How to Fund a Mobile Wallet
Oct 06, 2013
Mobile wallet apps are proliferating like crazy today as every developer seeks to grab a slice of the consumer pie. Of course, building a mobile wallet app is easier said than done. There are plenty of hurdles -- in the form of security concerns and regulations -- that developers need to clear in order to succeed, and there is plenty of argument about the best way to fund a mobile wallet.
From my point of view, there are four primary options for developers to consider as they decide how to fund a mobile wallet. Each of these options has their distinct advantages and drawbacks, as I’ll outline below. The option a developer selects depends on both the customer base and company goals. But before you make a decision, it’s vital that all options are explored.
1. Direct Bank Transfer (ACH)
ACH is the direct deposit and withdrawal mechanism that banks use, and in some ways it seems like the simplest way to fund a mobile wallet. Rather than going through a middleman, why not connect the app directly to a consumer’s bank account?
Unfortunately, it’s not that simple. ACH is not a consumer-facing system, and doesn’t have the kind of dispute-resolution system that you get with credit cards, for example. There is also no authorization system, so it’s not easy for mobile developers to work with banks on becoming trusted partners.
Essentially, when it comes to ACH, there is no blueprint that developers can follow to easily set this up. On top of that, since there is no immediate approval mechanism, money can’t be transferred on the spot (as you know if you’ve ever tried to move money from one account to another). This is because banks don’t currently have the infrastructure to support daily spend over ACH networks. This can be an issue for both merchants and consumers, who generally prefer money to be moved more quickly.
So why don’t banks go ahead and build the appropriate ACH infrastructure? Well, it’s expensive, and mobile wallet developers aren’t going to foot the bill anytime soon. For now, banks are allowing these types of discrete transactions to take place on a small scale, but it won’t be long before they wise up and start charging transaction fees for mobile wallets that use ACH. So while this might look like a dream solution on the surface, in effect, it is actually one of the more difficult ways to fund a mobile wallet.
Take-away: Developers should only choose this option if they are able to build strong connections with banks and can provide value to them to make it worth their while. Though the landscape may change in the future, for now, ACH transactions are fairly complex.
Pre-funded wallets work much like a gift card. You put a certain amount into them and then spend it as you like. When the money is gone, you can refill it. Simple enough.
The downside to pre-funded wallets is that they don’t offer a seamless experience. If a consumer runs out of money in the app right before a purchase, odds are he will turn to a credit card, and probably grow frustrated with the app. One way to solve this is to set up automatic re-upping. Starbucks offers this with their mobile wallet app, and it has worked out pretty well for them. Of course, automatic charges can cause consumers to grow annoyed, especially if they forget that they have set them up (which many do). If developers can communicate consistently and clearly with their users, this can usually be avoided.
Pre-funded wallets do add extra steps for consumers (i.e. the act of connecting a bank account and then topping up the balance periodically), but this is probably the easiest way for developers to get money into their wallet apps. It doesn’t require any new infrastructure, is simple enough for banks to handle (since it only requires one large-ish transaction and not a slew of little ones like the ACH method described above) and also avoids the liability and risk inherent in credit.
Take-away: If you’re confident you can provide an elegant and easy-to-use interface for consumers so they won’t grow frustrated when it’s time to top up, then this may very well be the way to go.
Of course, the most hands-off way for consumers to use a mobile wallet app is to connect it to a credit card (or two, or three). This has become the default for many apps and mobile operating systems when they need to transfer funds from one party to another. Uber is a great example of this working extremely well in the wild, especially when compared with the alternative of taking out your wallet and trying to use a card when most cabs prefer cash.
The only real downside to this is that it incurs fees that must be paid by the recipient (the merchant or cab driver), the consumer or the mobile wallet developer. No one likes fees, and this has led many app developers to try to get off the traditional credit card “rails.”
There is one alternative to connecting an app to a credit card, though: building a credit mechanism into the wallets themselves. In other words, your app could be a credit card. If app developers want to move to this type of credit, where consumers sign up and are pre-approved for a certain amount of spend, they will most likely need to find partners who fund this and can manage credit.
Take-away: As I mentioned earlier, there are risks inherent in credit, ones that traditional credit card companies have learned to mitigate and build into their business models. This could prove tricky for developers to navigate, but it may also prove worthwhile for those who wish to operate off the traditional rails and cut out middlemen -- and fees -- completely.
4. Virtual Currency
The final option is one that is largely aspirational at this point. Instead of funding a mobile wallet via cash or credit, it may be possible in the future to do so using virtual currency, such as Bitcoin. The benefit would be that someone else (in this case, Bitcoin’s developers) would handle the money and your mobile wallet app would simply distribute it. The downside, of course, is that most merchants will not accept Bitcoin as currency at this point in time, but this could change; stranger things have happened!
Take-away: As it stands, this isn’t a viable option in virtual currency today for the vast majority of developers; especially those who target mainstream consumers.
A Final Word
So there you have it: the four methods (or, realistically, three) for funding a mobile wallet. The option you choose depends on a variety of factors, including the preference of your user base, the relationships you have with banks and other financial institutions and your general tolerance for risk. Ultimately, the most important thing to consider is how to make your value proposition clear from the outset and how to provide users with a seamless, positive experience that incentivizes them to keep using your app over time.