E-wallets: not suitable for mainstream e-commerce

Over the years, we’ve had a lot of people come into Web-Op with a vision revolving around an “e-Wallet” service. If you can convince users to load funds into their wallet service, they can spend them at participating merchants without involving Visa or Mastercard. Usually it runs on top of bank transfers, but sometimes the wallets are funded from in-person transfers or credit-card payments with fees backed in.

Sometimes e-wallets are presented as a MLM opportunity– getting people to sign in as new merchants on a wallet platform or by offering referral links for members. Most frequently it’s a blatant “it’s cheaper than using your existing credit card gateway.” Framkly, at this point, I’m ready to reject them at first glance. On your typical e-commerce site, they’re a losing proposition.

First, these programs often fail disasterously in user experience. Consider the common use case– “eliminate merchant fees by forcing users to use our wallet instead!” A new customer comes to your site, ready to buy. Oh, wait! Let’s sign up for an account. Now, we have to pre-load it with money, or sometimes you can link a bank account. Depending on the implementation of that process, it can take days. By that time, a large number of customers are not coming back. Most of them found what you were selling on a site which will take the credit card they already have. This means, at best, you’re usually only able to offer them as a second-choice payment option– credit cards for most customers, and the e-wallet for the handful of people who are either already using it or that you can incentivize into signing up.

Second, they often aren’t that viable themselves. Most e-wallet platforms only have a handful of vendors offering it, even as an alternative payment option. Cashing out is often expensive or has limitations attached. As a result, users will load the minimum they can in the account and not leave funds in. This means that the platform operator won’t be able to rely on investing the account money until spent as a major revenue stream– so fees will eventually climb or the outfit will run out of money.

Is there an environment where e-wallets make sense? Possibly a narrow one: a scrip-style financial system. For example, we’ve dealt with clients who want to use wallet accounts to dispense bonuses to employees. In that situation, you don’t have the user-experience mess of having to create and fund a wallet prior to use (the employer does it) and only being able to use the money in a narrow set of vendors may be an asset. However, even there, that may be coming at a high cost– by using real money in the system, you still expose yourself to a lot of legal and compliance issues which may be simplified by converting to a simple “rewards point” system that can be redeemed for merchandise or gift certificates.

There is a demand for better payment systems– faster, more reliable, less chargebackable, lower fees. The problem is that these are not features the consumer asks for. Only the most caring person will ask “can I save you, my favorite shopkeeper, 2% on payment processing?” You have to offer them something very special to make up for the fact their regular credit card gives them airline miles, or free extended warranties.

Now, you may be about to say “What about PayPal? The greatest e-wallet of them all?” PayPal succeeded not because it was a wallet service, but because it solved a consumer need directly. Consumers wanted to deal with small players on eBay who didn’t have credit card processing, but still wanted to pay with a credit card. The fact the money ended up in a wallet balance was insignificant at best. And even with that clear consumer benefit, it took them years to get very successful, and giving out a lot of free money to recruit new members. Does your wallet platform have 5 years to work on building a user base? Can it afford to pay $10 per customer in kickbacks to bring on every new account? Does it have anything near as compelling as “20 million eBay sellers” to present to potential buyers to show they should get on board? If it does, let me know. You might be able to make a go of it.