Quick Thoughts – Bank Launches of Digital Wallet and Checkout Products are a Threat to PayPal and Catalyst for MCX
Banks are getting into the digital wallet and checkout business in competition with PayPal. Recent products include Chase Quick Checkout (announced in February), PNC’s digital wallet (announced in July), and the Citi Digital Wallet (announced two days ago); WFC and JPM also participate in the carrier-sponsored wallet initially branded as ISIS, but bank-branded wallets represent an important evolution.
Like PayPal, these bank products allow consumers to checkout from an online shopping trip by entering a user-name and password linked to pre-registered payment card and shipping information; there is no need to re-enter this information into a merchant website so that checkout is quicker and cart-abandonment risk is reduced. Unlike PayPal, the bank products typically leverage the Visa and MasterCard acceptance brands as the networks extend these into the digital space through Visa Checkout (used by PNC) and MasterPass (used by Citi); the Chase product is an exception in that it does not leverage these brands but rather the proprietary acceptance brand JPM is developing along with its ChaseNet network (announced in February 2013). As with PayPal, when users see the relevant acceptance brand on a merchant web-site they click through to be presented with the cards they have registered, check the accuracy of the card and shipping information, and confirm-click to complete the transaction.
Bank-branded digital wallets and checkout products will be lower-cost to merchants than PayPal since there is no intermediation by PayPal and, in the case of ChaseNet, no intermediation by a branded network either; PayPal has a price-advantage for transactions routed over the interchange-free ACH network but this accounts for only 20% of dollar volume, a percentage which has not risen for the last three years. Furthermore, bank wallets will quickly achieve widespread consumer adoption as they are integrated into bank-branded mobile apps that consumers are already accustomed to using for balance-checking, remote-deposit, and P2P payments. Finally, as merchants deploy EMV-compliant payment terminals at point-of-sale to manage fraud risk, and some choose to subscribe for contactless features to enable “tap ‘n’ pay” mobile payments as well as chip-card payments, bank wallets will be used at physical point-of-sale more broadly (because of the breadth of the Visa and MasterCard digital acceptance brands) than PayPal (despite its acceptance relationship with Discover and direct acceptance relationships with some merchants such as HD and Jamba Juice).
The launch of bank wallets and checkout products is a catalyst for MCX for two reasons. First, member-merchants have committed not to accept competing mobile payment brands at physical point-of-sale and this commitment becomes more difficult to sustain as consumers become used to paying with bank products first at online merchants and then at merchants who are early-adopters of the associated digital acceptance brands at physical point-of-sale. Second, the retailer concern that banks will attempt to reserve the mobile payments channel for high-interchange products is validated by the Citi wallet; at least for now, consumers can register only credit cards, and not debit cards, into the wallet. In contrast to the banks, a key goal of retailers is to use the mobile channel to steer consumers who have checking-account funds available (and so do not need pre-approved credit at point-of-sale to complete a transaction) to debit cards where interchange, for Durbin-regulated issuers, is just over 20 cents/transactions versus 80 cents for a premium credit card and, say, a $40 transaction.
Our research note of August 25th, “Payments and the Convergence of Physical and Digital Commerce” provides a more detailed treatment of the threat to digital brands, such as PayPal, as brands with an analog heritage leverage mobile for “app-and-mortar” strategies.