wallet purveyors will be instilling confidence among consumers in their security and privacy, with later adopters likely to differentiate among digital wallets based on their perception of the wallet operator’s ability to protect their data.

With the growth in mobile-based payments solutions, consumers will soon start thinking in terms of which digital wallet to use when they are ready to make a purchase – not which credit card, as has traditionally been the case, according to a new report from Forrester Research.

As consumers start thinking in terms of digital wallets first, there will be several implications for the payments space, including that consumers will make their credit card choices earlier in the purchase journey when they decide which payment accounts to link to their digital wallet.

The trend also means that digital wallet operators will gain control and influence over the consumer purchase journey at the expense of card issuers and retailers.

Digital wallet operators will house the cards that consumers link to their digital payments choices and will provide the ability for consumers to define how those cards are used as well controlling which offers and value-added services are available.

As a result of these trends, traditional incumbents in the payments space – such as credit card companies – risk losing their existing control and influence of the customer’s purchase journey and experience when consumers adopt digital wallets offered by a third party.

“As retailers migrate to EMV card acceptance, they will need to make some level of investment anyway to continue to accept plastic credit cards,” Ms. Carrington said.

“Smaller and mid-sized retailers can begin trialing digital wallet acceptance now without making a big investment – and they can take advantage of integrated loyalty programs, tools that provide business analytics and in some cases lower cost payment processing,” she said.

“Many smaller merchants are likely to use these alternatives to a traditional POS to avoid costly POS systems and to take advantage the embedded tools that many of these merchant-facing digital wallet solutions have to offer.”

Final Take
Chantal Tode is associate editor on Mobile Commerce Daily, New York