Imagining a Passbook-powered digital wallet

Despite the somewhat mixed reception it got from users, I like iOS 6's Passbook feature. When it works, it's a great alternative to more-traditional counterparts: no more paper to carry around; no more rummaging through your inbox at the last minute, looking for an elusive boarding pass.

It really shines when it ties in well to your shopping experience, as is the case with Starbucks's excellent iOS app, which lets you purchase items and track your loyalty rewards just by waving your iPhone in front of a scanner.

Passbook's potential, however, remains largely untapped. Each merchant must implement it on a one-off basis, which reduces its convenience: You present your boarding pass or coupon or loyalty card, and the vendor decides what you can do with it and how, resulting in ad hoc systems that yield uneven results and may not work well with one another.

Apple has thus far given no sign that it plans to build a more comprehensive payment system around Passbook. Still, a "digital wallet" that allows users and merchants to exchange data in both directions could revolutionize the way we deal with our finances.

Lose the plastic

As Bill Gates once said, computers don't get thicker and heavier as they get stuffed with more data. He was talking about laptops, but the same concept applies to smartphones: The most obvious impact of a digital wallet would be to reduce the amount of plastic and paper you must carry with you, in order to have access to the information when you need it.

This isn't just a matter of convenience. Much of my interaction with my physical wallet consists of triaging its contents, in an ongoing effort to keep it at a manageable size; but inevitably I find myself ditching various that I don't need every day, but that might come in handy at some point.

On more than one occasion, this card-juggling trick has cost me money--for example when I leave gift cards at home and they eventually expire. Such consequences wouldn't ensue if I could safely store all of my data on my phone.

Stay safe

A side benefit of carrying fewer cards is that they're harder to lose. A misplaced or stolen card requires a call to the issuing bank (whose number is, of course, on the card itself), and it raises the possibility of having to dispute fraudulent charges and to submit a new credit card number to all of the companies that you have recurring charge arrangements with.

A single digital wallet can mitigate these problems. For one thing, it's much less likely that you are far less likely to lose your phone and not notice that fact for several days. In addition, you can protect an iOS device with a strong passcode, whereas the average credit card is just a signature and a four-digit PIN away from unauthorized use. Also, if someone steals your mobile handset, a quick visit to Find My iPhone makes wiping its data a breeze.

One of the biggest sources of credit fraud is the point of sale--where crooks often skim credit cards and steal PINs, and where you have no choice but to hand them over to the merchant. A digital wallet, on the other hand, can create single-use credentials for every transaction, seamlessly enabling the merchant to charge you without ever coming into contact with your personal information.

Keeping tabs on your money

Though credit cards are complicated and confusing beasts, when properly used they offer many advantages over cash--for example, rewards or special discounts under specific circumstances. Even the ability to postpone payment until the next bill is due can help customers manage their money and spread out their expenditures over time.

But juggling multiple credit cards can be a hassle. For example, a particular card may offer special rewards when used in a specific store, while another one may give you extended interest-free payment terms for purchases above a certain amount.

Unless you're an accountant (or like me, you're married to one), that's a lot of information to keep track of--not to speak of trying to figure out which option is best in a given situation. But a digital wallet could easily keep track of your cards' various special features  and pick the most advantageous one to use for a particular purchase, whether with the long-term goal of shaving money off your expenses over the course of a year, or accruing points toward a vacation or other reward.

Even better, a digital wallet system set up to allow merchants to send data back to the user could collect detailed information on all of your purchases and feed it to a personal finance package, which could help you track your expenditures and make better-informed decisions. (In my family, we do the same thing by hand--which is incredibly useful but also mind-numbingly boring.)

A matter of control

Could Apple pull off something like this? It's hard to say. If the company did undertake such an effort, it would probably encounter a number of obstacles along the way.

For one thing, credit card processors are unlikely to welcome the prospect of having a third party meddling in the purchase process that they currently control. I wouldn't be surprised to see them try to block Apple from offering an alternative to their services.

However, the folks from Cupertino could sidestep this problem by building a digital wallet that allows merchants to obtain credit card numbers from users securely, and then use those numbers to process purchases through normal channels.

Similarly, credit issuers and large retailers may be wary of the power that the data collected by a digital wallet gives their clients. Better-informed customers--particularly if helped by well-written software--are likely to make smarter financial decisions, giving consumers a chance to save money that would otherwise end up in the pockets of the banks that issue their credit cards, or the folks that sell products and services.

A digital wallet could have an enormous positive impact on its users' lives, and such a system that worked only on iOS devices would help Apple keep more customers tied to its ecosystem. That alone could motivate the company to put its considerable heft behind the effort required to make the service a reality.

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