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How to Manage Wavering Consumer Interest in Mobile Payments

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The competition for mobile payments has been intense over the previous year. Dozens of digital wallets have launched with mixed results. Now, as players shift focus to adoption and usage, banks need to understand consumer drivers and better define their offerings. With new market research suggesting that consumer interest is beginning to waver, market leaders need to deploy mobile solutions promptly in order to speed adoption and build scale. Laggards should be prepared to defend long-standing consumer relationships.

2013 will be a critical year for mobile payments. Smartphone penetration finally exceeded 50% last year, according to comScore. At the same time, McKinsey's annual mobile consumer survey shows mixed developments compared to one year ago. Enthusiasm for mobile payments remains high but is moderating, suggesting increasing urgency for players.  

The majority of consumers still believe that mobile payments at the point-of-sale will be widespread in three to five years. In fact, that number is rising. Moreover, usage levels for various types of mobile payments – app purchases, m-commerce, etc. – are strong. The main drivers for consumer adoption – deals and offers, convenience and integrated payments – remain steady.  However, consumer interest in these drivers is cooling. Deals and offers, for example, are now ranked as "very exciting" by 16% of consumers, down from 21% one year ago.   

For banks, these changes indicate a narrowing window of opportunity. With consumer expectations reflecting a more pragmatic view, mobile payment providers need to build engagement before indifference leads to disengagement. Otherwise, they may squander the burst of consumer interest and face an uphill battle to convert disaffected users.

The market for digital wallets is fragmented and changing rapidly. Alternative payment players made early inroads over the past 18 months with launches by Google Wallet, Square and others. Now, traditional payment players are regaining ground. Visa and MasterCard have launched digital wallets, and major banks are actively working on their own digital wallet solutions. Merchants have also entered the fray.

So, how are players positioned? McKinsey's consumer panels show that banks and payment networks are seen as the "most trusted" providers. While that is an important asset, banks get mixed results on innovation. Notably, Chase is perceived as the "most digital bank" with highly engaged customers that view mobile innovation as important. Customers at other banks, however, are less energetic about their bank's digital innovations and are undecided about bank-based mobile solutions. As a result, banks need to strike the right balance between trust and innovation and make a clear decision about their path forward.  For banks considering mobile wallets, now is the time to act.

When we asked consumers to design their "ideal digital wallet," their responses were compelling. First, consumers want flexible ways to pay. Banks cards were the obvious staple, but reward point redemption spiked as the most attractive. Next, consumers view bank-based financial controls (e.g., receipt management, bill pay) as a critical feature, which could prove a strategic differentiator for banks. Finally, specialized features, such as in-wallet credit, customization, cross-border commerce and charitable payments, appeal strongly to niche groups.

These findings hold major implications for banks and mobile payments. Consumers are interested in multiple value propositions, increasing the likelihood of fragmented offerings. Against this backdrop, there are four strategic imperatives for banks:

Accelerate consumer adoption. With a temporary window to connect with consumers and drive adoption, banks must act quickly to secure their position.

Refine the value proposition. The optimal balance of financial control and loyalty incentives is still open. Deals and offers, while compelling, have yet to fully materialize and banks hold advantages in financial management tools.

Align perception and values. Consumer views on trust, innovation and security are in play. Banks need to make clear decisions on the strategic importance of these factors and shape their development pipeline accordingly.

Begin planning for the next round. Launching a mobile wallet is just the start. Banks will need to fight for share and determine their strategy as the market moves from fragmentation to consolidation. Get ready for the long march.

For banks, the stakes in mobile payments are high. The good news is that various offerings have traction, and consumer experimentation and acceptance will continue. At the same time, consumers ultimately want a more consolidated digital wallet landscape where they can concentrate their activities. For banks, the coming period will require scale and durability to be successful.

Dan Ewing is a senior expert at the global consulting firm McKinsey & Co.

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Comments (1)
It appears that the "early adopter" wave may have passed. The next phase will be for each bank to decide their individual directions based on their customer segmentation and the answer to the simple question of "What's in it for me?" for their customers which is a succinct recap of the author's strategic imperatives. A more basic question is "do our customers have enough positive cash flow for them to want to be able to get discretionary expenditure "deals" ASAP. For example, can they negotiate a better price on a purchase if they can show the merchant a better price available at another nearby store, Groupon vendor, garage sale vendor, etc. and integrate the decision into their personal budget and cash outflow process. With so many people out of work, stopped looking for work, concerned about their future, the GDP appears to barely above the flatline. If you want a humorous idea for an innovation to encourage use, guarantee that the merchant will be paid with the same delay that they provide when they give refunds to your cards when you return items.
Posted by FrankRauscher | Wednesday, May 01 2013 at 12:09PM ET
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