How Can Banks Survive the Digital Wallet War Against GAFA?

April 1, 2021

WhatsApp recently launched its payment feature in India, enabling the country’s 200 million users to transfer money through the app; India is one of WhatsApp’s biggest markets. Having been threatened by disruptive FinTechs, banks in India are feeling the heat from WhatsApp’s new initiative. Global companies like Google, Amazon, Facebook, and Apple are quickly building a reputation for their know-how on the evolving behavior of the consumers. They have been rewarded with heightened penetration, reach, and popularity compared to banks.

The one competitive edge that banks could always boast of was their exhaustive customer database. But now, with the implementation of PSD2 in Europe, banks’ monopoly on their customer’s account information will likely disappear. This worrying development is coming at a time when the banks’ monopoly over their customers’ relationships is already left in a state of vulnerability with the entry of new-age FinTech companies.

With the ripples non-banking institutions have created so far, the banking industry worldwide is likely to witness many more WhatsApp moments in the years to come.

Banks will eventually fade away out of consumers’ sight and will fail to take center stage if they do not keep pace with the innovation. The only way out for banks to sustain their dominance is to up the ante by responding to the ongoing events in the digital payment industry and growing competition from non-banking players.

The digital wallet war

A 2017 survey revealed that 23% of consumers would give up their mobile banking app for a digital wallet with all their payments information in one place.

The days are not far when millennials and Generation Z will abandon the leather wallet for the digital wallet. Technological advancements in the fields of near-field communications and mobile payment systems have caused a shift in consumer payment behavior, altering the banking landscape and necessitating a change in operating models for banks. The most pressing of those changes is the reorientation of banks’ legacy IT systems.

This shift in consumer behavior has opened the opportunity for the non-banking players to penetrate the digital wallet landscape, posing a threat to banks’ relevance. If earlier competition came from FinTech startups, the current crop of competitors has only gotten bigger and better, with tech giants like Google, Amazon, Apple, and Facebook dominating the payment industry.

The rise of technological devices as payment platforms has only put further pressure on banks to respond to the demands of the digital payment market. With nearly half of banking consumers engaging multiple digital channels to conduct banking, banks are quickly finding that omni-digital strategies are essential to sustaining existing customers and acquiring new ones.

To survive this threat against the non-banking players, banks need to invest in a new set of capabilities around digital wallets and create a strong value proposition to retain customers.

Generation Z must be prioritized amongst mobile payment providers. Though they share some traits with the millennial cohort, Generation Z has never lived without Google, Amazon, Facebook, and Apple (GAFA). Recent estimates suggest that one-third of Gen Z consumers want to share their payments on social media as compared to just 3% of Baby Boomers, and the group is projected to make up 40% of all US consumers by 2020.

Digital wallets need to act as a one-stop-shop for all financial activity.

From managing payments, expenses, personal finance, paying bills and personalized advice, lifestyle management services, this generation wants everything in their digital wallet – for example, a wallet that automatically chooses the card that offers the best rewards or savings.

Enhancing customer experience is not only a matter of gaining a competitive edge but a matter of survival for banks.

Delivering personalized experiences to customers may not be very difficult for banks if they leverage their treasure of data using big data analytics. FinTech startups today are able to successfully harness this information to allow customers to access their money, cards, coupons, vouchers, loyalty points, and more with extraordinarily user-friendly interfaces. Today, FinTech solutions enable individuals to transfer money, make payments, manage budgets, shop online, book cabs, order food, and a lot more.

Creating a single interface for accessing multiple services will likely gain huge traction in the years to come.

Consumers crave new-age alternative payment options that offer value additions and complement their day-to-day activities. Banks will have to put all their energy and commitment into delivering unified payment experiences if they want to win the battle against disruptive non-banking players, as providers like Apple, Android Pay, and Samsung Pay currently all have higher penetration than traditional banks.

Rewards have become a new weapon for banks to get hooked to their customers, with consumers having received $15 billion in the form of cashback and points last year.

Given the fast pace with which these non-banking tech giants are growing, banks need to invest in building new capabilities to deliver next-generation rewards. The rewards mechanism will go beyond the physical cards, with the consumer product companies partnering with payment solution providers to digitize the coupons and offers.

Incumbent banks must engage the consumer trust they’ve built, creating a millennial-friendly customer experience.

Though many studies show decreased consumer confidence in the banking industry as a whole, customers still trust banks to secure their money and their personal data. How banks leverage this trust will determine their success in the long run.

And most importantly, banks can engage customers by leveraging technologies like Apple’s Siri & Face ID facial recognition, Google Assistant, Amazon Alexa, Facebook Messenger, and wearables. For example, Alipay has launched a digital storage feature for identification documents. The feature allows Chinese users to snap a picture of their identification card, driving license, and even property deeds to store the relevant information within the app.

Now it is very clear that banks cannot survive without completely revamping legacy IT systems. Sticking to the age-old architecture will give banks a tough time in meeting evolving customer needs rapidly.

The good news, however, is that banks have started steering the wheel towards digital transformation. With the innovation in digital wallets, payments have moved beyond the transaction, putting banks under pressure to deliver next-gen customer experiences. However, having the right vision will definitely hold great opportunities for banks in the future.

To learn about Prove’s identity solutions and how to accelerate revenue while mitigating fraud, schedule a demo today.

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