17 Jan 2017
Back in the late 70s, when the international payment schemes Visa and MasterCard began to proliferate globally, their plastic cards were just that: Visa cards and MasterCard cards (there’s a reason MasterCard is shortened to Master in many markets, it eliminates that apparent tautology.)
But the banks issuing those cards – that is the banks whose actual customers owned the cards and who issued those customers the credit – quickly realised that 47-odd square centimetres of plastic was valuable real estate. Consumers would see their brand every time they reached for the card.
"The latest era of digital wallet development (it’s not the first) will be genuinely disruptive.”
So the Visa and MasterCard (and JCB et al) brands were reduced to small logos on bank-branded cards for the issuers like ANZ or HSBC or Bank of America. That also paved the way for the cards to become “multi-function” – representing not just a credit card but offering access to transaction accounts and ATMs, for example.
Owning the customer
The cards were kept in purses and wallets but no bank ever successfully branded what fundamentally has been a fashion item, one which also stored physical cash, licences, loyalist cards, security swipes, photos etc. Vogue never featured a Citibank clutch.
Today there’s an argument the digital world is different. That an institution – which may be a tech company or entertainment group or phone provider or a bank or something else – can own the purse or wallet.
And if it does own the wallet, then it has a much better chance of “owning” the customer – which means being the intermediary for a much greater array of products and services; not just financial services but government and lifestyle services. And that greater “share of wallet” translates into revenue opportunities.
Indeed, according to global financial intelligence consultancy Lafferty, this latest era of digital wallet development (it’s not the first) will be genuinely disruptive.
“In late 2018, we analysed more than one hundred case studies compiled during the production of the Lafferty Retail Banking 2020 series, and noted the most prominent category of innovative services in every region was mobile wallets,” Lafferty said in launching a new mobile wallet report.
“Today, also every major tech player from Alipay to Amazon is offering its own mobile wallet, where virtual cards can sit alongside airline passes, digital loyalty cards, digital assets and cryptocurrencies and digital identities.”
For Lafferty, digital wallets are not just a handy app but a genuine disruptor in their own right: “grown on mobile phones, these services are representing an enormous threat to banks and card networks alike, especially as real-time payments come online around the world. Mobile wallets could be a huge disintermediator of cards, as shown by the success of Alipay and WeChatPay. Visa and Mastercard have been investing hugely in real time payments to keep up.”
One analogy looks at what has happened to the traditional media sector of newspapers, radio and television as the internet and digital technology have evolved: audiences have fragmented, new non-traditional rivals have emerged, business models have broken and long established barriers to entry have shrunk.
In the context of financial services, almost every element of the traditional value chain has been challenged whether that be borrowing, lending, wealth management, insurance, broking or payments.
Payments in particular is a major battlefield for fintech, bigtech, telcos and traditional banks and that battle has really been about re-ordering existing elements.
Real time payments, Apple Pay and Apple credit cards, QR codes, EFTPOS, NETS, PayPal, gift cards, the list goes on and on when it comes to ways to pay but they all boil down to pay before, pay now or pay later.
We are increasingly able to pay in real time with platforms like Australia’s NPP (new payments platform) but the links in the payment chain remain a customer account, a payment facilitator institution, a payment processing institution and an authorisation and settlement entity - traditionally that may have been Customer Bank-Visa Card-Visa Net-Merchant Bank.
Now, new competitors abound at every stage. And old competitors.
One-time world’s biggest bank and payments dominator Citigroup has re-entered the merchant processing (“acquiring”) business it sold out of last decade in partnership with MasterCard and others. The new business is being driven by the emergence of mobile wallets among other payment types.
Meanwhile Fidelity National Information Services (Fiserv) will pay $US43 billion for another payments giant Worldpay.
Global M&A in payments this year alone has topped $US80 billion – double the total for all of 2018. New public listings include Italy’s Nexi and Network International.
The role of the digital – or E or mobile – wallet in this seismic shake-up is likely to be central to the customer proposition.
According to the 2018 World Payments Report bigtech – like Amazon or Apple or Google – have some significant competitive edges over traditional players with wallets including peer-to-peer payments, personalisation through data, new revenue streams, seamless customer experience, rewards and loyalty, and a truly digital ecosystem.
The report argues both bigtech and banks have advantages and could work together. Banks can offer client trust, network reach, regulatory expertise, transparency and payments instruments for all use cases. It estimated digital wallets had been the intermediary for $US42 billion of transactions in 2016. Of that, more than 70 per cent were made using the wallets offered by bigtech.
The point about regulation however is critical: global financial regulators are paying close attention.
“Both the potential entry of large, established technology companies into financial services and the ability of technology to decentralise financial transactions raise a number of issues, some of which may touch on financial stability,” according to the US Federal Reserve’s vice chairman for supervision, Randal Quarles.
“Technological innovation offers the promise of a substantially more efficient financial system. But new systems, processes, and types of businesses will bring with them novel fragilities.”
Ultimately the value of this latest generation of wallets resides in whether they add value in their own right or are simply utilities, repositories, providing a storage place for products and services which actually do add value.
That’s the perennial challenge: does greater share of wallet actually provide an institution with extra revenue? At present, most wallets which do market value-adding do so by promising superior financial management.
But most consumers still think in analogue terms. Their wallet is just an icon on a phone they can use to pay. They have other icons for apps that provide banking or insurance or broking or wealth management.
There’s no one wallet to rule them all and in the cyber world bind them.
Andrew Cornell is managing editor of bluenotes
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
17 Jan 2017
21 Mar 2018