If a digital or mobile wallet is about turning a mobile phone into a payment card, then the technology giants have already won. The harsh reality is that the banks, in collaboration with mobile operators, had their chance and blew it. Banks actively encouraged consumers to use Apple and Android; this issuer effect has been compounded by merchants, PSPs and acquirers, all of whom proactively included Apple Pay and Android Pay in their marketing as part of a short-term, gimmick fuelled race to attract early adopters.
Yet, while the initial battle may have been lost, the war is far from over. In reality, the rate of consumer take-up for Apple Pay and Android Pay has been little more than pedestrian, strongly indicating that paying for goods by waving a mobile phone in front of a POS device has failed to capture the imagination.
Plastic still fantastic for many
Whilst the number of contactless payments initiated using a smartphone isn’t specifically reported, evidence suggests it isn’t a significant percentage. In contrast, more than one in four card payments in the UK is contactless, and this number is rising rapidly [The UK Cards Association]. Because the facility has been around for so long, the UK card-carrying public has grown accustomed to making payments with a card. As a result, it’s not surprising that mobile payment take-up is low – a pattern that is not repeated in geographies where contactless card issuance is lower. And, while Apple Pay and Android Pay adoption rates are higher in the US, for example, they are still far from mainstream.
Banks ended up funding the opposition
If this is the case, does it matter whether consumers choose Apple Pay and Android Pay over a bank-branded payment option? The answer is yes, it does matter. The banks have already spent considerable sums of money implementing and then advertising competitor propositions, and now more than 50% of US consumers say they are unlikely to use a wallet provided by their primary card issuer [451 Research, Q3 2016 consumer survey]. It has also been shown that the cost of implementing third party wallets generally exceeds the value of the retained loyalty, or the financial benefit of an increased volume of transactions.
Maybe the true significance of the digital wallet passed banks by. Maybe Apple Pay wasn’t considered to be a threat – since it was, after all, only a repository for payment cards and the banks continued to issue their payment cards. Whatever the reasons, the fact remains that banks supported and funded the development and implementation of third party digital wallets that are now in direct competition with their own.
How banks can fight back
But all is not lost, and the banks still have two cards to play. The first is the trust card – broadly speaking, consumers still trust their banks. The second is the relationship factor, as banks (and PSPs) still have strong relationships with merchants. While these are currently strong positives, resting on these laurels is not an option and the banks must move quickly to develop wallet services on the back of their established position. The technology giants have already proved that digital wallets can store cards belonging to consumers, building consumer trust in the process. Third party digital wallets now act as trusted aggregators, and this is the hole that the banks must dig themselves out of.
Benefits in the form of value-added services would attract consumers away from the technology giants and they would also benefit the merchant side of the transaction. Therefore, the logical home for merchant-driven value-added service aggregation must be the digital wallet. The evolution of the global payment ecosystem is shifting towards the merchant, with a sharper focus on value-added services such as coupons, vouchers and cash-back schemes. While the merchant proposition might currently be weak, it represents an opportunity for the banks to redefine the transaction, incorporate new and innovative value ‘adds’, and reclaim customers.
Banks must meet 21st Century demands
Consider the fact that a single interface to the Apple ecosystem could provide a merchant with access to all the Apple users. Now consider Apple migrating their wallet to non-Apple platforms, giving the merchant access to all users. If the banks do not rise to the challenge of delivering a 21st Century payment ecosystem that adds value to the merchant and value-adds for the consumer – the technology giants certainly will.