The cumulative impact of a series of disruptive developments in the retail payments world could have far-reaching implications for retail banking overall, raising the bar of consumer expectations yet again.
The developments, occurring in the space of a few months, include Apple Inc.’s launch of the Apple Card as an integral component of its Apple Pay mobile wallet, and Facebook’s announcement of its cryptocurrency called Libra, to be held in a digital wallet called Calibra. The opening a year earlier of the ground-breaking Amazon Go stores, featuring “autonomous checkout” in which people shop and simply walk out, with payment handled automatically, is yet another key development.
Are these innovations just part of the ongoing scuffle for dominance in the payments world? Or are they closely interrelated and significant beyond the payments space in terms of the impact on traditional banks and credit unions?
A strong clue comes from the actions of the largest bank in the U.S. in the face of digital banking disruption. Twice in quick succession, J.P. Morgan Chase has stunned the industry by walking away from a digital venture: First it shuttered Finn, the mobile-only brand it launched in 2018 to appeal to Millennials. Only a few months later, the megabank announced that it would be shutting down the Chase Pay mobile app within a few months. Not ending Chase Pay, but eliminating the standalone Chase Pay app.
Some media reports speculated as to whether Chase was backtracking on digital banking, or whether these moves cast doubts on how effective its digital financial strategy is. In a statement, the head of Chase Pay, Eric Connolly, said, “We’re shifting our focus to expand Chase Pay’s presence in more merchant apps and websites.”
Are those just the words covering a setback? Or do they signal something else going on that could prove very significant to all financial institutions?
The Financial Brand interviewed Richard Crone, a respected authority in the digital banking and payments field to explore these questions. Crone leads the research and advisory firm Crone Consulting, which he founded. Joining in the conversation was Heidi Liebenguth, the firm’s Managing Partner and Research Director. The conversation began with the Chase Pay development.
What the Chase Pay Move Really Means
When JP Morgan Chase announced plans to shut down its Chase Pay app, Bloomberg called it “an about-face on a product introduced four years ago.” Changing direction after spending about $100 million on the product, according to the Wall Street Journal, is a pretty dramatic about-face to be sure. The Journal cites data from Bernstein Research that finds that the Chase Pay mobile wallet ranks ninth among mobile wallets with just 6% of online shoppers saying they use it, compared to market leader PayPal at 61%. (Apple Pay was fourth at 12%.)
Rather than using near-field communication (NFC), Chase Pay used QR codes to make purchases at the point of sale. QR codes are the most widely used approach of any mobile payment globally, but that hasn’t been the case in the U.S.
Chase Pay is also used online, however, and is embedded in merchant and gas company apps, which is quite significant, as Crone and Liebenguth explain.
Liebenguth: Chase found that Chase Pay was far more useful in empowering merchants’ apps for payments, particularly in fueling. When consumers pull up to put gasoline in their car using the Shell app, Chase Pay automatically pays for the gas — people don’t have to swipe a card or touch the keypad. Fueling apps are growing in double digits with payments a seamless part of the process.
Crone: Chase is not walking away from mobile payments. They’re just taking a step back from the physical point of sale and leveraging their strength in embedded payments. In other words, where the payment and loyalty credentials are pre-authenticated and embedded in the retailers’ app.
Impact of Amazon and Autonomous Pay
There are about 15 Amazon Go stores in operation now, according to Crone. He says the retailing giant is reported to be opening about 3,000 of the unique checkout-less stores.
Consumers scan the Amazon Go app on their phone as they enter. From there, they just pick what they want off the shelves and put it in a bag. Then they walk out the door. Their credit card is charged a few moments later and the receipt goes to their inbox. Every move the consumer makes in the store is tracked by video or sensors.
Crone: Autonomous checkout is game-changing, not only for the retail business, but for payments and ultimately banking. Already more than 100 legacy retailers are testing the technology with an eye to retrofitting stores. For payments this will create new payment types — cloud-based, person-present embedded transactions that have no fraud (because of the video audit trail) — which will portend a whole new set of pricing considerations for these transactions.
“This is what Chase is getting ready for. They had a distraction with trying the QR code, which didn’t work out. This time they could be well ahead of the next payment wave by getting embedded in everybody else’s apps.”
“In abandoning the Chase Pay standalone app, Chase is focusing their efforts on their own mobile banking app, which is really where they belong.”
— Heidi Liebenguth, Crone Consulting
Liebenguth: In abandoning the Chase Pay standalone app, they are focusing their efforts on their own Chase App, which is really where they belong. Bank of America, for example, has maintained a steadfast focus on enhancing their flagship user interface — the Bank of America mobile banking app.
Crone: If a financial institution expects to connect with a prospect or a client more than once, they must have a five-star rated app. That’s the new personalization platform. Not the wired web. Not a mobile browser, not even a chatbot. So Chase was diluting their effort to drive active use of mobile banking by separating out the payment functionality into a separate app.
