Banks Should Act Now on Mobile Payments

While start-ups and tech giants have piloted mobile payment solutions over the past few years, most banks have sat on the sidelines waiting to see which, if any, of these efforts will gain traction. Most saw no need to rush in. Only a fraction of bank customers use mobile payments — the early adopters who have the right phones and who seek out willing retailers.

That's about to change. Many consumers are already using their mobile phones to shop online, according to Bain & Company's recent survey of about 25,000 consumers in the U.S. and major Western European markets. In the US, 6.6% of consumers said they have used their smartphones to make in-store purchases. Many more said they expect to begin shopping that way over the next few years. Mobile payments still represent a small percentage of in-store purchases, but that percentage rose by 103% in the U.S. between 2010 and 2013, according to Bain's analysis of reports from sources including Morgan Stanley, Credit Suisse, PayPal and Forbes.

Given these trends, it's time for banks to get serious about integrating mobile payments into their long-term digital strategies. Just as customers embraced online and then mobile banking, they will expect their banks to provide them with mobile payment solutions.

The good news for banks is that even though they're late to the game, no one is better suited to provide payment solutions and digital wallets. Our research shows that consumers trust banks with their data more than they trust retailers, technology companies or alternative payment providers.

But the time to act is now. Bain's research indicates that most customers will have only one or two payment apps on their phone. Banks that want to be one of them will have to act fast.

Lenders that wait for others to create their payment solutions may also find themselves cut out of the conversation between their customers and the payment solution provider. Mobile payments in the U.S. are likely to use the well-established credit card networks, but brand loyalty could shift to the name on the digital wallet such as PayPal or Google Wallet.

The best mobile payment solutions will go beyond treating phones like payment cards. Customers want mobile payment programs that deliver extra value, such as better loyalty rewards or apps that help them manage their money. Of course, these apps must also be secure, widely accepted and easy to use. Where possible, they should also make it easier for customers to shop — for example, by eliminating the need to key in long credit card numbers for online purchases.

As banks plan their mobile payments strategies, executives should keep in mind three important facts.

First, mobile payments are part of a broad transformation to a digital model that includes mobile banking, online payments and using the data from customers' transactions to personalize the banking experience. The payments technology that banks use must harmonize with their overall strategic roadmap.

Second, no single bank has the market power to develop and thrive with its own proprietary solution. Banks will need to build mobile payment systems that work together and depend on common standards. The ideal positioning could be a digital wallet that puts a bank's brand in front of its customers, while relying on existing payment networks.

Finally, banks should be prepared to build new capabilities to make the most of the new data that mobile payments will deliver. Banks will gain crucial insight into what consumers buy and when and where they buy it. This transactional and contextual information should inspire innovation for new products and services. But unless banks can put in place the right people and teams to build on this data, its potential value will remain untapped.

Karim Ahmad and Gerard du Toit are partners with Bain & Company. Karim, based in Atlanta, focuses on payments processing and credit card issuance. Gerard leads Bain's banking and payments practices in the Americas, from Boston.