Apple Pay is probably the best positioned mobile payments solution to emerge in a long time. When Apple announced Apple Pay it did in ‘two hours’ what no one else could do in ‘ten years’ – most notably brought NFC back into the map. Consumers may now finally develop the habit of using the phone to pay that other wallet providers have found difficult to develop; and Apple, in a brilliant move, also decided to preserve the 4-party model without dis-intermediating any existing players from the market.
However, it is still early to declare Apple a winner! Apple Pay is still limited to a small portion of the overall market; and payments is all about scale and acceptance, big retailers are still behind MCX, and Apple Pay is currently a method of payment rather than an experience wrapped around payments. And a broader question still remains whether Consumer Financial Protection Bureau (CFPB) will now regulate Apple as a financial institution?
The question many banks still struggle with is how to respond to Apple Pay, particularly those that had aspirations to lead in the market and invested in joining industry coalitions such as Isis (Softcard), forged exclusive partnerships with Google Wallet, launched market pilots, or invested in emerging startups and new technology.
Fortunately, the opportunity may still exist for banks to be perceived as innovative. If banks are open to new approaches that benefit consumers, be selective about payment partnerships, and adopt a test-and-learn approach to experiment with new ecosystems, they stand to benefit their customers the most. In the case of Apple Pay, here’s how:
First is Partnership with Apple
This is a no brainer! Banks should deliver on the convenience of enabling customers to use its products (whether credit, debit or private label cards) along with Apple Pay. Bank customers who want to use Apple Pay should be able to do so. Sure, banks will have to share some interchange revenue with Apple but splitting a portion of interchange is likely better than losing the transaction and the customer entirely to a competitor. If banks don’t facilitate the experience, most customers may find other ways to use Apple Pay and shift to a competitor product – a situation banks will want to avoid.
Second is to gain more real-estate on ‘Passbook’
Banks now have the opportunity to think about new products and experiences tied to Apple Pay ecosystem. One approach is to develop new products to be used with Passbook. For example, when a customer signs-up for a new credit card it instantly appears in a digital form in Passbook; loyalty points that are earned are instantly updated for consumers to view in Passbook; attractive loan or mortgage products are introduced in Passbook to capture and acquire new consumers during the captive moment of shopping at merchants.
Another is to enable existing products to be used with Passbook, selectively offer a low or zero interest rate if a consumer uses a specific credit product and even use the opportunity to tender-steer transactions to high margin products (e.g. credit vs. debit). Another is to enable specific experiences such as delighting consumers with merchant specific coupons that appear in Passbook without prior knowledge of consumer, rewarding customers with triple loyalty points if transactions are above a specific amount etc.
There are no-doubt several other approaches, but by partnering with Apple to enable new experiences and deliver on customer convenience, banks may be able to achieve most of what they wanted to with their own wallets. The end-result could be a profitable relationship and long-term loyalty with their customers.
Third is Business Model Innovation
Banks will need to find new ways to make money and not just rely on interchange. Finding creative ways to increase overall transaction volume, introduce relevant products, and acquire new consumers by making use of Passbook are few ways to benefit from Apple Pay. Banks will need to avoid tender-steering to competitor products by incentivizing consumers to ensure they continue to use their products and make them the default in Apple Pay. Imagine a scenario where a competitor pays to put an ad within Passbook or in-app – e.g. Tap here to make this the default card – and starts to communicate with the customer – this will be a negative.
I’m not suggesting banks should rely exclusively on Apple for their digital commerce efforts or even abandon any of their innovation efforts. Rather an approach that includes careful participation in ecosystems, such as Apple Pay, where it benefits consumers and gives banks the opportunity to test-and- learn may yield the best results.
The digital commerce game is changing and market power is shifting to those firms that build long-term loyalty and enable convenience for their customers. If banks can make use of Apple Pay by delivering tangible benefits to their consumers, introduce new products, and enable new experiences with existing products, they will be able to use the Apple ecosystem to their own advantage.