Given the noise in the media last week with the launch of Apple Pay in the UK, I wanted to revisit the thoughts I shared in our recent paper, Experience Driven Banking: a race banks must win.
Apple is just one of several technology companies to challenge traditional banks and opens up an interesting discussion – how can banks compete with these challengers? Are banks really still equipped to win the customer loyalty prize?
Let's take a look...
Who are the challengers in the retail payments race?
A range of start-ups is emerging to nibble at parts of the banking model. Initially, at least, the focus has been in areas such as personal finance, trading and wealth management. These firms include Wealthfront, Mint, Lending Club, TransferWise and eToro, which take advantage of technological change to offer customers better value or a differentiated financial services experience.
Nonetheless, the main opponents in the scramble to deliver the winning banking experience are the larger technology companies. The ambitions of Amazon Payments, Apple Pay, Google Wallet, Gmail Bill Pay, PayPal, amongst others, have been well documented. Some will succeed, others will not. The advantage that these organisations enjoy is that their customer data is already refined, meaning they know client preferences and can target relevant offers. Most Apple users have long abandoned fears of surrendering data in exchange for convenient service and quality products. Facebook is also well placed to take advantage of its huge user base. The race is now on to get access to customer transactional data.
Apple Pay leading the charge
Introduced last September and rolling out fast across the globe, Apple Pay, has emerged as a genuine challenger to banks' retail business. Apple appears to be making more headway than rival initiatives including PayPal, Google Wallet and Walmart's CurrentC. It already has over one million US customers and an estimated 220,000 partner US retail outlets, as well as six major banks and the three major credit card companies, MasterCard, Visa and American Express. Retailers like Whole Foods Market have seen "significant growth" in Apple Pay's use.
Apple Pay securely stores multiple credit and debit cards on the Passbook application by encrypting or "tokenising" the information. Each card gets a device-only account number; actual card numbers are never stored or shared. With the wave of an iPhone and a thumb reading, the first alternative retail payment method that's faster, easier and more secure than cards has emerged.
"In no time Apple Pay has exceeded two decades of bank efforts to enrich the way in which credit card payments work," says John Schlesinger, Chief Architect at Temenos. "We are already seeing evidence that this is the first payment mechanism where consumers are prepared to change merchant if Apple Pay is not offered as a way to make the transaction. Its brand is that strong."
Apple has also been smart in the way it has set up its fee structure. By taking a fee from the card issuer, mostly banks and credit card companies, it has ensured a revenue generating model irrespective of what happens to merchant acquirers and scheme owners (such as Visa and MasterCard) over the longer term. The role of the last is likely to be made much less important by a combination of contactless payments, real-time settlement and distributed ledger technology, such as Ripple and Blockchain, which allow for instant, inexpensive and secure settlement.
With transactional data, the threat grows exponentially
While the convenience and security aspects of Apple Pay are interesting and revenue stream significant, the real value is in the data. Apple Pay doesn't store any of a customer's data on the smartphone itself and most of the sensitive data is encrypted. However, that does not stop Apple from gaining information regarding such items as the merchant name, and the date and time of the transaction, which it can then associate with a person's Apple ID. Gaining this level of insight can put Apple in a position to recommend third-party products and services and to help customers to make better and more informed spending decisions.
Banks must play to their strengths to retain advantage
Despite the hoopla around new payments, banks nevertheless retain many inherent strengths, and the savviest should emerge as even stronger brands from the shake-up. They have the deepest networks, the ability to offer integrated products and services and – for now – they hold their customers' precious spending and savings data.
Banks still have time to create data models to inform consumers and merchants about transactions at the point of sale, and about financial management. Their customers could be given more options for products and services when it is most convenient to them; the merchant benefits, too, from improved customer satisfaction translating into sales.
The race is on.
Read more in Temenos paper: Experience Driven Banking, a race banks must win by Ben Robinson