Hundreds of banks are supporting Apple Pay, but the cost is sparking a counter movement toward financial institutions operating their own wallets.
From the beginning, bankers have had conflicted about their work with Apple's mobile wallet, which launched in October. Some decried the one-sided agreement that Apple made banks sign; others were agreeable to the cost of doing business with Apple but realized that Apple Pay also increased the expectations for their own mobile wallet apps.
"Banks need to think about the digital wallet as not just a wallet, but an extension of a digital strategy. That is one of the reasons that they should own their own brand," said Doug Parr, chief revenue officer for Prairie Cloudware. "It's another point of access for consumers, and in this case it's the point of purchase, and you can convoy other information, such as the balance on the account used for that purchase, or coupons or other offers all in the same place."
Prairie Cloudware targets banks and credit unions rather than merchants, selling the idea of bank control over enrollment and placement of bank-issued cards within the wallet.
Prairie is developing a product, called Digital Payments Guardian, that lets bank customers configure their mobile experience to access accounts, debit, credit, store, loyalty and gift cards. These funding sources can be used online, in store, or via mobile phones and tablets. The product can accommodate different payment technology, and uses tokenization to protect account credentials.
"It's a way for banks to protect their payments franchise," Parr said. "Most banks make non-interest fee income from their card business, and banks need to protect that. If you don't own the wallet, how do you ensure you get to the top and get used?"
Prairie Cloudware plans to test its product with banks this summer. It plans to continue tweaking it during testing to accommodate further changes in the payments market. Though this product is pitched as a companion to Apple Pay, Prairie Cloudware also plans a version for Android devices.
The technology is hosted and delivered as a software-as-a-service, which lowers the setup fee and bases other charges on usage volume. Prairie Cloudware did not disclose its fees, but Parr said "it's not on the order of 15 basis points [Apple's credit card payment fee]."
Prairie Cloudware will likely face significant competition from other technology companies.
"A payment happens 30 to 60 times per month, that is a big jump-off point for new value-added services," said Richard Crone, a payments consultant.
There are a number of tangible and soft costs of using Apple Pay, according to Crone. There's the fee of 15 basis points for credit and a half cent for debit; the potential tokenization fees to the card networks; processing fees for accounting and paying those fees to Apple; the cost of providing customer and member service since Apple, the card companies and processors do not provide customer service representatives for this purpose; and the cost of losing marketing opportunities.
The potential value from the ads and offers is estimated to be about $300 per active mobile wallet user per year, Crone said. "The mobile wallet is a marketing platform, not just a wallet," Crone said.
These technology companies will also be pressured to partner with core banking technology providers to integrate mobile payments with mobile banking and other customer facing functions, Crone said, adding very few banks power their own mobile banking.
PayPal's recent acquisition of Paydiant, a provider of bank-branded mobile technology, could open the market to new entrants, said Daniel Van Dyke, a research specialist at Javelin Strategy & Research.
"Working with PayPal doesn't sit well with some financial institutions," Van Dyke said. "A vacuum opened up for white label bank offered wallets, which Prairie Cloudware could potentially fill. Creating a mobile wallet from scratch would be difficult for even the largest financial institutions to do successfully. A third party provider is needed."