For issuers, the time for mobile payments is now
The overwhelming majority of U.S. issuers have watched from the sidelines as mobile wallets from myriad providers have emerged around them.
The reasons for issuers forgoing the opportunity to launch their own branded payment applications are many. They include costs associated with deploying payment tokenization, risk of non-adoption, inaccessibility of legacy core processing infrastructure, and lack of developer and engineering talent. At the root of this problem is, in many cases, an absence of a vision for where mobile is headed. The nascence of mobile payments has created an opaque and challenging landscape for issuers to navigate, delaying plans to deploy more comprehensive strategies.
The challenges associated with mobile payments have led most issuers to assume a reactive role. This is particularly the case in the U.S. market, where only two issuers – Chase and Capital One – have formally announced plans to release a branded mobile wallet in 2016. For the thousands of other banks and credit unions, their mobile payment strategies have essentially been synonymous with integrating to third-party wallets such as Apple Pay and Android Pay.
Issuers whose only mobile-payment aspirations are to integrate with third-party wallets are putting themselves in a highly precarious situation. As these wallets scale, bank customers will become increasingly entrenched and weighed down by the ecosystem pull commanded by the likes of Apple and Google. Worse, they will begin to associate commerce-enablement not with the bank that issued their card, but with the technology vendor whose brand wraps the application they use.
As payments disappear behind the veneer of mobile apps and 'buy buttons,' the dynamics surrounding top-of-wallet strategies are changing for good. Issuers must be mindful that the 'set and forget' mentality of linking cards to a third-party application—be it Apple Pay or Uber—converts the issuer into what can best be described as a dumb pipe. While the mobile-payments sector remains in a nascent state, time is undoubtedly of the essence. We project NFC-based transactions will grow to more than $12 billion in the U.S. this year.
As new commerce endpoints continue to emerge, issuers must reconsider how to position their strategy and their brand in a digital world. As a starting point, issuers should look to their mobile-banking apps as the basis for new commerce experiences. This provides a sizeable advantage over competing providers from an existing active-user-base perspective, a trust perspective and an onboarding/provisioning perspective. While a full mobile-wallet deployment may not make sense for all issuers in the near term, we recommend taking the following actions now:
- Develop stepping stones. For certain issuers whose customers score lower for mobile-payment interest, deploying complementary mobile-wallet technologies is a sound near-term action plan. This includes implementing card-control solutions such as Ondot Systems' Mobile Card Services, and investing in cardless ATM cash-withdrawal technologies, such as those available through FIS and Paydiant. These types of solutions integrate seamlessly into an issuer's existing mobile-banking app, and can be viewed as stepping stones designed to build trust and interest on the pathway to a mobile-wallet deployment.
- Consider a value-added services platform. The noticeable void in third-party wallets is the lack of a coupon and rewards engine. Issuers have an opportunity to attain an early advance here by going beyond their card-linked offer programs and creating or acquiring a value-added services platform. The demand on the consumer front is apparent, with more than half of mobile bankers using coupon or rewards applications at least monthly. A bank-branded platform would provide an avenue to enhance cardholder value, while monetizing massive amounts of transaction data through offer personalization and attribution.
- Evaluate HCE and tokenization partners. As issuers hone their mobile-wallet strategies, one of the most critical decisions they will make is choosing a HCE (host-card emulation) and tokenization partner. There are many vendors to choose from, ranging from network services such as the MasterCard Digital Enablement Program to those from smaller software security players, such as Bell ID's Secure Element in the Cloud. We advise issuers to consider pinning up their own token vault. Doing so forgoes the low up-front costs seen with network-led models, but allows for long-term cost savings and flexibility.
For more insight on issuers' opportunity in mobile payments, see the recently published 451 Research report, For issuers, the time for mobile payments is now.
Jordan McKee / Jordan is a Senior Analyst with the 451 Research Mobility team covering mobile payments. His research examines the impact of mobility across the payments value chain with a specific focus on mobile wallets, mPOS and emerging payments technologies.