Non-Bank Mobile Payment Systems: A Threat to Banks?
In recent years, non-bank mobile payment alternatives such as Revolut have become more prominent and contributed to the competitiveness of the payment industry by even offering to exchange cryptocurrencies and perform payments over the blockchain. In some countries such as China where in 2016 alone, $9 trillion was spent through mobile payments, compared to the measly $112 billion in the US, mobile payments have almost eclipsed traditional payment systems such as credit cards or cash. Chinese consumers, for example, can simply go to third-party mobile and online platforms such as Alipay app or WeChat and pay for goods and services online or in stores. With mobile payment systems such as Alipay creating their own banking services, banks and credit card companies are increasingly in danger of becoming irrelevant to consumers.
Jargon buster: What do we mean when we refer to nonbanks or mobile payments?
As a starter, let’s first define what we mean by nonbanks and mobile payments. Nonbanks are any provider or enterprise that is not a bank (a fully licensed credit institution) and which offers payment services to its customers. A mobile payment refers to any payment service performed from or via a mobile device. There are various models for mobile payments, including mobile wallets, card-based payments, direct carrier billing (DCB)—paying for online services and products through your mobile and charging your phone bill, while avoiding the transmission of any personal data—contactless payments, and direct transfers between two bank accounts in real time.
Now when people refer to a mobile payment system, this usually is a payment application that is downloaded on your phone, and with which your credit card is connected. The app uses the technology of near field communication (NFC) which enables contactless payments when your phone is in close proximity to a payments’ terminal.
Popular mobile payment apps
Almost everyone these days must have had at least some experience with the oldest of payment companies, PayPal, as the most used digital wallet when performing their eBay transactions. PayPal, for example, allows you to send money to people but also pay on the go just by using your email and a password and without sharing your financial information with the seller. Other systems such as the Google Pay app, can be used in stores or online to purchase goods, while Google Pay Send enables receiving or sending money to family and friends. Paypal-owned Venmo is another popular app which allows payments between users by sending SMS. Payees receive funds through a text message and they need to be registered to use the service. In general, apps such as Apple Pay Cash, Circle Pay, Facebook Payments, Google Pay Send, PayPal, and Square Cash allow you to send money to other people, while Google Pay Send is the only one among these payment solutions that gives you the option to send money directly to the recipient’s bank account. With Xoom and PayPal, transferring money abroad is simplified, as the recipient can receive the funds in their local currency at their nearest bank by presenting an ID and a code. Stripe is currently in the process of creating a new solution that enables businesses to create and issue their own credit and debit cards which can be used in the Apple Pay and Google Pay platforms.
Why are they a threat to banks?
Simply their convenience, their cost-effectiveness and the way they have helped to streamline payment processes, should be enough reason to convince even the most conservative of users to turn to nonbank mobile payment solutions. Not having to worry about carrying your card or losing your wallet, has made such conveniences a part of everyday life. Especially with subscription services such as Netflix where monthly payments are automated, traditional transaction steps, such as confirming the card on file to proceed with a payment, have become obsolete.
Banks are now facing the clear threat of disintermediation. This means they are being eliminated as financial intermediaries, and thus, they are losing the privileged and direct relationship they enjoyed with their customers all these years.
In the meantime, mobile payment apps have taken control of the whole process and offer various services without the need of any banking intervention, including basic banking services such as checking and savings accounts. Bringing again the example of Chinese customers, some prefer to bank their money with the Chinese online digital wallet Yu’e Bao, instead of having a savings account because of the high interest rates. Distributed by Alibaba Group Holding’s online payments affiliate Ant Financial founded by billionaire Jack Ma, Yu’e Bao is the world’s largest money market fund with assets around 1.56 trillion yuan (US$233 billion). However, due to the Chinese economy slowing down, Yu’E Bao currently pays an annualized return of 2.8 percent, compared to more than 4 percent at the beginning of 2018.
Banks have already responded to the popularity of some of these non-bank mobile payment solutions, by creating their own versions. Zelle is a mobile banking app which is offered by more than 100 banks and credit unions and which you can use to send and receive funds in the US. But banks and financial services will need to continuously research and analyze consumer behavior and deliver banking and payments services that are in tune with the times, most importantly, they need to personalize the payments experience and deliver digital products that customers will find convenient, secure and easy to use.