Core’s Summer Associate, Aaron Mercurio, got started before the summer and is more bullish on the mobile wallet than I am:
The hype around the future of mobile payments and related services (e.g., real-time offers, P2P fund transfer, increased ‘one-to-one’ advertising) is focused on reaching the tech-savvy smartphone-carrying consumer. The opportunity for that is well-documented and the hype well-deserved; this is why we’ve seen such high level of investment from varied constituents both within the payment chain — Payment Networks, Banks, Processors, Retailers — as well as outsiders including mobile-network operators, technology companies and a plethora of entrepreneurs. Billions of dollars are being bet on the virtual wallet.
That said, many obstacles exist to achieving scaled adoption, not the least of which are a lack of standards for data transfer and security, IP rights and the ownership of customer and transaction data, merchant adoption of contactless terminals, and a settling of dust around the economics as many parties try to get a piece of the new value chain. Frankly, consumer adoption and impetus would appear to be the least of proponents’ worries today. But reflecting on the state of payments, the current system of plastic and ‘traditional’ rewards and offers driven by affinity, co-branded, and private label products simply isn’t broken – at least for consumers with access to traditional products.
If you believe that, then it follows that the immediate opportunity in mobile payments exists outside the mainstream. The US unbanked and underbanked consumers offer a compelling segment for several reasons:
- Displacement of cash transactions, a disproportionate amount of which comes from unbanked and underbanked consumers, will generate the most value for stakeholders. A volume share shift from credit products to mobile does not create value from incumbents in the payments landscape today without charging more to retailers – who often pass those costs onto consumers. Regulators have already hit debit interchange hard over the past year (perhaps an understatement); widespread increase in interchange pricing is not the answer to sustained financial growth.
- Mobile payments could certainly fill an unmet consumer need in this segment. The cost of cash and carrying cash on low-to-moderate income (LMI) consumers is particularly burdensome. There are less compelling tangible expenses related to destruction, germs, and theft. The real cost is related to the poor financial habits that cash encourages: use of high-cost check cashing services, lack of incentive to save, inability to track financial transactions including building credit, and the lack of access to lending that can hold the underbanked down.
- The mobile business model is well aligned with the underserved community. Product designs for the virtual wallet, especially around account acquisition and account servicing, most closely relate to GPR prepaid products, which target this segment today. Acquiring new customers who won’t require shifts of from many incumbent DDA accounts and expectations around existing financial products will be welcomed. Underserved consumers also shop heavily at the retail verticals that I expect to provide the most traction to mobile payment acceptance initially. Specifically, the overlap within QSR, Gas, Grocery, Convenience, big box retail, and discounters, is unmatched. Lastly, the menu of ancillary services that can be offered to underserved consumers once a provider owns the wallet relationship can drive economics beyond the core transaction.
Ultimately, we expect that winners in the virtual wallet war in the U.S. will be the innovators that design products that can access and support this growing market of underserved consumers.