Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewpayment transformations
Our legacy payments paradigm is under threat both in terms of the medium used and the content and functionality offered. Our industry continued to concentrate its efforts in plastic credit cards, and those are being challenged by other payments types. Debit card concentrations are already being impacted by Durbin and challenges to signature debit. The mobile wave can provide the foundation for a payments transformation that will allow dozens of new entrants into the space and offer different media to fulfill on payments transactions. Just download Square Wallet and you'll see what I mean. Here is an app that tells you all the places near you that accept this payment, AND discounts that will be automatically credited to your credit card if you use this app. A harbinger of things to come...
Consumer adoption of financial services delivery innovations of mobile is groundbreaking. It is estimated that over half of US households will be using mobile banking at least once a month ten years after market introduction (defined as 1% penetration), as compared to under 20% of households for all other innovations that have been in existence over ten years, such as online banking, direct deposit etc. One out of five consumers used their mobile phone to access their bank account, credit card or other financial account in 2011, and an additional 20% indicate they will be doing so this coming year, per the Federal Reserve Board survey. Not surprisingly, younger people (18-29) account for 44% of mobile banking users.
The primary uses of mobile banking include balance and recent transaction checks, transfers and bill-pay. Those that decline using mobile banking feel their banking needs are met without the device and have concerned about the security of the information. All other reasons are dwarfed by comparison.
As you consider mobile and other payments alternatives, note that both debit and credit card volumes are highly concentrated, i.e. playing field isn't so even in this space. While we can all enter and play, the top 3 issuers of debit cards have more than half the market, and that's an advantage that's difficult to combat. They make the market decisions and all other participants essentially follow. New payments mechanisms are different in that there are no dominant players yet. The field is still open.
Further, being a non-bank isn't a great advantage in the mobile payments space. The most trusted providers are banks, financial institutions, who received a 59% vote from consumers as the most trusted with mobile wallet security, vs. 8% for Facebook, 32% for credit cards and 47% for PayPal.
And yet, some companies are game-changers as we speak. American Express, for example, has made the decision that it wants to be a mass market bank. It therefore introduced Bluebird, which, while distributed by Walmart, can also be bought elsewhere. The product imitates a checking account, not just a prepaid card. The card can be used in millions of locations, 22,000 ATMs and offers a digital wallet with a P2P payment platform. Money can be added to the account through payroll direct deposit, remote check capture via a mobile app as well as by a checking, savings or debit card accounts. The target - 68 million under-banked customers (as per FDIC). Their timing is great, since 58% of customers now bank with more than one company, a 9% jump in one year (per Ernst & Young). Amex hopes that this unrest will give it an opportunity to compete with banks in the mobile payments space without actually building branches. Amex wants to also further build on the fact that 10% of banks customers have been driven out of the banking system, per FDIC, due to bank fees, monthly balances etc. Similar targets are the 25% of US households that use payday loans, check-cashing, pawn shops and other loan alternatives. Note that the average Amex holder charged $14,124 in 2011 alone-quite an impressive figure.
Part of Amex' onslaught has involved partnering with major players in the space, either as recipients or as facilitators. Its joint venture with Walmart is one. In addition, Amex partnered with foursquare to offer its customers unique savings and specials wherever they go if they use Square and the Amex card. The card is synced up to redeem special merchant offers without any coupons or codes. It all happens automatically, and the savings appear on the customer statement as a credit within 5 days. The company also partnered with Twitter, Facebook and Zynga, among others, in a similar fashion, allowing their card holders to sync their card with their social media accounts.
We still don't know which of the early mobile payments versions will win the market. Initial versions imply that the current payments scene won't change, and they do not offer improvements, additional security, privacy protection or efficiencies to the way things are done today. In short, current mobile wallets appear to be a transitory technology.
New entrants into the space might do better. Apple offers its Passbook which is a great place to store all kinds of things, not just money. Other competing apps include Sprint's, AMEX's and Burger King's, but there isn't a winning business model currently in place for NFC. Overall, the market is moving to apps where the consumer controls the functionality. Consumer apps optimize the purchase efficiency in many ways, including more efficient marketing spend, which might be sufficient to justify the incremental expense of the app itself.
Mobile payment behaviors are just emerging, but the early observations for app adoption include:
The train is out of the station, and is possibly being hijacked by high-powered, creative companies like Amex and others. This is a direct threat to our bread-and-butter business, but an incredible opportunity as well. We should be sure to get out there and take it.