The digital wallet wars have begun. And credit card giant Visa and search behemoth Google are likely to be among the first to face off in the market as they each try to convince consumers to ditch their real wallets for ones that store credit cards and other information on their cell phones.
In May, Visa and Google announced separately their plans to offer a so-called digital wallet or an application that stores credit card and rewards information to enable people to use their phones to pay for things.
The hope is that these digital wallets in conjunction with near-field communications technology, a short-range wireless technology that allows people to swipe a phone for payment, will replace the need for a physical wallet.
While several other companies are also planning to launch digital wallets and mobile payment systems, Visa and Google will be among the first companies whose applications will hit the market in the next few months. Google is expected to launch its Google Wallet by the end of the summer. And Visa will be out with its yet-to-be-named digital wallet sometime this fall.
Bill Gajda, global head for Visa Mobile, said he doesn't necessarily view Google as a competitor, but the similarities in the company's strategies are striking.
For one, both companies profess that their respective digital wallets will be "open," which means that they will eventually work with any credit card. And second, the companies also see big opportunity in leveraging the digital wallet to promote location-based advertising through offers programs.
While Visa will continue to generate revenue through traditional transaction fees it charges merchants when consumers use the digital wallet in stores, it will also add an advertising element that will allow the digital wallet to help merchants push new offers to customers based on where they made their last purchase.
"We can see the transactions in real time," said Bill Gajda, head of Visa Mobile Global. "So consumers can receive alerts about offers from nearby merchants."
Visa is already testing a program with the Gap that offers location-based discount offers to Visa card users via text messages, which promote discounts at local Gap stores.
Google, which already makes most of its revenue from advertising, has no plans to charge a transaction fee for the Google Wallet. Like Visa, it plans to work with merchants to help them promote goods and services to Google Wallet customers based on location.During the launch of Google Wallet, the company demonstrated how shoppers could get coupons delivered to their phones based on their location and they could redeem them from the phone.
Hedging its bets
Even though Google is likely to be a competitor to Visa in the digital wallet market, there's also a chance that Google may include Visa's payWave payment technology into the Google Wallet offer. When the service launches, Mastercard will be the initial credit card payment partner with its PayPass system. But Gajda said that Visa is also talking to Google about being included in the Google Wallet.
This wouldn't be the first competing digital wallet that Visa will work with. The company has already joined up with another digital wallet initiative known as Isis. Isis is a joint venture formed by three of the top four major wireless carriers, AT&T, Verizon Wireless, and T-Mobile USA. Now all four of the world's largest credit card issuers--Visa, MasterCard, Discover, and American Express--plan to participate in the Isis digital wallet, which is set to launch in 2012. Isis has already been conducting trials of its service in Salt Lake City and it has plans to add other cities, such as Austin, Texas, soon.
"Our relationship with Isis is not exclusive," Gajda said. "We have been in discussions with Google. And we will continue to talk to them. We will also continue to work with Isis. Our goal is to be truly open."
Gajda explained that the digital wallet market will initially be very crowded with different players jockeying for position. And then he predicts a shakeout with the market quickly consolidating to two or three main players.
Picking winners and losers
Visa's obvious advantage is its strong financial brand. Recently, Ogilvy & Mather asked 500 consumers who they trusted with mobile payments. The traditional credit card companies, which included Visa, MasterCard, American Express, and even PayPal, dominated the list. Visa actually had the highest rating with over 40 percent of consumers saying they trusted Visa with mobile payments. By contrast Google was at the bottom of the list.
Visa plans to leverage this financial reputation initially marketing the digital wallet service through banks. A bank like Citibank or Bank of America could offer the digital wallet application as part of their online banking service. Banking customers will be able to add any of their existing credit cards to their digital wallet as well as rewards cards. The online application will allow them to track their spending across all their cards as well as make one-click purchases online, eliminating the need to type in credit card information.
By marketing the service first to online banking customers or directly through its own Visa Web site to online users, Gadja believes the company will have a chance to build an audience before NFC technology becomes more widely available.
"Banks will be an important distribution channel for the digital wallets," he said. "So that's why we will first target these online customers by providing one-click shopping. And then we'll promote NFC."
Google's advantage is that the company will be the first with a digital wallet using the NFC technology to hit the market. And since the company controls the popular Google operating system Android, it can easily embed the technology and Google Wallet application into new devices coming to market over the next few years.
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The downside to Google's approach is that the NFC technology that is needed to turn the phone into a payment device is only now being included in devices. Currently, the only Android phone with NFC embedded is Google's Nexus S phone, which is sold by Sprint Nextel. Google is partnering with Sprint and the Nexus will be the first device that will get access to Google Wallet.
But Google promises that more NFC devices are coming in 2012. Gadja agrees that every major smartphone manufacturer will be including the technology at least in a portion of their product portfolio next year. To help spur adoption of its Visa payWave technology, which allows for the tap-and-pay functionality, and eventually its digital wallet, Visa said that consumers could insert NFC-enabled microSD cards into their phones. And if a memory card slot is not available, such as in the current version of the Apple iPhone, the company is offering a case that has a microSD slot built into it.
Even with these NFC solutions available, Gadja said it's still up to the wireless carriers which payment solution they allow on phones that use their networks.
"Mobile operators are an important part of the chain," he said. "They are responsible for distribution of 90 percent of the phones in the U.S. and they subsidize the handsets. So I think they have a lot to say in terms of what features get turned on or not."
This means that if AT&T and Verizon Wireless want to promote their Isis digital wallet over another digital wallet, such as Google Wallet, they could simply disable the app on the phones. This may be why Research In Motion's BlackBerry phones, which have NFC technology embedded in them already, are not yet enabled for payments.
The wireless carriers' tight control of what services and features can be enabled on their phones may be why Visa is hedging its bets with Isis while also introducing its own digital wallet. And it could by why the company is initially focusing its digital wallet on winning online customers rather than mobile-phone customers using NFC technology.
The other wild card in this race is what Apple might do. The company is expected to launch a new iPhone in October that could have NFC technology built in. And with the company's existing iTunes music and App Store it could easily add its own digital wallet, immediately tapping more than 225 million iTunes account holders. There's no question an announcement from Apple could shake up the burgeoning digital wallet market yet again.