Microsoft: Last Chance At A Mobile Wallet?

What ever happened to Microsoft's (NASDAQ:MSFT) mobile payments? In the wake of the software giant's purchase of Nokia's phone business, that's a question worth asking. Microsoft will soon have Apple-like (NASDAQ:AAPL) control over a smartphone maker's hardware and software, which puts it in the perfect position to offer mobile payments that actually make sense to merchants.

Will Microsoft do that? Maybe. But it's going to require a radical rethinking of what last year Microsoft was calling the Windows Phone 8 Wallet.

The WP8 Wallet that Microsoft talked about a year ago used a near field communications (NFC) chip in the phone to mimic a credit card for in-store payments, the same way Google (NASDAQ:GOOG) Wallet, Isis and a plethora of minor competitors do. Wallet also worked a lot like Apple's Passbook to hold coupons, tickets, loyalty cards and other digital items that matter to retailers.

But organizing coupons is easy. The big deal was the possibility that someone had finally cracked the problem of really getting merchants to support a mobile wallet.

That didn't happen. The WP8 Wallet got no payments traction. Meanwhile, its competitors' results have been every bit as underwhelming. Google Wallet has all but abandoned in-store mobile payments for lack of use. Isis is mum about how many transactions it actually handled during a year-long trial in Salt Lake City and Austin. Apple hasn't even had the nerve to dip a toe into mobile payments.

Some observers blame the banks, the mobile operators or consumers for that situation. They're almost certainly wrong. The problem is that retailers don't see any solid benefit to mobile payments. Merchants already use a non-cash payment system that's small, lightweight and seems to satisfy most customers—that's the plastic credit card. Why should they bring in third parties who will raise costs without doing anything that's clearly better for the store's business?

When Microsoft takes over Nokia's phones, that's the situation it'll walk into. And with just a tiny sliver of the smartphone business, what hope will it have of getting retailers interested in yet another tap-your-phone-to-pay system?

None, really—unless Microsoft does something that's apparently unthinkable for Google, Apple and Isis: Throw out the standard mobile-payments playbook and make payments a service that Microsoft won't profit from.

What if Microsoft told merchants, "Look, we're in this for the market share, not the money. Do payments with us and we'll make sure you get to keep all your customer purchase data, not us. We'll help you get set up. We'll pay any extra costs for audits to make sure you're secure. We'll learn a lot about the mobile payments business and so will you. Maybe someday you'll be interested in buying value-added services from us. In the meantime, all we ask is that you tie mobile payments to your loyalty program and promote it."

That would cost Microsoft a lot of theoretical profit. But the profit is all theoretical anyway. Google Wallet, for example, has lost money on every transaction. Making basic mobile payments effectively zero-cost to merchants and actually focusing on what merchants want—more customer engagement with their stores, not with Microsoft—just might break the payments logjam and give Microsoft's phone business a big advantage that it desperately needs.

Will it happen? I have my doubts. Squeezing both its partners and customers is too deeply ingrained into Microsoft's culture. But who knows? This clearly isn't PCs or laptops, and the painful experience of Microsoft's overpriced tablet entries may be enough to remind the company that deep discounting to gain market share is how it first became dominant. (It's no coincidence that Visa and MasterCard became dominant in retail payments by giving away credit cards, too.)

Or Microsoft could do the same things that haven't worked for its larger, better-established competitors. And in a year or two, no one will wonder whatever happened to Microsoft's mobile payments. No one will even bother to ask.