Digital wallets are spreading quickly. Hot on the heels of an announced tie-up between coffee retailer Starbucks and digital wallet pioneer Square—founded by Twitter co‑founder Jack Dorsey—comes news of a partnership between eBay-owned PayPal and credit card firm Discover.
Starting in the second quarter of 2013, some seven million retail outlets now accepting Discover credit cards will begin to accept payments for in-store purchases from PayPal’s 50 million users.
Nor is it difficult to see the appeal of digital wallets for both retailers and customers.
In the case of digital wallets based around Near Field Communication (NFC)-based devices such as smartphones, for instance, the core enabling technology will arrive in their pocket or purse almost by default. As Forrester senior analyst Denée Carrington points out, by 2016 more than a quarter of U.S. consumers will own an NFC-enabled handset.
For consumers, the selling point is convenience. With a wave of that handset, payments can be made—not just at retail outlets, but in automated transaction situations such as parking, transportation and vending machines. For retailers, the selling point is a way of eliminating or reducing the high cost of the fees that they pay to traditional payment processing providers, such as credit card firms.
A Rich Digital Signature
But in focusing on convenience and lower payment-processing fees, are retailers—and consumers—missing the real point of digital wallets? For unlike cash transactions, payments made from digital wallets carry a rich digital signature. Who you are, and where you are, certainly. But also, when you are making a transaction, and conceivably why you are making it.
“The real battle should be about customer data,” affirms Ted Bissell, a mobile business expert with PA Consulting in New York. “It’s emphatically not about the technology of the payment transaction itself.”
Enter the role played by analytics, to take that digital signature, and leverage it to deliver profitable insights. The challenge: making those insights profitable for the consumer, as well as the retailer. Failing to deliver this benefit to consumers could cause adoption to falter, experts say.
“The potential is huge, and inside the payments industry there’s a lot of thinking going on as to how to exploit it,” says Edward Adshead-Grant, London-based business process outsourcing lead for cards and payments transactions at Hewlett-Packard. “Digital wallets let you move from a card number, and very limited customer data, to a complete customer profile—consumer behavior, social media interaction, and a full demographic segmentation.”
Adshead-Grant says that before a transaction, retailers’ focus is on identifying the propensity for someone to spend money, at a certain retailer, at a certain time, and at a certain place. Post-transaction, the aim is to generate repeat purchases, via targeted coupons and special offers.
Wilson Raj, global customer intelligence director at analytics specialists SAS, agrees.
“The digital wallet agenda is about personalization, relevance, and context,” Raj says. “It’s about taking a transaction, and then extending it across multiple consumer touch points, combined with other data from other channels. From an analytics perspective, it’s about on-site behavioral targeting, recommendation engines, and contextual insights—but in real time.”
In other words: from what we know of you, what can we tempt you with; from what we know of your past purchases, what can we suggest that you might also like—and from what we know about where you are and the time of day, what can we offer you that we might not otherwise—but which might seem appropriate for someone at 10 p.m. at night, in an area in which they don’t live?
“Mobile digital wallets allow consumers to proactively indicate where they are, and provide contextual information that can’t be brought to life so readily with a credit card,” adds Forrester’s Carrington. “In effect, you’re announcing to a merchant: I’m here, you know what I like, so let’s just get down to it.”
Not Yet Money in the Bank
Experts cite the potential for achieving new levels of customer analytics through the adoption of digital wallets, including:
- New kinds of offers based on a consumer’s real-time location and time of day, in conjunction with her purchase history and product preferences
- Contextual information about consumers’ spending habits
- On-site behavioral targeting of consumers, including purchase recommendations and offers while a shopper is in the store
Challenges for the industry to overcome before widespread adoption can occur:
- Demonstrating benefits to consumers in exchange for sharing more data about their location and tastes
- An offer via smartphone can’t just show that a retailer knows where a shopper is located now—it must be tailored to the individual so it is welcome
- Retailers need to have clear business targets when implementing analytics to guide digital wallet implementations
- Retailers must avoid confusion between a new digital wallet program and existing customer loyalty programs
- Analytics need to be real-time. There’s no point e-mailing an offer only to find that the customer has left the store
Avoiding the ‘Creepiness’ Factor
But not surprisingly, given the precision with which it’s possible to conduct such targeting, privacy concerns appear high on the list of challenges faced by digital wallets. Talk to experts in the field, and the word ‘creepy’ is used.
“You can focus much more precisely on individual customers, but you have to do it in a way that avoid the creepiness factor,” says Colin Haig, program principal in the retail division of enterprise software giant SAP. “The customer is giving up a lot of privacy, and in exchange will want targeted offers that are appropriate.”
Will that happen? It depends on the shopper. Younger consumers, for instance, are seen as having fewer privacy concerns—and, what’s more, are more likely than average to possess smartphones and (critically) NFC-enabled smartphones.
“There’s a generational shift taking place,” says PA Consulting’s Bissell. “The younger generation are part of a demographic segment that is still selecting brands, and tends to be very open to opening themselves up to digital interaction. Through social media such as Facebook and Twitter, they’re already doing it in a big way.”
And even among more jaded—and older—consumers, the prize remains very much one that is up for grabs, says John Lucker, global leader of the advanced analytics and modeling practice at Deloitte Consulting.
“There’s a huge hunger within consumers for companies to engage with them intelligently,” Lucker says. “Can you think of five companies which you know you so well, and which ‘touch’ you enough, so as to be able to continue to delight you in ways that are relevant to your needs? The answer is usually ‘no’—and even when it’s ‘yes’, it’s usually because people are confusing customer service with customer insights and relevant offerings. People want offers tailored for them, not ‘cookie cutter’ offers e-mailed to everyone.”
Keys for Analytics Projects and Digital Wallets
How likely is that to happen? And by when? Experts point to two critical bridges that have to be crossed.
First, retailers embarking on digital wallet analytics need to be clear about what those analytics are trying to achieve.
“From an analytics perspective, it’s not just about analysis, but about decision management,” says SAS’ Raj. “What problem are you trying to solve? Generating a purchase? Customer retention? Enhanced loyalty? You need to know this before you can deliver the offer. And you need to know it time to deliver that offer in real-time, too.”
Second, digital wallet providers need to be sensitive to the data ownership issues that their technology will bring—and in particular, how it plays with respect to existing customer loyalty programs. It was precisely this issue, for instance, that lay behind the creation of the Merchant Customer Exchange, with companies including 7-Eleven, Best Buy, Target and Wal-Mart Stores banding together to offer a mobile‑commerce system capable of integrating a wide range of consumer offers, promotions and retail programs, and available through virtually any smartphone.
Take, for instance, Google Wallet, introduced in 2011, and which has reportedly struggled to gain support from either phone networks or merchants.
“Google would readily admit that version one of Google Wallet didn’t deliver what the company wanted, and I think that they’ve now understood the importance of aligning themselves with merchants and banks,” says Forrester’s Carrington. “Merchants and banks looked at version one, and simply said: ‘You’re trying to monetize our customers, and that doesn’t play well with us.”
Google seems to have gotten the hint. Over the past month, the company has announced enhancements to make the smartphone application more appealing and accessible.
Freelance writer Malcolm Wheatley remembers analyzing punched card datasets in batch mode, and using SAS and SPSS on 1970s-era mainframes. He lives in Devon, England, and can be reached at firstname.lastname@example.org.