The concept of mobile wallets and new payment methods in financial services is nothing new. These attempts to establish less costly purchase portals (outside of the card networks) makes financial sense for merchants in reducing interchange fees. For customers accustomed to speed convenience, the added friction with wallets leads to minimal adoption.

Debit card usage (especially from younger demographics who avoid credit card debt) continues to increase in 2020. With stay-at-home daily life due to COVID, e-commerce is thriving on card transactions for food delivery and holiday shopping. As the world transitions further away from cash, the industry is experiencing surging interest and demand for alternative payment methods. Now may be the best time to for mobile wallets and new payment networks better designed for consumers and merchants to take off.

MERCHANT BENEFITS from E-WALLETS

The resurgence of mobile wallet from retailers comes in response to demand for contact-less payments. About 57% of consumers show willingness to buy more from stores with these offerings.

When it comes to accepting payments through card networks (e.g. Visa, Mastercard), merchants pay about 1% - 3% on each sale (based on transaction type and category) in interchange fees. The fees are split between the network and bank that issued the card — there’s is no cost to the consumer. For retail companies (such as grocery stores) with low profit margins (about 2% - 3%), reducing interchange payouts by a few points would be a huge benefit (especially across high transaction volumes).

Bank transfers (via the ACH network) are far less costly (typically a small flat fee), boosting the bottom line for merchants of all sizes. Customer deposits as payments would be kept within a merchant’s platform for purchases. While these funds wait to be transacted, the merchant can earn interest revenue from these balances. In certain program structures in which a company carries significant deposits, the merchant can also access a portion of the funds for cash flow as short-term working capital.

These closed-loop offerings (defined as customers and merchants having wallets and balances within the same bank and platform) can be expensive to build and maintain. The upside comes at scale with a higher user base maintaining larger balances, so that program structure becomes profitable. Customers that keep balances and recurring transaction activity also maintain deep, long-term loyalty with retailers.

Consumer friction WITH WALLET experience

For each consumer to have a mobile wallet, they would need to create a profile with a merchant, provide personal identification data, and link their bank account for funding. This onboarding typically happens on a mobile app that plugs into a Know Your Customer (KYC) vendor for compliance. Once the user’s information has passed KYC checkpoints and their wallet funded (2 - 3 business days to settle), they can then transact at the retailer through the app.

In order to have shoppers go through this lengthier process (instead of swiping a card), the benefits and value proposition needs to be compelling. Some merchants choose to pass back the savings in interchange fees as discounts or customized offers for members. True adoption with mobile wallets needs to include the following:

1. Leading with convenience: Any new payment system needs to be just as easy (if not easier) than a card in order to gain traction. Asking consumers to pull up QR codes or log into an app at time of checkout lead to extra steps that increase the strain on a user’s experience;

2. Beneficial reward system: Incentives are just as critical as convenience for consumers. Users are willing to use a mobile wallet if they’re compensated accordingly. Cash back, discounts, and personalized bonuses are potential options that merchants can leverage. Retailers need to compare these payouts against the decreased interchange fees and strike a profitable balance that builds customer loyalty and recurring usage;

3. Lag in funds availability: The ACH network (in the US) tends to be the default, low-cost transfer method between external banks and mobile wallets. However, this payment rail operates on a batch process (not real-time) — payment requests get settled overnight or next business day (depending on cutoff times and day of the week). Merchants can verify external bank balances via account aggregation services (such as Plaid), but this only shows a snapshot of the account. Actual funds in the account can vary by the time an ACH request is fulfilled (up to 2-3 business days). Retailers willing to pre-authorize transactions before settlement are risking losses and bank fees with ACH returns due to insufficient balances.

If these three factors align for a consumer, mobile wallets make sense as an alternative payment method. Multiple companies have made attempts with these offerings — many of them failing to scale due to lack of usage, while others show strong demand and growth (especially during the pandemic).

retailers expand to mobile wallets

The mobile wallet concept isn’t new to the retail industry. About 9 years ago, a group of retailers (including Walmart) launched the Merchant Customer Exchange (MCX). This new platform offered a general e-wallet linked to a user’s bank account and the ability to make payments. This was followed by the grocery chain, Safeway, launching ‘Fast Forward’ in 2013 (for bank payments). In the battle against increasing fees from networks, companies (like Kroger in 2018) have even tried to ban specific cards like Visa, Mastercard, or Discover due to higher interchange costs.

The majority of these wallets have had low usage, with the exception of one — Starbucks. The most recognized brand in coffee has tremendous success with its closed loop wallet, driving over $1.5B in balances throughout the year. About 10% of these funds stay on the platform, sitting in customer’s wallets and earning interest revenue for the megachain.

Why is Starbucks so successful with its mobile wallet? Consumers are accustomed to their daily coffee fix from their local shop and instead of waiting in line, they can order ahead through the Starbucks app (convenience). The app exclusively uses the Starbucks card, which is reloadable in $10+ increments automatically or as needed. The funds are drawn from a customer’s external debit card or credit card in real-time (funds availability). The purchase made that day is typically less than what’s available on the card. The remaining balance stays on the card until the customer’s next purchase (deposit balances earn interest revenue for Starbucks). The volume of purchases earns rewards for consumers and the company runs monthly specials and discounts exclusive to members (beneficial reward system). Overall, Starbucks hits directly on the three areas discussed in the previous section and earns additional revenue.

There are two new retail players entering the mobile wallet space:

• Albertsons: the grocery retailer is launching Albertson’s Pay, an app featuring a stored value account that can be reloaded as a closed-loop wallet (Albertsons Cash), and a bank direct payment (Albertsons Direct).

• 7-Eleven: in partnership with Arcusfi (fintech service platform), is rolling out a wallet specifically for bill payment in Latin America. For the unbanked and underbanked who pay bills with cash, this offering provides an improved experience of speed, security, and tracking history. The 7-11 app provides the mobile wallet portal — users show a barcode to the cashier and hand them cash, which can post next day (no later than 3 bus. days). Customers earn reward points for usage.

What's NEXT in digital WALLETS?

2021 will a critical year for other companies to decide if they should follow with their own mobile wallet.

One of the next chains that can join this group: Costco. The bulk retailer has a large volume of existing customers through its membership structure. Costco shoppers make purchases on a monthly basis — often above $100 per visit. As a trusted shopping source, customers would be willing to pre-fund their upcoming trip on a mobile wallet. Rewards can come in the form of free annual membership and monthly discounts. Walmart is another mass retailer that can see success with a wallet.

For stores with an existing wallet that’s gaining traction, adding Buy Now Pay Later (BNPL) functionality would be a strong option. BNPL providers, such as Affirm, Klarna, and Sezzle, have seen strong demand over the last 3 years as an alternative payment method that stretches payments on purchases interest-free.

As the lines between banking, retail, and payments continue to blur together, expect to see partnerships or full-service offerings from retailers over the next few years.

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