The versatile smartphone has become indispensable to the average consumer. It is a music player, alarm clock, game console, GPS navigation device and even a TV screen, in addition to being a cell phone. But one thing it struggles to be is a wallet.

That is not for lack of trying. Three years ago, Google introduced Google Wallet, a mobile app that lets consumers transfer money, redeem coupons or pay for purchases with a tap of their smartphones. Consumers can also store their credit, debit and retail loyalty cards as well as other information in the app. Last year, AT&T, Verizon Wireless and T-Mobile launched a mobile wallet called Isis (whose name is being changed to avoid confusion with the militant group). In the same year, PayPal rolled out a digital wallet. Amazon is testing Amazon Wallet now, and Apple is rumored to be introducing one as part of iPhone 6 this fall. Throw in startups like Venmo, LevelUp and Loop, and you have a crowded marketplace vying for users.

But despite their promise of convenience and ease of use, mobile wallets are far from popular. According to a study by mobile research firm Yankee Group released this year, a mere 16% of consumers used their phones to make an in-store purchase between December 2013 and February 2014. Among these buyers, 73% made fewer than five purchases a month. Such low rates of adoption have already killed off the Square Wallet, a mobile app that was introduced in 2011. “Clearly, the way we pay for goods and services is not slated to change anytime soon,” the study concludes. However, the report notes that consumer interest is high: Two-thirds of those surveyed said they were interested in learning more about switching to a mobile wallet.

Why the hesitancy among consumers to adopt such a seemingly convenient technology? It turns out that even in the age of social networks and over-sharing, consumers are worried about the security and privacy of mobile wallets, according to a 2013 study by PricewaterhouseCoopers (PwC). People trust storing their loyalty cards and discount coupons in a mobile wallet, but when it comes to money or digital house keys, they will take a big step back, the PwC report says. Their main concerns are theft and loss of access, such as when their phone loses battery power or hits a technical glitch. They also do not want their mobile carriers knowing what they are doing with their funds.

“I think 10 years from now, we’ll look back at it and say, ‘Hasn’t this always been here?’”–David Reibstein

Wharton marketing professor David Reibstein notes that consumers had similar privacy concerns when credit cards were first introduced. “There were some that were paranoid and upset about the loss of privacy,” he says. Today, “we don’t even think about American Express or Visa knowing what we are buying. There will be concern, but it will dissipate, unless it is abused.”

The hodgepodge of features and platform also pose a barrier for consumer adoption. For instance, Android smartphones work with point-of-sale terminals enabled with so-called near field communication (NFC) technology for one-tap purchases. (Think standard Bluetooth but with a much shorter reach.) But Apple’s iPhone does not support NFC as yet. Also, most mobile wallets work only with some merchants but not others, making them inconvenient to use — you still have to take your physical wallet with you, defeating the purpose of having a virtual one. Indeed, the PwC survey found that most consumers would be willing to use mobile wallets only if at least 75% of retailers, hospitals and other relevant entities accepted them.

Making the Leap

Reibstein points out that throughout history, consumers have greeted shifts to new payment systems with skepticism and fear, from the checkbook to credit cards. “There’s just paranoia to things that are new,” he says. But once the benefits of using the new system become compelling, and consumer protections catch up, people will make the leap, he predicts. With credit cards, for instance, consumers are liable for only up to $50 worth of fraudulent charges by law. Such assurances go a long way in boosting trust. “It’s just a matter of people making an adjustment,” Reibstein says. “I think 10 years from now, we’ll look back at it and say, ‘Hasn’t this always been here?’”

Wharton marketing professor John Zhang shares Reibstein’s view that the widespread use of mobile payments is inevitable. Consumers take their smartphones everywhere, and one-tap purchases are quite convenient. “To that extent, surely this technology is here to stay,” he says. Zhang adds that mobile payments are particularly popular among the youth, who are tomorrow’s big purchasers. Retailers would ignore this group to their peril. “If you don’t [accept mobile payments], you’re going to be passé. You’re going to lose lots of your [future] customers.”

Millennials are taking to mobile wallets like Venmo as easily as they have adopted Facebook and Instagram as part of their daily routine. “In fact, you can combine mobile payments with social networks,” Zhang notes. A popular use of mobile wallets is the transfer of funds between friends — to pay them back for dinner, get a loan in a pinch or bail out someone short of cash at a store. “It’s much easier for you to borrow money [this way] and much harder to forget to pay someone back,” he says. “It definitely improves the efficiency.”

Indeed, half of the individuals in the 18-to-29 age group surveyed by PwC are likely to use mobile wallets to transfer money. In general, the report notes that younger consumers tend to adopt mobile wallets more quickly. They also are more likely to use mobile wallets in place of paper tickets for events, along with those from ages 30 to 44. But when it comes to using credit and debit cards in virtual wallets, the 30-to-44 year old set are more comfortable doing so. Among all age groups, PayPal was tops in consumer awareness and usage, followed by Google Wallet as a distant second and then Starbucks’ mobile app.

As proof that mobile payments and wallets will stick, Zhang points to higher rates of adoption worldwide. are definitely more widely used. Even in China, the mobile payment is actually a pretty big deal.” In countries without a developed financial infrastructure or where there is lack of access, mobile payments usually take off, he adds.

