2015 Takeaways: Wallets, Merchants, and Issuer Woes

Year end, and a time to mull over 2015, and muse on what 2016 will bring.

My colleagues have written great summaries of what we saw in 2015—here, here, here, among others. I can’t improve on these. But in reading them I see a theme around mobile wallets, FinTech and challenges to card-issuing banks. See if you agree.

Mobile wallets been around for a long time, and at the start mostly pushed by financial services (FS): payments companies. And they haven’t gone much of anywhere.

In 2014 Apple Pay’s launch brought huge visibility without commensurate success, at least in the first year (though I believe Apple is playing a different game than many think, more about building the iPhone ecosystem than payments).

But wallets bound tightly to commerce—that’s where we’ve seen success. Starbucks– long the poster child—and more recently quick service restaurants like Chipotle and Dunkin’ Donuts—have led the way.  As I’ve argued in the past, success in wallets isn’t about payments.

Now look at the last month:  Walmart announced its wallet, and as I write this post, there are stories about Target doing the same.  None of these merchants intend theirs to be the sole form of payment, but if you think about how wallets might be successful, integration with commerce is always a part (as this slide suggests).

And note another 2015 thread about wallets: store card integration.  Some big-name wallets have it (e.g. Apple Pay & Samsung Pay) and there will be more to come, given theresurgence of interest in store –aka “private label”–cards.  These cards lower merchants’ cost of payment acceptance and offer revenue from lending.

Now add to this other examples of merchant muscle such as Costco’s 2015 co-brand deal, and you see merchant confidence growing.

And then there is FinTech, all the rage in 2015. It attracted massive amount of money last year, and thankfully is pretty easy understood as an umbrella covering multiple topics. Blockchain? Most definitely. Peer-to-peer lending? Sure, that fits. And of course payments.

Merchants or other non-banks (say, Apple)—let’s call them non-FS– have little allegiance to legacy payment or lending methods: they just want to sell stuff. If they are running the successful wallets, the door to FinTech innovators will be more open than if wallets are controlled by legacy financial services firms.

If you think about the payments complexity I took a stab at explaining a few weeks ago, non-FS wallets offer a way around much of the mess, by engaging consumers and merchants without needing to protect a legacy model.

What does this mean for card networks and card-issuing banks?

For the networks, neutral to positive.  They dominate the connecting rails, have vast networks, and don’t make their money from interchange or lending.  They just need to be nimble in partnering and innovation.

For card-issuing banks, the story is not good.  Bank brands get lost if the branding is that of the merchant; and if the payment vehicle is a store card, big issuers see no interchange and lose potential interest income. Payments revenues decline.

Notable in confronting this trend is Chase, which appear intent on creating its own version of Amex through ChaseNet (its deal with Visa that provides Chase its own network) and the recently announced Chase Pay (which is pretty much just PR at the moment). But as Tom Noyes recently commented (deep in this long post) , this is odd at a time when Amex is struggling.

Banks aren’t going anywhere.  Whether we like them or not, we implicitly trust them since we let them manage our money.  And as we saw after 2008, the government will shore them up if needed.  But how they make money is changing, and 2015 offered more evidence that credit cards are becoming less and less a source of profits.

Happy 2016.

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