Digital Wallet Technology - The Punctuated Evolution Of Digital Wallets

THE PUNCTUATED EVOLUTION OF DIGITAL WALLETS

Digital wallets first emerged in the mid-1990s with a great deal of hype, but to a lukewarm public reception. The earliest wallets required customers to download the digital wallet vendor's software and store it on their desktops. This method largely inhibited customers from warming to the technology. Downloads generally were viewed with some skepticism by analysts, since they tend to limit overall distribution. Slow connection speeds exacerbated the problem, since customers tend to grow frustrated and abort downloads if they take an excessively long time to complete. In addition, any time the vendor updated its digital wallet software, customers had to download all over again. Moreover, once the software was downloaded, the digital wallet was stored on the computer's hard drive, requiring the customer to make all purchases from that computer. This lack of flexibility became increasingly problematic as more Internet shoppers roamed from one place to another and used multiple computers for surfing and shopping.

Another impediment to digital wallet penetration was customer awareness. In 1999, according to the research firm Bizrate.com, only 58 percent of online purchasers were even familiar with digital wallets, while only one-fourth understood their capabilities. In addition, the sheer glut of digital wallet offerings in the late 1990s—issued by merchants, software vendors, credit card firms, banks, and other outfits—led to customer confusion, not to mention frustration stemming from the lack of compatibility between all these wallet packages. With no standardized payment system, customers were reluctant to fill up their hard drives with mutually exclusive digital wallets, nor maintain contracts with various firms.

Several online retailers, including Amazon.com, created their own versions of digital wallets for use only on their sites to encourage repeat purchases. After the first purchase, when a customer fills out an entire order form, he or she only needs to click a button to repeat the entire order-filling process automatically. However, only a small number of very large firms had the clout to make such an investment worthwhile. To benefit from digital wallets, most companies needed a larger framework of mutually shared technology. Furthermore, only the very largest, most leveraged companies could afford to contract with a variety of vendors at the same time, putting them at a great competitive advantage but also limiting the overall penetration of digital wallets.

In 2000, Forrester Research released the results of a survey of online merchants. The merchants were asked why digital wallets had failed to attain prominence. Sixty-two percent of U.S. e-merchants felt there simply was too little customer demand, while 54 percent reported that digital wallets weren't a priority. Twenty-seven percent thought the market was too immature, another 27 percent couldn't see any benefits in adopting the technology, and 19 percent thought that digital wallets would result in the loss of customer relationships.

One of the biggest drawbacks, however, was compatibility. Since customers may have maintained digit wallet accounts with vendors other than the one a particular company may have used, the layers of software downloads necessitated to use digital wallets with all the different businesses made the process more cumbersome than the lightning-fast world of e-commerce had promised. Thus, by the end of the 1990s digital wallets were fairly antiquated and used mainly in very tightly confined networks.

To amend this problem, several interested parties—including MasterCard, Visa, American Express, IBM, Microsoft, Trintech, and CyberCash—teamed up in the late 1990s to begin working toward the establishment of a digital wallet standard. The Electronic Commerce Modeling Language (ECML) was conceived as a mechanism to clearly define a format for online order forms that could incorporate digital wallet technology from any vendor. To adopt ECML, merchants need only reorganize their existing online order forms so that the fields correspond to those set forth in the ECML standard. No licensing or usage fees apply, and ECML requires no additional software or hardware, according to Catalog Age. The first digital wallet to comply with ECML was IBM's Consumer Wallet 2.1, which was that company's second shot at digital wallet technology. Meanwhile, ECML standardized the format in which the various fields were stored in digital wallets.

Digital wallet vendors increasingly aligned with credit card issuers, whose massive marketing clout was expected to further the wallets' cause. The popular American Express Blue credit card was packaged with American Express's own digital wallet to facilitate use of Blue on the Internet. Meanwhile, Visa and MasterCard spent 1999 and 2000 in vigorous competition to align with wireless software and hardware vendors with an eye toward capitalizing on the expected boom in digital wallet use. Some of these systems involved "fat" wallet technology, in which the wallets were embedded in handheld devices or on a smart card, while others simply utilized a server-side system over a wireless medium.

By the early 2000s, digital wallets were undergoing a mild renaissance. The models developed at that time abandoned software downloads altogether, opting instead for digital wallet systems that worked directly with ISPs and other telecommunications firms. In other words they involved server-side (or "thin"), rather than client-side ("fat"), technology. This eliminated the need to download any software or to conduct transactions from a certain computer. When a customer places an order with such a system, his or her identity is secured in the eyes of the merchant by attaching a digital certificate to the order message. In this way, merchants supporting digital wallets were afforded some protection from online fraud while also allowing for greater convenience and flexibility.

Moreover, the details of purchases weren't generally shared directly with the ISP or other intermediary—only the connection to use the digital wallet was routed through these agents. In this way, consumer fears of privacy invasion were somewhat eased, as the information was shared only with a company with whom they already entrusted the data. Meanwhile, in an effort to hang on to market share in an increasingly competitive market, ISPs often pitched their Internet payment services options to their customers as an added value of their offerings.