Your New Digital Wallet: In The Cloud But Still Tethered To Fees

Enlarge this image toggle caption Kim White/AP Kim White/AP

Tech companies from Seattle to Silicon Valley, intent on transforming how we shop, have set their sights on the electronic payments industry.

Microsoft is building a digital wallet into its next generation of mobile phones. Apple is moving into loyalty cards, and Google has set its sights on payments. The online payment service PayPal is also pushing into traditional retail stores.

But if you expect this to mean that merchants and consumers will save money on transactions, don't hold your breath.

For now, technology companies trying to break into the payments business have decided to work with banks and credit card companies. That means the billions in transaction fees merchants pay (and often pass on to consumers) every year are only likely to grow.

Wallets Living In The Cloud

PayPal is now accepted at more than 2,000 Home Depot stores across the country. In the next month, the company, which once existed only in cyberspace, will invade Abercrombie and Fitch.

A skydiver pays for his trip while in free fall in this ad for PayPal and Vend, a New Zealand-based startup. YouTube

PayPal President David Marcus says he wants your wallet to live in the cloud so that you can pay for products and services online, or in the real world using PayPal with almost any device — or even no device at all. An online video ad for PayPal and Vend, a New Zealand-based startup that creates payment software for retailers, shows a skydiver paying for his trip while still in free fall.

"So you can literally pay hands-free if you check in [with a mobile payment app] and say you're ready to pay," Marcus explains.

At Home Depot, it's now possible to check out using just a personal identification number and your mobile phone number. This new service can be incredibly convenient for customers on the go, and for merchants like Home Depot, it promises to boost sales.

A Hunger For More Information

Brick-and-mortar retailers are hungry for more data about their customers. Creating a digital wallet or online program to manage loyalty programs could help retailers find out which products customers are looking at, and if they are comparison shopping online with their smartphones.

"With a digital wallet, all of your coupons, your loyalty points, everything will be deducted automatically from all of your purchases, so [the customer doesn't] have to think about it," Marcus says.

Square, one of the fastest-growing startups in San Francisco, uses GPS in your mobile phone to show a picture of you to a store clerk when you walk into their shop. To check out, you can just give them your name.

Keith Rabois, Square's chief operating officer, says using mobile payments will help retailers track when customers walk into a store and if they leave without buying anything. "You can identify your best customers and track their sales over time," Rabois says.

Same Fees, More Business

Google, Apple, Microsoft, Intuit and Square are all trying to break into the market for digital wallets. But with all these high-tech giants trying to make this work, the leader in mobile payments might surprise you. Starbucks, according to the Electronic Transaction Association's CEO Jason Oxman, is currently the largest mobile payments network in the U.S.

Oxman is optimistic about the future of the digital wallet. It used to cost thousands of dollars for merchants to get set up to take credit cards. Now, because of companies like Square, all you need is a smartphone.

But Oxman doesn't believe the digital wallet will displace the credit card industry. If anything, he says, it will help the already enormous industry grow even faster.

Last year, consumers around the world used debit and credit cards more than 135 billion times, paying more than $11 trillion in purchases globally. And there are lots of little ways for the transaction business to make money. Visa and MasterCard charge swipe fees on every transaction at stores like coffee shops. Last year in the U.S. alone, card companies and banks made close to $50 billion that way.

"[The transaction fees have] caused a lot of angst within the retail community," says the National Retail Federation's Mallory Duncan, who had hoped tech companies breaking into the payments industry would try to drive those fees down.

Instead, companies like PayPal and Square have built their technologies to work in concert with the credit card companies. They simply link your smartphone or an online account to the cards you already have, resulting in the same card fees for each transaction.

Duncan says it's "not an ideal solution for anybody." But for the banks and credit card companies that already earn tens of billions of dollars in fees, business is getting bigger.