From Fat to Thin: How the Cloud and Mobile will Transform our Wallets

A History of Your Stuffed Wallet


For centuries, people walked the planet with small pouches crammed with coins and other forms of money, never worrying about their ability to pay for an item at their local merchant (unless, of course, they had no money). Rewards and loyalty programs didn’t exist. Cash was king, and barter could ultimately fill the gaps if needed. Credit, as a concept, only existed amongst friends or through high-interest loans à la the The Merchant of Venice.

During the 20th century with the advent of the American middle class, retailers markedly increased the availability of individual store credit accounts in the hopes of increasing sales and consumer loyalty. In other words, the payment scheme was a marketing scheme. Not surprisingly, consumer wallets started to fill up with bits of closed-loop “plastic” (Technically, though, most of the cards were heavy stock paper.) Yet it wasn’t until around 1950 that the first open-loop credit card emerged onto the scene, courtesy of Frank McNamara’s Diners Club. American Express and Bank of America followed suit with their own cards a decade later, and the world has never been the same.

Fast forward 50 or 60 years, and we now find consumer wallets stuffed to the gills with every type of card imaginable. I’m packing an ultra-thin wallet, since I don’t like the corresponding bulge on my behind. I’ve got exactly eight cards: two credit cards, one debit card, one driver’s license, one insurance card, one hotel loyalty card, one airline loyalty/club cards, and one BevMo! card (sad but true). I used to have a ninth card as well, but I will explain its absence later. I like to think that my wallet is unusually thin, unlike my wife’s wallet. She has no less than 20 cards in something roughly the size of a small suitcase, and I have no idea how many gift cards are floating around in the bottom of her purses.

Stored snugly in your wallet, every card you have is effectively lifeless until it is pulled out and handed to a cashier. At that point, the card comes to life, sending the requisite pulse to a network/person to validate a payment, access, association, and so forth. Once the transaction is complete, the card lies in stasis in your wallet until it is needed again. It’s useful, but it’s in a coma unintelligent and unresponsive. Yet that’s all about to change.

It’s Alive… Almost


Simply put, the mobile phone is the electrical equivalent of the lightning strike that brought Frankenstein’s monster to life, and comparing the mobile wallet to Frankenstein’s monster isn’t that far off.

Today’s network-connected smartphones offer a persistent link to a nearly infinite number of data sources, each vying to wake up your phone’s apps with a new offer, promotion or credential. Effectively, the mobile phone can deliver the “Holy Grail of Marketing:” being able to cost-effectively deliver the right message to the right person at exactly the right time with the consumer ultimately using the right card. Payments alone won’t be enough. The network connected wallet will have to link all of these elements to be successful.

This universal goal isn’t a new concept. In the early 1980s, the advertising industry was doing its usual business of trying to justify itself by working feverishly on a new concept called orchestration. The pitch was simple: We’ll coordinate all the messaging we do in every medium (i.e. give us more business) in order to build a deep relationship with the customer, with the endgame being a product or service purchase. The difficulty was the delivery of messages in a timely manner. Ads were static and of questionable value when the user was standing in the store aisle debating over a toothpaste purchase. Coupons – or free-standing-inserts in newspapers – might drive purchase behavior one time, assuming they were brought along at all. Ultimately, while the concept of orchestration was sound, the technology wasn’t able to deliver on the promise.

In the 1990s with the rise of the Internet, the advertising and marketing industries were energized by the Internet’s capacity to deliver more quantifiable and actionable, marketing offers. The agencies offered, for some extra fees, to unite all of the marketing efforts of their clients, including digital marketing, behind a single, actionable theme. Exciting stuff! For online purchases, this was a no-brainer, since offers could be delivered to the right person at the right time, leading to the right purchase. Google built the biggest advertising business online based on this premise. But in the offline or bricks-and-mortar world, the online offers and synchronization weren’t much better than the traditional non-digital solutions. The quest for marketing’s Holy Grail would continue for another decade until something happened in 2007.

