Will Bank-Backed M-Wallets Win?
As banks gain a more prominent spot in the mobile payments market, will they become the one wallet to rule them all?
The mobile wallet competition has intensified now that banks are making a play for the space, pitting themselves against third-party wallets and retailer payment apps in a race for enrollment.
Along with the arrival of the so-called Pays—including Apple Pay, Android Pay and Samsung Pay—the past two years have produced a succession of banks announcing plans for their own proprietary wallets. And activity on that front has picked up in recent months.
Capital One became the first U.S. bank to get in the game when it added contactless payments capabilities to its existing Capital One Wallet in October 2015, enabling its users to make purchases at the point of sale. Later that month, Chase revealed plans for its own wallet, Chase Pay, and made known its plans to partner with retailer consortium MCX to have Chase Pay accepted by its network of member mer chants, including Walmart, Target and Best Buy.
The trend of bank-backed wallets could signal a new direction for mobile payments, a method that’s struggled to achieve widespread consumer adoption. Only 18 percent of North Americans make mobile payments regularly, even though 52 percent of consumers report that they’re “extremely aware” of mobile payments, according to a 2015 Accenture survey.
The question is whether financial institutions have a shot at winning the wallet race, and industry observers say the banks have some inherent advantages over the third-party platforms. Banks stand to reclaim half of the market by developing their own mobile wallets, says Richard Crone, CEO of research firm Crone Consulting LLC. He estimates there are 60 million to 100 million active wallet users worldwide.
“The one who enrolls is the one who controls,” Crone says. “If the bank hasn’t enrolled the customer, they’re reducing their franchise value and turning over their business to the ‘Pays’ one enrolled user at a time.”
Banks traditionally have taken a conservative approach to innovation, preferring to watch others innovate before taking any action. So it’s no surprise that banks have waited until now to jump in so they could get a feel for the market first, explains Rick Oglesby, president of research and consultancy firm AZ Payments Group. “Banks have always wanted to own and brand the payment experience. As these third parties have gotten involved and started trying to offer their own wallets, we’ve always said that sooner or later the banks would have to get going on this,” he says.
The trend of banks launching their own mobile wallets is spreading in global markets.In February, Citi Banamex in Mexico and Mastercard unveiled the Banamex Wallet, a mobile app leveraging host card emulation (HCE) technology to enable Android users to make contactless payments. Samsung and Citi also announced plans to deliver Samsung Pay in the Asia-Pacific region, specifically in Singapore and Australia.
Banks in Switzerland also appear to be taking some leadership on the mobile payments front. The five biggest Swiss banks—ZKB, Raiffeisen, PostFinance, Credit Suisse and UBS—are forging an alliance with some of Switzerland’s retail heavy hitters to create a digital payments system that allows for mobile access. Retailers partnering with the banks include supermarket chains Migros and Coop, along with the telecom firm Swisscom.
Joshua Gilbert, partner with industry advisory group First Annapolis, says it’s better late than never for banks to enter the fray. “They’re feeling a lot of competitive pressure to do something, and I think it’s the right conclusion,” he says.
All Eyes on Chase Pay
Perhaps the most anticipated FI player in the mobile wallets game is Chase. Chase Pay could be a game changer for mobile payments, as the U.S.’s largest bank by assets has a few key advantages over competing financial institutions. When Chase Pay launches—expected in the fourth quarter—it will become available to the bank’s more than 90 million account holders. That means one in every two U.S. households will have the ability to use Chase Pay, Crone says. “The launch of Chase Pay will be a seminal moment in mobile payments,” he continues.
Chase Pay presents an attractive proposition for merchants, too. Because of a 10-year partnership made with Visa in 2013, resulting in the creation of the Chase Merchant Services platform, Chase can negotiate card-acceptance pricing and certain operating rules directly with merchants. That means merchants won’t be beholden to Visa’s interchange schedule, nor will they face network fees, merchant processing fees or fraud liability.
Chase Pay also will rely on tokenization technology and function as a cloud-based mobile wallet, and it won’t require NFC or any necessary hardware. “One of the ways Chase Pay is unique is that we’ve started with merchants,” says Chase spokesperson Edward Kozmor. “By solving merchant concerns first, such as the cost of payments and merchant fraud liability, we create an incentive for merchants to encourage their customers to use Chase Pay when it becomes available.”
