Banks Can Counter Millennial Appeal of Apple Pay and Venmo

For many banks, the increasing popularity of mobile payment platforms such as Venmo and Apple Pay, among millennials in particular, should be cause for concern.

Projections show that Apple Pay users in the U.S. are expected to double from 12 million people using the service at least once a month to 25 million this year alone. That same Bloomberg article revealed that only five percent of banks polled have a branded wallet app compatible with Android phones and just 17% plan to release one within the next year. There appears to be a disconnect in there somewhere.

Younger generations crave instant gratification. Studies reveal that millennials in particular are more likely to switch from their primary banks and thus the convenience afforded by these mobile platforms poses a legitimate threat to customer loyalty. McKinsey’s annual Mobile Consumer Panel consistently identifies convenience as the leading factor in consumer adoption of mobile payments. For banks who have yet to jump on the bandwagon, it’s time to climb aboard.

Here are a few options for banks looking to get with the program:

Integrate into existing technology company solutions. This route has the benefit of being relatively simple and cost-effective. Banks willing to sign a deal with larger tech companies, such as Apple and Google Wallet, can then tell their customers that they already have a digital wallet option available. One drawback to integrating with tech companies could be the rising customer concern over data privacy and theft. According to Accenture, 86% of consumers trust their banks over all other institutions to securely manage their personal data and may not want their financial information shared with companies like Apple (although recent positions with the DoJ might have strengthen further consumer’s perception of Apple privacy concerns).

Another potential drawback of this approach is that pre-existing mobile payment platforms, such as Apple Pay, may not match up with customer expectations. Apple has stated that they wouldn’t use transaction data for marketing and promotional purposes.  Yet getting discounts and loyalty points could be of interest of consumers, which show their eagerness to be rewarded for their loyalty.

Finally, and this is the most critical aspect, while Apple Pay seems to have a fair offer for banks, getting “only” 0.15% of the transaction value from the interchange fee, banks embracing Apple Pay would lose something more important – customer connection. Payment is the most prevalent way we have to interact directly and indirectly with our banks. So, in an era where enterprises, especially in the financial sector, take aim at increasing the frequency and quality of interactions, giving this up to another player is counter intuitive at best.

Build a branded digital wallet. Pursuing this option offers banks the most control and, if done correctly, can even create a more unique and improved customer experience. Building a digital wallet ensures that banks get to securely hold onto customer data that would otherwise be held by a merchant platform. Moreover, banks would be able to deliver an offering better tailored for their specific customers, allowing them to differentiate in the markets and attract new segments.

The main drawback of this avenue is the cost. However, since we already know that younger generations are more fickle when it comes to bank loyalty, and considering the increasingly significant spending power they have, committing the extra time and money to developing a solution that fits with their needs could be well worth it. In the end, this might be the most effective method, but it may also be the most difficult to implement.

Build a joint solution. Banks may also choose to establish an association and work together to develop a joint digital wallet solution. There is a good chance this will turn out to be the most mainstream option for smaller banks who do want to retain customer interactions and transactions knowledge but do not have the resources to build their own digitial wallet. By sharing assets, a significant amount of resources are not required from any one party. This gives each organization the ability to better implement and improve the resulting digital wallet offering / platform.

Many banks may not be moving quickly on the mobile payments trend, but for those who are, the tide of non-bank owned digital wallets poses some tough questions.

Are incumbent banks capable of issuing their own digital wallets or do they need to look to merchant ones, such as MCX, or tech providers’, such as Apple and Google, to help them ride this wave? And for banks who do choose to fly solo, are they capable of delivering a truly unique product for their customers?

No matter the answer to that, before pursuing any option and forcing that choice to the customers, banks must gain a clear understanding of their customers’ needs and requirements from their digital wallet provider. That would give them the opportunity to define their strategy based on actual needs, rather than convenient routes and me-too choices.

As McKinsey stated in its report: “Offering a strong payments plan as part of a comprehensive strategy for digital banking is therefore an imperative for banks.” But, as it is also said at the end of the paper, “banks will succeed only if they can match the solutions, operational efficiency, and client-service skills of attackers."

Filippo De Montis is director of global industry solutions for banking and insurance and Software AG.