Consumer use of mobile devices to shop both online and in-store is pushing merchants to adopt the use of digital wallets. The term describes electronic devices and programs used to make payments for purchases digitally, without presenting a physical credit card, debit card or cash. Apple Pay, Android Pay and Samsung Pay are all examples of digital wallets.
A recent study by Citi Retail Services found that shoppers are embracing digital wallet adoption at a growing pace, due in large part to convenience and ease of use.
“Digital wallets are quickly becoming mainstream,” said Leslie McNamara, Managing Director of Partner Management, Citi Retail Services, in a prepared statement from the company. “Tech-savvy shoppers are increasingly demanding seamless, omnichannel retail experiences and looking for solutions that deliver this. There’s no question 2016 will be a pivotal year as digital wallets gain more widespread acceptance.”
Small Business Digital Wallet Adoption
What must small businesses do to meet this growing consumer demand?
For the answers, Small Business Trends spoke with two industry experts, Laurence Cooke, CEO of nanoPay, a digital payment technology company, and Sean McQuay, credit card expert with NerdWallet, a financial education and resource site for consumers.
“Digital wallets are most prevalent in Asia,” Cooke said. “In Japan, for example, every phone has a digital wallet. In the U.S., however, adoption is significantly lower.”
The reason, according to Cooke, is that digital wallets don’t really do anything a physical credit card can’t. He doesn’t see the incentive. “If I use just one card for purchases, I might as well carry it in my wallet,” he said.
Plenty of people would agree. A sizeable percentage of respondents to the Citi study stated that they have yet to use a digital wallet to make a purchase, for the following reasons:
- Easier to pay with another method, such as cash or credit card (47 percent);
- Don’t see any benefit from using a digital wallet (45 percent);
- Concerned about the security of payments (45 percent);
- Don’t know much about digital wallet tools (44 percent).
Of those respondents, 66 percent said they “could be convinced” to adopt a digital wallet if they were educated on the benefits.
“Digital wallets must become the default way of paying for things before they can get to scale and be a genuine replacement for credit cards, and that’s a long way off,” Cooke said. “I see no incentive for merchants to start accepting these and, in fact, a lot of merchants in the U.S. are going out of their way to say they won’t accept them.”
McQuay takes a less pessimistic view. Rather, he encourages small businesses to seriously consider implementing POS systems that facilitate digital wallet use.
“With the shift to EMV (i.e., chip card readers), most point-of-sale terminals come with near field communication (NFC) capabilities, which enables contactless payments,” McQuay said. “Apple Pay, Android Pay and Samsung Pay all use NFC.”
The biggest question small business owners need to ask, McQuay said, is how payments work for their particular type of business.
“In a hardware store, the customer places the goods on the counter, the cashier checks them out, and they pay,” McQuay said. “In a restaurant, however, it’s customary to pay the waiter at the table.
“Adopting digital payments is very different between those two scenarios. It makes sense to the hardware store owner but not for the restaurateur. No one wants to hand the waiter their phone to process a payment, particularly those who use Apple Pay, which requires personal authentication with Touch ID or a passcode.”
Digital Wallet Benefits to Small Business
McQuay suggested there are three benefits to small businesses regarding the use of digital wallets: surprise and delight, loyalty offers and added security.
“‘Surprise and delight’ is a soft benefit that lets the customer know you are up to date and put a premium on keeping their data safe and secure,” McQuay said. “Also, with Apple Pay and Android Pay, you can build in loyalty programs (i.e., digital punch cards).”
From the standpoint of security, McQuay said that the new EMV terminals adhere to a “chip and pin” standard, established by the credit card industry, that produces a unique transaction code (called a “token”) for each purchase. As such, EMV credit cards are more secure than cards with magnetic stripes, and this new standard enables payments to occur via NFC over POS systems.
How to Get Started Using Digital Wallets
Getting started using digital wallet technology for purchase transactions is as simple as buying an EMV terminal that supports NFC.
“There are a number of POS devices that accept NFC payment,” McQuay said. “Merchants should be seriously looking to shift to EMV, for security reasons. When they do, they might as well include NFC along with it.”
There are several POS systems affordable enough for small businesses. Not all support NFC, but a few, such as those offered by Square and Shopkeep, do.
Cooke said that for digital wallets to fully replace their physical counterparts, they will need to hold everything a leather wallet does: cash, receipts, membership cards and payment cards. Otherwise, they can’t be genuinely classified as digital wallets but only “part of a wallet,” to quote Cooke.
Despite his advocacy for digital wallet use, McQuay shares a similar opinion.
“Until I can get my entire wallet on the phone, I see no point in replacing any part of it,” he said. “I still don’t use mobile payments that often. The credit card in my physical wallet works just fine.”
Both agree that widespread digital wallet adoption is still far in the future and that it is not entirely clear what has to happen to make it a reality. If, as the Citi study attests, consumer demand is driving adoption, then happen it will. And small businesses need to prepare for when it does, whether that’s in 2016 or beyond.
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