Already, merchants have begun actively promoting Chase Pay. Earlier this year, Starbucks agreed to incorporate Chase Pay into its wildly popular mobile payments app, while Shell announced over the summer that it would start accepting Chase Pay at its U.S. gas stations. And Chase’s deal with MCX could prove to be a major coup for both the bank and the retailer consortium, which includes more than 100,000 member locations.
Crone compares Chase’s play for the mobile wallet space to its launch of mobile remote deposit capture four years ago. Every time Chase ran its national ad promoting the service, the bank opened up 10,000 new accounts. Chase Pay could yield similar results, he suggests.
“They’re gunning to take away customers from the banks and credit unions that don’t have this capability, and they’re going to use it to move the market the same as they did with mobile remote deposit capture,” he says.
More financial institutions are getting into the mobile payments game, whether that means launching a proprietary wallet or incorporating third-party wallets into an existing app—or both.
Capital One’s platform enables consumers with Capital One credit and debit cards to use an NFC-enabled Apple or Android device to make contactless payments. As the first U.S. bank to enter mobile payments, Capital One encountered more skepticism than optimism about the need for a bank-backed wallet. Now those attitudes are changing, says Tom Poole, the bank’s managing vice president for mobile and emerging payments.
|MCX Shifts Strategy to Tap Potential of Chase Wallet, FIs
MCX’s decision to shelve its own mobile payments app and shift its attention to partnerships with financial institutions could signal a turning point for the retailer consortium’s mobile wallet strategy.
MCX announced in May that it would hold off on the nationwide rollout of its CurrentC mobile payments platform and focus instead on working with FIs such as Chase, a deal that could be a game changer for both the bank and the consortium. Under MCX’s agreement with Chase, Chase Pay will be accepted at MCX’s more than 100,000 member retail locations. Chase has garnered support of merchants through MCX and other partnerships and has the advantage of a large customer base. This creates a closed-loop among merchants, consumers and the bank.
Rick Oglesby, president of AZ Payments Group LLC, says a consumer-led approach is going to be necessary for mobile wallets to take hold, which is why MCX’s partnership with Chase is significant. One of MCX’s biggest objectives is to create an environment in which banks have to compete with each other to gain acceptance at the largest merchants in the world.
“That’s why their pivot makes a lot of sense,” he adds. “Their deal with Chase is a big step in that direction, so they really need to focus on making it work.”
Last year, MCX began testing its CurrentC QR-based wallet through a pilot program in Columbus, Ohio. MCX CEO Brian Mooney said publicly that the results of the pilot were part of the reason behind the consortium’s strategy shift. MCX has not yet indicated whether it will end CurrentC permanently. Stores stopped accepting CurrentC on June 28.
MCX’s decision to postpone CurrentC resulted in a staff reduction of about 30 employees, because MCX said it will need fewer resources. “People say MCX is dead because they dropped out of CurrentC. I tend to disagree with that. The goals of MCX haven’t changed, but the approach has,” Oglesby says.
“Ironically, when we first launched payments, people began to ask us, ‘Why would we use a bank for payments versus a digital company?’ But as customers began to use our wallet, they loved the convenience of being able to stay on top of their spending and get the most from their credit card rewards,” Poole says.
Right now, the wallet app provides real-time spend alerts, the ability to store gift cards and receipts, and transaction monitoring with special alerts for things like unusually large tips or potential double charges. Based on feedback, Capital One is seeing a demand for more advanced features that give banking customers more control of their spending, and the bank plans to start releasing what it calls new “auto-magical” features soon through its wallet platform every one to two months.
In May, Wells Fargo became the second-largest U.S. bank behind Chase to announce its own mobile payments platform, and it beat Chase to the punch with the rollout of its NFC-enabled Wells Fargo Wallet for Android to more than 5 million customers in July.
Wells Fargo is looking to capitalize on the fastest-growing channel in Wells Fargo history—mobile. The bank estimates that approximately 38 percent, or 5 million, of its mobile app customers use Android phones. “Our goal is to satisfy our customers’ financial needs when, where and how they want,” says Jim Smith, head of virtual channels for Wells Fargo.
