The Digital Wallet Is Starting to Take Shape

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Google, Apple

Imagine if, in addition to all the things your smart phone does now, it could also act as your keys to the real world.

Instead of fumbling through a wallet for your credit cards, coupons, gift certificates, plane tickets, membership cards and receipts, you could simply tap your phone to a terminal. All the necessary information would load automatically, and then you’d confirm your identity with a thumbprint or PIN.

(MORE: How Near-Field Communication Lets You Pay by Phone)

We’re not there yet, not by a long shot, but the pieces are starting to fall into place. Although the digital wallet has been hyped up for years, recent developments are bringing a useful version of the idea closer to reality.

Until now, the big question about using your phone as a wallet has been a simple one: Why? It’s not that hard to pull out a credit card when you want to buy something, so near-field communication (NFC), which lets you pay by tapping your phone against a sales terminal, seems superfluous. Besides, some businesses, like Starbucks, already let you pay by phone using dedicated mobile apps. As VentureBeat’s Devindra Hardawar argued this week, NFC still seems like an answer in search of a problem.

Why not just use apps instead of relying on NFC? While the way Starbucks handles mobile payments is cool, paying or using virtual loyalty cards stored inside your phone becomes impractical if every retailer starts offering its own dedicated app. Suddenly, your phone would be filled with dozens of apps, and you’d be stuck fumbling through software instead of a physical wallet to find what you need. That’s not an improvement.

The first step toward making the digital wallet better is consolidation, and that’s happening now. The next version of Apple’s iPhone software, due this fall, will have an app called Passbook that stores all your loyalty cards, tickets and coupons in a central location. Passes can be time- or location-aware, so they pop up when you might need them, and they can notify you of important updates, like gate changes for upcoming flights. Google, not surprisingly, says it wants to offer a similar service as an extension of Google Wallet.

But even that’s not a complete solution. Unless you have a gift card for everywhere you shop, you’ll still need to get out your actual wallet to pay, adding another step to the process. And location awareness won’t work everywhere. For instance, if you’re in a mall, or a place where GPS doesn’t come through, you’re back to sorting through dozens of virtual cards.

This is where NFC comes into play. Instead of digging through an app, you just tap your phone to a terminal, and the phone automatically figures out which coupons and credit cards you need. Your physical wallet gets lighter — maybe even unnecessary — and you don’t have to waste time searching through a list of onscreen bar codes.

Google already has the NFC piece in place with Google Wallet, and though it’s struggled to gain adoption so far, I think the addition of a Passbook-like service would help. Rumors of an NFC-equipped iPhone, meanwhile, have circulated for over a year. It’s not likely to happen in the upcoming iPhone, but I wouldn’t rule it out for the one after that. In July, Apple acquired mobile-security company AuthenTec, which specializes in fingerprint-sensing patents and technology. As the Next Web pointed out, fingerprint scanning could be a key piece in a secure, NFC-based payment service from Apple.

Like I said, none of this is going to take off in the near future. There’s still a war brewing over who will handle those NFC credit-card transactions, and it’ll be a while before Passbook and Google’s answer to it gain traction. But at least now, the end goal for the digital wallet is coming into focus.

MORE: Pay with Square at Starbucks: The Biggest Moment Yet for Mobile Wallets