U.S. banks waf­fle over dig­i­tal wal­lets

A mi­nor­ity are ready­ing dig­i­tal wal­lets that work in stores “Banks were asleep at the wheel and didn’t of­fer … al­ter­na­tives”

Bloomberg Businessweek (Europe) - - CONTENTS - −Olga Kharif

Alexan­der Silva is think­ing less and less about his bank th­ese days. He uses his Venmo app at least three times a month to pay his rent or re­im­burse a friend who picks up the check at din­ner. “I’ll just Venmo them right then,” says the 25-yearold San Fran­cisco pho­tog­ra­pher. He’s also been us­ing Ap­ple Pay in emer­gen­cies—like the time he paid for gas when he for­got his wal­let on a road trip. “I think of it as I am us­ing Ap­ple Pay” rather than Bank of Amer­ica, says Silva, who’s linked his ac­count at the len­der with Ap­ple Pay.

That at­ti­tude con­cerns fi­nan­cial in­sti­tu­tions, which be­lieve mo­bile pay­ment ser­vices such as Venmo and Ap­ple Pay could erode loy­alty, par­tic­u­larly among mil­len­ni­als, who sur­veys show are more prone to switch­ing banks than their el­ders. “The big­gest risk for them is their re­la­tion­ship with their cus­tomer,” says Zilv­inas Barei­sis, a se­nior an­a­lyst at Ce­lent, a con­sult­ing firm. Sur­pris­ingly, most banks aren’t putting up much of a fight. Only 5 per­cent of U.S. banks Ce­lent polled in Novem­ber had a branded wal­let app that works in stores for An­droid phones, and just 17 per­cent planned to re­lease one in the com­ing 6 to 12 months. (Most third-party in-store wal­lets are in­com­pat­i­ble with iPhones.)

Many in­sti­tu­tions seem pre­pared to cede the field to Google, Ap­ple, and Sam­sung, all of which have a head start. Ap­ple Pay, in­tro­duced in 2014, ap­pears to be get­ting the most trac­tion in the U.S., where some 12 mil­lion peo­ple use it at least once a month, a num­ber that should more than dou­ble, to 25 mil­lion, by yearend, ac­cord­ing to Piper Jaf­fray an­a­lyst Gene Mun­ster.

Ap­ple Pay isn’t the first dig­i­tal pay­ment tech­nol­ogy to pose a chal­lenge for the bank­ing in­dus­try—pi­o­neer PayPal has been around since 1998. But the stakes are much big­ger now that Wal­mart stores, Star­bucks cafes, and Chevron gas sta­tions are among those re­tool­ing to han­dle pay­ments through dig­i­tal wal­lets. Re­searcher EMar­keter es­ti­mates the value of trans­ac­tions made by tap­ping or wav­ing a phone at the point of sale will reach $210 bil­lion by 2019, up from $8.7 bil­lion last year.

“We see a day when cus­tomers are leav­ing their home with­out their card,” says Jonathan Velline, head of ATM and store strat­egy at Wells Fargo. Al­ready, 82 per­cent of banks are con­cerned about en­sur­ing that theirs be­comes or stays the mos­tused card in the dig­i­tal wal­let, while 61 per­cent worry that Ap­ple and other tech gi­ants may en­croach deeper into their ter­ri­tory, ac­cord­ing to the Ce­lent sur­vey. Mau­reen Burns, a part­ner in Bain’s fi­nan­cial-ser­vices prac­tice, says “the worst-case sce­nario” for banks is that they’re re­duced to play­ing the role of a util­ity, in which “they have the risk and reg­u­la­tory bur­den but don’t get to par­tic­i­pate in the best parts of the profit pool.”

Ap­ple has never dis­closed the fees it charges banks to process Ap­ple Pay trans­ac­tions, but an­a­lysts fig­ure it col­lects half a cent on in-store debit card pur­chases and 15 ba­sis points on credit cards in the U.S. The ser­vice gen­er­ated just $15 mil­lion in gross rev­enue for Ap­ple in the first year of op­er­a­tion, ac­cord­ing to Richard Crone, chief ex­ec­u­tive of­fi­cer of Crone Con­sult­ing, a firm that spe­cial­izes in mo­bile pay­ments. Crone fig­ures that could top $1 bil­lion an­nu­ally in five years if ad rev­enue is fac­tored in.

In Oc­to­ber, Cap­i­tal One be­came the first U.S. in­sti­tu­tion to in­tro­duce its own wal­let app that works in stores. “The irony is, when we first launched pay­ments, peo­ple be­gan to ask us, ‘Why would we use a bank for pay­ments vs. dig­i­tal com­pany XYZ?’ ” says Tom Poole, man­ag­ing vice pres­i­dent for dig­i­tal pay­ments. He says the wal­let has been “a suc­cess” but won’t say how many cus­tomers are us­ing it. “Banks were asleep at the wheel and didn’t of­fer cus­tomers al­ter­na­tives,” he adds. JPMor­gan Chase will un­veil its own mo­bile wal­let in mid-2016. As the largest retail bank in the U.S., it could rack up as many users in the first year as Ap­ple Pay did in two, Crone says.

Some banks are lin­ing up be­hind a prod­uct com­pletely dif­fer­ent from a wal­let. On Feb. 4, Visa an­nounced soft­ware be­ing tested by undis­closed clients that feeds card data to all apps on a con­sumer’s de­vice and di­rects con­sumers to the is­suer bank in case of a prob­lem. “This puts the banks more firmly into their roles as the trusted third party in pay­ments,” says Jim McCarthy, an ex­ec­u­tive vice pres­i­dent at Visa. “Peo­ple won’t think about whether it’s Ap­ple or Sam­sung or Google. Over time it will be­come the card again.”

That may be wish­ful think­ing. “Be­ing able to pro­vide a fully branded ex­pe­ri­ence in the dig­i­tal world will prob­a­bly be un­re­al­is­tic,” says Ce­lent’s Barei­sis. “The world will be more frag­mented.” Wells Fargo is em­brac­ing that no­tion: Be­gin­ning in the se­cond quar­ter, ac­count hold­ers will be able to use An­droid Pay, as well as plas­tic, to with­draw money at thou­sands of its ATMs. “The con­ve­nience means that cus­tomers are go­ing to get value out of the fact that they have a card with Wells Fargo,” says Brett Pitts, head of dig­i­tal at the bank. The bot­tom line Banks are play­ing catch-up to Ap­ple Pay’s dig­i­tal wal­let, which could have 25 mil­lion ac­tive users in the U.S. by yearend.

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