Not all institutions are developing their own mobile wallets. Bank of America is opting for what it calls an open wallet strategy, in which the bank partners with the major third-party wallet providers. BofA spokesperson Betty Riess says it’s a matter of customer choice in a time when consumers are being inundated with wallet options. “This strategy allows our customers to load and use their cards as they do today in any major wallet they choose,” she says.
Another option became available in July when Mastercard announced Masterpass in-store payments and the ability for issuers to incorporate the digital wallet into their own mobile banking apps. Initial issuing partners include Ally Bank, Bank of America, Capital One, Citi, Fifth Third Bank, First Tech Federal Credit Union, SunTrust and Virginia Credit Union, among others.
“The launch of the new Masterpass marks an important industry milestone as we become the first network to deliver a bank-branded, all-digital payment solution that works across devices and retail channels,” Matt Barr, senior vice president, digital payments and labs, Mastercard, said in an announcement.
Citi has offered its own digital wallet, Citi Wallet, for online purchases since 2014, but so far it has offered no mobile payment option in the U.S. for use at the point of sale. Customers can make Citi payments through Apple Pay, Android Pay and Samsung Pay. Citi also is exploring global markets with its wallet strategy.
“Digital wallets have been in use for e-commerce transactions for quite some time, but the widespread adoption is driving a new wave of innovation in mobile wallets, and banks are uniquely positioned to enhance their current product set by leveraging the capabilities of the mobile device to further strengthen their relationship with customers,” says Barry Rodrigues, head of digital payments for Citi Global.
Changing Consumer Habits
The road to widespread mobile wallet adoption still could present banks with the same challenges third parties have encountered, says Art Roca, senior director of payment services for Alliance Data, a marketing and loyalty firm that provides branded credit products for several high-profile retail brands.
“The plastic card has withstood pretty well. It’s not broken,” Roca says. “And consumer habits are pretty hard to change unless you connect and interact with [consumers] as loyal customers and offer value-added services beyond the payment.”
Roca points out that even among customers with the right kind of phone and application, and an eligible card, only 19 percent end up using a mobile payment on that device, according to a mobile payments survey the company conducted in April.
Banks also must figure out which payment protocol will be the most likely to catch on, and right now they have differing opinions on whether NFC is the way to go. Smith of Wells Fargo is bullish on NFC’s potential for mobile wallet uptake. “We believe that the steady increase of NFC-enabled payment terminals, in addition to the proliferation of NFC-enabled ATMs, will drive customer adoption of mobile wallets,” he says
Both Wells Fargo and Capital One are relying on NFC-enabled wallets. Chase will be able to work with NFC where applicable, but the bank plans to incorporate open protocols, such as barcodes and QR codes, rather than rely solely on NFC.
Creating ubiquity and widespread distribution will be the challenge for all mobile wallets, but the banks are in an advantageous position, says Bob Legters, senior vice president of product, banking and payments at FIS, which provides tech services for banks and has created a tokenized wallet that banks can integrate into their existing apps.
What sets the banks apart is that they can link consumers to secure data and bank account information in ways that third-party mobile wallets can’t. “At the end of the day, if you’re going to run all your financial payment tools through a product, you’re going to be more inclined to do that through one that’s issued by a financial institution,” Legters says. “That’s the feedback we’ve gotten from some of our clients.”
Particularly among the larger institutions, more banks are showing an interest in adding mobile payment functions to their apps, although it’s not their primary request, adds Walt Granville, senior vice president of mobile innovation for Cachet Financial Solutions, which helps banks integrate services into their mobile apps.
“There are a number of limitations that exist in most people’s banking applications that they want to address, more than adding payment,” Granville says. Those features include biometrics authentication, mobile remote deposit capture, money transfer options, card controls, and personal financial management data and tools. “But I do think payment is slowly but surely becoming an area our clients are looking at.”
Even if the banks gain a more prominent spot in the mobile payments market, it’s unlikely there will be one wallet to rule them all, just as there’s no dominant card or payment type, Crone says. But there’s still a gaping hole in the market that the banks could easily fill. “It’s the financial institutions’ to lose,” Crone says. “But you can’t hit the ball unless you swing the bat.”