A banking industry revolution is underway with increasing adoption of digital technologies and a rapid increase in the use of mobile technology.
Historically, banks have erred on the side of caution, testing the waters rather than taking the plunge. They demonstrate an intent to have a stake in the game but their conservative approach often means they don’t realize their full potential. In contrast, disruptors (new-generation banks or technology companies) are redefining the rules and taking a more customer-centric approach, developing innovative new services that go beyond the boundaries of traditional banking.
While banks have been focused on offering banking functions to their customers via mobile apps, technology companies have been busy at the other end of the service spectrum. PayPal launched a digital wallet allowing consumers to pay for purchases over the internet. Smartphone usage has led Apple and Google to launch mobile wallet solutions, gradually developing a partner ecosystem to enable wider acceptance of this payment model.
Non-bank mobile wallets allow consumers to use tokenized versions of their bank cards at contactless payment terminals, while also facilitating payments in-app and in browser. The banks so far have been quite happy to let this happen on the grounds that their cards would continue to be used by customers without them taking on any additional risk or significant development. Bank customers have therefore been provided with a convenient way to store cards and use them without the hassle and risk of carrying physical cards. At the same time, banks have been able to deliver next generation payment services with minimal outlay, but potentially at a longer-term cost.
Traditional banking services are now being delivered through mobile banking apps, which fall well within the accepted domain of the banks. However, most next generation services are being delivered via mobile wallets, which remain separate from mobile banking apps. Trends in the provision of open API banking interfaces, Revised Payment Service Directive (PSD2) for example, mean that established bank relationships with customers are under threat from the non-bank mobile wallets. It should also be noted that adding remote banking services to an established mobile wallet app will be a lot easier than adding wallet services to an established banking app, something banks should consider.
Banking services are becoming commoditized. As banks gradually wake up to the realization that they could easily become little more than a funding partner, bank executives may well consider a strategy of maximizing product portfolios for minimal immediate expenditure. However, these short-term gains may well be obscuring the long-term costs.
It is interesting to note that so far non-banks have been unable to compete in the mobile banking space, because the banks own the data. However, the advent of open banking regulations such as PSD2 in the EU is now signaling a change. Previously, for wallets, non-bank players have been able to generate a significant global presence (e.g. MasterPass) due mainly to there being no need for bank customers to have banking relationships with wallet providers.
It now seems reasonable to assume that wallet providers will be able to incorporate banking service functionality into their product offerings with very little effort. The banks, however, face a fork in the road: incorporate mobile wallet functionality into current banking apps or support two discrete apps.
The key downside with the latter approach is the need for customers to download two apps onto their smartphones, and then launch the appropriate app based on the intended transaction. While this may not cause any specific inconvenience to the customer, adopting a dual app approach does add unnecessary complexity and costs to servicing future merchant payment integrations, which do not apply to the non-bank wallet. These represent the obscured long-term costs; the ability to develop services based on converging technologies is restricted if the underlying strategy is divergent.
The almost exponential growth in consumer use of (non-wallet) contactless payment cards over the use of Apple Pay and Android Pay shows that the long-term consumer value of a financial services app (including wallets, banking apps, and wallets incorporated into banking apps) is driven by more than just the ability to make a payment.
Implemented creatively, wallets can add value to the consumer proposition around the payment process. Some of the possible value-adds might well be obvious, but nonetheless they represent the difference between consumer adoption and consumer rejection. The exchange of the delivery and billing address early in the transaction process, for example, allows logistics to be managed and shipping charges to be calculated prior to checkout. At the same time, coupons, vouchers and loyalty points can be applied to the transaction in real time. The customer then pays using their preferred option, which could even be the default option, requiring no further action.
Non-bank wallet providers seem set to incorporate traditional banking facilities into their consumer-focused and gamified financial service apps, which makes sense from the service provider perspective and is also attractive to the consumer. The banks are therefore going to be competing with the technology giants’ one-stop shop approach, where all consumer financial services are delivered through a single point of interaction. The banks have a decision to make that will have significant impact on their future relationships with their customers. It boils down to the choice between supporting a banking app alongside a variety of wallets (multiple apps) or incorporating a wider set of wallet services into existing banking apps (single app). A single app would offer banking customers a viable local alternative to the developing big name wallets.
The single app strategy becomes self-sustaining as third party integration with complementary services becomes streamlined in response to the single point of interaction. A multiple app strategy requires additional investment in the processes from the consumer, which will inevitably encourage churn to more convenient offerings.