The Defining Challenge: Instant Mobile Issuance
What’s really going to challenge all financial institutions, large or small, according to Crone, is the instant issuance experience of the Apple Card on an iPhone. The consultant posted on LinkedIn how he applied for the card and within three minutes had activated the account and made a purchase.
Not everyone may achieve that speed, it should be noted. For one thing, it presumes the person has already set up an Apple Pay wallet, with two-factor authentication turned on, which many iPhone users have not done. Yet the experience, most agree, is slick.
Crone: Apple Card’s application and onboarding is the new standard that people will expect. Consumers who can originate an account in less than three minutes in the privacy of their own phone won’t even consider going into a branch or calling contact center, or going through the agony of applying for any type of account with a legacy financial institution. If you can’t do that you might as well sell your banking franchise, because it will never be worth more than it is now.
De-Coupled Debit … Banking Disrupted
The instant account opening on a mobile device is more significant once you realize that the what Apple did with the user experience goes far beyond applying for a credit card. A key feature of the Apple Card is that the cash-back rewards it generates are paid immediately as “Daily Cash.” These accumulated funds — held in a Green Dot Bank account — can be used immediately.
Crone: The Apple Card is a person-to- person payment product and a prepaid account because of the Apple Cash feature. The app also has a “credit wheel” that allows you to define your payment terms at any time — it’s what I call customized credit. But you can also pay off the balance daily. That looks a lot like a demand deposit account to me.
“With each new user, Apple and Goldman Sachs are harvesting the routing and transit and demand deposit account numbers.”
— Richard Crone, Crone Consulting
The only way you can pay your Apple Card bill is through the automated clearing house. And so Apple and Goldman Sachs with each new user are harvesting the routing and transit and demand deposit account numbers. Given that, version two or three of this evolving story could bring a de-coupled debit product — meaning a debit instrument separated from the financial institution that issued the credential.
Although this isn’t a new concept what is new is that Apple can combine instant issuance with instant acceptance. [Apple says Apple Pay is accepted at 70% of the merchants in North America.] Not to mention any other variations of credit that Apple wants to leverage using the pre-authenticated credential, such as auto loans or customized credit at the point of sale.
That is going to be a juggernaut that will have so much flywheel momentum that it’s just going to broadside many financial institutions, especially community institutions that generate revenue from debit card use.
Libra, P2P by the Billion
Facebook’s plans for a cryptocurrency, Libra, rocked the banking world when it was announced in mid 2019. The currency would be operated by the nonprofit Libra Association, which has 100 founding members, including Visa, Mastercard, PayPal and Uber, but no FDIC-insured institutions, according to Crone, who finds that astounding.
Along with Libra, Facebook announced a digital wallet, Calibra, in which to store the currency.
Crone: Think of Libra as a massive, private-label, prepaid, person-to-person social payment service. In payments you have to have an issuing and an acquiring side. Libra and Calibra will be able to play on both sides of that. They already know who their users are — billions of people across the Facebook universe. Even if a person isn’t enrolled, if I send you $50 in Libra currency, you’ll figure out how to enroll to get it.
The challenge for financial institutions is to make sure that they are the domiciled account for the fiat currency that goes in or comes out of Libra.
“If the Feds put the kibosh on Libra, they’d have to do the same to Venmo, PayPal and Zelle.”
— Richard Crone
The government won’t stop Libra. If the Feds put the kibosh on Libra, they’d have to do the same to Venmo, PayPal and Zelle. That would be the equivalent of shutting down a massive part of the payment system today whether they control it or not.
How Legacy Brands Can Stay Relevant
The interconnected developments of Apple Card, Libra, instant account opening and autonomous checkout present huge challenges for traditional institutions. Crone and Liebenguth offer some suggestions and advice for bank and credit union executives to avoid becoming road kill.
1. Figure out how to open an account at the new standard — entirely through a mobile device in less than three minutes. The solution is not likely to come from core providers. Better to look to start ups and fintechs that are trying to empower banks and credit unions to be able to match the new account-opening standard.
2. Leverage PayPal. The lack of pre-authenticated credentials leads to high abandonment rates for many banks and credit unions. All you have to do is establish yourself as a PayPal merchant and you can use “enroll with PayPal” to get name, address and existing payment credentials to open any new accounts you want. That’s what Goldman Sachs is doing with Apple.
3. Embed/enroll your customers in wallets and merchant apps. The strategy for every financial institution should be to register and embed payment credentials in the wallets or merchant platforms. That way, you ride the coattails of PayPal or other payment platforms. Yes, you would make more if you enrolled the consumer directly, but that’s often not possible. For the same reason, banks and credit unions should support Apple Pay. Many don’t.
4. Confront these challenges at your next board/management retreat. When you think about Libra and Apple Card and autonomous checkout, an embedded payment strategy is really the key. That’s the world that banks and credit unions need to prepare for and it’s coming faster and more impactfully than they realize. It’s either figure out how you’re going to have a solid strategy or figure out how to merge or get acquired or liquidate.