The rise of mobile wallets threatens to upturn long-held dynamics which influence consumers’ choice of credit and debit cards, according to a recent World Economic Forum report.

It comes as Apple and Google’s contactless smartphone payment schemes are quickly gaining a foothold in the Australian payments landscape while one-click payment facilities offered by companies such as Uber and Amazon are also growing in popularity.

While these digital payment facilities offer seamless point-of-sale convenience, they can also strip consumers’ ability to select different cards for different transactions depending on retailer acceptance, fees, rewards, interest rates, or brand loyalty.

“Customers may lose visibility into their payment choices, increasing their default cards’ share of wallet and reducing the importance of some traditional differentiators like brand and design,” according to the World Economic Forum’s Future of Financial Services report.

The stakes are high for traditional card issuers such as banks.

Australians hold more than 40 million debit cards and almost 16 million credit card accounts. They were used to process around 6.2 billion transactions in 2014-15 worth more than $503 billion according to the Reserve Bank of Australia. It is a major market which could become more consolidated as few customers manually select specific cards from their digital wallet.

Monitor Deloitte manager Hwan Kim (who contributed to the World Economic Forum report) says a more consolidated market could reduce customer choice and competition, slowing product innovation. However, the trend may not be all bad.

“Card issuers will still need to compete with one another to become the dominant card and as being a dominant card can drive disproportionate benefits, this competition may actually result in a greater value delivered to customers,” he says.

“Furthermore, such competition will lead to the development of ‘best in aggregate’ loyalty and benefit programs (or even more dynamic loyalty programs by issuers where the benefits are catered to each customer’s needs more closely), lowering the trade-off between value and simplicity.”

Rising competition

Competition amongst card issuers is already playing out in several ways.

Some card issuers are reportedly agreeing to pay mobile wallet providers new fees to become “top of the wallet” while others are striking deals with specific companies. For example, certain US credit card issuers are partnering with Uber, offering significant price discounts or higher reward rates if their card is used as the default method of paying for trips.

The ACT became the first Australian region to regulate Uber’s ride-sharing service in October 2015 and was quickly followed by New South Wales. Meanwhile Apple Pay and Google’s Android Pay are quickly forming a range of new partnerships to tap into the Australian market, which has one of the highest rates of smartphone use in the world.

The terms of new deals between these digital entrants and established card issuers are being fiercely fought. Not only are profits at stake, but the potential to gain access to a richer data set about customer consumption patterns.

In December 2015, Google revealed that it had signed up major local banks ANZ and Westpac, as well as retailers such as Coles, Telstra and McDonald's to its Android Pay system. In February 2016, ANZ launched its own mobile wallet for Android – goMoney Wallet, a service which circumnavigates the threat of losing default card status.

Other innovations could also change the nature of competition to become the default card. For example, US-based Wallaby Financial offers a credit card optimisation app which selects the best card from a digital wallet based on pre-specified rules.

It is another facet of rising competition which will force card issuers to find new ways of operating as they face rising pressure from new digital entrants as well as ongoing regulatory intervention from the government, which is eroding margins.

“To generate sufficient capacity to invest in better customer value proposition and other innovative offerings, the ability to reduce transactional operating costs will become essential for card issuers going forward,” Kim says.

Above and beyond traditional operational excellence, many emerging innovations deliver sophisticated capabilities to issuers at a significantly lower cost, from leveraging blockchain for settlement to fraud detection based on machine-learning algorithms – and these cost-cutting innovations shouldn’t be overlooked by issuers over revenue-generating innovations.
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