Wallets – the flexible way for banks to maintain competitive advantage
Mobile wallets for payments and loyalty provide the perfect weapon for banks seeking to fight off competition from fintechs. They are also a key driver towards a cashless society. How they can be used to maximum advantage will vary from region to region, but whatever the use case, using a flexible wallet system brings functionality and value that new market entrants have taught today’s customers to expect.
Capturing user imagination
At their heart, wallets are a means of offering mobile payments and of digitising payment instruments. There are multiple ways of achieving this, but irrespective of the functionality, issuer and technology used, they will only capture the imagination of users and generate enough use to justify themselves commercially if they are able to offer additional value, compared to legacy payment methods.
That requirement plays to the key strength of a well designed wallet – their ability to securely store and manage multiple sources and stores of value and applications in one place. This allows for the potential of using several different sources of value, be it multiple payment instruments, multiple stored value accounts in one, or more currencies or multiple coupon schemes to complete one transaction. This makes them useful in both open loop and closed loop ecosystems.
As a result, in Europe and in North America wallets have specific potential as an easy, modern way of attracting younger customers. Millennial and Gen Z customers in particular don’t want to engage with branches.
That’s something that fintechs have clearly figured out. But because wallet technology facilitates the type of engagement that fits the lifestyle of this demographic, there’s no reason for banks to relinquish the younger market to new players. Wallets allow bank to offer customers of all ages the best of both worlds – fintech style engagement, but reinforced with traditional bank stability.
They also give the user a superior degree of control. It’s easy to implement features like daily spending limits and other transaction restrictions to help personal financial management or to enable sharing of some but not all funds and features across multiple users. BPC customers in Europe taking this approach include Banca Transilvania in Romania.
Outside Europe, wallets play a valuable role in financial inclusion in regions where fewer than 50% of people are banked in the conventional sense.
Globally, according to the World Bank, up to 1.7 billion people remain unbanked, yet two thirds of them own mobile phones. Reaching these potential customers through conventional card issuing is expensive. Using wallets as a substitute for cards cuts costs sharply.
In that sense, these markets are leapfrogging Europe, where today wallets are often viewed as a supplement to cards rather than a replacement. In the coming years though, cards will be used less and less in all geographies as we move towards token and account based payments, managed through wallets.
Up to this point, we have been talking about open loop wallet systems. But wallets have a lot of potential to offer in closed loop systems too.
Enabling the growth of B2B marketplaces
In closed loop environments, wallets can promote the development of B2B marketplaces. For example, a bank may offer microloans to small farmers. By providing that loan as value issued through a wallet, it can limit the ways in which the farmers can spend the loan to suppliers already participating within the marketplace who also use the same wallet system. That might be feed or seed suppliers or it might be government offering utility services.
In that way, the bank ensures the money stays in the system and cannot be lost or misused. The farmer benefits not just from the loan but also from access to potentially subsidised services.
While this type of wallet approach is highly applicable to developing economies where microloans are a feature, there’s nothing to stop banks in Europe from developing similar applications for consumers and for SMEs. For example, it could be used to ensure that funds released through remortgaging a property could only be used for home improvements rather than spent on holidays or day-to-day expenses. Insurance payouts can only be used at approved retailers. Alternatively, a corporate loan could be ring-fenced to ensure that it goes on buying materials or stock rather than on entertaining or executive benefits.
On top of that, expenditure could be limited to vendors who are also customers of the issuing bank, again ensuring the money stays within a closed loop system and providing incentives for customers of the bank.
Wallets are so much more than a single solution. Whatever the use case, they are a valuable tool for banks seeking not to cede market advantage in an increasingly competitive environment.
By Peter Theunis, senior vice president at BPC Banking Technologies