U.S. banks face long odds challenging Apple and PayPal by creating their own digital wallet on the backbone of the bank-owned peer-to-peer payments app Zelle. But if successful, the concept could undermine fintechs and major card networks, experts say.
Early Warning Services, which is owned by seven of the largest banks and operates five-year-old Zelle, plans to launch the digital wallet in the second half of this year with Visa and Mastercard as partners. Consumers would be able to make online payments by entering just an email address or a mobile phone number at the merchant checkout.
Scottsdale, Arizona-based EWS will announce the executive team leading the effort on Tuesday, a company spokesperson said. News of the pending digital wallet — which will operate separately from Zelle and has not yet been named — was first reported in
Breaking the grip Apple Pay, Google Pay, Samsung Pay and PayPal/Venmo have built with consumers for online and in-store checkout over nearly a decade would be a tough challenge, most observers agree.
But banks have many incentives to try getting back into the driver's seat in digital wallets with a new concept leveraging their success with Zelle, which moves more than
The concept EWS is developing could enable credit and debit cards to retain their trusted role with consumers, managing fraud and chargebacks through the existing and mature networks of Visa and Mastercard. It could also allow banks to cut out fintech intermediaries like Apple, which charges a fee of 15 basis points for each Apple Pay transaction. The EWS concept also could potentially allow merchants to negotiate transaction fees directly with banks.
No doubt the primary factor compelling Early Warning to take action was watching Amazon deploy PayPal's Venmo, according to Richard Crone, a principal with Crone Consulting.
"Banks can't ignore … the same opportunity to expand broad usage of their P2P platform to pay-by-bank e-commerce, which could eventually extend to the physical point of sale," Crone said.
The key asset Early Warning has is Zelle's existing database of pre-validated mobile phone numbers and email addresses, representing about 150 million debit and credit cards already on file, he said.
One major problem EWS must fix before moving ahead with an online digital wallet is finding a decisive solution to deal with fraud, chargebacks and disputes, based on rising levels of
"EWS must address bona fide nefarious actors and 'friendly fraud' for payments not recognized by consumers, as well as system outages from their participants in the banking industry," Crone said.
PayPal stock briefly dipped on Monday when the EWS news broke, but equity analysts say any competitive impact won't be immediate.
"We're not ready to give this the benefit of the doubt until it's launched," JPMorgan Chase equity analysts said Monday in a note to investors.
"If the wallet is successful and gains acceptance, it will introduce pay-by-bank capabilities similar to Zelle and circumvent the [card] networks if consumers choose to direct [payments] from their bank account," the analysts wrote.
"We put this in the camp of ongoing competition, and believe PayPal must continue to develop fast checkout and build its breadth of services around the checkout button — including a recently launched savings account — to maintain consumer engagement leadership," Chase's analysts concluded in the note.
The biggest challenge EWS faces is unseating existing third-party wallets, which have been steadily gaining adoption since 2014, said Zil Bareisis, a senior analyst with Celent.
"Consumers are getting increasingly comfortable with using Apple Pay and Google Pay in stores, and PayPal and others are well established online," Bareisis said. "Those habits may be difficult to shift."
Apple Pay and Google Pay are still not as widely accepted in e-commerce as they are at the point of sale, creating a possible opening for EWS to exploit, but the biggest obstacle will be the banks themselves, he said.
"Banks in the developed markets don't have a great track record of launching digital wallets, except in smaller and more concentrated markets where banks were able to partner successfully to launch the likes of Swish or Vipps Mobile Pay in Northern Europe," Bareisis said.
A year after Apple Pay made its debut,
Banks might be able to one-up third-party wallets by offering a superior experience for generating and managing rewards and integrating receipts, but these features have been notoriously challenging for digital wallet operators to bring to market, Bareisis said.
EWS has its work cut out trying to capture consumers' attention, said Jim Mortensen, a strategic advisor for fraud and AML at Aite-Novarica.
"It will be interesting to see how EWS and the banks brand this. As a P2P service, Zelle has gained fast adoption but it may be confusing to consumers to have the same brand used for a digital wallet unless they can also use their Zelle tokens for payments," he said.
Assuming they find a way to successfully market the new wallet, participating banks may devise a new bank-controlled payment approach that satisfies all parties, according to Mortensen.
"Banks increasingly are competing with an expanding universe of fintechs and working to maintain full visibility to their customers' payment behaviors. Also, changing consumer behavior is difficult and when you are a latecomer you need to give consumers a reason to change," Mortensen said.
