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Fintech’s wallets don’t pay, for banks

Part 2: Banks will become invisible back-end providers for third-party wallets if they don’t offer competing mobile payments solutions.

This is the second in a four-part viewpoints series by CCG Catalyst's Paul Schaus regarding banks versus fintech players. This is the second in a four-part viewpoints series by CCG Catalyst's Paul Schaus regarding banks versus fintech players.

The move from plastic to digital is now well under way in payments. As a disruptive force, mobile payments have much in common with P2P lending, subject of Part 1 of this series: mobile payments make up a negligible percentage of the overall payments market, but they’re set for explosive growth in the coming years.

Plastic might provide an easy way to pay, but it has major flaws that will facilitate the growth of mobile payments as an alternative. Mag stripe cards are the most insecure method of payment available, which will be a growing concern as consumer awareness around data security and privacy continues to grow.

Additionally, payments cards don’t sync with the increasingly digital way consumers live.

Payments in the digital age

The big value in mobile payments—for both consumers and solutions providers—will be in the data and insights that can be gleaned. It’s one thing if you can make a mobile payment, it’s another if you can make a (secure) mobile payment and instantaneously see on your phone how the purchase impacts your monthly budget. With a plastic card, that kind of information may take days to deliver as the bank takes more than 24 hours to process the transaction to your account.

The longstanding obstacle of merchant acceptance will also become less of an issue over the next year as NFC terminal penetration increases. While small merchants will likely take years to implement NFC terminals, large retailer chains are already doing so to get ahead of the EMV liability shift this fall.

With NFC adoption increasing, in-store mobile payments volume will triple over the next year to $22.4 billion, Aite Group projected earlier this year. After 2016, mobile payments will nearly double each year in volume through 2020, when it will reach $487 billion, according to the projections.

That $487 billion is still just a sliver of the in-store payments market in the U.S., which is valued in the trillions. With a massive market ripe for disruption, it’s no wonder that huge players like Samsung, Apple, and Google have decided to go after a piece of it with their own mobile payments solutions. Banks are partnering with these third-party providers just as they are partnering with the disruptive P2P players in lending.

Who’s working for whom?

However, unlike with P2P lenders, the banks are in a position of weakness in these partnerships. That’s because as the epicenter of the customer relationship will shift to the payments app provider.

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As mobile payments solutions gain adoption over the next few years, control over customer relationships will shift to whoever can provide the most value and best mobile experience for the customer. With consumers looking for financial advice and security in the wake of the recent financial crisis, that value will be derived from transactional data that can be turned into real-time personalized financial guidance.

Data from mobile transactions can help payments providers give their customers an up-to-the-minute picture of their finances through the device that customers carry with them everywhere they go—their smartphone. Whoever can best deliver that real-time view of a customer’s financial and spending habits will own the customer relationship. As Apple, Google, and Samsung see more transactions originating from their mobile payments solutions, they will be able to start providing that real-time financial advice to customers through their mobile wallet solutions.

Of course, banks could provide real-time advice for customers as well through their own mobile banking apps. But if their customers are using third-party apps to make payments, they will be more engaged with those wallet apps since they will use them several times per day to make purchases.

Since they own the handsets and operating systems, Apple, Google, and Samsung are much better positioned than banks to deliver the best experiences for customers to visualize and understand their purchasing behaviors. That ability to deliver a compelling mobile experience is also ingrained in their DNA—which can’t be said for most banks.

Do you play in consumers’ new world?

There is also a huge need to raise customer awareness about how and where they can make mobile payments. The best place to provide that education is within the payments apps, where an intuitive user experience will take customers through the steps of making a payment and show them where they can do so.

Ideally, the wallet app will be able to alert customers when they are near a store where they can make a payment with it, and offer some reward or incentive to do so. Again, the safe money is on Apple, Google, and Samsung to deliver that intuitive mobile experience, rather than a bank.

Banks might still provide the back-end processing that makes these third-party solutions work, but as payments go mobile, new entrants who have core competency in designing great digital experiences will likely own the customer relationship.

The only way banks can hold onto their customer relationships and avoid becoming back-end infrastructure providers is to offer their own mobile payments solutions. Banks still have an important strength in competing with non-banks in mobile payments: by integrating payments into their mobile banking apps, banks can turn their apps into one-stop shops for all of their customer’s financial needs.

Providing real time financial advice that includes a customer’s entire financial picture—including spending habits, bill payments, personal loans, mortgages, etc.—is a valuable proposition. If customers are looking for financial advice, their bank can give them more relevant tips than anyone else.

If banks can design a competitive and intuitive user experience, they can still stay relevant with consumers by delivering insights that help them on the path to financial security. If they can’t …

To read Part 1, "Who will consumers choose?," click here

Next: Why humans should worry about robo-advisors

Paul Schaus

Paul Schaus is CEO & President at CCG Catalyst. Follow CCG Catalyst on Twitter and LinkedIn.

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