mobile wallets

“Paper or plastic.”

For more than 50 years these were the dominant payment options available for consumers to spend and for marketers to process.

But in the last few years, concurrent with the rise of smartphone adoption (hovering around 55% for the US and higher in localized demographics), both paper and plastic – cash and magnetic-stripe cards – have found a new partner: mobile payments.

And there are growing indications that summer 2013 might be the time when mobile wallets, in all their fragmented formats, achieve a collective “aha” moment. In 2012, according to research firm Berg Insight, US smartphone owners purchased $500 million in goods and services via mobile payment platforms, with much of that spend coming from Starbucks alone. Berg also predicts that global mobile wallet spend will grow into a $35 billion industry by 2017. While still small compared to overall commerce and a fraction of ecommerce revenue, the forecasts nevertheless call for substantial growth.

Gartner offers an even rosier mobile payments picture – especially if you include electronic payment transfers. The research firm predicts mobile transactions will grow from $163.1 billion in 2012 to $235 billion in 2013, a 44% increase.

The logic behind all this excitement is simple. Since 2007, when the first generation of iPhones was released, smartphones have matured into indispensible “digital Swiss army knives.” Capable of making video or phone calls, interacting with social media, making in-app purchases or performing a simple mobile web search, it’s reasonable for industry watchers to conclude that the next step in that evolution includes mobile payments. The paperless office has been predicted for 35 years, so why not equally forecast the end of the physical wallet?

Similar expectations hold true for loyalty programs. Consumers anticipate that their loyalty programs will evolve from their siloed status, becoming more flexible and seamlessly wedded to the mobile experience. Doing so will help programs reverse the tide of Colloquy data which shows a decline in consumer loyalty engagement (down to 44% in 2012 versus 47% in 2010) despite a 27% uptick in program memberships. And transaction-focused loyalty wallets like the Points platform, which allows consumers to buy, exchange or gift their loyalty points across various programs under one digital umbrella, are key.

Why Industry Fragmentation is an Encouraging Sign

Of course, the mobile payments industry isn’t without its challenges. The naysayers criticize the degree of market fragmentation, particularly in the United States, and the need for backend software universality. A recent article compiled a list of 10 digital wallets to be on the lookout for, including Google Wallet, Apple’s Passbook, Lemon and Square Wallet. Just imagine if one nation had 10 competing currencies.

But fragmentation isn’t a sign of distress. It’s actually the sign of a healthy pioneering spirit, of a technological frontier just starting to be explored, with mobile payment trails just beginning to be blazed. All mature industries from railroads to radio to the early Internet underwent similar growing pains before they achieved standardization.

Mobile payments will be no different. So the next time you’re out shopping and the cashier says “paper or plastic,” remember that that three-word phrase is about to be replaced by something far more exciting: digital loyalty wallet.