What will be the killer app for mobile wallets?

If you are introducing a new platform, you need a “killer app.” These are applications so useful that people need the platform so they can have access to the app.

VisiCalc and Lotus 1-2-3 were some of the first killer apps. All of a sudden, managers needed PCs so they could have these electronic spreadsheets and run their own analyses.  Every new gaming console has needed a new killer app – from Space Invaders to Halo.  And the introduction of email turned internet access into a must have.

So what will be the killer app for mobile wallets? The technology has proven itself over the past couple of years, and security is getting better, yet most consumers view mobile wallets as a curiosity.  Something to try once or twice, but then pushed into the closet of used technology.

It won’t be rewards

Many people believe the killer app will be issuer funded rewards. Give consumers an integrated platform that combines better reward offers with payment capabilities.  This solution has a big problem: it is expensive.

Issuers already provide credit cards with an impressive array of rewards to entice consumers. These same reward cards are frequently used as the payment vehicle for mobile wallets.  These rewards are generally subsidized with interchange.  With interchange averaging about 175 basis points, it is possible for issuers to provide rewards in the 1-2 percent range without cutting into finance charge margin.  However, it is unclear that issuers have much wiggle room to provide a better reward if consumers use a mobile wallet instead of their existing plastic card.  Additionally, many experts are predicting that interchange rates in the U.S. might fall dramatically.   If U.S. credit card interchange followed a similar trend to Europe and dropped to something closer to 50 b.p., it would be difficult to see how issuers could even sustain their current levels of rewards.

Payment account optimization is the better alternative

It doesn’t sound as enticing as a rewards program, but transaction optimization is perhaps the best opportunity for banks to provide a real mobile wallet killer app. Let the smart phone help the customer decide which account to use for a particular transaction.  The bank already knows all your accounts, balances, payment due dates, and spending patterns.  Imagine if my bank’s mobile wallet could do the following:

• Routine grocery store transaction. The mobile wallet realizes that I am in the grocery store buying my weekly supply of food. It checks and finds no special incentives and therefore suggests that I use my debit (after first confirming that I have enough money in my checking account to cover the purchase).
• Gas purchase. My mobile wallet remembers that one of my credit cards gives a 4% rebate on gas purchases. After checking that I have enough “open to buy” on that card, it suggests I use my rewards card for this purchase.
• Electronics store. I finally break down and get that large-screen TV. My mobile wallet recognizes that this purchase is slightly above my normal purchase level. It checks all my accounts and realizes I will probably have to pay this off over several months and suggests that I use my low APR credit card (calculating that the lower interest will more than make up for the lost rewards.)
• Kitchen upgrade. I go to the home improvement store and order several new appliances and cabinets for a kitchen renovation. My mobile wallet checks my home equity line of credit and suggests that this account is the best payment source for this transaction.

In all cases, I am free to accept the mobile wallet’s suggestion, or override to another account. For example, if I know a bonus will soon be deposited into my account, I might chose to put the large-screen TV on a rewards card knowing I will be able to pay off the debt at the end of the month.

Apps are available today – such as Wallaby and Reward Summit – to help consumers optimize across several rewards cards to help customers earn the most rewards. Account Optimization lends itself as a bank offering as opposed to a merchant (e.g., Walmart, Target, Starbucks) or a tech giant (e.g., Apple, Google, Samsung). Why?  Because knowledge of the full range of a customer’s accounts, balances, and spending patterns are critical to making this application a killer.

As a step in the right direction, large banks have been recently announcing that their proprietary mobile wallets will allow customers to view account balances before a purchase.

As banks consider plans to offer a proprietary mobile wallet, payment account optimization would help customers leverage their bank’s accounts for every transaction – and be more likely to boost mobile wallet usage and customer loyalty in the process.