Moving Beyond Lip Service – Mobile Wallets & Under/Unbanked –

Everyone and their uncle are tripping over themselves in a race to launch a mobile wallet or at least talk about an intent to produce one in time. Judging by the number of initiatives out there (or soon to be), it would seem that unbeknownst to me, there is a direct correlation between kickstarting adoption and the number of choices available to a consumer (higher the number of choices, quicker the adoption). If there is, then do point it out to me.

And I get it. Issuers are concerned, and so are retailers. Mobile snuck up on them and the rest of us. The sheer scale of its adoption will soon eclipse every other technology innovation ever to grace our collective lives. However, it must be noted that to the broad majority, mobile phones are still a device that enables us to connect and share with each other. It is not yet a device that is synonymous with enabling commerce. That part is somewhere along the technology adoption curve, a ways away from even the chasm. Now take that in for a moment.. if we have not even reached the chasm, what makes you sure that anything we are doing today in the name of mobile commerce and payments, will look anywhere near similar by the time we reach the pragmatist majority? (Note: The subtle irony of lemmings rating their peers leap to certain death was not lost to me in how we rate mobile payment initiatives today)

Product development is hard. It’s harder, when you are trying to create a market for what you are building – alongside. Furthermore, you almost have to build it twice – once for the early adopters and then once more for the majority – who share a lack of enthusiasm for anything and everything that resonated with the former. There is much agreement in that smartphones have heralded an era of disruptive innovation. Yet, what we have generally done here – and I mean mobile wallets in general – is that we have hurried to take something disruptive and married it with something incremental (NFC) and called it “transcendental” before attempting to shove it down the collective throats of our mainstream market.

Now if the mainstream market was a wrong choice, that if we launched too early to an all too apparent and apathetic public – what then is the right choice? Plastic works pretty well today and all too often while standing in line to pay, I am torn between my Citibank dividend card and its digital manifestation in Google Wallet. Why the latter over the former, when there is no bloody difference?(Note: I am not merely comparing a swipe to a tap, but the actual plastic card to its digital alter ego in my mobile wallet – same exact card, rate, rewards etc. What differentiates these two enough for me to reach for the latter? Should they even be the same product?)

Underbanked/Unbanked: Why they matter

But, imagine a segment today who are shunned by the mainstream banks for a lack of profitability in serving them, a segment that today transacts largely via cash, and if one were to trust the recent Fed survey – has 57% smartphone penetration, above the 44% that is the national average. Further, to the underbanked and unbanked, mobile is largely the primary and the only channel to access the web. They are also price conscious and would buck the trend to learn a better way to work coupons in to their buying patterns. That segment – the Underbanked, seems to have slipped under the radar, or were simply ignored as the industry largely focused on selling mobile payments upstream, eager to be profitable as quickly as possible. And though for banks, mobile wallets and the role they play in them, were largely a defensive strategy, this apparent folly is inexcusable. Their response to mobile in general is to retrofit it around their existing product lines and then as quickly as possible sell it to their most profitable customers – in an attempt to slow down erosion in their current customer base. This is reflected in how both Google Wallet and Isis features no debit products at launch from their banking partners. And if one were to believe prevalent market trends, we are moving from a credit economy in to a debit economy – except that anyone involved in the next stage of evolution in payments seems to have missed the memo.

Now certainly issuers are not alone at fault. Their choice of credit cards vs debit, in gaining product placement within mobile wallets – has equally been driven by the costs they have assumed through MNO’s who charge a flat fee plus a subscription fee for every card holder, every time card credentials are provisioned – and that means every time we misplace our phones, switch phones, switch Carriers, sign up for new accounts, worry our wallets are compromised etc. This apparent control point for provisioning the wallet and the cost associated with it, in the long run will prove to be detrimental to its adoption – the model simply never achieves scale as the costs prove to be prohibitive for the issuer to keep operating under a loss. And banks are going to find it difficult to pass on these provisioning costs to their customers. In an age where traditional banking services are largely commoditized by a race to the bottom, where fees for checking accounts and debit cards are mulled but never followed through for a fear of customer uproar, banks run out of reasons to justify new fees for mobile payments. If banks plod on, the early days will be excruciating at best, as the relatively modest profits the new payment instrument shall generate, will be paid out as provisioning costs to the MNO. Post Durbin, debit hardly warms the cockles of banker’s hearts, and brings in adequate revenue to turn a profit (or lessen the blow) while feeding the MNO.

