eWallets - Where Are We Now?

eWallets have been part of the online payments ecosystem for almost twenty years now, and their roots can be traced back to the early days of PayPal in 1998.

Those roots have since blossomed, and eWallets are now of monumental importance to the payments industry, notably with the Chinese giants AliPay and Tencent currently blazing the trail (AliPay alone currently has over 400 million registered users).

The rapid growth of online transactions channeled via eWallets did not go unnoticed by Visa and MasterCard, who launched their own (very similar) proprietary eWallet systems almost 5 years ago. They have continued to invest significant resources in an effort to ensure their success.

eWallet wars? When PayPal have historically been the biggest payments platform and biggest channel for Visa MasterCard transactions? In this article we will take a step back to look at the genesis of the Visa and MasterCard digital wallets and analyse why both engaged in these proprietary projects. Finally we will give you our perspective why we believe those projects have fallen short of achieving their objectives.

Refresher: What is an eWallet, and How Does it Create Value for both Online Consumers and Merchants?

Before we begin our analysis of the genesis of Visa’s “V.me” eWallet and the MasterCard “MasterPass”, let’s refresh some basic concepts: what an eWallet is, and how they create value for both online consumers and merchants.

In basic terms, an eWallet offers consumers a way to store funds electronically and then use those funds to pay for products and services online to websites/merchants that accept the specific eWallet as a payment solution.

These eWallets require a “funding” method - a way of “topping-up” the virtual wallet with electronic funds. These funding methods are predominantly credit/debit cards, but bank transfers and cash (via prepaid cards or prepaid voucher purchased at physical stores) are also alternatives.

How Consumers Benefit

eWallets offer a variety of value-added features for consumers. For example, eWallets improve security due to the fact that consumers do not have to input card numbers on different websites, and convenience because eWallets require simple email and password verification rather than a cumbersome log-in to an eBanking platform or the entry of 16-digit card numbers, expiry date and CVV (and a 2-step identification password in case of 3D secure). There are a number of additional services that can be offered via an eWallet platform, such as peer-to-peer transfers between eWallet accounts, x conversion, or smart analytics. 

How Merchants Benefit

eWallets offer merchants access to their pool of sticky customers, higher conversion rates and often the possibility to accept payments for more secluded geographical markets or more controversial lines of business (e.g., Gambling, Forex, Adult), which do not have access to more traditional payments solutions.

PayPal: The Biggest Threat to Visa and MasterCard? 

Five years ago, Paypal already represented more than 25% of all online transactions, with the majority of those coming from US and Western European customers. This situation suited both Visa and MasterCard, who benefited from card holders replenishing their PayPal eWallet via their debit and credit cards.

However, Paypal continued to grow and started to ‘influence’ consumers to use direct bank payments to finance their eWallet, thereby circumventing the Visa and MasterCard networks and the associated expense (which at an average cost of 2-3% per transaction, representing 30-50% of PayPal’s gross margin).

This development coincided with PayPal’s meteoric rise in visibility and brand equity, and Visa and MasterCard being all but invisible to consumers using a PayPal eWallet.

It was among this set of circumstances that both Visa and MasterCard announced their entry into the Digital Wallet space and launched two very similar products that they hoped would become the future of digital payments and ultimately compete against the burgeoning powerhouse that was PayPal.

In November 2011 Visa announced “V.me”, which launched in selected markets as early as Q1 2012. MasterCard launched “MasterPass” just a year later in February 2013.

5 Years of Massive Investments from Visa and MasterCard with Limited Success 

The five years since the launch of those two platforms have seen significant investment from their respective owners, in addition to resources and attention. In fact, we estimate that Visa Europe has spent more than EUR 350M on V.me, a figure which we expect to be larger still for Visa Inc.

Have those investments and application of resources been worthwhile? Ask yourself if you have ever seen or used V.me/Visa Checkout or MasterPass. If you answered yes, has it really become your new favorite and by default payment option?

It is very likely that the majority of readers will answer no to both of those questions. 

Visa Inc. realised that their project was failing, and introduced a new version of their eWallet named “Visa Checkout” in July 2014. This updated platform was entirely independent from - and incompatible with - the existing V.me platform. Visa Europe continued to invest in V.me until September 2015, at which time the platform was officially abandoned and replaced by Visa Checkout (2 months before the purchase of Visa Europe by Visa Inc. was confirmed).

The updated Visa Checkout differed from its predecessor in that it operated more as a centralised product that did not rely on issuing partner banks to sign-up new customers. This step moved Visa Checkout closer to the PayPal model. The fact that the V.me and Visa Checkout platforms were entirely independent meant that merchants integrated within the V.me environment would have to go through a new registration process in order to offer Visa Checkout as a payment option.

