The Epic battle for the Digital Wallet
So right off the bat, I want to make it clear that I am not a payments expert. I am a consumer banking professional solving consumer banking needs - one of which happens to be payments. The payment world is multi-layered with lots of players and intermediaries and is ever-evolving. Here are some of my early thoughts on the payment ecosystem and here's a more detailed article from one of the experts. However, as a banking professional who has been in the consumer finance industry for the better part of my professional career, I take notice whenever there is a big new development in the payment space.
If you are reading this post then by now you’ve most likely heard that Google launched its redesigned version of Google Pay. There is much to talk about and discuss here! This comes on the heels of Facebook launching WhatsApp pay in India. If you want to learn more about the Google Pay app, here’s a good article, and here’s the official video from Google explaining the features and functionalities. In short, the new version of the app is a step up over the previous iteration and tries to create an ecosystem of peer-peer payments, a great shopping experience, and a PFM (personal financial management) tool, all under one uber app – hellooo WeChat! The three things are the three tabs in the app. 1) the ability to pay friends and businesses somewhat effortlessly. 2) explore retail coupons and rewards and generate savings for the user 3) A PFM tool that offers insights about spending and helps with budgeting, planning, and saving. While payments are at the core, the PFM feature is an important hook– it encourages users to link their bank accounts thereby giving Google more insights into your finances. In addition, Google will launch Google Plex next year, a no-frills, digital-only checking account that will seamlessly integrate with the Google Pay app. Google claims that they have partnered with 11 banks for Plex – mostly credit unions and smaller regional banks with Citi being the one behemoth. Think of Plex as Google providing the front-end UI/UX and the banks managing the core banking product at the back end.
The payment world is multi-layered with lots of players and intermediaries and is ever-evolving
Okay, so why do I think this is a big deal and what does it mean for banks. Banks (particularly big banks) have been playing close attention for a while now to the increasingly aggressive forays made by big tech into the banking industry – particularly in payments. However, the general consensus has been that the “regulatory moat” will continue to insulate the Banks from any major disruptions – after all which big tech CEO wants to do sit down with regulators and lawmakers and get skewered as to why their fancy ML-based underwriting model is not Reg B compliant! That said, there are two trends that are starting to take off – 1) Big tech partnering with Banks (e.g. Apple and Goldman for the Apple Card) 2) Innovations in the payment space (where the regulatory burden is not as much). The launch of Google Pay squarely straddles the two. If the Google Pay app and Plex take-off (and it’s a big if with Google’s somewhat scattershot approach to innovation), it’s likely not good news for Banks. I see two big implications–
1) Google takes over the UI/UX and the front end and ‘owns’ the customer relationship. Over time, Google becomes the forefront brand anytime a customer needs to make a financial decision. When you combine that with seamless integration with a digital shopping experience, and a PFM tool, it’s not hard to imagine that Google’s end goal is likely a WeChat like uber app ecosystem. In all this Google becomes the ‘center of the universe’ deciding who, what, when, and how gets prominence. The Bank just gets lost and depending upon how well (or not) they play with Google, may get relegated to obscurity- what we in the Banking industry have long feared- becoming the utilitarian “dumb-pipe”!
2) Margins from interchange and cross-sell for Banks start shrinking. Margins from interchange are a huge source of revenue for Banks. I believe Google pay will charge 2.9% for credit card transactions (no new charges for a debit card transaction). So, it’s not hard to imagine that someone will have to eat those charges - the merchant, the consumer, or the issuer. And if we go by past instances, it's likely going to be the issuer. Another massive implication is that the Banks relegated to the back-end will lose control over the customer experience and may have to give up control over their cross-sell and up-sell programs. Google will now influence (read control) all the decisions, including cross-sell/upsell products – and will likely take a cut from the revenue that comes with it.
So, in all this I am using Google as an example - they are the ones who made the recent splash, but this entire space is heating up fast. It is very likely that Apple Pay will come up with a similar uber app in the not too distant future (and we all know Apple’s product design and UI/UX chops are much superior to the competition, not to mention their appetite for higher margins). The launch of WhatsApp pay in India and its likely integration with Facebook is HUGE (my 65-year-old mom uses exactly two apps on her smartphone and no prizes for guessing which two!). Then there's Amazon with its aggressive global payment strategy and aspirations for world domination! Bottom-line -- the digital wallet space is likely going to see is a huge upheaval in the next 12-18 months.
So now the million-dollar question (make it a trillion) – What do banks do. As I see, there are two options -
1) Waive the white flag and accept being relegated to the back end. For some banks that may not be a bad idea. A lot of sub $100B banks (in assets) do not have the budget or the skills to counter this groundswell. They are barely getting by in this current environment and every day see their margins shrink by a double squeeze – by big banks on one side and fintechs on the other. Some of them have already adapted (bank charters for rent?) and for others, the option to partner with a big tech that takes over the “headaches” of product design, UI/UX, and customer management while they manage regulations and the core banking platforms while generating a steady revenue may not be a bad option. Is it a coincidence that 10 out of the 11 Banks in the initial list for Plex are community or regional banks?
2) Stand your ground and fight bank. Before you laugh me off, (and I won’t blame you if you do), I don’t think it’s totally unfathomable. Remember, the regulatory moat is still very much a factor, and depending on which administration is in power, may only get wider, deeper, and more deadly (not to be taken literally). However, Banks cannot do it individually. They must get together and/or work with the regulators to create some common standards and platforms (like PSD2 powering open banking in Europe or UPI in India supporting the Whatsapp payment) and perhaps create their own uber app – and Zelle shows that it is possible. It will be interesting to see the trajectory of open banking over the next few cycles as a harbinger of things to come.
And finally, what does this mean for the consumer. I think this one deserves a separate post but ultimately, it’s the customer who will determine which one of these options takes shape. One thing is for sure -whenever there is a paradigm shift and emergence of new competition, it usually bodes well for the consumer - more options, better choices, better pricing, and better service. And as someone who has been working hard to crack the personal banking and credit card code for gen Z/students/young adults, I can tell you that there is tremendous willingness and appetite to break away from the beaten path. Competition from big tech (and fintechs) will compel the ‘stodgy’ banks to UP their games. But (there is always a but!) the offsetting factor to creating that smart ML and AI-based UI/UX and all the conveniences that come with it is DATA and PRIVACY. After everything that has been transpiring lately, who is most likely to win the consumer's trust when it comes to their most prized possession – and no, I am not talking about their Facebook likes, Instagram pics, and TikTok videos! I am talking about their financial data and transaction history. As they say ....‘follow the money….. ‘ and when you do that you know everything that there is to know!
Other than the customer, who should be the obvious winner here, I am not going to predict a winner here (I am obviously somewhat biased). But I am going to be watching and hopefully meaningfully contributing to how this epic battle for the consumer's wallet plays out over the next 12-18 months.