Big banks’ proposed digital wallet payment system likely to fail

A group of leading banks is partnering with payment service Zelle’s parent company to create their own “digital wallet” connected to consumer credit and debit cards to enable online or retail store payments.

The new payment service, however, must compete with entrenched digital wallets such as Apple Pay and Google Pay that are embedded on mobile devices. It’s also not the first attempt for some in the consortium to create a digital wallet payment service.

The consortium includes Wells Fargo & Co., Bank of America, JPMorgan Chase, and four other financial services companies, according to The Wall Street Journal (WSJ). The digital wallet, which does not yet have a name, is expected to launch in the second half of this year.

The system will be managed by Zelle’s parent company, Early Warning Services LLC (EWS). It will have about 150 million Visa and Mastercard credit and debit cards connected at launch, with plans to add other card networks later, according to an EWS blog.

“Early Warning is working closely with financial institutions to build a wallet that provides consumers a secure and easy way to pay,” James Anderson, EWS’ managing director of Wallet, said in the blog. “The wallet will also aim to deliver better business outcomes for merchants — including higher transaction approval rates and more completed sales.”

The consortium’s digital wallet will be a standalone service, not something under Zelle’s service, according to reports. It’s expected to compete with other digital wallet payment services such as Apple Pay, Google Pay, and Neo. And it will be up against other digital wallets run by banks, such as Revolut, Monzo and Curve and payment organizations that offer PayPal and Venmo.

An uphill fight

The new digital wallet project is not a first for some in the consortium; JPMorgan Chase, for example, shuttered Chase Pay in 2021 — after only a year in operation.

Along with consumer advertising to entice uptake, the bank consortium will have to spend heavily on marketing to convince retail stores to embed the software into their point-of-sale and online systems. That was JPMorgan’s Achilles heel with Chase Pay, according to Alyson Clarke, a principal analyst with Forrester Research.

“Chase Pay fell over because of a failure to get enough merchants on board; that will likely be a challenge here, too,” Clarke said. “Kudos for continuing to try, but I question what the incentive will be for consumers to use the app: Additional rewards? Otherwise, why not just keep using your credit card through Apple Pay?

“There are lots of unanswered questions about this. There’s a whole bunch of elements to the experience that I can’t see how a bank consortium’s digital wallet app can overcome,” Clarke said. “They’re not even embedded on the [mobile] device. Are they going to use this to move to virtual CCVs [card verification values]? Probably not.”

JPMorgan Chase, Wells Fargo and Bank Of America are among the banks that had to refund customers and each other for Zelle users who were scammed out of money during the pandemic. The scammers tricked Zelle users into sending money by posing as customer support representatives. Greater security via a digital wallet is expected be a key feature touted by the consortium.

According to the WSJ, last year, Zelle’s owners considered allowing consumers to use it for online purchases, but concerns about fraud helped kill the idea.

In terms of online banking, the consortium is still working out the details. An EWS spokesperson offered little insight: “The wallet is intended for e-commerce. We will share more at a later date.”

How digital wallets work

The digital wallet will likely involve consumers’ typing their email on a merchant’s checkout page, according to the WSJ. “The merchant would ping EWS, which would use its back-end connections to banks to identify which of the consumer’s cards can be loaded onto the wallet. Consumers would then choose which card to use or could opt out.”

The idea behind digital wallets is to store a user’s payment information in one easy-to-access place on a digital device. That means a user doesn’t need to wait for a credit card to be mailed to them, and it can be instantaneously approved for use on a mobile device.

Other useful features include tracking a user’s spending patterns so they can manage finances better.

“For example, Google Pay provides its users insight into where they spend the most money, which enables users to better budget their finances,” said Sam Gazeley, a cyber and digital security analyst with ABI Research.

In Asia, a number of digital wallet providers are looking to provide “super-apps,” where services such as in-app hotel booking and food delivery, among others things, are possible. “This is also now expanding into the cryptocurrency market, with some US  payment companies such as PayPal offering the option to purchase crypto,” Gazeley said.

In addition to credit and debit card connections on the digital wallet, there is also the option of storing other assets, including plane tickets, concert tickets, hotel reservations, public transit cards, gift cards and coupons, according to Gazeley.

“Digital wallets also require a form of identification to make a payment, like a separate PIN, facial biometrics or fingerprint in order to facilitate a transaction, which is more secure,” Gazeley said in an email response to Computerworld.

Like the digital payment services with which it hopes to compete, the banking consortium’s wallet aims to provide a simpler, more secure way for consumers to pay online, without the need to type in credit card numbers.

Current digital wallet payment systems, such as Apple Pay, provide a brick-and-mortar or online merchant a tokenized card number. Tokenization creates a randomized data string that links back to sensitive card information but cannot be accessed by unauthorized entities; the tokens themselves contain no credit card information. The tokens can change from transaction to transaction, or be changed by a card holder, making accounts far more difficult to be hacked by cyber criminals.

“Everyone’s trying to copy what Apple is doing with virtual card numbers and virtual CCVs,” Clarke said.

The banking consortium will also have to spend significantly on advertising to gain access to a market that’s highly fragmented. Among consumers who make digital payments, 70% use more than one tool, and 49% use three or more, according to Cornerstone Advisors. The use of digital payments also varies among generations with 62% of Gen Z and Millennials, 50% of Gen X, and 32% of Baby Boomers making digital payments (or transfers). 

Nearly three-quarters of Gen Zers and Millennials (consumers between 21 and 42 years old) use PayPal, about half use Square CashApp, and roughly four in 10 use Venmo, according Ron Shevlin, chief research officer for Cornerstone Advisors.

Cornerstone Advisors

Gazeley agreed that the banks will struggle to achieve uptake. “I think that the significant capital that these incumbent banks can bring to bear for digitized solutions will go some way to narrowing the gap,” he said, “however, the current issue facing the market is that of fragmentation. …As more and more wallet solutions are launched, it will become more and more difficult for each solutions provider to differentiate themselves to new customer bases.”

The reason banks want in on the digital wallet space is simple. Companies such as  Apple and Google are eating into their profit margins by moving consumers onto their platforms.

The growth of mobile apps providers like PayPal and Square’s Cash App has created additional competition for traditional financial institutions, according to a study done last year by Cornerstone Research. Since the start of the pandemic in 2020, PayPal has added 126 million new customers. Cash App, meanwhile, has grown from 24 million users in 2019 to 44 million in 2022; its revenue increased from $1.1 billion in 2019 to $5.1 billion in just the first half of last year.

According to Cornerstone, three-quarters of smartphone owners have at least one merchant’s mobile app on their device. In total, roughly $3.2 billion moves in and out of the 10 leading merchants’ mobile apps every week.

Banks are growing increasingly concerned about the broader intentions of various digital wallet providers such as Apple. As these wallet providers own more of consumers’ payment experiences, banks fear their customer relationships becoming disrupted, according to Jordan McKee, a principal fintech research analyst with 451 Research.

Wallet providers are also cross-selling financial services to their users, such as credit cards and savings accounts, which pose a threat to banking interchange revenue and deposits.

“While the concerns of the banks behind this initiative are warranted, they are most certainly late to the game with a wallet,” McKee said. “Banks should not underestimate the challenge they will face in growing merchant acceptance to the point where a wallet will become useful to a meaningful number of consumers.”