The launch of Apple Pay last month was undoubtedly a defining moment in the evolution of mobile payments.
The ability of Apple to bring together the payment networks, processors, some of the largest card issuers and acquirers, as well as a diverse set of retailers and merchants speaks volumes about its brand, products and "cool factor."
As we move past the initial euphoria of "mobile payments have arrived.", banks and card issuers need to pause and assess the long-term implications of a new party in the payments value chain. Additionally, they need to be sensitive to changes in the economic model as the new party also brings in new cost.
The best case is the reduction in fraud offsets the new expenses and in the ideal scenario there is a decrease in fraud losses and an increase in purchase volume. If the numbers hold, the incremental interchange earnings would be net positive for an issuer. On the flip side, a card issuer experiences no reduction in fraud and volume stays flat.
These costs are the obvious ones in terms of the fee banks and card issuers are paying Apple as a function of purchase volume. We submit there are other expense and issues to contend with. Plus, we believe that fundamentally card business management and marketing will need to change.
As Apple Pay (or other mobile wallets) gain greater consumer adoption banks will lose the customer interface at the point of sale (POS). Banks have made considerable investments in their card brands (including design, look and feel) and there will be diminishing returns as consumers use Apple Pay vs. (insert bank card brand). If the right marketing strategies are not employed the bank card brand will become an "ingredient brand" provisioned within the phone (not ideal) or become marginalized.
This in turn leads us to the next issue. How does the bank get the card to top of wallet status and how does the bank build cardholder engagement and loyalty? With customers provisioning multiple cards from various banks into the wallet ensuring "top of wallet" and engagement get more challenging and expensive. Our thesis is that banks will need to drive significantly greater and uniquely differentiated value, and they will need to be more creative in terms of marketing and personalization. At its core this could mean higher credit lines, better pricing, bonus rewards points for Apple Pay transactions, etc.
This is where Apple Pay gets interesting. We believe that once banks and card issuers re-align their business model to operate in a mobile and digital world there is an exciting future ahead. We see an ecosystem where mobile supports an interactive real-time environment that actually enhances the bank-customer relationship through data and analytics, where reward points, fiat currencies and digital currencies co-exist and where marketing is targeted more effectively, is more personalized and more relevant.
Consider this example. A consumer buying a new TV conducts research via the phone, settles on the best deal, rationally selects between using rewards points or a payment card at the POS, elects to use a payment card, consummates the transaction and instantly gets an offer on the phone to move the transaction to a 6-month no interest fixed payment plan and a credit line increase. All this before the customer has left the store. That should engender some loyalty with the bank and keep the card on top.
In our view Apple Pay provides a superb new customer engagement platform. Can banks and card issuers leverage it effectively and strategically to grow volume and wallet share?
Ali Raza is a principal and payments leader at CCG Catalyst.
