Stop me if you've heard this one before – a group of industry players creates a consortium to launch a digital wallet to participate in the payments process and exert control over the consumer experience.
Such an endeavor has been pursued in the past years by major U.S. retailers, like MCX, and telecom providers, through the unfortunately named ISIS.
Just as conventional wisdom seemed to have settled on smartphone makers as the logical wallet providers – Apple Pay and Google Pay – seven of the largest U.S. banks have decided to enter the fray through their existing jointly-owned entity, Early Warning Services (EWS). The as-yet-unnamed platform would operate separately from the EWS-run peer-to-peer payments platform Zelle.
The details remain unclear, but the announcement signals that banks want to accelerate their role as technology players, behaving more like fintechs and introduce more competition against established providers. It's also a prompt for FIs of all sizes to revisit their payment blueprint.
Who Owns the Digital Experience?
Not long ago, flashing certain cards exuded particular brand associations, creating unique experiences at the point of sale and beyond. Today, that experience in the U.S. is disappearing with the emergence of mobile wallets.
As payments became digital with cards, a gamut of intermediaries – networks, acquirers, and processors – inserted themselves into the equation, each staking a claim in the process. Mobile wallets added another stakeholder; Apple Pay's card issuer agreements call for a piece of transaction revenue.
Although a branded card image may briefly appear on the phone screen, today's digital wallets subsume payments into a device-centric brand experience. After all, users state that they use Apple Pay rather than mention the name on their card or even a debit vs. credit distinction.
The large banks naturally want to re-establish their brands' prominence. For instance, JPMorgan Chase has already moved in this direction with its Chase Pay offering, trying to own the customer experience.
Apple Pay enjoys an early-mover advantage for mobile wallets, especially after pandemic-prompted consumer behavior shifts. But EWS's challenge isn't necessarily insurmountable. A bank app may offer more features and controls. App security has evolved with hardware security, allowing apps to conduct secure transactions across multiple operating systems. And regulators have begun to suggest that consumers should have more downloading options than those offered by today's app stores.
What Should Smaller FIs Do?
EWS is a logical home for this initiative because it is already co-owned by the major banks behind the announcement. It's reasonable to assume that, like EWS's other offerings, the digital wallet will be made available to other banks and credit unions.
The debate then focuses on how the nation's other 9,500+ financial institutions should prepare as new payment options get through the adoption curve. The notion of a single bank-centric digital wallet, integrated with individual banking apps and independent of the tech giants –who would still exert market power through tokenization/security standards – holds promise. It's easy to envision services like Zelle eventually rolling into this endeavor. Will community banks, regional banks, and credit unions be better served by carving out their own identity?
It's important to consider that such wallets are poised to accelerate "pay with bank account" options, which JPMorgan Chase has already announced as a feature to address bill pay and similar use cases. While cannibalizing card volume could be troubling for many FIs, fighting the trend – as opposed to leveraging it – is likely pointless, given younger generations' credit-averse/debit-friendly mindset.
The Bottom Line
EWS's announcement signals that large banks are rethinking their role with digital wallets and the overall consumer payment experience. FIs beyond this top tier should engage in the same strategic thinking, analyzing the payments behavior of their current and prospective customers and developing a digital roadmap to achieve the desired end state. SRM is ready to help you create a strategy and identify the partners and capabilities needed to make your vision a reality.
Prakash Natarajan, Managing Director, Payment Strategy, has decades of experience in cards and payments, advising leading banks on their strategy, innovation, and transformation initiatives. Further inquiries may be made by emailing Prakash at pnatarajan@srmcorp.com.