Bob Graham, SVP & Head of Banking & Financial Services, Virtusa
The pace of disruption in banking continues on a near weekly basis, creating challenges for banks to retain front of mindshare, and preserve and retain their customer base. Consumer banks are threatened in nearly every traditional product area from upstarts and more nimble competitors, to non-bank players that are disrupting the traditional interaction model between the bank and the customer. Take a look at the Apple Pay announcement. Most reports had banks breathing a sigh of relief because Apple chose not to change the core transaction model involving the card companies and the banks. Instead, Apple essentially layered a new front end on top, and it will use the existing rails of credit card processing, thereby preserving the precious fees card companies and banks make. Announcements touted first-mover banks that were participating (JPMC, Bank of America, Wells Fargo, Capital One, and Citi etc.) and indicated roughly 500 others that were rushing to join the fold.
More mobile payments should be a good thing for banks but there are several reasons why banks should be worried. Firstly, Apple has inserted itself squarely into the payments game and has done something that the banks and card companies have struggled to do for years – create customer excitement and adoption around mobile payments. Over a million customers enrolled in Apple Pay within the first few weeks. The retailer Whole Foods says it has seen over 150,000 transactions and McDonalds reports that Apple Pay has captured 50% of the tap to pay transactions. The banks themselves are highlighting their support of Apple Pay on their websites. More importantly – merchants are touting that they accept Apple Pay. I would suggest this is the first of what is a major disruption to the system. Apple has clearly stated that it is not tracking transaction data, hence at present; it will not provide any features tapping into rewards and loyalty. Look for others to jump into the fray to create applications that bring this value added feature to the forefront.
Secondly, Apple has thrust mobile payments into the consumer consciousness and is spurring adoption. There are multiple other mobile payment initiatives out there which are coming to market (MCX, Softcard, Visa etc.) and there will certainly be others that have not yet been conceived of today. The point is that the door has been thrust open and the market will innovate. It is entirely possible that the bank’s position and their fee structure could be further eroded by a future change.
Thirdly, Apple just took a bite of the fees. While largely preserving the status quo in the payment processing ecosystem, Apple is getting a piece of the interchange fee, (reportedly .15-.20%) plus an enrollment fee at the same time. It has also been reported that merchant fees will not rise, so Apple’s cut is coming from the banks. The rationale for the banks is that Apple Pay will yield a much lower fraud profile, because of Apple’s security features with card present transactions. Banks also hope to see increased overall transaction volume over time. This seems to be a win-win: for merchants who do not have to support extra fees, for the card companies and banks, who get to maintain the status quo and get lower fraud expense, and for consumers being able to use an exciting new product. Note several banks have complained that the agreement is one sided, and several were said to be evaluating whether they wanted to participate in Apple Pay.
And they should. Similar to when it created ITunes, Apple has just created a significant new fee based revenue stream for itself by orchestrating a better user experience in an area where it had no presence before. The pie is huge. Apple CEO Tim Cook indicated, while discussing the launch of Apple Pay, that the US payments market had a daily volume of $12 billion. That figure is expected to go up as the security and convenience of Apple Pay drives more usage.
Lastly, it is ultimately about customer experiences not transactions. Banks have been working on mobile payment solutions for the last few years with varying degrees of success and equal amount of failures (e.g. partnerships with google wallet). The two big issues for mobile payments have been security and convenience. Tokenization, where Apple is not storing any card information on the device, handles the first concern. In fact, this represents a far more secure transaction experience than the current plastic card swipe and signature.
The challenge of convenience has always been how to create another process that is as simple as the card swipe and signature. Starbucks, and even Dunkin Donuts, have shown that if you can create convenient experiences on the smartphone, then consumers will use it. Apple Pay replicates that in a seamless checkout. No swiping, no signature – just scan your phone. With the use of their biometrics reader, it makes it even easier to have your screen be ready for scanning. Apple has now stepped into the forefront by not only combining features of its physical device, but also by using software to make mobile payments work in a way that transforms the customer experience. This will become comparatively even more convenient next year, with the rollout of EMV that will require a swipe and pin at checkout.
While the naysayers will point out that despite early excitement, with over one million enrolled cards and 220,000 merchants on board, Apple Pay is barely moving the needle on the more than 600,000 US credit cards market and it has less than 3% of merchants supporting it today. But, there is a very critical point here that cannot be overlooked. Apple has demonstrated that you can change the user experience around payments and in doing so, it has disrupted the status quo to the point where banks are now subsidizing Apple Pay. Apple has opened the door as a catalyst for further changes in the payments landscape. Future innovations may come from Apple or other companies, but clearly change is on the way. In this new mobile payment experience, how much are you thinking about your bank in this transaction versus thinking about Apple? About as much as you think about the record company when buying on iTunes – that should be worrisome to banks.