Banks, payment networks, retailers, wireless operators and startup tech companies immediately rushed to develop mobile devices that could be used at a point-of-sale terminal to pay digitally. The prize would be the valuable data the system would gather on buying habits, offering merchants the chance to better target customers with special offers and promotions.
After that, nothing. In-store mobile payments are expected to account for just 0.6 percent of the roughly US$ 4.65 trillion in in-store sales expected in 2016, according to a report by eMarketer, cited by Fitch Ratings in a new note.
"Despite growing sharply off of a low base in recent years, consumer adoption of mobile wallets in the U.S. has developed at a much slower pace than most industry experts would have predicted," Fitch director Michael Taiano wrote in the note.
There are three main reasons that mobile wallets have not taken off, in Taiano’s estimation. First, none of the mobile wallets on offer have succeeded in delivering a real value proposition to consumers, in the form of checkout speed and/or financial incentives, such as discounts. In some ways, mobile wallets were the solution to a problem that didn’t exist: POS terminals using swipe cards (and later chip cards) were perfectly efficient.
For merchants, there was no clear financial benefit that would outweigh the costs of accepting card payments, which include interchange fees and the costs of installing POS terminals.
Second, the proliferation of wallets has only created confusion at checkouts, as many are not equipped to accept them all.
The third reason is that consumers are more aware of and more wary of cyber risk, and not all are convinced that enhanced security features such as tokenization offers sufficient protection against attack.
Apple Pay was expected to be the leader in the field, thanks to its brand strength and large and loyal customer base. But adoption of the system has been slow, with only about 4.5 percent of respondents in a quarterly survey by PYMNTS.com and InfoScout reporting using Apple Pay for a transaction in October.
"Google itself has also encountered challenges in its initial foray into mobile payments with its Google Wallet app, although the company appears to be having more success with the launch of Android Pay," said Taiano.
The most successful system is the Starbucks mobile app, which has evolved from a loyalty-card program and still includes benefits such as reducing the time spent in line by allowing customers to order and pay before entering a store. Reward points are stored electronically, and security is enhanced by the fact that the system is exclusive to Starbucks stores.