Mobile wallet shift hindered by plastic | Payments Source | PaymentsSource | American Banker

Mobile wallets are becoming more popular with consumers, but banks shouldn't expect plastic cards to disappear anytime soon.

"It's low-tech, but it's also super easy. And muscle memory is a thing," said Craig Lancaster, analyst and content specialist at Javelin Strategy & Research, who explored the idea of a cardless payments landscape in a recent report.

Digital wallets have been gaining ground for the past several years following Apple's groundbreaking attempt to upend consumers' reliance on plastic cards. The COVID-19 pandemic helped propel mobile wallet use, but physical credit and debit cards are still widely popular, especially in the U.S.

Ninety-four percent of financial professionals view the mobile channel as vital to growing their payments business, according to research from Arizent, American Banker's publisher, which also reports 80% view mobile wallets as important.

A recent Javelin study found that 92% of those polled had used a physical credit card in the past month and 84% had used a debit card. There's also significant overlap when it comes to physical card and mobile wallet use.

The No. 1 driver for consumers with payments is convenience, said Keri Crane, a director at Jack Henry who also chairs the U.S. Payments Forum. For some people, that's paying with a phone. For others, a plastic card is the preferred method, Crane said.

Several barriers exist when it comes to eliminating plastic cards in the U.S. These include the ease of using a physical card and generational tendencies. In addition, some people, regardless of age, aren't comfortable paying with their phones, and some merchants still don't accept digital wallets as a payment method.

Rodman Reef, managing principal at Reef Karson Consulting, said he was recently at a newer hotel in Chicago that didn't accept contactless payments. Ironically, that particular hotel was hosting a payments conference he attended.

Because the U.S. government doesn't regulate the types of terminals store owners must have, many merchants don't have the most up-to-date technology, said Debbie Buckland, director analyst at Gartner. It's more expensive to offer card-not-present technology and merchants, especially smaller ones, might not want to pay to upgrade, Buckland said.

That's not to say that virtual wallet use won't continue to grow over time. In 2023, wallets accounted for about $3.1 trillion of global e-commerce spending and $10.8 trillion of global point-of-sale spend, according to merchant payments processor Worldpay. By 2027, wallets are projected to account for more than $25 trillion of global transaction value across e-commerce and POS.

Notably, Worldpay predicts that digital wallets in the U.S. will outpace debit cards in transaction value for in-store payments by 2027.

Digital wallets could also continue to gain more traction if the movement toward digital IDs gains steam, Lancaster said. As long as people still need to carry a physical driver's license, there's less incentive to opt for a fully digital payment experience, Lancaster said.

Some issuers offer consumers the option of whether to print a physical card. Crane gives the example of a Jack Henry bank client that has a tech-savvy clientele and decided to offer this choice. But it's not yet a widespread industry practice, she added.

At some point more issuers may decide to offer physical cards only if customers pay for it, depending on usage trends, said Reef, the consultant. "One of the ways to maintain profitability could be to charge for cards, but you're still going to have cards in the market," he said.

Certainly, there are reasons for consumers to consider a switch to mobile wallets. Most people always have their phones on them, which can be a major time-saver and convenient for someone who accidentally leaves a physical wallet at home after heading out to the store. Mobile wallets are also easy to use and there are security benefits as well. For issuers, broader digital wallet use can help reduce the cost of printing plastic, which is also an environmental hazard, though some issuers are trying to mitigate that by using more eco-friendly cards. The flip side, however, is what happens if the consumer loses the phone or it's stolen or malfunctions.

"There's no way I would travel without plastic available to me," Crane said. "I just wouldn't be comfortable and I believe that would be true of a lot of consumers today."

For the foreseeable future, decisions around whether to use mobile wallets versus plastic are likely to turn largely on consumer choice, available payment methods and location. In Asia, for example, mobile phones are a highly popular payment method, Buckland said.

Eli Goodman, co-founder and CEO of Datos, said for U.S. adoption to grow there needs to be better marketing education by mobile wallet providers and merchants. Many people don't realize it's an option for them, or don't think about using their phone to pay at checkout time. People also need more education about what the contactless payment symbol at checkout represents. It's a very simple thing that could help drive adoption, he said.

"Over time the number of physical cards will go down and [more] people will use digital wallets in person," Buckland said. But it's going to be a while before physical cards fall out of favor completely. "If we can't get people to routinely take reusable bags to the grocery store, how are we going to get them to use mobile wallets only?"