Why banks’ existing relationships give an advantage in mobile payments

For many banks and payment card issuers, the business case for mobile payments remains unclear: concerns about the potential Return on Investment (RoI) are combined with a wariness of the often-significant resources needed to get programmes up and running, says Gilles Ubaghs, senior FS technology analyst at the Ovum consultancy. Issuers that ignore mobile payments …

November 11, 2013 | bobsguide

For many banks and payment card issuers, the business case for mobile payments remains unclear: concerns about the potential Return on Investment (RoI) are combined with a wariness of the often-significant resources needed to get programmes up and running, says Gilles Ubaghs, senior FS technology analyst at the Ovum consultancy. Issuers that ignore mobile payments today, however, risk losing their positioning in the long-term and could be disintermediated.

One of the chief threats facing banks and payment card issuers is that they could easily lose their consumer-facing position and quickly become just a ‘dumb pipe’ for payments if they allow others to dominate the mobile payments space; leaving them with higher card dormancy rates and costs but no benefit as effectively a ‘utility’ provider.

This disintermediation threat is something that financial institutions (FIs) can easily avoid in my opinion if they get active in the mobile payments arena. Although competition in the mobile m-payments market is increasing, banks currently have an advantage because they already have wide-reaching relationships with consumers and merchants alike – they just need to leverage these relationships.

The shared UK mobile m-payments platform, being built by the VocaLink Zapp subsidiary, is due to launch in 2014 and is aimed at opening up the UK market for mobile payments. Greater interoperability between banks should decrease frictions about widespread consumer take-up. However, rather than wait and focus on a bank-centric shared service solution approach, some banks such as Barclays in the UK with its Pingit app and later Buyit and Shopit additions, have been more proactive and demonstrated a firmer grasp of the competitive opportunities to be gained by moving more quickly. Many banks, particularly the larger ones keen to hold on to the value-add direct consumer relationship, may still prefer to carve out their own niche – even if they do end up sharing the same payments processing technology back-end. Cross-bank platforms are growing internationally, with for instance the pan-European electronic e-authorisation and e-commerce transaction platform MyBank a prime example, but this doesn’t mean that banks cannot carve out their own niche offerings. This approach does not preclude them from joining bank-centric shared service solutions in future, as Barclays will do with Zapp, but it can give banks a more distinctive identity and service offering.

The point is that these various schemes show that the bank relationship is still worth something and should be leveraged. Although various newcomer providers, such as PayPal, Google or others, are offering competing products and services, they will have to replicate these networks of relationships that banks and card issuers currently have. FIs that act now can not only protect their current relationships with merchants and consumers, but also further extend them by creating platforms and new product streams that will ensure they remain in charge of the data and value-added customer services.

Banks Risk Disintermediation if They ‘Wait-and-See’
Many payment card issuers, particularly larger FIs, are taking a ‘wait-and-see’ approach to mobile m-payments, but I’d advise against this. Their perception is that the market remains at an early, unformed stage of development, so rather than planning for and investing in mobile payment capabilities now, they are waiting to see what mobile payment products develop.

The primary reason for many banks’ apathetic approach is that regardless of the mobile payment provider, most mobile m-payments will continue to be funded through bank-issued payment cards, so they will continue to gain revenues from each transaction. However, the day-to-day visibility of an issuer’s brand is at risk of being displaced by a third-party consumer-facing brand such as Google Wallet or PayPal, reducing the level of interaction between the issuer and the consumer. Once this relationship is weakened, the risk of the consumer switching to other payment providers is heightened.

The ability to hold multiple payment products on one mobile platform increases the risk of card dormancy and back-of-wallet positioning. Although a consumer will always be reminded of a physical card in their wallet thanks to its tangible nature, a virtual card in a wallet is much easier to forget about or ignore.

Issuers Hold An Advantage Thanks to Consumer and Merchant Relationships
While the threat of disintermediation from technology companies and other newcomers is well known, banks maintain a significant advantage over emerging mobile payment providers because of their existing networks of relationships with consumers and merchants. Although the number of mobile m-payment providers is growing and many are now attempting to create their own networks of relationships, none has the same scope or depth as those held by FIs.

Trust remains an important component in driving usage of mobile payments, as it does with the development of any new payments technology. Banks already hold a strong position as the standard trusted source of payment products and merchant acquiring services and, with the right product design and features, this advantage could easily be expanded into m-payments. Among merchants unsure of how to approach mobile payments, services and products offered by their existing payment partners will be more likely to gain traction.

However, if banks remain too complacent about their existing relationships and market positioning, there will be space for emerging players to quickly develop. The growth of PayPal in the online payments space highlights the missed opportunity many FIs failed to grasp in the early 2000s. Due to the fact many banks were reluctant to enter what was viewed as the strange and potentially risky world of online payments, a little-known start-up, filling a particular need, was able to expand into a globally recognised brand in little over a decade. A ‘wait-and-see’ approach can easily lead to the very rapid growth of new payment players – a new PayPal if you like – and another missed opportunity for banks.

Mobile Payments Create New Opportunities
Mobile financial services, in various forms, provide a strong platform with which banks and FIs can deepen their levels of consumer engagement and, potentially, provide new services to the market. Indications suggest that on average, consumers tend to log onto mobile banking platforms significantly more frequently than they log into traditional online banking platforms. As the technology underpinning mobile banking develops from providing an informational format to providing a transactional one, and eventually delivers a more interactive experience, banks will gain the means to engage consumers and potentially cross-sell products to at key moments in the financial decision-making process.

Mobile payments are no different, providing a means to engage with consumers on a day-to-day basis and potentially launch new products and services targeted at very specific audiences. For instance, payday lenders such as UK-based Wonga are largely reliant on their online and app presence to reach consumers, directly threatening the lower end of the credit card market. However, most issuers have done relatively little work so far to offer over-the-air (OTA) credit card provisioning or short-term loans via virtual credit cards. Banks that are active in the mobile payments space could launch these sorts of products more easily than those that are not. Mobile payment platforms provide a simple means to reach a potentially large audience at a critical point in the process of payment selection.

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