What's in Your Digital Wallet?

Photograph by H. Armstrong Roberts

Have you checked your digital wallet lately? Something’s missing.

It’s the ability to make approximately 80 percent of all purchases—the ones where you shell out a few bucks for that sandwich and soda, or a dozen eggs on the way home from work. These are known in the industry somewhat tellingly as low-value purchases (LVPs). For issuers (the cardholder’s bank) and acquirers (the merchant’s bank) to be able to make a profit on processing a single electronic transaction, the fee they have to charge ends up being completely uneconomical for these purchases. At around 30¢ per transaction, merchants are more inclined to discourage using electronic payments for small purchases than to invest in the new card readers and software to go entirely cashless.

You would think that those involved in the e-wallet movement would want to tap a substantial portion of the estimated $1 trillion cash purchases made in the U.S. every year, according to consultancy Edgar, Dunn & Co. Instead, what’s happening is that digital wallets are being set up to cannibalize plastic rather than expand the overall volume of electronic payments.

Some partial solutions are in place. Currently, Starbucks, Burger King, and Wal-Mart have their own apps. But do consumers want yet another piece of plastic or digital wallet app on top of their existing cards, each one requiring its own registration and password? More practical would be one form of payment consumers can use anywhere, with any merchant, securely and without hassle. (Whether that will take the form of a card or a smart phone will be for the consumer to decide.)

What’s needed isn’t a piling on of countless and fragmented niche solutions but a way to lower the costs associated with electronic payments. Until then, the digital wallet will get you only halfway there.