Card association or networks, such as Visa, MasterCard, and banks that have been traditionally important entities in the payments landscape, are now at the cusp of digital disruption. As mentioned in our previous post, competitive threats are no longer coming just from industry peers, but from disrupters across other industries. Mobile devices manufacturers, platform providers (e.g. Apple iOS and Google Android), telecommunication companies, and third-party app developers (basically innovative startups) have launched their own mobile wallets providing a stream of beneficial services. Those services are closely substituting or eliminating the necessity of using banks and card networks, and are more easily accessible by consumers.
Before understanding the impact of mobile wallets, it’s important to first take a closer look at the traditional role of the banks and card networks that have made them such successful businesses. Every bank has a mandate to oversee the payments system in entirety, which encompasses a wide variety of individual payments instruments – ranging from checks and payment cards to high-value corporate payments, and the usually unseen arrangements that ensure the smooth transfer of funds from the accounts at one financial institution to another. Banks also act as credit or debit card companies that issue the cards to consumers and service their accounts.
Card networks, on the other hand, handle the worldwide processing of card payment transactions, acting as gateways between merchants and credit card companies for authorizing and processing each transaction and also setting the terms of those transactions (e.g. interchange fees and fraud liability). Currently, banks and card networks play a major role in ushering the payment transactions smoothly between two parties. However, they take up different forms of fees during this process, in the form of interchange fees and others. Although the banking system has been in existence for decades, its’ exact penetration is still debatable since a large percentage of people still remain unbanked.
In order to determine the impact of mobile wallets, two important questions need to be considered – if the long-standing banks and card networks have been successful with their traditional set of services, what has changed around them that allow such disruption from mobile wallet solutions? and why haven’t the banks and card networks been able to take an advantage of these changes and extend their services?
To answer the first question, let us step back. The last two decades have seen a proliferation of the internet in both businesses’ and consumers’ lives, touching all aspects and connecting both entities. Add to this, the advent and growing prevalence of mobile devices and cloud computing which has pushed every brick-and-mortar business to now operate online and allowed many startups to serve the consumer in innovative ways.
Additionally, today’s consumers are always on the move with continuously changing lifestyles and on-demand business and personal needs. Mobile devices with internet connections and device-to-device communication capabilities (e.g. NFC) are the new constant companion through the day. It seems natural that payments and other related services were brought to mobile devices and are becoming a growing preference amongst the consumers. Mobile devices have allowed consumers to reap the benefits of mobile wallet services by simply waving their phone over a POS (point-of-service) device. Mobile wallets have shown the potential to change the customer’s daily experience, establishing their preferences for particular payment instruments and making it possible to manage finances on-the-go.
For the second question, we believe banks and card networks were complacent enough to allow other players to disrupt their business, and were also taken by surprise when consumers (including their own) started preferring mobile wallets over traditional services provided.
Better late than never, banks and card networks are taking steps to survive and thrive. They are realizing that they cannot ignore the bottom of the pyramid population using excuses such as low business profits, and are taking steps to utilize technology to help them reach a wider audience. With mobile wallets, the cost of servicing remote customers is also substantially lower – a fraction of the cost of setting up branches in remote locations to service the unbanked. This cost disruption aspect of mobile wallets has also suddenly made it easier and profitable for banks and card networks to service remote customers. Other strategies include third party wallet participation, joint venture wallets or building their own proprietary wallets. However, banks and card networks have to tread carefully. Overwhelming consumers with a stream of services that may not be necessary, in an attempt to compete, could be unknowingly harmful.
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