The country’s largest banks are launching a new digital wallet through their joint entity, Early Warning Systems (EWS), an organization best known for running peer-to-peer payment product Zelle. Now is the perfect time for such an effort and the portfolio could be a conduit to a much higher stakes game for the banks.
Digital wallets are here to stay
There is no doubt that the road to success with digital payments is paved with failed attempts at digital wallets. From payment legends like VisaV and MastercardMA to strangers like Verizon, AT&T, WalmartWMT and 7-11, the past decade has seen new digital wallets hit the market at the rate of a new challenger every 2-3 years. None of them achieved much success. That all changed in 2014 when Apple launched Apple Pay and the release of the EMVCo specification which defined how digital wallets would provision, store and manage digital payment cards. As an industry, the rollout of Apple Pay marked a new era.
The big banks’ annoyance with Apple charging them for Apple Pay transactions has been well covered over the years. However, Apple Pay, Paypal, Google Pay and all other surviving paid products have one thing in common. They use tokenized versions of existing bank cards to perform transactions. Whenever someone uses Apple Pay or any other digital wallet, banks still earn a significant portion of the revenue in exchange for each transaction. That merchants charge credit card companies 2-3% to be able to accept cards? More than half of this amount goes to the issuing bank. In fact, the real threat to banks in the United States is the emergence of new payment methods that eliminate or diminish the money banks make from transactions.
Plaid is the real competition
The biggest danger in enabling such a transition is not Apple or Paypal but Plaid. The emergence of open banking and the desire of banks to expose consumer data to authorized parties has enabled a whole new breed of business. These companies can leverage existing banking APIs and ACH or RTP functionality to verify that an account is genuine, that you own it, and that it has funds. Additionally, many of these opening bank connectors or aggregators can trigger an authorized movement of funds from one account to another.
Suppose this scenario plays out on a large scale. In this case, banks run the risk of being large transient depository institutions where customer relationships are lost, as well as the ability to sell lucrative products. That’s why it’s time for banks to build a digital wallet. It is imperative that banks maintain the connection with their customers every time the customer interacts with their money.
The creation of a digital wallet would allow banks to provide a payment solution for e-commerce, physical point of sale, bill payment and many other types of transactions at risk of being disintermediated. That doesn’t mean success will force banks to beat Apple or Paypal on their share of digital wallet transactions. Many banks would settle for these card transactions to continue using the customer’s preferred wallet. This means that the banks behind the EWS Wallet will reduce the disintermediation that companies like Plaid could cause.
Zelle’s precedent
Another key piece of news we saw last week was that EWS would be leading the effort for banks. This is a strategy that banks have used to market other initiatives, including Zelle. The creation of Zelle and the agreement to integrate it as a branded product with a consistent user experience and flow was driven by the belief that the bank needed to create a peer-to-peer payment product that rivaled Venmo. and Square Cash. Zelle has proven to be a resounding success for banks and has seen continued growth over the past five years as consumers continue to use it for many transactions that would traditionally have been made by check, cash or other P2P products. This strategy helped ensure that when customers digitized their payments, they maintained their interactions with the bank and did not transfer those transactions to third parties. Zelle’s goal has never been to support all P2P payment volume; it has always been to promote cohesion with the bank and integration into customers’ consumption habits. When you look at the product management success of Zelle and Early Warning, it’s easy to see why banks would pursue this path again for a digital wallet.
In addition to Zelle, major banks also have several other assets that can be leveraged to further enhance the capabilities of a digital wallet. These include taking advantage of the fraud tools offered by EWS, the user directory contained in Zelle, and The Clearing House’s Real Time Payments (RTP) network. These combined services create the opportunity for banks to build integrated product functionality beyond what competitors might offer. It also sets the stage for banks to further explore their role in driving the future of digital identity.
It all comes down to the how. The last decade of failed digital wallet attempts has provided a roadmap of pitfalls to avoid on the road to success. Many payment industry veterans at major banks have lived through these trips and are well aware of the ideas of what to do differently this time around. This knowledge, combined with the strengths banks bring to the table, creates the greatest opportunity for success we have ever seen. This success will not be measured overnight but will only be revealed over the next decade as the bank takes proactive steps to maintain its position rather than sitting still and watching its customers slowly disappear.
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