Why Retailers Are Betting Big on Mobile Wallet Technology

If you're one who often forgets your wallet at home, you're in luck: Your smartphone is increasingly becoming an acceptable means of payment.

Welcome to the mobile wallet era.

Billions of dollars are flowing into the development of mobile-payments systems that function as so called "digital wallets." Businesses across the board are confident that consumers will soon be as comfortable making purchases with their phones as they currently are when paying by credit or debit cards.

Now a group of U.S. retailers on Wednesday embraced the growing trend in mobile wallet technology. They want to get a jumpstart on the new way of paying for everything from a Slurpee to a tank of gas to major appliances.

The dozen plus big retailers have formed a new company called Merchant Customer Exchange (MCX) and will create their very own mobile wallet application. The companies include Best Buy Co Inc. (NYSE: BBY), 7-Eleven, Target Corp. (NYSE: TGT), Wal-Mart Stores Inc. (NYSE: WMT), Royal Dutch Shell Plc (NYSE: RDS.A, RDS.B), CVS Caremark Corp. (NYSE: CVS), and Darden Restaurants Inc. (NYSE: DRI), among others. More retailers are expected to join in the coming months.

MCX intends to cash in on the broad reach of the collaborating businesses', which together take in some $1 trillion in annual sales and serve nearly every smartphone user in the United States.

In addition to eliminating the need for cash, the MCX platform will offer promotions, retail programs and customized offers.

It is unusual to see such a partnership among direct competitors, but these merchants recognize they need each to establish a presence in the mobile tech industry.

Money Morning's Capital Wave Strategist Shah Gilani alerted readers to the mobile wallet undertaking early in the game, when he wrote in May, "the mobile wallet movement is inevitable."

In a compelling series outlining the move to mobile months before it started, Gilani said "traditional wallets and purses are being replaced by smartphones. Your future is calling on your mobile phone, and the ringtone sounds like a cash register."

Cash, Credit, Debit or Mobile Wallet

The strategic MCX development follows a Starbucks (Nasdaq: SBUX) announcement last week that it has poured some $25 million into mobile payment startup Square.

"People have their phones on them all the time. It's a seamless transaction," explained the coffee giant's CEO Howard Schulz.

A whopping 87% of Americans currently have a mobile phone and almost half of those are smartphones (cellphones with myriad applications and Internet access), a March report from the Federal Reserve revealed. In addition, among people with a mobile phone and bank account, 11% used mobile payments in the prior year.

The mobile wallet movements currently in development are geared at filling the mounting demand from consumers, in particular the younger set, for payments that are more streamlined and speedier. Merchants are convinced that building such electronic systems will increase customer allegiance.

"Creating choices for consumers to drive business will lead to more innovation and more services offered at more competitive prices. At least, that's the way the free market is supposed to work," Gilani said. "Merchandising and marketing is changing."

The merchants in MCX bet that their customers will prefer the mobile wallet experience to traditional payment methods, and the switch will strengthen the merchant-shopper relationship.

"As merchants, no one understands our customers' shopping and payment experience better than we do, and we're confident that together we can develop a technology solution that makes that experience more engaging, convenient and efficient," Best Buy president Mark Williams said in a statement.

Wal-Mart's corporate vice president and assistant treasurer Mike Cook noted in a statement that using a mobile app will help to cut down costs and will make shopping faster and more convenient.

But consumer benefits aren't the only incentive for companies - they're getting a huge benefit as well.

Mobile Wallet: Tracking Your Shopping Habits

Sure, retailers will get to cut down payment time if customers use digital instead of counting out cash. The move to mobile, however, also means where you spend and how much you spend will be recorded.

Merchants who accept mobile payment methods will then have access to consumers' shopping habits.

"Who's buying, what the market segments are, where they are, what kind of things they're buying and how the information that's captured at the point of sale can be leveraged for things like offers, loyalty, rewards, and that kind of thing," Bill Maurer, who runs the Institute for Money, Technology and Financial Inclusion at U.C. Irvine, told American Public Media's Marketplace.

This doesn't mean the stores can access your banking information, just share data to establish trends in what's being bought across different retail segments. It's like online shopping except you're actually visiting the stores.

"When you shop at Amazon or on any other online merchant, you're going to get recommendations that say people who bought what you just purchased have bought this other thing," said Maurer. "The idea here is to move that online marketing model into the physical point of sale world where we're buying products every day. If you think about it, the dominant way of making purchases still in the U.S. for a lot of things still is cash. All the data so to speak in a cash transaction is lost."

In addition to those listed above, other companies joining the MCX are Sears Holdings Corp. (Nasdaq: SHLD), Sunoco Inc. (NYSE: SUN), Publix Super Markets Inc., Alon Brands (NYSE: ABO), HMSHost, and Hy-Vee Inc.

Mobile wallets will not change the way we shop, but also how we think about cash. Cash is no longer king, "the truth is the whole world is using less and less cash," said Gilani.

It's time to embrace mobile wallet technology. As Gilani stressed, "It's going to be huge."

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