Three Key Challenges for Visa and MasterCard

The V.me and MasterPass platforms faced three key challenges:

  1. Both Visa and MasterCard treated the eWallet as a credit card that a local bank would issue to consumers, and therefore relied on their issuing/acquiring partners to market and activate their new products.
  1. This lack of direct access to merchants also had an impact on the construction of their “acceptance network”, meaning the large online merchants base that would accept the new systems as payments methods.

In addition to working with acquiring partners, both Visa and MasterCard struck up partnerships with Payment Service Providers and payments gateways that controlled merchants relationships in an effort to improve the scale of their “acceptance network”. One tactic used was to offer cash incentives to merchants, and both V.me and MasterPass approached large PSPs such as Ayden and WorldPay to encourage merchant integration. The actual numbers are not available, but we know that each market had a budget of between $10-50 million.

  1. The final and main challenge the eWallets faced was the fact that all merchants were already accepting Visa and MasterCard as stand-alone card payment solutions, and saw only a limited value in offering their consumers an additional, potentially confusing method of payment.

Underwhelming Results

Both Visa and MasterCard have had underwhelming results; Visa Checkout reported a userbase of 6 million users in July 2015, 7 million in November 2015 and apparently 12 million users in May 2016 (after 5 years of existence and 700 million USD of investment, meaning $60 per user), compared to the 200 million users of PayPal.

Perplexingly, American Express launched the proprietary “Amex Express Checkout” eWallet in July 2015. This launch came as a time where both Visa and MasterCard already realised that their projects were making no headway and they stood to continue to lost money.

Given the current environment and performance statistics, it is difficult to see the American Express eWallet project going in any other direction than the same as the Visa and MasterCard projects.

From a Long Battle to a Truce

At this point, it is difficult to see how the attempts of Visa and MasterCard to breach the eWallet space have even been noticed by PayPal. Looking at the current environment objectively, PayPal’s competition comes much more from Payment Service Providers offering the class card solutions (Adyen, WorldPay and other such providers around the world), rather than the Visa and MasterCard eWallet projects.

Since the launch of V.me and MasterPass five years ago, PayPal has continued to go from strength to strength: after going public in July 2015, PayPal entered the Top 100 Brand Rankings. Both Visa and MasterCard have been part of this ranking for more than 15 years, putting the brand threat that PayPal poses into perspective.

On the other hand, PayPal has realised that integrating directly with banks to give access to their users to ‘direct bank transfer’ as a cheap way to fund the wallet is a fairly complex and lengthy process in North America and Europe, and next to impossible in most emerging countries where PayPal is aiming to capture new growth opportunities.

This most certainly explains why in July and September this year Visa and MasterCard signed partnership agreements with PayPal which guarantees a minimum percentage of card-based transactions will be used to fund the PayPal wallet:

“As part of the deal, PayPal agreed to stop steering customers to link directly to bank accounts, which allows it to avoid paying fees to card networks such as Visa or MasterCard Inc”.
(PayPal, MasterCard Reach Deal for Store Payments, Daily Mail, 6 September 2016)

The agreement also guarantees visibility and stability for PayPal on future increases in fees. The Wall Street Journal suggested that “the deal ends a year of tense negotiations between the firms and removes uncertainty for PayPal about the fees it pays Visa, with higher fees being a major threat to its profitability.”

In exchange for this guaranteed minimum percentage from PayPal, Visa is making PayPal a part of its “Digital Wallet” program, meaning that PayPal will be accepted at stores that can accommodate for “contactless” mobile taps with Visa, once PayPal gets banks that issue cards to agree to support it.

What Is Next? 

In such a complex and growing space, and in light of this new agreement, what is next? Will Visa and MasterCard abandon their eWallet projects?

From our perspective, the eWallet space is still very competitive and has more surprises in store. The large Chinese players AliPay and TenCent have the unique position of having over 800 million users (dwarfing the 200 million PayPal users). Although AliPay is not a direct competitor as focused on Chinese consumers, it has clearly expressed an intention to grow internationally and has already established presences in both Europe and the rest of Asia.

Visa and MasterCard also confirmed this month that the Visa Checkout and MasterPass programmes will indeed continue, with “new ambitions” for 2017.

At this stage and after 5 years of intense efforts, there are only two possible outcomes; either they abandon those platforms or invest further - to actively compete in this space both Visa and MasterCard must offer more features and pursue a higher merchants penetration, which we know has been ‘very expensive’ and questionably ‘successful’ so far. 

Sources