The impact of new mobile wallets and the future role of banks
There is lots of talk today about new payments capabilities and providers. It started over a decade ago with PayPal, but accelerated about 6 years ago. Think Amazon, Google, Softcard (f.k.a. ISIS), Starbucks, MCX. Now we have Apple Pay, Android Pay, Samsung Pay and more on the way.
Payments are moving into a digital form and the pace of this movement is accelerating – now people even use a digital payment form when paying in person! Consumers today use technology service providers to move, and even manage, their money; meanwhile banks shift further back in the process. I have read many articles about how banks can prevent this, but that position misses another option – why not embrace the position of a back-end provider? (Note, I am talking only about retail/consumer banks in this post.)
What positions should each stakeholder play as this shift unfolds? This is precisely the question I want to address.
When a shift occurs, it is natural to take the position that you must prevent the shift and protect yourself – that’s the easy position to take. The best opportunities require you to free your thinking and think about how it could work if you built it anew…but, I am getting ahead of myself. Let’s begin with a brief history lesson.
If you are already familiar with what has happened in payments in the last 15 months, then you may want to skip this section.
BACKGROUND AND RECENT HISTORY
WHAT HAS CHANGED?
The game shifted into high gear in October 2014 with the launch of Apple Pay. Several factors coalesced here:
Apple Pay has broad acceptance (relatively speaking).
- Merchants didn’t change. If they accept NFC, they accept Apple Pay. (hopefully more merchants start to accept NFC as they upgrade for EMV)
- It isn’t tied to a specific merchant (Starbucks) or set of merchants (MCX).
Apple is very popular. iPhones hold the highest market share by phone manufacturer.
They partnered with the ecosystem. The payments networks (AMEX/MC/Visa), the largest issuers (BAC, CapOne, Chase, Citi, Wells) and merchants (for in-store and in-app) were involved.
The Apple marketing powerhouse was behind the launch. The networks, issuers and merchants all marketed Apple Pay.
Even with all its success, Apple Pay’s usage and public understanding are low. Some continue to argue it is a solution looking for a problem – swiping your card is a universal behavior, whether you are in New York City or the Australian desert. (This will likely change with the EMV roll-out in the U.S. – using your phone is much easier than inserting your card and waiting.)
SO WHAT’S THE BIG DEAL WITH APPLE PAY?
First, it broke through several barriers – not least of which was getting the main stakeholders to cooperate. Additionally, popularity is growing and others are jumping on board (e.g. Samsung, Google, LG).
Second, it set a precedent – the firms that seemingly manage every other aspect of our digital lives (Apple, Google, Samsung, etc.) have begun to manage our financial lives. This is a small start, but these companies specialize in making our lives easier. Google has bill pay and P2P. AMEX lets you check all your 10 most recent transactions in Apple Pay (not just those made with Apple Pay). Customers used to go to their banks for these things, but now they go to a tech firm. Bank interaction no longer necessary.
Following this logic, it is conceivable that the bank’s role could be significantly diminished, but I am not implying banks will disappear. Banks serve a critical function and are continually rated as most trusted by consumers (click here for a recent example of this repeatedly confirmed sentiment). Banks may be the center of your financial life today; however, the lines are blurring and some routine actions (e.g. sending money to a friend) can now be done using apps you already use all day long (e.g. Facebook).
WHAT DOES THIS MEAN FOR THE FUTURE?
I must admit, much of this is old news, albeit to a limited set of individuals. The new news will be the roles each party ends up filling and how they change. What role(s) will each player fill in the 10-20 years?
EACH PLAYER HAS A PURPOSE AND A ‘SOUL’
To find that answer, it helps to consider the purpose of each party because, as Shakespeare says, “to thine own self be true.” You are not necessarily stuck with the present, but there are limits – Vito Corleone would have been a horrible synchronized swimmer! Therefore, I want to start with a review of each key player.
The banks are really good at making sense of complex regulatory/legal environments and they work well with ambiguity. It would be easy to get stuck in analysis paralysis, idly waiting for final guidance, but they find a way to trudge forward while avoiding getting into too much trouble (broadly speaking). Have you ever looked at how many agencies and regulations come into play moving $1 to (even) a friendly country like the U.K.? It will make your head spin, yet banks do it every day and customers never realize it is going on.
Obviously, banks are also really good at operational complexity, accounting, and storing, transporting & protecting money – plus many other taken-for-granted bank things. Unfortunately, in this day & age, it is hard to separate the former (regulatory/legal) from the latter (holding money), though banks wish they could.
On the flip side, banks don’t create the best customer experiences (especially digital ones) and they aren’t very good at innovation. Most try to innovate (some with partial success), but their purpose and culture isn’t built for it. They serve a far simpler, but nonetheless important, purpose.
The networks (e.g. American Express, MasterCard, Visa, The Clearing House, etc.) exist because they bring value to the middle of the chain. The reasons are varied, but they are needed for trust, controls & standards, and, in part, because they are good at repeatedly finding new ways to add value. Blockchain threatens to flip this on its head, but I won’t go there. [Watch for a series of blog posts coming soon on blockchain. We also have a blockchain lab to simplify the creation of Eris chains (click here).]
The technology firms (e.g. Apple, Facebook, Google, Microsoft) keep us connected and strive to make our everyday lives easier. They create great customer experiences. They excel at innovation – they build their corporate culture for it and their purpose is aligned to it. We expect these companies to constantly try new things – sometimes it works, sometimes not – no harm no foul. They try, they listen and they adjust…they are not regulated!
