Mobile Wallet as an Ecosystem: 3 ways to reinvigorate growth
The aggressive expansion of tech firms into payments has been one of the marked shifts in financial services over the last five years. Apple and Google have kickstarted the migration of cards from your physical wallet onto your mobile, and the relationship you have with your card provider — often your primary bank — has started to move to the mobile wallet as a result. Although this change does not appear to be too significant on the face of it, it has triggered a number of important and often hidden consequences. In this post, I’m going to concentrate on how this provides opportunities for intermediaries to integrate their services into the payment process; but it’s worth mentioning upfront that this is only one of many effects.
More than any other technology in history, your mobile phone is inherently personal. It constantly connects you to the many networks that now constitute your life, like I wrote about in my last post, and comes loaded with metadata about your life. This has created industries founded on the ability to mine the data generated from mobiles, and your financial life is the next field of exploration.
With early adopters now habitually using digital wallets, the question now turns to making the leap to the next segment of customers. Much like the unexploited markets of yore, the mobile wallet space offers vast opportunities for those willing to innovate. The stakes only get higher when you factor the regulatory changes being seen in the financial services market. A wave of open banking regulation will require banks to expose customer data, allowing mobile wallet providers to access more detail about the conduct of the entire banking relationship.
My prediction, which I will elaborate on below, is that tech firms will use this opportunity to develop their mobile wallet propositions into a more mature offering giving space to third parties to provide additional functionality. This work done by a16z in exposing the digital wallet ‘stack’ clearly shows that there are abundant opportunities for intermediation.
Integrating apps into the mobile wallet (in a app-in-an-app model) will reduce friction and improve the customer experience and, in sparking an ecosystem around the payment process, will also create network effects drawing previously hesitant customers to mobile wallets. The Chinese market, in which the app-in-an-app model is already well established, has already started to explore this possibility.
Although this space merits further thought, to keep your attention I’m going to turn to three ways in which I think digital wallets could develop to cross the chasm and reinvigorate growth.
Peer-to-Peer Payment Integration
In China, the most mature p2p payments market, 32 billion digital hongbao (a digitised version of the Chinese cash-filled red envelope tradition) were sent over the six-day Chinese Spring Festival period in 2016. The UK ecosystem, however, is fragmented and replete with friction, with players like PayM and TransferWise failing to dominate.
I predict that we’ll see a major move in the UK to integrate peer-to-peer payments into a platform over the next few years, especially as regulation creates a more open banking environment. Mobile wallets are one of the most credible platforms in this space, and my money is on a battle between mobile wallets and messaging apps to capitalise on this opportunity.
P2P payments are a space in which one winner will take all. The friction encountered with all existing solutions is currently hampering their growth, and the most mature mobile wallets can act as a springboard to create enormous network effects. Mobile wallets are also well positioned because they offer support across issuing banks and their users are actively opting in, thus solving the issues encountered by intra-bank solutions and PayM.
Half the money I spend on advertising is wasted; the trouble is I don’t know which half. - John Wanamaker
Moving payments online has created an opportunity to solve one of the fundamental problems with advertising, ie the disconnect between ad spend and customers’ purchases. Digitising anything creates data which can be used to track behaviour, thus meaning that the advertising industry can now accurately track users throughout their journey, from the inception of an attraction to their product all the way through to the payment and beyond into the ongoing relationship.
All players in the payment cycle (retailers, banks and schemes) have an incentive to increase spend, and mobile wallets provide an opportunity to solve this age old problem. Integrating rewards, such as coupons and gift cards, into a mobile app is one way in which those players could track customers. We’ve already seen small forays into this space with Fare Free Mondays on TfL, but I expect a wider range of merchants to start offering targeted campaigns.
Personal Financial Management
There have been some advances in software that helps customers manage their money, but to date these have been relatively limited and reserved for the financially savvy. Products like Mint and YNAB have digitised the process of tracking receipts and budgeting, but lack any sophisticated functionality or the automation that would attract the early majority. Some FinTechs, Monzo for one, are already starting to explore populating charts based on spend data, but current offerings lack maturity.
As regulatory developments facilitate the aggregation of a customer’s accounts across banks, mobile wallets are well positioned to offer sophisticated PFM tools. One opportunity would be to offer automated switching services between the most commoditised utilities and banking products. Integrating these comparisons into the mobile wallet would establish a personal finance ecosystem, and the customer journey could be as simple as setting a risk tolerance up front through a robo-advice journey.
Another example could be mining the metadata that comes baked into mobiles to offer targeted PFM suggestions. Data about demographics, preferences, geolocation and social networks could be used to offer smarter and more tailored suggestions to customers. Borrowing money could become a much more personal and intimate experience if your payday loan was crowdsourced from your Facebook friends through Apple Pay.
As smartphone access increases, and more and more customers get access to a supercomputer in their pockets, it’s clear there is a ripe opportunity for expanding the uptake of mobile wallets. To date in the UK market, the functionality of the major wallets has remained relatively restricted but I suspect this will change imminently. The power struggle currently being played out between banks, tech firms, retailers and card schemes is only set to get more intense.
My take is that by offering increased functionality and capitalising on the network effects, it will be the player(s) that can offer the best customer experience through the most widely adopted platform that will profit most in the long run.
One thing I’m sure about is that mobile wallets will dominate the future payments landscape, however we’ll wait to see who comes out on top.