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Google Wallet, launched in 2011, allows a customer to store credit cards, debit cards or loyalty cards in a single digital wallet.


Banks' monopoly may be ending as Google, Facebook enter payments market

by Lingjiao Mo
June 11, 2014



Lingjiao Mo/MEDILL

Google Wallet


Silicon Valley’s tech titans are waging a war against traditional Wall Street bankers.

 

Google Inc. and Facebook Inc. are getting into financial services with digital innovations in money transfer and payments, making inroads in a market that’s grown $1 billion and is expected to grow another 20-fold to nearly $60 billion in mobile transactions by 2017.

Social media giant Facebook is close to obtaining a license from Ireland’s regulator to allow users to store or make payments on the website, the Financial Times reported without citing its sources. It also said the company is looking to partner with three London start-ups which offer online or mobile money transfer services.

Earlier this year, search engine company Google introduced a plastic debit card to access Google Wallet, a mobile app that allowed users to settle transactions through their phones. These moves have drawn the attention and concern of some sharp-eyed bankers.

“We’re one of the largest payments systems in the world. We’re going to have competition from Google and Facebook and somebody else,” said Jamie Dimon, CEO of JPMorgan Chase & Co. at the Euromoney Saudi Arabia conference in Riyadh early May.

Dimon’s concerns are warranted. The payment industry has been dramatically reshaped by technology. According to a survey by Pew Research Center last year, 51 percent of American adults bank online and 35 percent of cell phone owners use mobile banking.

According to research firm eMarketer, mobile payment transaction in the US will reach $2.59 billion in 2014. The firm defines mobile payments as transactions for goods or services made by scanning, tapping, swiping or checking in with a mobile phone at the point of sale. By the end of 2017, eMarketer estimates the value of such transactions will total $58.42 billion.
 

“When consumers have so many alternative options with technology companies, those banking relationships become less sticky,” said Nathalie Reinelt, analyst with Aite Group, LLC. “Additionally, banks could face a loss in revenue via transaction fees, depending on the technology products consumers adopt.”

LINK: View a presentation on the payment industry here.  

Tech firms are all in.

Competition is fierce. In past years, tech companies, including Amazon.com Inc., Paypal and Apple Inc.’s iTunes, have established reputable digital payment platforms. Payments start-ups like Square and Stripe are mulling their next moves abroad. Carriers AT&T, T-Mobile and Verizon have developed their own mobile wallet, Isis.

For marketing behemoths like Google and Facebook, the battlefield is relatively new but the potential economic returns are hard to resist. The key is to capitalize on their millions of users.

“Getting into payments by itself isn't going to be as lucrative for Google and Facebook as advertising has been, but the currency they are after with these moves is likely transactional data,” said Aite Group’s Reinelt. “The purchasing habits of their users would be incredibly valuable for Google's and Facebook's marketing clients.”

Google Wallet, launched in 2011, allows a customer to store credit cards, debit cards or loyalty cards in a single digital wallet. Customers can then tap and pay for goods and services with their smartphones through the Google Wallet app, which then takes money from debits, or charges money to any physical card connected to the Wallet.

 

It also allows for money transfers within the country. Originally, the app only worked on cellphones that support near field communication, or NFC, a wireless technology that enables similar devices to communicate when brought together.

But the idea did not catch on, as Apple Inc., maker of the ubiquitous iPhone, refused to install NFC. Sprint was alone among the mobile carriers who agreed to accept the app and few local merchants supported it.

Earlier this year, Google attempted a comeback by introducing a physical Google Wallet card, a debit card that aims to bring all the benefits of Google Wallet to the non-NFC world.

Unlike banks’ payment system where a percentage of the purchase is charged to the merchant or service provider based on each payment. The new Wallet Card does not charge annual or monthly fees. Users don’t need to pay fees to activate the cards or withdraw cash from ATMs.

But that low-cost architecture has a tradeoff. Google was able to eliminate fees by collecting users’ data and selling it to advertising clients. That has made some privacy-conscious consumers uncomfortable.

“Does the data specifically relate to me personally? Or is it just trending data like — 300 people buy product X versus Julian likes product X?” said Julian Rodriguez, a Google Wallet user who works as an IT administrator in Chicago. “I’m okay if they aggregate data. But I’m not okay with mining detailed data.”