That something was the launch of Apple’s now iconic iPhone. While the iPhone was a revolutionary concept in its own right (a touchscreen device with no keyboard), what really made this phone important was its ability to break apart the mobile carriers’ control over all content delivered to handsets. This disruption, combined with the phone’s simple user interface (UI) and its state of ready connectivity, finally put something in the consumer’s pocket that quietly held the promise of much greater things to come.

The Battle Begins


Not surprisingly, Apple’s iPhone is no longer the only device that can finally deliver on the promise of marketing’s Holy Grail. The phones running Google’s Android platform, as well as the devices tightly controlled by the new mobile carrier joint venture (ISIS), will also be well positioned. Announcements from phone and software makers, like Microsoft, RIM, Sprint and Amazon, also add to the clutter. So, lots of players with lots of conflicting agendas. What is the likelihood of success? It’s low for most. And the probability of consumer confusion? High. Ultimately, there are difficult challenges ahead in the forms of device control, POS control and business model.

While devices like the iPhone are wonderfully open for developers, allowing them to create every type of application imaginable, they still suffer from one key problem: providing a secure place to store payment credentials. While this wouldn’t necessarily interfere with many parts of a network-connected wallet, it is a challenge for the final step around the ultimate payment. More so, each of the parties that develop the service (handset makers, mobile platform providers, mobile operators, banks, payment networks) want to own and control the secure element.

The payment credentials can’t just be stored on the phone in a non-secure method. Rather, they have to be provisioned into a secure piece of hardware on the handset. The typical choices are the carrier-issued SIM – an embedded device from the phone maker – or some sort of removable media device (e.g. SD Card with NFC capabilities). Each one of these options has its own problems.

The SIM is carrier issued and therefore carrier controlled. If you want to load a credit card on the SIM, you can expect to pay at the very least a provisioning fee. More likely, you’ll also have to pay some transactional revenue as well. Obviously, this is not the preferred approach for banks and other large issuers.

The embedded device in the handset would move the power over to the handset manufacturers, like Apple, Google and RIM. Would they want a transactional revenue sharing arrangement? Probably not. Instead, they’d want to control the wallet on the phone, filling it with their own offers, rewards and coupons. Again, this approach is not necessarily the best thing for the existing ecosystem. Also, if the handset folks start loading their own secure storage devices, you can probably expect the carriers to have a problem, which might lead to reduced new phone subsidies.

The removable option has its own issues as well. Many phones don’t have SD cards, and users are notoriously fickle about adding new pieces of hardware to a device that is effectively a fashion statement. Clipping on an NFC-enabled iPhone case might be fine in the short term, but there needs to be a more highly integrated long term solution.

Which of these approaches will win? I’d put my money on the solution powered by the handset folks. Why? Well, from what we know today, their approach is the most open. None of the solutions (with the possible exception of Apple) are looking to completely disrupt the existing ecosystem. This is good for consumers, who are inherently lazy when it comes to adopting new payment schemes. The carrier’s strategy is to introduce a completely new payment method, which means a lot of work convincing consumers that there is something inferior about their existing, perfectly usable plastic cards and rewards programs. I think that getting consumers to switch to something new and non-universal will be a significant challenge.

So, assume for a moment that someone gets it right, and there is a simple way for consumers to load and use their existing payment tools via an NFC phone. Also, assume that there are enough NFC payment terminals to make it worthwhile for the consumer. Then, the next obvious question is whether or not consumers will want to use their phones to pay. While there are countless trials going on around the nation in order to gauge the level of consumer interest in mobile payments, there is already one significant successful example of a network-connected wallet: Starbucks Card Mobile.

A Frictionless Model That Works


Remember that missing ninth card in my wallet? Well, it used to be a Starbucks card. Approximately a year ago, Starbucks quietly launched a limited mobile payments test in 16 stores across Seattle and Silicon Valley. The goal was to convert the ubiquitous Starbucks gift card into a mobile phone format. The project launched with an app on the iPhone that featured a way to track your Starbucks card balance, view your transaction history, reload your card and find stores. The app also included a payment trial powered by a 2D barcode.

