Why you’ll be able to pay for things on your phone in lots of ways for a long time

One of the biggest themes at last week's retail confab in New York City -- besides the intense gravitational force of Amazon.com ripping the industry from its moorings -- concerned mobile payments. In the future, everyone will just pay for stuff on their phones, right? What does that mean for how retail is set up? And whose payment system will ultimately triumph?

And that's exactly how the question is usually framed: as a war of digital wallets, in which one winner must eventually take all. Indeed, the modern Internet economy tends to function that way, with some services gaining widespread adoption through network effects -- see Twitter, Facebook -- and crowding out the rest.

It's not clear, however, that mobile payments will work the same way. The space is big enough, the market is fragmented enough, and the barriers to entry low enough that a huge number of options might stick around for some time to come. Let's break this down.

1. The market is still wide open.

Even though digital wallets have been around for years, consumers have been slow to start using them, for many reasons. That leaves a huge chunk of commerce that could be converted from cash and cards to phones -- especially if they can be used in physical stores and restaurants, as well, since that's where most purchases are likely to take place for some time. It's going to take a lot of marketing to reach all those consumers, and it's unlikely that one or even a few big players will be able to do it on their own. According to Forrester Research: 


We still don't buy much online, and mobile payments can be used in physical stores, too. (Forrester)

2. No one mobile payments operator can give consumers everything. 

There are three kinds of entities that offer ways to pay for things with a smartphone: tech companies, financial institutions and the merchants themselves. Each of them has different interests and capabilities.

Tech companies like Google, for example, can integrate their wallet with all the other services you might use -- like sending special offers for locations you might search on Google Maps, or allowing you to send money to your Gmail contacts. The advantage of Google Wallet and others, like Dwolla, PayPal, Paydiant and LevelUp, comes in removing friction from the commercial experience and integrating payments with the rest of your digital life.

Financial institutions, like banks and credit card companies, are better at integrating payments with whatever you do to manage your money already. Visa's V.me, Mastercard's Masterpass and Barclays' Barclaycard keep all your financial information within one system that you might trust more as a guardian of your account balance than another app that might get hacked. Some of them have partnered with wireless companies, including Verizon and AT&T, to form a mobile payments company called ISIS that uses "near field communications" technology, allowing you to tap your phone against a special terminal to pay.

Finally, some of the biggest retailers -- like Amazon, for example, but also fast-food restaurants and other stores that people visit often -- like to use their own payment options as a way of sucking in customer data and giving them incentives to buy frequently. A number of very large retailers are working on a compromise approach -- the forthcoming Merchant Customer Exchange -- which will allow customers to use one app for retailers from Sheetz to Walmart.

None of those kinds of companies offer the advantages of all three, so consumers will either have to choose among them or use all of them at once. That is, if they play nicely together: Verizon, for example, decided to ban Google Wallet from its smartphones, to clear the decks for ISIS.


The crazy proliferation of payment options right now. (Forrester)

3. Merchants don't have to stick to one kind of payment.

In the typical model of consumer technology adoption, you want to be on the platform that everybody else is on, because the size of the network is its value proposition. There's no point in using something like Snapchat if no one else is around to receive your ephemeral messages.

Mobile payment platforms are different. With the exception of those that are primarily meant for individuals exchanging money, like Dwolla and eBay's Venmo, it doesn't matter to a consumer how many other consumers are using the service -- just that the merchants you want to buy from use it. For the merchants, it's not that difficult to integrate payment methods, and they have the incentive to let you pay in whatever way you want (while offering rewards for people using their own method, if they have one). There are a number of scanners that can accommodate apps that use barcodes. And, as tap-to-pay technology gets integrated into more points of sale -- which it will over the next few years, for credit card security reasons -- retailers will be able to accept whatever payment mechanism designed for it (the big ones now are Google Wallet and ISIS).

All of which means that an already crowded marketplace is just likely to get more so. "In the short term, were going to see more wallet solutions, not fewer," says Forrester Research's Denee Carrington. And because of how the market is structured, with so many players and divergent interests, it may not consolidate in the way that so many other markets have.

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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