Can The Big Banks' Digital Wallet Succeed?

Hi, and welcome to What's Going On in Banking. I'm Ron Shevlin, chief research officer at Cornerstone Advisors.

Hot news this week: The Wall Street Journal reported that a consortium of large banks, including Wells Fargo, JPMorgan Chase, and Bank of America, is planning to release a digital wallet to compete with Apple Pay and PayPal. If this sounds like a consortium similar to Early Warning, that's essentially what it is. Early Warning was cited in the article as the company that will run and deploy the digital wallet.

I'll share a few of my initial reactions. First, I wasn't particularly impressed by the announcement. I think the big banks may be approaching this with a winner-take-all mentality, but when I look at consumer behavior in the digital wallet, P2P, and broader payments world, that's not how people behave. Consumers use multiple wallets and payment tools, often based on convenience. I don't think this is a market where the banks can simply come in and steal all the share from the existing players.

I also questioned the focus on Apple. PayPal is still the 800-pound gorilla in this space, and the announcement seemed to overlook the strength of Cash App. According to consumer research I've done, Cash App actually has higher utilization than Apple Pay, which isn't surprising because Apple Pay is limited to iPhone users while Cash App is not. Square also brings a substantial merchant network to the table, and I think that is something the consortium may be underestimating.

There also seemed to be some confusion about Early Warning's role. One of the leading payments experts in the space, someone I respect greatly, posted that this effort would be separate from Early Warning and run as its own consortium. Minutes later, I saw a LinkedIn post from Early Warning saying how proud they were to be part of the initiative.

To help make sense of all of this and get to the real "so what" behind the digital-wallet announcement, I've brought on Scott Harkey, executive vice president of financial services and payments at Endava. Scott is one of the leading payments experts in the space and a fellow Forbes contributor. Scott, I really appreciate you joining the What's Going On in Banking podcast.

After I posted about the announcement on LinkedIn, I would say 99% of the comments were supportive of my take. You accounted for the 1% that wasn't, which is exactly why I wanted you here. Can you take a few minutes to explain why you disagreed with my post and, perhaps, with the way the announcement was being interpreted?

Thanks, Ron, and thanks for having me. It's great to be on the show. There's always at least one guy who's going to cause trouble, and I guess this time it's me.

My immediate reaction was really about the way the news came out. From my perspective, the initial Wall Street Journal article made a lot of assumptions about what was happening. I don't know what the source of the information was, where it came from, or how it got out there. Over the course of the day, though, the article was updated with more information as Early Warning put out commentary.

I struggle when people make assumptions about a product and then judge it based on those assumptions. There was a lot of speculation about what this wallet would be and a lot of reaction along the lines of, "Maybe Apple Pay isn't the right comparison," which I agree with. But I didn't see a direct quote from Early Warning or any of the participating parties saying that competing directly with Apple Pay was the entire point.

So for me, the issue is less about knowing exactly what the objective is and more about saying, "Wait a minute. Let's hear what this actually is." Let's understand the go-to-market strategy, the use cases, and the target segments. I felt like everyone was assuming what the product would be and then judging it based on those assumptions, when in reality it could be something quite different or aimed at a completely different set of use cases.

I'm not one to shy away from criticizing what the big banks do. I've lived through a lot of these initiatives. But I want to give everybody a chance. Let's judge the product that actually goes to market, not a pre-release news story that wasn't even really an announcement.

Good points. I do want to take the report at face value for a moment and get your reaction to one of the other issues I had, which was the description of the user experience. The article said that, when making a purchase online, the consumer would give the merchant an email address. The merchant would then check with Early Warning to determine which cards were available and present that list back to the consumer so they could choose a payment method.

My reaction was, "For God's sake, I hope that's not how the actual experience works." So I really have two questions. First, do you think that's an acceptable user experience? Second, you made some good points on LinkedIn about what the experience could be. Can you walk through those?

The way you just described the experience, or the way it was described in the article, makes me think of one of the iterations of Masterpass from a number of years ago. At one point, Masterpass was trying to provide a master wallet while each individual financial institution had its own sub-wallet within that system. That description reminds me of that experience, and it wasn't great. It was not widely adopted. So I also hope that is not the end-state experience.

At the same time, there are a lot of ways the underlying customer credentials could be entered that may not be nearly as painful as that description makes them sound, depending on the use case. Think about real-time payments and the request-for-pay flow around bill pay. That entire experience is initiated by the customer, and it can be tied to a contact email address or other information the financial institution already has on file.

If you separate the traditional idea of a digital wallet at checkout from the assets banks already have, or have access to, through Early Warning and The Clearing House, you start to see more possibilities. They have tokenization capabilities, real-time payments, and other infrastructure. Instead of building a new directory, for example, they could potentially leverage the directory structure that already exists within Zelle.

When you think about the alias structure in Zelle and what that could enable, and then start putting these pieces together, the opportunity looks different. If the goal is simply to recreate the Apple Pay wallet experience, I think that's going to be a real struggle because Apple can provide such a tightly integrated experience. But if you think of this as a payments platform and ask which use cases could be improved by a bank-driven wallet, I think there are quite a few possibilities.

Bill pay is an obvious example. As bill pay moves toward real-time payments and request-for-pay becomes a more integral part of the flow, banks are naturally embedded in those transactions. Recurring payments are another opportunity. If I'm setting up a recurring bill or subscription, the one-time step of connecting my account to a payment mechanism isn't a huge burden because the payment happens repeatedly after that.

