Suddenly, it seems like almost everyone is offering a mobile wallet. Major issuers, telco consortiums, search engines and other third-party intermediaries are clamoring for attention.
Mobile payments have become a highly visible, yet still undefined, category that involves potentially large stakes and vast spheres of influence over consumer-to-retailer transactions. It is an emerging industry that is no less revolutionary than the advent of credit card processing. And given the intimate relationship consumers have with their smartphones, and the frequency of purchases within a typical day, it promises to redefine selling and marketing.
Several new players have been seeding the market with their own branded mobile wallets. Some say they want no part in interchange and payment processing fees; they ask only to retain the advertising revenue. They see banks and retailers as elements inside their new world order. They seemingly offer an easy path, and they may lend a certain glamour by association. But banks, and the consumers (and commercial depositors/retailers) they serve, need to remember there's no such thing as a free lunch.
Providing payment capability is one of a bank's most profitable activities. Payment is the culmination of the shopping experience for a retailer's customer. It is what turns prospects into customers. Do banks and retailers really want to hand over payments to a third party?
When payments happen within a third-party mobile app, or "mobile wallet," that third party becomes the trusted transmitter of the customer’s money. More than that, the third party has first knowledge of the customer’s transaction information: who was the seller, at what location, what was the amount of the purchase, what payment instrument was used, and more. The aggregation of that data, for a single customer and also across a large number of customers, provides purchase behavior and prediction insight that has previously been impossible to achieve. Yes, the customer must opt in to the collection of this data, but given the success of other apps that track behavior and people's willingness to share such details through social media, the opt-in requirement may not be such a high hurdle.
Imagine the kinds of advertising rates these mobile wallet providers can achieve, knowing where the consumer is, what they're buying, how much they are spending, how often they shop at this location. Collectively these details are referred to in consumer marketing as "big data." The incentive is enormous for them to sell advertising to competitors, placed at the most critical moments in the shopping and buying decision-making process.
Michael A. Cook, assistant treasurer of Wal-Mart, asked at a recent conference in Las Vegas, "If my customer is using my shopping app to locate my stores, using it to check in to receive offers at the store, using it to navigate the store and find products and reviews, why would I want them to close my app and open up someone else's app for payment?"
Why would banks feel any differently? Banks traditionally have been the keepers of their customers' financial services. Growth in the use of debit has increased the value and customers' dependence on the mobile banking app as a way to track balances. If a customer is using his mobile banking app before a spending decision to check his balance, why would the bank want him to close it and open a third-party intermediary's app for payment? If banks or retailers do not preserve their own mobile app experience throughout the sales cycle they will miss the biggest part of the "big data" sequence: customer interaction before, during and after purchase.
The stakes are high. Adoption of mobile banking is accelerating, and interactions with mobile banking are expected to surpass wired online banking in a few years. Customers who use mobile banking to track their account balances, pay bills, transfer funds, locate branches and ATMs, and even deposit checks with new mobile remote deposit capture capability, spend more and are far less likely to switch financial institutions. Conversely, banks that don't offer this functionality can expect to see higher attrition.
A key component of any financial service relationship is payment. When you tally the interactions a customer has with his money, payment is the most frequent touchpoint, a crucial element in reinforcing the bank’s brand, providing value to the customer and profitability to the bank. It makes sense that if a bank is to support mobile payments, it should enable them first from within its own mobile banking app. There is a natural flow to a customer checking their account balance before making a purchase, and actually making the payment.
But how to safely bring payment in the mobile banking app to the point of sale? Near-field communication requires cooperation, and additional fees, from wireless carriers, device manufacturers, trusted service managers, among others. This complexity, higher costs and the controversy over NFC standards are preventing adoption. There's an opportunity for banks to reclaim the access point of sale through a newer technology that is not dependent on wireless carriers, device manufacturers, even card associations. Several financial institutions are quietly testing a promising new solution that allows them to keep credentials safely in the cloud, sending a token to the point of sale that is relayed back via the smartphone app and camera for payment. The PIN debit networks supporting the pilots have judged the new solution to be safer than a magnetic stripe card and PIN, and are treating it as a card-present transaction.
Some banks will choose to aggregate their customer's payment instruments and preferences inside their own apps. Others will choose to be aggregated, to fight for space and relevancy inside a powerful third party's mobile app. There will be room for both approaches, and many will choose to do both. But banks should consider the strategic implications and outcomes of their choice.
Richard K. Crone and Heidi A. Liebenguth are partners with Crone Consulting LLC, an advisory firm specializing in mobile payments.
