This year certainly has not seen a slowdown in digital-wallet development. Except if one is looking for a wallet offered by a bank.
Indeed, banks are on the outside looking in instead of being in the forefront of mobile payments.
But it’s not too late, and creation of bank-branded digital wallets represents an opportunity for financial institutions if they move quickly, AlixPartners LLP, a Southfield, Mich.-based global business advisory firm, concludes in its March report “The Mobile Shopping Revolution.”
As such, banks should work to create their own branded digital wallets for customers, who want their banks to do so because they trust financial institutions handling payments more so than telcos or technology providers, Bob Hedges, AlixPartners managing director in financial services, tells PaymentsSource.
“Banks would have to promote it as, ‘get your digital wallet from our bank,’ but they would have to work with a variety of technology providers and other partners in the payments ecosystem,” Hedges says.
However, if banks fail to provide customers with a secure and trusted digital wallet soon, they risk allowing digital brands to strengthen their position and undercut banks’ role in payments, he suggests.
Hedges goes as far as to say “it’s a dire scenario if banks don’t defend their place in the payments network.”
Teresa Epperson, also an AlixPartners financial services managing director, says banks offering a digital wallet would control two major elements of mobile payments.
“The bank could influence which payment cards would be at the top of the wallet, through loyalty programs and rewards, so they could make sure the card they issue gets used the most,” she tells PaymentsSource.
In addition, banks in control of a digital wallet would have access to 100% of the data for consumer transactions, allowing them to better serve customers with future offers, Epperson adds.
Because mobile-payment technology has evolved into a total “mobile shopping experience” because of software applications that allow price comparisons or access to coupons, banks have an opportunity to deliver consumer value through a “shopping-enabled” digital wallet, the study contends.
AlixPartners predicts at least 60% of Americans will own a smartphone by 2016, further increasing mobile shopping as a norm. By the end of last year, nearly 40% of smartphone owners reported using a mobile shopping application, mostly for coupons or price comparisons, according to the research from AlixPartners, which surveyed 6,000 Americans online in December.
The phone ownership and shopping trend likely would go together, with consumers using mobile devices more often to review bank accounts and make payments, the report suggests.
Banks could combine those elements when offering a digital wallet, making it easy for their customers to monitor accounts and make online or point-of-sale purchases with the cards inside their digital wallet. In addition, banks offering digital wallets could alleviate much of the confusion and uncertainty consumers have with mobile payments because of the fragmented technology and various providers in the market, the study notes.
Banks have been slow to get involved in mobile payments in general, let alone the concept of delivering a branded digital wallet, Hedges says. AlixPartners previously encouraged banks not to allow waiting on specific technology development, such as Near Field Communication, to slow down their mobile-payments progress (see story).
“Banks are late to this party because the overall pace of mobile-payment development has been much faster than they expected,” Hedges suggests.
Financial institutions operated on “muscle memory” in recalling how long it took online banking and new ATM developments to take hold, and many considered mobile payments another technology that would “sort of happen” over time, Hedges says.
“There have been so many life-challenging threats to banks in the past few years they have not been able to clearly focus on mobile payments and understand how profound the changes can be,” Hedges notes.
More banks likely will try to develop a digital wallet now that retailers are showing an interest in taking a lead role with a wallet they would control, Epperson says (see story).
“A key for the banks would be making sure they keep the wallet an open architecture, with their cards on top but allowing all other cards in the wallet,” Epperson says. “It is of great value for the bank to see all of the transactions taking place in a wallet.”
Other than storing card data in a secure cloud environment, the fundamentals of a payments network would not change much with a digital wallet, she adds. Card issuers would work to ensure most transactions are initiated with their top-of-wallet card, while most processors would continue to work to support the goals of the issuers, Epperson notes.
Banks never had to be innovators in the past, but the mobile-payment advancements of the past couple of years have “kind of painted them into a corner,” Epperson adds.
Hedges suggests the entire mobile-payment industry is “playing out like a huge strategic drama.”
For banks, it means getting in the forefront of that drama as best they can, he adds.
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