With consumers’ growing awareness of and concern over privacy issues, some wonder if Google Wallet will succeed. The company has indicated it’s happy to continue the experiment even if it doesn’t turn a profit.

"We are in the payment business to create a great user experience," Google payments chief Ariel Bardin said at the Electronic Transactions Association's Transact 2014 tradeshow in Las Vegas in April. "That's a little different from others in this industry. Making money will come later.”

The banking industry says tech companies will have an unfair advantage as long as they’re not regulated as financial services firms.

“A tech firm can move fast and be nimble, but that’s because they are not under the same constraints as the banks,” said Stephen Kenneally, vice president of the American Bankers Association. “I can create a car company that can compete with Ford, I can do it in three years if I don’t have to put in any emission standards such as seat belt and air bags.”

Banks guarding their turf

Whether they want it or not, banks are already in this battle. The technology innovation and the participation of tech firms has raised consumers’ expectations on how financial services should be provided.

“(Customers) are looking for instant responses to all the transactional needs,” said William Downe, CEO of BMO Financial Group at 50th Annual Conference on Bank Structure and Competition in Chicago in early May.

 

He said about 41 percent of BMO’s retail customers’ banking was accomplished via personal devices, such as tablets and smartphones. Banks, he warned, have to step ahead of consumers’ fast changing expectations and rise to the challenge of the “disruptive nature of technology.”

Many national and regional banks have developed their own mobile payment apps, allowing customers to check basic information such as account balances, transaction history and transfer records. A growing number of banks’ apps support remote deposit capture, which lets users to scan checks and deposit funds through their smartphones, saving them a trip to a local bank branch.

“What the technology companies are doing may actually be forcing the change within the banking system,” said Bert Ely, a financial institution consultant based in Alexandria, Virginia. “When they lose customers to the agents (tech firms), they will wake up and say ‘We shouldn’t have let it happen.’”

Some big banks are going even further. Unsatisfied with clunky password logins, U.S. Bank announced February that it started testing voice recognition for its mobile banking app, joining two other banks, Wells Fargo & Co. and Barclays PLC that are already doing so.

Chase is trying to leapfrog over the rudimentary functions of mobile banking with its mobile app, “My New Home,” which enables users to search for houses, calculate mortgage payments and connect to a mortgage banker.

“Online banking is one of the key factors why a lot of consumers stay with their banks,” American Bankers Association’s Kenneally said. “That’s generally regarded as a plus.”

Going digital is a quick fix. In the long run, however, bankers may have to do more to catch up.

“What the technology companies are doing is essentially arbitraging the inefficiencies within the banks’ payment system,” Ely said. “The challenge for the banking industry is to figure out how they can develop a competing mechanism or make their existing payment system cheaper and more efficient.”

Known as automated clearing house or ACH, the current payment network in the U.S. is often considered old, costly and inconvenient. Money transfers may take days to get from one bank account to another and interchange fees can be exorbitant.

Believing there is room to improve, the U.S. Federal Reserve, which regulates the system, has been pushing for a real-time ACH.

“The U.S. payment system has begun to migrate incrementally toward faster payments primarily through private-sector innovation; but these innovations, when considered in total, have not resulted in a ubiquitous near-real-time system,” said a 13-page consultation paper led by Federal Reserve Bank of Cleveland last year.

It’s not surprising, given that banks earn interest on funds that remain parked with them for a day or more, that the industry is pushing back against real-time clearing.

“Bankers like to hang onto their customer's deposit balances as long as possible,” Ely said. “Of course, faster ACH transactions means that deposits to recipients' accounts will be coming in faster, too, as senders initiate ACH payments.”

To tech firms touting fast transactions and fee-free policy, there are no boundaries for experimenting with new ways to pay bills. But wooing existing banking customers, notorious for their loyalty, could prove to be a challenge.

“(Tech firms) appeal more broadly to younger generations, who are very technologically savvy and willing to step away from traditional banking,” Aite Group’s Reinelt said. “But they will have a harder time appealing to more mature and traditional banking customers.”