Why Banks Will Win the Battle for the Mobile Wallet

In September of 2014, Apple CEO Tim Cook promised that his company’s upcoming mobile payment offering would forever change the way we buy. The announcement of Apple Pay undeniably accelerated our collective migration towards mobile payments.  Even though Apple has received most of the media attention, I believe it will be banks that will emerge as the winners after the dust has settled.  This is because they are the undisputed masters of the two most influential factors for consumers, loyalty programs and security.

Early mobile wallet introductions from Google, Softcard (at the time ISIS), and others garnered significant industry media attention at the time of their announcements but never converted into more than a trickle of commerce when pushed out to Main Street.

There isn’t going to be much traffic on Main Street anytime soon anyway. Analyst estimates of the mobile payments business are conservative at best. The consensus for two years out from now is still around $100 billion, which is about 2% of the approximately $5 trillion of total retail transactions.

Don’t overlook the fact that through the last five years of mobile payments evolution, one winner has already been clearly established and that is Starbucks. While Apple boasted of 1 million credit cards collected so far. That number is dwarfed by Starbucks’ 7 million weekly transactions. And the number of mobile payments that they process is growing at 50% annually. Here’s what most impressive – Starbucks processed 90% of all mobile payments made in 2013 (latest data available from Starbucks). CEO Howard Schultz related that the secret to their success lies in their their loyalty program. Banks are masters of the universe when it comes to executing successful loyalty programs, so watch out Starbucks.

The other deciding factor will be security and no one comes close to approaching the success of banks at securing consumers. Consumers want to know that their money and their privacy are safe. In the end, reputation will trump all of the techno-babble about Secure Card and Host Card Emulation. Consumers still trust their banks with their money more than they trust any other institution.

Apple also loses out in platform support as well. Banks and retailers mobile apps work with both Apple and Android. Apple is locked out of more than half of the market simply by their platform limitation.

Starbucks gained a true advantage by being first with a great app that consumers are using, but banks are just a step away with their mobile banking applications. According to a March 2014 report from the Board of Governors of the Federal Reserve, 51 percent of smartphone owners have used mobile banking in the past 12 months, that’s up from 48 percent a year earlier. And 12 percent of mobile phone users who are not currently using mobile banking think that they will probably use it within the next 12 months. That’s tens of millions of consumers already using their bank’s mobile application and that places them just a simple feature addition app away from being the platform of choice in mobile payments.

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7 Responses to Why Banks Will Win the Battle for the Mobile Wallet
  1. I would like to agree but if a Wallet s used to pay for goods and services then Banks suffer a similar issue to mobile phone manufacturers. This is that consumers have a choice of what bank to use. Therefore in simplistic terms a card scheme enable banks and sellers to transact with consumers in an agreed payment framework.

    Therefore I see the ‘Seller / Marketplace’ wallet becoming the popular in the wallet war as the seller controls the payment framework they wish to support.

    If the ‘Wallet’ adheres to the payment framework agreed by the banks then the security of transactions is also maintained.

    The other issue is the payment type the wallet is supporting – for Starbucks the model is generally payment scheme CNP payment loading a pre-paid account that is accessible via a token issued by Starbucks. The CNP transaction could also be an ACH or cash load to provide value that is spent in store or now online via remote ordering.

    For Uber this is just a CNP transaction on behalf of the taxi driver with the amount of the transaction being agreed by the customer. Then the taxi driver is paid via ACH I believe.

  2. Anthony, good insights and I agree with most of your observations. It is a very dynamic situation and I think more shifts and changes are yet to come. In the end, it could easy by another VHS versus Betamax battle (hope you are old enough to get that reference) and market momentum may trump everything else.

  3. Hi Frauke,

    Yes I remember Beta Max and VHS.

    I feel the issue will be eventually be for the retail payments model. Will there be a move from Card scheme type (Old Fashioned) PULL payments where funds are requested and paid for via a process from the receiving organisation to a PUSH payment ACH type model where the costs are sometime shared between the parties?

  4. Anthony
    there already exists a secure working network that works on the ‘push’ model – it is bitcoin and the blockchain protocol .
    Forget all the media nonsense about drug deals and terrorism, bitcoin is going to transform how the internet of things exchanges ‘value’ in the coming decades. (not just currency, but smart contracts like insurance, share ownership, voting, accountancy services etc )

  5. Good observations and I agree, but there are obstacles to the broad acceptance of bitcoin such as 5-10 minute transaction settlement at retail and a valuation that fluctuates wildly when compared to standards currencies. Bitcoin part duex should have a big impact.

  6. Perhaps an alternative view.

    Payments are being commoditised, Apple Pay looks like the first successful payment technology lead by a third-party but with support from payment schemes. Apple is cross-selling a service (with a revenue model) to their own clients, who typically endorse Apple’s innovation at some stage. This can still make them a powerful player once they also offer wallets.

    The times are a-changing, PSD II outlines new ways for third parties to access banking accounts. Consumers may become used to giving third parties access. Here’s where Anthony’s market place observation is very sharp and very spot-on; this will result in new players stepping up to their next challenge. Just to mention a random example, airmilles/nectar are also trusted consumer brands, they might well decide to play a role and start facilitating push payments and create wallets?

    I believe this is a new battle ground, and regulatory aspects (e.g. PSD II) and banking innovation (real-time payments) will affect the tactics of all involved competitors (whether those are manufacturers as apple, telco’s, retailers as Starbucks and/or other non-banking players)? I personally expect that future winners will also have a powerful strongest brand, we trust our bank but if someone with an equally strong can convince us to use their wallet (knowing our money is still safe in the bank), we might trust that party when transacting .

  7. Interesting and insightful comments – Yes, payments will become commoditized (I think in 3-5 years) and that will change the competitive landscape, but Apple Pay is still a long way from being successful anywhere but in making partnerships and gaining media attention, which I agree is a good start.

    Keep in mind that regulations and practices are very much different between the States and the EU, so we will likely see different leaders emerge on different continents.

    Banks always come out number one in consumer surveys on trust. Surprisingly ISPs and MNOs are not a huge amount behind, so they are definite contenders in the long run. It’s great to have front row seat isn’t it?

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