Banks worldwide have been clamouring to support mobile wallets launched by technology companies. While this may make for good PR in the short term, the same banks are at risk of losing their biggest advantage: The customer relationship.
The established view has been to offer consumers the ability to store multiple bank cards in a single mobile wallet at the same time as ensuring acceptance across a wide range of merchants. Consumers value not only tangible benefits like deals, discounts and rewards, but also intangible benefits like convenience and relevance.
Many of the banks rushing to join the xPay revolution (Apple Pay, Android Pay and more recently Samsung Pay) do so in the belief that it is a cheaper alternative than launching their own branded wallet. This might be somewhat short-sighted as it does not count the hidden cost of developing and marketing the entry of the technology giants into the banks’ domain.
The banks are paying up front, and they are also paying on a per transaction basis for the privilege of acting as a funding partner to a global player with an alternative vision of the future. Once accepted by the public as a provider of payment services, the technology giants are well positioned to move in and take the customer relationship, especially if that relationship is underpinned by deals, discounts and rewards.
The holy grail of checkout is frictionless payment. Uber has cracked this nut, Amazon is giving it a go and the pay-in-advance coffee shops are constantly experimenting. The reality is that card issuers gain no brand value from invisible payments.
Additionally, the value of the convenience (of the payment process) passes to the wallet provider leaving the consumer open to the attraction of value-added services, which are ultimately going to be associated with the wallet rather than the payment.
As the wallet market develops, and the features available to consumers are extended, the percentage of wallet real estate taken up by payments will inevitably shrink. If wallets are provided by technology giants as part of the smartphone ecosystem, consumers are going to be attracted by the non-payment services, because adding a card to a wallet is simple. The banks have already done the work.
Some time ago, Ross McEwan, CEO of RBS, said “Our busiest branch in 2014 is the 7:01 from Reading to Paddington - over 167,000 of our customers use our mobile banking app between 7 am and 8 am on their commute to work every day. Over 2.1 million customers use our mobile app every week.”
This reported trend has so far not subsided, and today, many of the organizations that provide real-time banking data are noting that they are spending increasing sums of money on storage, servers and bandwidth to respond to the early morning demand for personal financial information. The banks’ own banking apps are clearly the first port of call for their customers, giving the banks direct access to what is essentially a captive audience. Their actions, however, are effectively handing over that same captive audience to the technology giants.
Beyond the wallet but still associated with the wallet ecosystem lies the threat of open banking. The advantage of being the only organizations allowed to deliver financial transaction and account information to the commuters on the 7:01 from Reading is being challenged by PSD2, and banks will face serious threats if the business of banking can be delivered by non-banks.
As legislation forces banks to expose their services through APIs, technology companies are handed an opportunity to aggregate those services and offer a host of innovative consumer-focussed financial services under their own brand.
The consumer’s need for a direct relationship with their bank could be virtually eliminated if consumer services are increasingly delivered by non-bank wallet providers. The provision of these services provides for the gathering of consumer data, and as the banks lose their direct relationships with their customers, they also lose the ability to determine why. Ultimately, banks may continue to make money offering banking services, but the technology companies will benefit from the provision of value added services.
It is imperative that banks launch their own, branded, mobile wallets as part of a wider mobile strategy. While the business case for mobile wallets used solely to facilitate contactless payments is undeniably weak, the longer-term potential for mobile wallets is not.
The technology giants recognize the value of the direct relationship with the consumer and the rich data seam available to mine, and they also appreciate that over time the consumer will come to understand the value of a single point of contact in an increasingly complex world.
Banks are swimming against a tide of their own making, their first priority must be to stem that tide. They do have the means:
Stage 1. The vanilla or “me-too” wallet, used to store-bank issued cards. The focus is on customer retention and the provision of an attractive alternative to the xPay wallets.
Stage 2. Expand the range of cards supported to those of other issuers, along with an initial set of services. This would attract new customers and help retain existing customers.
Stage 3. Create a differentiating value proposition by offering a range of value-added services in conjunction with merchants and service providers, especially those merchants that are already corporate customers of the bank. Use the data harvested to cultivate meaningful insights that can be used to develop further contextualized offers and targeted services.
Banks can choose to limit themselves to Stage 1, but in doing so they are arguably putting themselves at a disadvantage. Consumers are ultimately going to choose the wallet and provider that can offer maximum convenience with minimum intellectual investment.
Consumer interest in rewards that are intelligently tailored presents an opportunity to incentivize mobile wallet adoption and build customer loyalty. Banks that are aware of the practicalities of Stage 1 should therefore be planning for the second and third stages.
Being the preferred point of interaction for both the virtual and the real world is a source of value to any wallet provider that far outweighs the income potential of payment transactions: There is value to be had from consumer transaction data, which is significantly enhanced if it also includes the additional basket data available from the merchant via the wallet application; there is value to be had from partnering with merchants to develop interesting and engaging ranges of services that resonate with consumers; and there is value to be had from a business model that acts as a true value proposition for all the players in the game: the consumers, the merchants and the banks.
In summary, banks should be prepared for the long haul. In the short-term they need to invest in their own wallets, under their own brands. The alternative, adopting the xPay wallets, poses a definite threat to their long-term business.
The virtuous cycle of using the transaction data to determine customer preferences and then using the insight to offer relevant and compelling value propositions through a combination of in-house offerings and external partnerships presents a true win-win opportunity for everyone, with the banks firmly positioned in the middle.