Now only if retailers were good-neighbourly-like, If only they would understand the predicament of issuers, and embraced these mobile wallets to spur the fabled consumer adoption. Then they could all sit around the fire and sing kumbaya. If only. The reality is that retailers would rather see their customers driven to using debit, or store branded cards (if they offer those) especially in retail categories where margins are razor thin. For mobile wallets to one day enter mainstream consciousness, they need to be embraced by food retailers (over 328,500 in total across US) including grocery chains and supermarkets along with convenience stores and gas pumps(over 148,000 stores & pumps across US). Both, who have complained quite loudly here and here, about swipe fees that they currently pay to issuers and card associations. Convenience Stores and Gas Pumps together paid over $11B in swipe fees in 2011 alone, which was 87% higher than the industry profits! Ouch. Retailers would like to see more debit volume, and may even attempt to incentivize debit usage via discounts similar to the 5% that Target offers on its store branded debit card. On the flip side, these attempts by retailers are bound to be stymied by much publicized past (and future) data breaches (which gets far more serious when its your debit/bank account) and therefore encounter slower uptake, until retailers are able to convince customers or push them towards store branded prepaid cards.

Focusing on the Underbanked

Instead of selling mobile wallets to the mainstream market, for whom plastic works just fine today, why not provide it as a cheap paid alternative to debit or credit cards to a segment that lacks the sufficient asset requirements to be deemed profitable or even worthy of banking services? For example, consider the underbanked/unbanked who currently have little to no access to debit or credit cards, who are currently forced to transact in cash, and yet is a segment with a higher than above average mobile penetration – they will welcome the availability of a prepaid option, and are price conscious enough to learn (if necessary) to use a mobile wallet to find/load coupons and pay. Day in, day out – Startups are told to find something that is broken today. There is one today that exists out in plain sight, but banks will not attempt this – continually pushed towards quick profitability they are doomed to always float upmarket seeking more affluent customers and higher profits, but those customers clearly don’t see an upside to switch from plastic – even with the promise of coupons. And maybe it is better that banks not attempt this – solving the problem requires agility and tenacity while it promises comparably small successes that has appeal for a small startup but barely reverberates with in a big bank.

So why not take your time to build out a proper vision and product. There are those among us who truly need this disruptive product and need it today. Focus on them first before trying to sell to the rest of us. You and I can wait, plastic firmly in hand, till the future gets here. We will still have crap to throw away money on, when it does.

What do you think? Sound off below in Comments.

If you read this far, you should follow me on Twitter here. Connect with me on LinkedIn here.

Board of Advisors at SimplyTapp - creators of Host Card Emulation driving democratization and open access to NFC in Android. Mobile Commerce & Payments Lead at Experian Global Consulting, serving Experian's clients in Banking, Retail, Consumer Credit & Payments. A strategic adviser w/ over 17 years of international Tech & Business Strategy consulting, advising firms in banking, retail & asset mgmt that seek clarity & insight in to the myriad business models around payments, fraud & commerce. Founded DROP Labs, a mobile payments/commerce strategy & advisory practice. Tweets here. I'm on LinkedIn here.
Cherian Abraham
View all posts by Cherian Abraham
Tagged , , , , , , , , ,
  • Sumit Bakshi

    With countries now focusing on local clearing of card payments (e.g. Rupay) we can expect card transaction costs to come down; but indeed that’s some time in future only. I think for un/under-banked population in emerging nations, the best way for financial inclusion is the banking correspondence model (e.g. HDFC and Vodafone tieup) where telecom agents act as bank’s front. For developed nations with infrastructure available, prepaid cards with reduced transaction costs fit best in the current scenario.

  • Pre-paid mobile wallets are already hugely successful in the digital content space for several of the reasons you’ve identified. The key is reducing friction and offering consumers an incentive. I think the argument that this could be the case for retail transactions falls down on the basis that if these consumers are primarily using cash those transactions work just fine at retailers today. The discounts, loyalty points, etc for switching to a mobile payment would have to be deep – but maybe you’re right and it would make more sense to crack this nut than the early adopters.

  • Anonymous

    Thanks for the intersting article.  I once heard Geoffrey Moore http://www.geoffreyamoore.com the author of Crossing the Chasm talk about how much work it is and there were no signs to the crossing, but when it happened the person trying to cross would know.  Like the lemmings cartoon each new manufacturer needs to give it their best shot and maybe they can survive the fall to try again and see if they can fly.