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Introduction and global scenario
Retail banking has been a subject of digital disruptions but none as critical as the rise of digital payments. The emergence of payment systems that are designed to function seamlessly with mobile devices, in-app methods, or browsers has prompted wide-ranging innovation from banks, digital giants, and FinTech organisations. The volume of digital payments is soaring and by 2020 is expected to reach USD 5 trillion worldwide and USD 800 billion in the United States. Mobile wallets are the main contributor to the digital payments ecosystem, with an expected CAGR of around 32% between 2017 and 2022. According to the Zion Market Research report, the global mobile wallet market was valued at approximately USD 594 billion in 2016 and is expected to reach approximately USD 3,142.17 billion by 2022.
Visa, MasterCard and American Express each offer different forms of network wallets. Their device wallets can hold multiple cards, linking directly to a customer’s bank account. Companies such as PayPal and Paytm are offering P2P wallets which perform direct account-to-account transfers, eliminating banks from the process.
Digital finance service providers are able to access untouched markets through mobile money, providing them with access to over 1.6 billion new retail customers in emerging economies. The latter allows them to build new business models relating to data-based financial services, micropayments and other new digital businesses. Existing service providers also have the opportunity to reduce their direct costs by USD 400 billion annually.
That growth poses both opportunities and risks for retail banks. Banks that fail to keep pace with market leaders in digital payments including mobile wallet payments will lose share to non banks—and any reduction in payment interactions will have a ripple effect on the rest of the business as payments often serve as the primary relationship gateway between banks and customers. Consequently, ceding ground in the payments arena can result in lower revenues elsewhere. This shift is already hurting banks in China and India, which are rapidly falling behind leading FinTech organizations. India, for instance, was a country depending on cash transactions till 2016 when the demonetization of currency allowed mobile wallets to penetrate the market. Mobile wallets have since become a mainstream payment instrument in India. According to a Global Data survey, shares of cash and cheques in e-commerce fell from 31% in 2013 to 16% in 2017. Mobile wallet share, on the other hand, increased from 7% to 29% during the same period. Meanwhile, payment card usage declined from 38% to 32% during the period.
The mobile wallet market has been dominated by Paytm, accounting for 9.9% share in total e-commerce transaction value in 2017. PayPal closely follows with a share of 9.8%. Other popular mobile wallets include MobiKwik and FreeCharge, accounting for 2.8% and 2.7 respectively.
Countries including Indonesia, Thailand and Singapore are working towards a cashless ecosystem. To support the initiative, the Thai government has launched a national e-payment scheme titled “PromptPay” which already has fourteen million registered users. Users in Singapore tend to dislike digital payment. However, the government is still focused on building a smart nation and Apple Pay, Bitcoin and QR scanners are popular.
In developing countries, governments are easing banking regulations to attract a wider client base that may not typically use banking services. This presents an opportunity for mobile wallets to solve e banking and technology problems. For instance, RecargaPay, founded in 2010, is a mobile payment platform and digital wallet for the Brazilian market. The app allows anyone to access the benefits and convenience of a mobile payment system without needing a bank account, thereby empowering unbanked people. Most existing providers of contactless payments such as Apple Pay and Android Pay use near-field communication (NFC). Google’s new mobile wallet in India, called “Tez”, allows audio QR to exchange money, without requiring NFC.
BI Intelligence, Business Insider’s premium research service, expects P2P payments transacted on mobile devices to grow from USD 5.6 billion in 2014 to USD 174 billion by 2019, and from a 1% share of total P2P payments in 2014 to 30% by 2019.
P2P payments have gained popularity in the US. According to BI Intelligence, volume, transactions and users have continued to increase as consumer awareness grew. Using P2P platforms, transferring money through a mobile device is easier than writing a cheque or withdrawing cash from an ATM. UK-based supermarket Co-op Foods predicts that by 2025, 65% of all transactions will be made using a mobile phone, eventually making bank cards obsolete.
Globally, mobile wallets play a key role in the development of the digital ecosystem by creating an opportunity for financial institutions to expand their reach. In Africa, for example, banking institutions face challenges such as high-cost models and fees which make banking unaffordable for low-income individuals. Individuals in Africa prefer cash over digital transactions and have a predisposition towards cooperatives. Africa’s retail-banking penetration stands at half the global average for emerging markets at 38% of the gross domestic product, according to McKinsey. In contrast, McKinsey estimates there are 100 million active mobile financial services (MFS) customers in Africa dealing in transactions worth USD 2.1 billion.
Africa-based financial experts believe that adopting a mobile-based approach will help banks, keeping in mind African banks’ ranking as second in the world in terms of growth and profitability. Mobile money presents an opportunity to increase payment income and earn interest on increased deposits—creating a new income stream for telecommunication companies. This cooperation is already evident in Equitel, which allows Kenya’s Equity Bank customers to use Airtel infrastructure to send and receive money. Similarly, Safaricom’s M-Shwari loan product was developed with two banks in Kenya. Telecommunication companies are becoming increasingly aware of these market-specific needs and are modernising their service offering. French telecommunications company Orange announced it would apply for a banking license to operate through its mobile money platform in eight West African nations. In many African countries, lower smartphone prices are driving the digitization of cash and transactions.
Adoption of mobile wallets in the Middle East
2017 reports found that the GCC has some of the highest mobile penetration rates in the world (about 175 subscriptions per 100 population) but is yet to embrace mobile payments. The GCC’s mobile payments account for 1.3 per cent of global transactions compared to roughly 37 per cent in Asia- Pacific.
