This is the second article of a two-part series on mobile apps: how they can give instant gratification in an on-demand world-and what banks need to do to keep up with the pace of change. As we discussed before, mobile payments are what is going to drive this on-demand economy into the next generation of payment technology. With the increased use of mobile payments occurring worldwide, the biggest player in the game is going to be digital wallets.
The Game of Wallets
Mobile digital wallets are now the most important battlefield in the modern payments world as smartphones have become the standard vehicle for U.S. consumers. This has introduced a wide array of stakeholders to the market – card networks, issuers, smartphone makers, plus other payment facilitators like PayPal, Apple Pay, Android Pay and Amazon –all aggressively competing for market share and consumer attention.
The stakes are high in the face of fast-growing transaction volumes, millions of dollars in fees, and rich customer intelligence data. In fact, predictions suggest mobile wallet-based payments will double over the next few years, approaching 10 percent of total U.S. retail commerce by 2020.
Rewards and loyalty remain a prime motivator for consumers when selecting a payment method at a traditional point of sale, so why would it be any different when selecting which card to put top of wallet? In keeping with the “immediacy and convenience” mantra of instant gratification, such rewards should be relevant and instantaneous; cost reductions at the moment of purchase are one such example.
Without the consumer manually selecting a different card every time, the one default card will benefit the most and drive transaction fees. Consequently, issuing banks have been offering extremely generous rewards and loyalty benefits to gain new customers and entice them to spend as much as possible. Knowing the importance of the top of wallet card, customers can be offered extra savings for all transactions within the first six months. This tactic ensures that a customer will use that card regularly. That’s important because cardholders typically stick with the brand that made the initial offer even after the bonus expires, instead of sticking with the card with which they’ve built up loyalty points and other benefits.
Issuers bear much of the current cost for loyalty, but merchants are also seeing the benefits and are increasingly launching their own schemes. Therefore, customer rewards can be two-fold as they can benefit from both merchant and bank loyalty schemes. Winning the wallet game will increasingly depend on banks cooperating with merchants and attracting customers to become the default payment mechanism of choice.
Staying Top of Wallet
Continuous cardholder engagement is vital to frequent card use and spend volume. Whatever the bank or issuers does, it is the consumer who is the final arbiter of which cards get loaded into a smartphone mobile wallet, and in which order. Most consumers load at least two cards in their mobile pay app wallet, which will typically have a default setting for one chosen card. It is only the winning card at the top that will gain the benefits of processing fees, analytics data on customer transactions, and a long-term, profitable relationship.
The new providers of the modern on-demand economy have been key business disruptors over the last decade. As such, they have experienced skyrocketing growth trajectories. Off the back of their hard work, legacy acquirers, card issuers, and networks have benefited from millions of transactions that might not otherwise have occurred. But this is no time to sit on the work of others. Financial institutions of all sizes must recognize the emerging threats from new disruptors and emerging payments facilitators that specialize in mobile and online business. It is time to fully engage in this vibrant digital market; not in a passive way, hoping previously loyal customers will place their card top of wallet, but by actively engaging with merchants and consumers, and offering meaningful and instant rewards to keep and grow market share.