There are also e-commerce and P2P use cases where the enrollment or account connection happens once, and after that the payment mechanism can become very frictionless. Think about Shop Pay. Every time I go to a site that uses Shop Pay, it's one of the easiest checkout mechanisms available. But I still have to identify myself first, usually with an email address and phone number. That's what creates the connection. Once that happens, everything afterward is very fast and easy.

That's the model I think is important here. A little bit of friction at the beginning is acceptable because the customer has to identify themselves somehow. Cookies and other technologies can make that easier, but fundamentally the system has to know who you are. Once it does, a fully integrated experience could be very good. The bank already knows your address and other details. It has access to the payment rails, including real-time payments, and it may have aliases or other tools that connect those details to the underlying accounts.

So I see the opportunity as taking all of those assets and applying them to a payment flow that looks more like Shop Pay than a direct copy of Apple Pay.

You're making a good case, Scott. I'm still somewhat hesitant and pessimistic for a couple of reasons. The first is the point I made earlier: this isn't a winner-take-all market. Your emphasis on specific use cases is spot on. The real question is whether the banks can capture use cases with enough volume to matter.

Consumer behavior is also difficult to change once it's established. If someone already uses Apple Pay, Google Pay, Cash App, or another digital wallet, that behavior becomes ingrained. Now the big banks want to come in and disrupt it.

I was a little surprised you picked bill pay as an example because I would have thought that one might be harder to crack, especially among younger consumers who often wait for a communication directly from the biller and pay from there. But I do think your point about recurring payments is interesting. If the banks pair this with smart subscription-management capabilities, that could be a use case they can win.

I have two final questions. First, from an organizational perspective, do you have any insight into how this is actually going to operate? Is this part of Early Warning? As I mentioned, one expert suggested it would be separate from Early Warning with its own CEO. Do you know how it's structured?

I don't. I saw the press release and the commentary from Early Warning, and I saw LinkedIn updates from Early Warning employees identifying new roles. I would put more weight on those signals than on rumors or supposed inside information. I fully respect other people's opinions, but I saw plenty of incorrect rumors circulate during my Apple Pay days. I've learned to wait for the official announcement.

That was a pretty good Freudian slip, by the way. I might have to note that one.

They're apparently expecting this to launch in the second half of the year. Either that's incredibly fast development time, or they've been working on it quietly for quite a while. Are you surprised by how quickly they expect to release it?

It does feel soon. I've heard rumors about this, and we've already seen headlines about JPMorgan and others going back and forth on some of these use cases. They weren't necessarily talking about a wallet specifically, but there has definitely been discussion around the broader topic.

In general, I think the banks are asking how they should think about RTP and whether they are willing to let some of it replace card volume and card transactions. Historically, that would have been taboo. You wouldn't even have a conversation inside a big bank about potentially replacing interchange revenue with lower-cost payment methods. But that seems to be changing.

There is more recognition now that banks need to maintain ownership of the customer relationship in the payments space. In that context, the initiative isn't especially surprising. The success of Zelle has also given the banks confidence that they can bring something to market and make it successful.

One other thing I wanted to come back to is the winner-take-all point. I agree with you that it isn't a winner-take-all market, but I don't know that any bank actually thinks it is. That's another area where I think some of the commentary around the article is conjecture. Nobody said they had to win the whole market.

Zelle is a massive success from the perspective of the banks that launched it, but it doesn't own the entire market. Venmo and Cash App are still very successful. I think it's perfectly reasonable to define success as becoming a meaningful player in a certain set of use cases or even with a certain demographic. That's how I would define success for something like this.

So we'll see how the timing plays out. It does feel soon, but these initiatives sometimes take years and sometimes products come together very quickly.

All right, last point. You brought up Zelle and the fact that it didn't need to win the entire market. I agree that Zelle has done very well from a P2P perspective. Part of the reason it gained success so quickly, though, is that the competition was largely non-bank. It was Venmo, Cash App, and PayPal. Some of the early bank P2P tools were vendor-driven and not particularly good, and many of them wanted to charge customers a dollar per payment. Nobody wants to pay to pay.

Another thing that helped Zelle was its ability to make inroads into smaller and midsize financial institutions. I can point to plenty of institutions that aren't thrilled about the cost of participating, but they're seeing the volume and accepting it.

With this digital wallet, though, the dynamic is different. From a credit-card perspective, Chase, Bank of America, Wells Fargo, and potentially Capital One are competing with one another every day. Unlike clearXchange, which was the predecessor to Zelle before it moved under Early Warning, I see much more inherent conflict in this initiative. Do you think that's going to be a problem?

I think that's a great point. Even the JPMorgan example, based on the headlines I've read, shows how much disagreement can exist inside a single institution about how aggressively to pursue some of these ideas. So yes, I absolutely think the conflict is real.

I also want to be clear that I'm not saying this will be easy or even that it will work. The doubt and criticism are understandable. My point is that I understand why the banks want to do it. I think they have the assets and, at this point, the proven ability to bring something to market successfully.

After Isis, Softcard, MCX, and all the other failed attempts, if there was ever going to be a moment to make another run at something like this, now feels like a reasonable time. I'm not surprised they're trying. We just have to see what actually reaches the market and judge it then.

I've changed the title of my blog post three times, Scott. It started as "Delusional on Announcement." Then I softened it to "Doubtful on Announcement." Finally, I changed it again to "Doomed on Announcement." So I'm still a little pessimistic.

One word: optimistic or pessimistic about the concept?

Definitely optimistic.

Awesome. Scott Harkey is executive vice president of financial services and payments at Endava. Scott, thanks a lot for being on What's Going On in Banking. And everybody, thanks for listening. I hope to see you on the next episode of What's Going On in Banking.