Although only 25 per cent of the GCC population uses plastic cards, the digital payment revolution presents an opportunity for the region to go directly into the fourth generation of payment systems. With a tech-savvy population and high mobile penetration rates, the region is the ideal place for digital payments. Research by Moz for Cards and Payments Middle East finds that 77 per cent of people surveyed wished for greater convenience in their transactions, opening a USD 3 billion market in the UAE alone by 2018.
Studies find that contactless payments in the UAE now exceed 10 per cent of Emirates NBD’s total payments. Three years ago, the figure was 2 per cent. Furthermore, it is digital transactions are said to be going up 30 per cent year on year. In the UAE, Apple Pay, Samsung Pay, Emirates NBD Pay, FAB payit, Etisalat Wallet, Enoc VIP and Beam Wallet are currently being used. Apart from these wallets, Alibaba’s Alipay has also entered the UAE in collaboration with Mashreq. Created in China in 2004, Alipay is the largest third-party payment platform in the world, . Customers coming into the UAE from East Asia are accustomed to paying with Alipay or UnionPay and having their cards accepted globally. According to Dubai Tourism, UAE represents one of the fastest-growing tourist destinations for the Chinese, with a 41 per cent increase in the number of Chinese visitors in 2017.
Despite UAE Central Bank statistics stating that the country remains a 75 per cent cash-based economy, mobile wallets in the UAE are on the rise. Cashless payments have been identified as a top government priority in the UAE’s Vision 2021 and in 2017, 38.6 million cashless transactions were made using the e-dirham, according to the UAE Ministry of Finance. The e-dirham refers to a digital platform for paying government-related service fees in the UAE. Digital payment experts believe that despite the focus on cash, the UAE’s young and digital-minded population, deep smartphone penetration and government-led smart economy drive create the perfect opportunity for increased mobile wallet adoption.
In Kuwait, One Pay and Quickpay enable customers to pay their bills using a dedicated mobile app. Furthermore, the National Bank of Kuwait made its contactless payment service NBK Tap & Pay available on specially-designed smart wristbands and stickers. In addition, Kuwait Finance House launched its KFH Wallet in 2017 enabling users to perform mobile payments at merchants’ NFC (Near-Field Communication) POS terminals in the country.
Qatar’s Ooredoo’s Mobile Money Payroll service has witnessed great demand in 2017. Every month, the Ooredoo Mobile Money Payroll service is used to pay over QR100m to employees across Qatar, directly into their Ooredoo Money Wallet which can be accessed on a mobile phone. This helps businesses save on processing fees, reducing accounting and administration costs, improving business efficiency.
Mobile wallets and the growth of the banking industry
1- Strengthen relationship with existing clients
Research on mobile wallets finds that social media users often prefer to store loyalty cards on their wallet and use their phone to pay for transit system fares. Android Pay, Apple Pay and Samsung Pay support loyalty card integration in their mobile wallets, which could encourage habit formation, but many major retailers like Walmart are holding back on loyalty or payments integration to boost adoption of their own wallets. This could lead to fragmentation in the industry.
Banks may compete using redesigned transaction and payment products to encourage customers to make banks their primary digital wallet providers. Many banks explicitly tier the rewards they offer on their products to attract customers.
Most banks have already immersed themselves in work on loyalty programs in an attempt to increase customer retention and attract new customers. To increase the number of loyal customers, banks have started experimenting with various methods and tools.
For instance, Citibank recently introduced the ThankYou program allowing customers to earn points based on customers’ monthly activities within the bank’s network as well as its partners. Customers can later redeem them for various products and travel experiences.
According to Amdocs research, 61% of customers like the ability to manage their loyalty programs from a mobile wallet, but only 21% of financial providers offer this feature. Capital One is one of such forward-looking banks with its proprietary wallet app designed for loyalty card management and reward redemption.
2- Access to data
The rise of third-party mobile payments solutions and wallets poses a threat to commercial banks, limiting their access to customer data. For instance, in China payments through Alipay are far more than those by state-owned settlement network UnionPay. As a result, UnionPay, along with issuing banks and acquiring banks, is losing income from merchant fees. The latter is caused by the dramatic increase of mobile payments to offline merchants such as supermarkets and restaurants. The move by more Chinese consumers to switch from plastic cards to scanning QR codes with mobile wallet apps led to an income reduction of USD 20 billion from banks in 2015, according to Shanghai-based fintech consultancy Kapronasia. in the phenomenon is not limited to China. According to financial experts globally, the bigger challenge to banks, comes from the way in which third-party payment providers are interposing themselves between banks and customers, thereby depriving lenders of valuable data on consumption patterns.
3- Convenient experience
To discourage customers from going to nonbank providers, banks must make signing up for and using payment products as seamless as possible. This requires re imagining and redesigning the payment journey.
To date, most banks have focused their redesigns on winning new account and credit card customers. However, customers place greater value in learning how to get the most out of their new cards, redeeming reward points, paying bills, upgrading cards, resolving instances of fraud, and changing account settings—all of which involve multiple interactions.
To make their offerings more appealing, banks must pay greater attention to these aspects of the customer experience. End-to-end solutions can also deliver substantial cost savings, particularly through deployment of smart processing technologies. Tools such as machine learning and robotics can achieve savings of 25% to 35% in addressable back-office operating expenses, while improving customer satisfaction. Banks can then reinvest these savings in the front-end experience.
4- Acquire new clients
In most developing economies, a large segment of the population is unbanked due to regulatory requirements that financial institutions follow with regards to retail banking and consumer retail lending products. Payments are an optimal gateway product for financially underserved households. Unlike credit, insurance, and savings, payments do not require trust by either party. Providers don’t have to screen clients either as anyone willing to sign up is profitable for providers. Payments are made by all households and represent a significant pain point for many.
Experts therefore suggest that traditional financial institutions should work closely with FinTech companies to deal with digital payment solutions to cater to individuals that are unbanked.