On the other hand, these companies are not very good at understanding the extreme regulatory framework that is global banking – nor should they be! These firms are not used to being under the purview of countless regulatory bodies, nor to someone auditing their every move. Their “let’s give it a whirl” approach leads to governmental purgatory very quickly. To quote Ferris Bueller, “No, you don’t want this much heat.”
THERE IS A NEW WAY THESE PIECES CAN FIT TOGETHER
I have generalized a bit, but simplification illuminates ideas. This is not to imply these firms can’t do anything else, but before thinking about what they could do, they must think about how they are built and where they can best dedicate their talents.
When thinking about this ecosystem, it appears there is an opportunity that would be difficult to accept, but has strong potential nonetheless. One major bank should seize the opportunity to dedicate themselves to serving these technology firms. Today, many banks shift with the winds, trying to participate in everything, lest they be seen as falling behind. Instead, make a proactive choice and dedicate yourself to an explicit direction. Stop worrying about acquiring and servicing your own customers – be the bank and let the technology firms own the customers and experiences.
I have read plenty of articles about how banks can avoid becoming the dumb pipes. Some say they need to become a new central hub and others say they should accept becoming the dumb pipes but still maintain their own – basically play everywhere. These are options, but are not the only options.
What I am proposing is drastically different – a bank should admit defeat to the game as it is architected today and should reinvent itself by focusing on their core services. Banks make sure the rules are followed and they make sure things happen as they should (e.g. the money moves correctly). They don’t need to own/acquire the customer. They don’t need to interface with the customer and they don’t need to provide tools to the customer. They can stop marketing and get rid of branches. Banks should become what they already are and should top distracting themselves by trying to be everything. Provide the banking services to the technology companies that already own so many consumer actions and experiences. Partner with Apple, Facebook, Google, Microsoft, Samsung, Sony, Twitter…and the list goes on. Don’t forget the start-ups and global FinTech community too!
This helps the technology firms avoid something they don’t (or shouldn’t) want to get into. This helps the bank because they turn a taken-for-granted consumer product into a service – and service companies usually charge premiums!
Some banks partially do this today, but I wonder whether they can handle the full scale of the major technology firms. Additionally, some banks are more reputable than others and the brand and trust of the major banks is important – these technology firms want a solution that is in line with their own reputations and corporate principles. There are still perceptions out there that (1) if I haven’t heard of them, I don’t trust them and (2) a bank needs a physical presence (for customers) to be trustworthy. These perceptions have generational variations, but exist nonetheless – and will for years to come.
This is not for the faint of heart, so few other formidable competitors are likely to follow these footsteps in the foreseeable future – only once a brave bank is well cemented, will they face any real competition.
Another far off thought – what about when the IoT explodes and pieces of technology need their own wallet or account? See Brett King’s excellent post here. As Brett rightly points out, how does a shared car complete the KYC process? This is another case where the banks provide the bank services, in support of the technologies that face off to the customer. These could be crypto-currencies, but I think it will still fit back into a banking system of some sort. Lots of questions still to figure out on this one.
CONCLUSION: MANY TOUGH QUESTIONS REMAIN
The final consideration is, as always, to consider the customer experience – how would this really work? Are customers ready to deposit their money with Apple? Would you move your paycheck, savings, rainy day fund, etc. all to Apple or Google (with some bank behind it)? I wonder whether that trust shift has occurred – we may not be there yet. Perhaps the technology firms need to leverage the trust consumers regularly state for their banks – the bank can leverage their relationship to bring a sort of Good Housekeeping Seal of Approval. (Tech firms engender their own trust, but my emails and my financial livelihood/future retirement are two wholly different things.)
Additionally, there can easily be debate about what type or size of a bank should do this. It is difficult to imagine the technology firms trusting some small no-name banks. Plus, those smaller banks have less experience at the big-boy/girl regulatory table. On the positive side, they are more willing to push the envelope with the regulators. Conversely, the big banks are much more risk-averse, are less efficient and have a higher revenue target to match if they totally shift their business. On the positive side, they are very, very good at managing the regulatory mess and they have the size and scale necessary for the ambitions of the all tech giants. To further muddy the waters, maybe it could be one of the regional or super-regional banks. Again, it is important to know who you are and who you want to be. This path is not for any bank.
Let those who innovate, innovate. Let those who masterfully weave experiences and offerings together, continue to weave. And let those who bank, bank – offering their services to a large, and ever-growing, set of corporate technologists that exist to make consumer’s every day lives easier.
I invite others to join in this debate. Share your thoughts about whether this option is truly an opportunity. If you agree with the premise, do you believe it should be a big bank, a small bank or something in the middle? Should the bank brand remain front & center (even if they don’t own/acquire the customer anymore)? Are customers ready to trust their money to the tech giants? Share your thoughts in the comments section below, or contact me via email (email@example.com), Twitter (@gregoryjlloyd) or LinkedIn (https://www.linkedin.com/in/gregoryjlloyd).
In future posts, I will try to look at some of these scenarios and specific use cases / options in more detail. Every bank’s analysis and reaction to this idea will, and should, vary greatly. Thankfully you are not alone – Levvel is here to help. Please contact us if you are struggling with your strategy and want a partner to levvel the playing field.
I would like to thank my colleagues, Chris Hart and Scott Harkey, for their assistance in writing this post. Their knowledge, wisdom, insights and challenges were invaluable. (Note, such support does not represent implicit agreement with the opinions expressed in this post.)
I also would like to thank several other (to remain unnamed) friends for their review & feedback.