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 the chance and missed 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 fueled race to attract early adopters.
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 a 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 interest of many everyday consumers.
Plastic Is Still Fantastic for Many
While the number of contactless payments initiated using a smartphone is not explicitly reported, evidence suggests it is not a significant percentage. In contrast, more than one in four card payments in the UK are contactless, and this number is rising rapidly.The UK card-carrying public has grown accustomed to making payments with a card because the functionality has been around for so long.
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, 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. It is also known 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, or perhaps Apple Pay wasn't considered to be a threat since it was, after all, only a repository for payment cards while 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
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 facto. 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 banks must dig themselves out of this hole if they want to win the digital wallet race.
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 toward 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 if Apple migrates their wallet to non-Apple platforms, giving the merchant access to all users. If banks do not rise to the challenge of delivering a 21st-century payment ecosystem that adds value to the merchant and the consumer -the technology giants certainly will.
The article was originally published on Financial IT and is re-posted here with permission.
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