Brian Knight
Associate Director, Financial Policy, Center for Financial Markets
Banking and Business and Capital Access and Capital Markets and Finance and Financial Innovations and FinTech and Global Economy and Job Creation and Public Policy and Regulation and U.S. Economy
Brian Knight is an attorney with significant experience in new sources of capital, financial technology, and entrepreneurial issues. He is interested in the interplay between technological, regulatory, and market innovation and how best to improve access to capital for businesses of all sizes.
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The Evolution of Digital Wallets Continues

By: Brian Knight
June 01, 2015

Digital wallets are a much discussed (though perhaps not much used) innovation in payments. While they are not new, the release of Apple Pay late last year generated new buzz and interest in the space. Not only has Apple continued to make Apple Pay a central part of its messaging, but rivals Google and Samsung are also increasing their engagement in digital payments. Google announced “Android Pay” – a retail-centric digital wallet spinoff of Google Wallet that uses near field communication (NFC) for brick and mortar transactions and supports app-based purchases. Google Wallet will remain as a peer-to-peer payment system similar to Venmo. Samsung has also announced “Samsung Pay” – a digital wallet whose most unique feature (known so far) is that it will work with any magnetic stripe reader, rather than requiring NFC.

Beyond the hype are real questions about digital wallets’ viability as major players in payments, because they are not much better than the physical cards they seek to replace…at least not in a way that resonates with consumers.

Yes, in some respects digital wallets are more secure than cards, thanks to the use of tokenization or host-card emulation to prevent credit card data from being accessible to a criminal who hacks a terminal or store record system. But that doesn’t mean that digital wallets are completely safe. In fact, Apple Pay was seeing higher rates of fraud earlier this year due to lax security on the part of banks and the elimination of the physical card requirement. Further, regulations insulate credit card users so well from liability for fraudulent purchases that they may not view the enhanced security features of digital wallets as compelling selling points. There is still the risk of identity theft, but that may not be as obvious or visceral to most consumers. This, and the “muscle-memory” and ubiquity of plastic, has led people, including some of the participants in our initial payments roundtable, to wonder if there is enough of a value proposition to drive consumer adoption of digital wallets.

Apple and Google seem to agree that there is a need to increase the benefits of digital wallets because both companies announced that their wallets will become compatible with merchant loyalty and reward programs. This means that the digital wallet not only contains your credit card but also those merchant-specific “membership” key fobs that currently clutter key rings. Including reward programs in digital wallets may also allow merchants to get better data on consumer behavior, depending on how user data is treated. To further entice digital wallet adoption, Apple is reportedly rolling out its own rewards program to encourage the use of Apple Pay over plastic.

Whether this will be enough incentive to convince consumers and merchants to embrace mobile-enabled credit card payments instead of plastic is unknown, but it is clear that major tech players think there is a “there, there” and are competing to create a better more compelling payments experience, which – whether they succeed or fail to meet their specific goals – is likely to have significant impact on how we spend our money.


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