Among the few U.S. retailers making major inroads in mobile wallets is Starbucks. Earlier this year, the coffee retailer revamped its mobile wallet for iOS devices to add more features such as tipping your favorite barista or “shake to pay,” where shaking the phone brings up the barcode of a consumer’s Starbucks card to make the purchase. The wallet stores gift cards and rewards frequent purchases. In an earnings conference call for the quarter ended June 29, Starbucks CEO Howard Schultz said mobile payments now account for 15% of all U.S. transactions for the firm.

Most retailers, however, have to contend with the “chicken and egg” dilemma, Zhang notes. “If you don’t have the payment system available in the stores, very few people will look into using mobile payments. But, on the other hand, if a lot of people don’t use [mobile wallets], retailers will not have an incentive to adopt them. That’s where we are today.”

Part of the reason for low adoption “is that the existing payment methods aren’t broken. If nothing’s broken, there is less of a compulsion to have to adopt.”–David Reibstein

If It’s Not Broken…

The problem with mobile wallets is that most U.S. consumers still are not convinced they need them. Shoppers do not see digital wallets as solving any big problem they face. “Part of the reason is that the existing payment methods aren’t broken,” Reibstein says. “If nothing’s broken, there’s less of a compulsion to have to adopt. [The mobile wallet] has got to have some unique and clearly demonstrable advantage before consumers will be flocking to it.”

Reibstein would know. As a co-founder of comparison shopping site BizRate in the mid-1990s, he and his partners set out to solve a problem: Consumers were wary about buying from merchants online. So, they founded a service that rates the trustworthiness of merchants, giving them a kind of “Good Housekeeping seal of approval,” something that was new back then, he notes. Merchants signed up because it would give shoppers more confidence, and buyers liked it because it provided assurances. BizRate also shared purchasing data with merchants so they could better understand their customers. It worked. BizRate reached a peak of more than one million unique visitors a day. “It was widely populated,” Reibstein says. Scripps bought BizRate in 2004, and seven years later sold it and other e-commerce properties to a private equity firm.

Jeff Grass, CEO of buySAFE and co-founder of, agrees that mobile wallets have to figure out what their value proposition is to a consumer or business. Right now, they are hampered by what he calls “hassle” and “trust” factors. Not only can it be a hassle to link one’s bank accounts to the virtual wallet and load credit, debit and loyalty cards, but consumers might not want to trust an unknown start-up or non-financial institution to handle monetary transactions. The PwC survey showed that consumers trust their primary financial institutions the most, garnering nods from 50% of respondents, followed by their credit card company at 22%. Mobile operating system providers such as Google came in near the bottom at 3%, while mobile apps were at 2% and retailers garnered a dismal 1%.

With such odds, why would the likes of Google even bother? According to Wharton marketing professor Eric Bradlow, making money is not the primary motivation. “It is more of a data play than anything else,” he says. “Mobile wallets measure something better, potentially, than web traffic and clicks on banner ads. They measure actual purchase behavior, which allows for customer targeting, custom pricing, product recommendations, churn modeling” and other strategies. Further, it is a “platform play” — if one firm becomes more dominant in payments, it guarantees access to customers, Bradlow adds. No wonder tech companies are entering the fray.

“Mobile wallets measure something better, potentially, than web traffic and clicks on banner ads. They measure actual purchase behavior.”–Eric Bradlow

When it launched in 1999, took on the task of convincing skeptical consumers to pay their bills digitally. Grass says that the firm had to get permission from consumers to reroute their bills to the company, a practice some could see as more of a hassle than sticking a check in the mail. Moreover, there was a trust issue, because “was a young company nobody had heard of,” he says. But the company overcame these concerns by insuring people against online fraud and loss. It also partnered with established financial institutions — such as Citibank, American Express and E-Trade — to give consumers more confidence in using their services. Finally, provided value-added services, such as bill management and analysis, as well as payment scheduling to avoid late fees. Grass notes that the start-up pledged to “take the hassle out of bill-paying so you can enjoy your life.” PayTrust bought the company in 2000.

Mobile wallets could be getting to that point. For years, a wrinkle of one-tap purchasing was that mobile telecom operators would have control over the customer’s payment details stored in a secure chip on the phone that interacted with the NFC-enabled point-of-sale terminal at a store. But last year, Google embedded a new feature in the 4.4 (KitKat) version of its Android operating system that effectively bypasses the chip and interacts directly with the checkout terminal. Analysts see Google’s technology as paving the way for wider adoption of mobile wallets, especially since Visa and MasterCard said they would support it.

Still, Zhang believes it will take years before mobile wallets will become the predominant way to pay. People are so used to purchasing with physical credit and debit cards that it would be hard to change their ingrained habits. Both virtual and physical wallets will probably co-exist for a while, he predicts. Last year, Google introduced a physical debit card tied to a Google Wallet account. In the meantime, merchants could prepare for the transition by installing systems to accommodate both methods of payment.

But will they invest in costly retrofitting? Reibstein predicts they eventually will. He recalls working with Shell Oil on a program to install transponders at gas stations, so that drivers could wave an electronic fob in front of a scanner to pay. Shell had to retrofit close to 8,000 service stations, which was not cheap, and it took time to test the system, he notes. “Yet they did it because it was making things easier for consumers, and consumers would go where things are easier,” he says.

Reibstein compares mobile wallets to electronic speed passes on toll roads. Cars used to wait in line pay a toll collector, but now they just zip through lanes with hardly a thought or any cash exchanged. In the same way, shoppers will someday speed through checkout lanes with a wave of their virtual wallet. “The advantage to consumers is that they get in and get out quickly,” he says. “Who doesn’t prefer that?”