The app quickly gained a loyal following, and it was obvious that people enjoyed buying coffee with their phone. The payment trial expanded a few months later into about 1,000 Target stores (the ones with Starbucks inside). At this point, the app added a new feature: tracking your rewards and loyalty points, as well as in-app advertising. Several months later, the payment trial expanded again to include stores in New York City and Long Island. Finally, with enough data to justify the value to consumers and Starbucks alike, the payment solution exited the trial phase and was pushed into every company-owned store in the United States or about 6,800 locations.

Since then, the app has taken off: shortly after launching nationwide, Starbucks CEO Howard Schultz announced more than 3 million mobile payment transactions at the point of sale. Almost overnight, Starbucks had become the largest mobile payment program in the United States.

As the Starbucks solution gained notoriety, I was approached by many of my mobile banking customers. All of them asked the same thing: “Why did this work?” Well, I think that the success of their program comes down to five very simple points:


1.    POS Control – It is well known that Starbucks controls their point of sale, which means that they can do pretty much whatever they want. As they’ve said publicly, changing software and hardware was a relatively easy task for them, as soon as they could build a positive business case. If mobile payments proved themselves, the POS changes would follow. If they didn’t, they wouldn’t. With nearly 7,000 stores now equipped with mobile readers, the jury appears to be in for mobile.

2.    Account Control – It is also known that Starbucks controls their millions of stored value/gift card accounts. As a consequence, unlike traditional payment providers, Starbucks can direct enrollment, top-up, balance inquiries, etc. As a result, no one can stick their hand in Starbucks’ pocket, trying to take transactional revenue. That’s key, since no one likes to be pickpocketed.

3.    Loyal Customers – Starbucks customers seem to have a daily habit. It’s reported that they are in the stores around the same time every day and basically buy the same product. This purchase frequency, combined with the small value of the transaction, makes a mobile solution a practical solution.

4.    Closed Loop – The stored-value solution at Starbucks is closed-loop (i.e. it’s a Starbucks-only solution not requiring approvals from Visa, MasterCard, et al). This means that Starbucks can weigh the relative risk of using a barcode versus NFC without having to consult their network provider. More freedom means less friction.

5.    Smartphones – As Starbucks has noted publicly, a large percentage of their customers use smartphones – the ideal device for add-on mobile services since they are effectively “open” devices. I doubt this smartphone ratio is the case for other quick-service restaurants, but a $3 latte will certainly help self-select a more affluent clientele. If your customers have the right phones, they will want mobile services.


In hindsight, these points are simple, but that doesn’t make them easy. Frankly, I can’t think of any other merchant that has the daily volume of transactions, account control, POS control, network control and customer loyalty to match Starbucks. As soon as you lose one of the five levers above, the mobile wallet model grinds to a quick stop. Need to use legacy phones? Get ready to pay the carriers. No network control? Prepare to play by the controlling network’s rules. No daily repeat customers? You’ll have a tough time justifying the POS swap.

Ultimately, Starbucks Card Mobile worked for the very simple reason that Starbucks held all the cards. Many people ask me when Starbucks will switch to NFC. I always answer, why would they want to if it means giving up a card or two?

So, How Much Longer?


So, Starbucks aside, how much longer will it take to reach the Holy Grail of marketing and payments? The short answer is: years. How many years? It’s hard to say, but at a minimum, think two-to-three years, and that’s optimistic.

A critical mass of NFC-enabled phones won’t be launching until late 2011 at the earliest. Given the usual turnover timing on handsets, we’re looking at another 18 months to hit a reasonably large installed base in the United States.

The same is true for swapping out the existing POS hardware and replacing it with an open-standard NFC terminal. Why would merchants want to do this? They’ll need believable promises of reduced interchange, increased transactions or improved loyalty and offer redemption. Without some combination of these things, merchants have no reason to push for new hardware.

Of course, the real wild card in the whole equation is the consumer. They too will need a reason to adopt a new payment method, because convenience and coolness won’t be enough. Rather, they will need those items along with rich rewards, better offers and simpler coupons – all beautifully packaged in a simple, easy-to-use interface. Get that stuff right, and consumers will finally allow marketers, merchants and issuers to communicate with them dynamically at the POS. Get that stuff right, and consumers will then happily shred their cards, converting them into 1’s and 0’s, alive and waiting for instruction within a network-connected wallet.